The dollar jumped the most in two weeks, pushing Treasury yields as much as 6bps higher (before easing back) with US equity indexes primed for a another record-setting day after Senate Republicans approved a reduction in the corporate tax rate as part of a sweeping overhaul, giving a boost to President Donald Trump’s stimulus plans. The key market catalyst was the US Senate passing the tax reform bill through a vote of 51 vs 49 just before 2am on Saturday morning. This now pushes the bill to the next phase in which the House and Senate will have to reconcile their 2 bills, while the House is said to vote on Monday night for motion to go to conference on tax bill reconciliation.
“With this tax deal, markets could pick up speed into the end of the year. It looks like the ingredients for a year-end rally are there,” said Angelo Meda, head of equities at asset manager Banor SIM in Milan, predicting equity gains of 3 to 4 percent. Tax cut hopes have been a significant tailwind this year for U.S. stocks, although the move is expected to add to the country’s $20 trillion national debt and increase the chances of more aggressive near-term rate rises in the world’s largest economy. Those expectations pushed the dollar up as much as 0.4% against a basket of currencies while Treasury yields rose across the curve. Two-year yields matched Friday’s nine-year high, indicating that bonds are already anticipating the debt increase according to Reuters.
“This environment should question whether the market is being too conservative in only pricing 50 basis points of (U.S. Federal Reserve) tightening next year,” analysts at ING Bank told clients. “Loose fiscal and tight monetary policy should be sending the dollar firmer.”
Furthermore, source reports stated that majority of House Republicans back a short-term continuing resolution to keep the government open until December 22nd and that a vote is expected this Wednesday, which further helped bullish sentiment.
The bullish stock moves will be welcomed by many investors after news from Washington rocked markets on Friday. The evolving investigation into potential connections between Trump’s campaign and Russian meddling in the 2016 U.S. election remains a threat, but with global equities still hovering near all-time highs, traders may be seizing on the potential boost to growth in the world’s largest economy from tax cuts as reason to sustain the bull market, Bloomberg reported.
In geopolitical developments, US and South Korea began their largest ever air combat drills which will last for 5 days, while North Korea accused President Trump of "begging" for nuclear war with these drills. At the same time, National Security Adviser McMaster said President Trump will "take care of" the increasing nuclear threat from North Korea by taking unilateral action if necessary, while US Senator Graham urged Americans to evacuate from South Korea and stated that we're moving close to military conflict.
However, as has often been the case, war rumbling out of N.Korea were roundly ignored with markets focusing on the historic corporate tax cut to 20%, which sent US equity future soaring, with futs on the Dow Jones surging over 200 points out of the gate and the S&P 0.6% higher this morning, European stocks opened higher, with French, German and British markets up 0.9 to 1.4%, anticipating a strong New York session - futures for the Dow Jones, S&P 500 and Nasdaq indexes rallied as much as 0.9 percent.
In Europe, the focus remained Britain, with 10-year UK government bond yields up around 6 basis points as Prime Minister Theresa May headed for a crunch meeting with European Union officials to break a deadlock in Brexit talks. EU officials have expressed optimism a deal on the main issues will be struck on Monday, even though members of May’s party have urged her to walk away unless there is progress. Hopes of a deal pushed sterling recently to six-month highs against its trading partners’ currencies but it slipped on Monday against the firmer dollar and was flat to the euro, giving up tentative early gains, only to rebound again sharply above 1.35 after MEP Lamberts said that European Commission’s Barnier sees a Brexit breakthrough as likely today. As a result, the FTSE 100 pares gain to 0.4% from as much as 1%; FTSE 250 pares advance to 0.5% from as much as 0.8% as pound climbs after a European Parliament member said chief Brexit negotiator Michel Barnier told lawmakers a breakthrough is likely Monday.
“If a green light is provided today for talks to move on to future relations, including a timely transition arrangement, it would open the door for further pound gains in the near-term,” MUFG analysts wrote, warning that the reverse was likely, should talks break down.
Not all markets shared the US tax euphoria, however. Asian stocks traded mixed and lacked the firm conviction seen across US equity futures. The passage by the Senate spurred a risk on tone at the open of electronic trade in which DJIA futures gained over 200 points and safe-havens were pressured. However, this momentum was somewhat lost on the ASX 200 (-0.1%) and Nikkei 225 (-0.5%) which were cautious ahead of a risk-packed week and as Asia markets also got their 1st opportunity to digest last week’s developments in the Flynn-Russia saga.
Japanese stocks dropped as investors reportedly ignored the tax deal and focused on the Trump-Russia probe instead, according to Bloomberg. The Topix dropped 0.5% to 1,786.87 as investors focused on an ongoing investigation into connections between Donald Trump’s presidential campaign and Russian meddling in the 2016 U.S. election. Electronics, telecommunication stocks were are biggest drags on Topix, while the Nikkei 225 slumped -0.5% to 22,707.16. “There are deep uncertainties over what’s going on with the Trump-Russian probe and how the U.S. market will react later tonight, so there are few investors who want to buy up Japanese stocks in this environment,” said Mitsushige Akino, an executive officer with Ichiyoshi Asset Management Co. in Tokyo. “Japanese stocks have come back to a high level, so some investors may want to lock in profits."
The Hang Seng (+0.2%) finally outperformed, after two days of losses, amid declines in money market rates, while China's Shanghai Comp. (-0.2%) was choppy on further news on regulatory reform and after the PBoC skipped its reverse repo open market operations for a 2nd consecutive day.
In total, world stocks rose just 0.18% though they stayed off recent record highs, following Asia's shaky start. Emerging equities rose 0.5 percent.
In currencies, the USD Index is ‘firmly’ back above the 93.000 level that had been largely capping Greenback recoveries before full Senate approval of the Republican tax reforms. 93.500 forms the next obvious upside target and also coincides with chart resistance, while nearest support in the event of another pull-back comes in around 92.500 and just below. The dollar extended its Asian session gains as London stepped in and stops were filled, yet pared its advance as leveraged names looked to fade rallies;
GBP has just spiked back over 1.35 vs. the USD following media reports that EU Brexit negotiator Barnier told MEPs that a breakthrough is likely. Elsewhere, JPY and CHF have given up the most ground vs the recovering Dollar (perhaps understandably), with USD/JPY briefly back through 113.00 and USD/CHF up towards 0.9850 before both pairs eased back.
Emerging currencies were mostly weaker against the dollar, with Turkish markets hit by data showing inflation at almost 13 percent, the highest since 2003.
On commodities, Brent crude futures slipped 0.7 percent, pressured by signs of increasing supply from U.S. shale producers. Copper prices firmed, after data last week showed China’s economy in good shape.
On the US calendar today, data includes factory orders and durable-goods orders.
Market Snapshot
- S&P 500 futures up 0.6% to 2,659.90
- MSCI Asia down 0.02% to 169.89
- MSCI Asia ex Japan up 0.4% to 554.69
- Nikkei down 0.5% to 22,707.16
- Topix down 0.5% to 1,786.87
- Hang Seng Index up 0.2% to 29,138.28
- Shanghai Composite down 0.2% to 3,309.62
- Sensex up 0.09% to 32,864.10
- Australia S&P/ASX 200 down 0.07% to 5,985.59
- Kospi up 1.1% to 2,501.67
- STOXX Europe 600 up 0.8% to 386.96
- German 10Y yield rose 3.7 bps to 0.342%
- Euro down 0.3% to $1.1858
- Italian 10Y yield fell 3.2 bps to 1.451%
- Spanish 10Y yield fell 0.6 bps to 1.411%
- Brent futures down 0.8% to $63.24/bbl
- Gold spot down 0.5% to $1,274.10
- U.S. Dollar Index up 0.4% to 93.21
Top Overnight News
- Donald Trump emerged newly emboldened from one of the most tumultuous weeks of his presidency, reveling in the prospect of his first major legislative victory while brushing off a federal probe that’s closing in on key members of his inner circle
- Senate Republicans narrowly passed tax bill that would slash corporate
tax rate and provide temporary tax-rate cuts for most Americans - The tax bill passed by Republicans in the U.S. Senate over the weekend may boost profits for industries from banking to retail to fossil fuels. It also could put the squeeze on hospitals and renewable energy firms
- House GOP announces 2-week plan to avoid government shutdown on Dec. 8
- Trump rejected reports that he’s looking to oust Secretary of State Rex
Tillerson, saying that despite some disagreements “we work well
together” - CVS Health Corp. will buy Aetna Inc. for about $67.5 billion, creating a health-care giant that will have a hand in everything from insurance to the corner drugstore
- Prysmian SpA agreed to buy U.S. rival General Cable Corp. in a $3 billion deal that strengthens its position as the world’s largest maker of industrial cables and extends a wave of consolidation in the market
- OPEC and its allies outside the group will maintain their cuts in oil output until global production meets demand, Saudi Arabia’s Energy Minister Khalid Al-Falih said
- Richmond Fed has chosen Thomas Barkin, a senior executive at global consulting firm McKinsey & Co. as the next president to replace Lacker, according to people familiar; will be a voter in 2018
- Brexit: Barnier told European MEPs that a breakthrough is likely today, according to MEP Lamberts
- Kuroda says BOJ will continue with yield curve control policy; has not created problems for financial stability
- A Senate investigation into connections between Donald Trump’s campaign and Russian meddling in the 2016 U.S. election suggests a potential case of obstruction of justice is developing against the president, Senator Dianne Feinstein said
- Brexit talks risk being torpedoed by the issue of the European Court of Justice as U.K. PM May heads to Brussels on Monday. With a deal on the Irish border still pending, the role of the ECJ in enforcing the rights of citizens emerged as the greatest obstacle on Sunday, according to the British official and a person familiar with the EU side.
- The chairman of France’s market regulator Robert Ophele sided firmly against Bitcoin, denouncing the cryptocurrency as a “dangerous illusion” and a tool for criminals
- 2Q18 is shaping up to be a potentially sensitive time for the yen, when new, or newly reappointed leaders at the Bank of Japan could opt to telegraph a tweak in monetary policy, according to Evercore ISI analysts
Asia stock markets traded mixed and lacked the firm conviction seen across US equity futures which were buoyed after the Senate voted to pass the tax bill. The passage by the Senate spurred a risk on tone at the open of electronic trade in which DJIA futures gained over 200 points and safe-havens were pressured. However, this momentum was somewhat lost on the ASX 200 (-0.1%) and Nikkei 225 (-0.4%) which were cautious ahead of a risk-packed week and as Asia markets also got their 1st opportunity to digest last week’s developments in the Flynn-Russia saga. Hang Seng (+0.2%) outperformed amid declines in money market rates, while Shanghai Comp. (-0.2%) was choppy on further news on regulatory reform and after the PBoC skipped open market operations for a 2nd consecutive day. Finally, 10yr JGBs were lower alongside pressure in Tnotes which gapped down following the Senate tax breakthrough, while the BoJ was also absent in the market with no Rinban announcement for today. PBoC skipped open market operations again due to high liquidity, for a net daily drain of CNY 90bln. (Newswires) PBoC set CNY mid-point at 6.6105 (Prev. 6.6067)
Top Asian News from Bloomberg
- HNA’s Units Are on a Borrowing Spree, Swallowing High Rates
- Billionaire Wang Jianlin to Buy Control of Hong Kong Unit
- China Is Said to Plan Extending Electric Vehicle Tax Rebate
- Modi Adviser Says RBI Misguided on Inflation and Should Cut Rate
- Trouble Ahead for Australia’s Turnbull Amid Leadership Woes
- Japan Investors Shy Away From Aussie as Yield Spread Shrinks
- China Stock Rally May Run Out of Steam Next Year, Bocom Says
- Kuroda Vows to Stay Course After Speculation Over Tightening
- Iron Ore Surges Toward Bull Market as China Supercharges Steel
European equities (Eurostoxx 50 +0.9%) have kicked the week off firmly on the front-foot in the wake of the news that the US Senate passed the tax reform bill through a vote of 51 vs 49 over the weekend. This now pushes the bill to the next phase in which the House and Senate will have to reconcile their 2 bill. However, some of the initial gains were modestly trimmed given that it is more of US-centric issue with developments in Brussels today more likely to be of greater direct importance for the Eurozone and the UK. In terms of sector specifics, financial names have benefitted with the movements seen in yields this morning with material names also firmer, in-fitting with price movements seen during Asia-Pac trade.
In Euro fixed income, Bunds and Gilts have held in ahead of support residing just ahead of the nearest downside round numbers at 163.00 and 124.00 respectively, encouraged by the failure of EU cash indices to extend gains after initial mark-ups made on the back of another Trump tax bill hurdle being passed over the weekend. The core Eurex debt future has recovered some poise to trade around 163.22 from 163.11 at worst (so far), with 163.05-03 (rising trend-line/Friday’s pm session base) not seriously tested. However, there is some distance to recover if dip buyers are looking for a gap to be filled on the upside at 163.54. Gilts may be capped on the just released firmer than consensus UK Construction PMI that makes it 2 out of 2 beats thus far, but remain some 10 ticks above the 124.05 base for the moment.
Top European News from Bloomberg
- Podemos Ally May Hold the Key to Catalonia After Election
- Danish Banks Set to Win FX Volatility Concessions, Minister Says
- Tryg of Denmark Agrees to Take Over Alka for $1.3 Billion
- Warsaw Vows to Go It Alone as Big-Bourse Mergers Lose Steam
In FX, the USD Index is ‘firmly’ back above the 93.000 level that had been largely capping Greenback recoveries before full Senate approval of the Republican tax reforms. 93.500 forms the next obvious upside target and also coincides with chart resistance, while nearest support in the event of another pull-back comes in around 92.500 and just below. GBP is back below 1.35 vs. the USD despite reports stated that the UK and EU are on the brink of a Brexit divorce deal with the Irish border issue still seemingly unresolved ahead of PM May’s trip to Brussels today. Elsewhere, JPY and CHF have given up the most ground vs the recovering Dollar (perhaps understandably), with USD/JPY briefly back through 113.00 and USD/CHF up towards 0.9850 before both pairs eased back.
In commodities, WTI and Brent crude futures trade lower with WTI back below USD 58/bbl in a mild pull-back as markets digest the fallout of last week’s OPEC announcement. In terms of energy related newsflow, the Saudi energy minister Al Falih said he thinks OPEC will not alter course in the second half of 2018, with the cartel not looking to flood the oil market. In metals markets, gold was pressured from the onset during Asia-Pac trade with the safe-haven weighed after the Senate’s tax reform passage spurred risk appetite. Elsewhere, copper prices benefitted from the positive risk tone and amid gains in Chinese commodity prices in which Dalian iron ore rose over 6% shortly after the open.
US Event Calendar:
- 10am: Factory Orders, est. -0.4%, prior 1.4%; Factory Orders Ex Trans, prior 0.7%;
- 10am: Durable Goods Orders, est. -1.0%, prior -1.2%; Durables Ex Transportation, prior 0.4%
- 10am: Cap Goods Orders Nondef Ex Air, prior -0.5%; Cap Goods Ship Nondef Ex Air, prior 0.4%
DB's Jim Reid concludes the overnight wrap
The Santa rally may have some legs back today. Indeed it’s likely to be a firmer open in Europe this morning than the slump seen around Friday's close. In the last half hour of European trading ABC News reported that Mr Trump's former top aide Michael Flynn was prepared to testify that the President had instructed him to make contact with Russian officials when he was a candidate for the White House. This would have conflicted with the President's version of events when the sacking of Flynn took place. European markets fell over 1% into the close after being broadly flat beforehand with US markets spiking down further with the S&P 500 dropping 45 points in 30 minutes. However as news filtered through that the Republicans were increasingly likely to have enough votes in the Senate to pass the tax bill, the S&P 500 steadily recovered 37 of those points into the US close and ended 'only' -0.20% lower. Adding to this, after the bell, ABC suggested that the story was wrong and that the President directed Flynn to contact Russia after the election result and to discuss topics that included cooperation against ISIS. So a very different story.
To add to the more bullish news, in the early hours of Saturday morning the Senate passed the tax reform bill with 51-49 votes, with one GOP Senator, Mr Corker, absenting. The bill still need to be reconciled with the House’s version, where there are material differences such as i) the rate and timing of corporate tax cuts and ii) whether some individual tax cuts will expire after 2026. So the final output is subject to revisions but it feels like the prospect of some form of tax reform appears likely - potentially by year end. Elsewhere, President Trump seems open to negotiated changes on the final bill, noting that the corporate tax rate “could be 22% when it comes out”, rather than 20%, which can save cUS$200bln over the next 10 years for the budget.
This morning in Asia, markets are trading a little mixed. The Nikkei (-0.45%) and ASX 200 (-0.07%) are down slightly, while the Hang Seng (+0.43%), China’s CSI 300 (+0.47%) and Kospi (+0.75%) are all up as we type. Across the pond, the US dollar index is up c0.3% and the UST 10y yield is up c4bp this morning, partly reflecting the passage of the Senate bill back on Saturday morning.
Back to politics and today marks the start of an important week for Brexit negotiations. Today UK PM May is due to travel to Brussels to meet with the EC’s Juncker and EU’s Barnier to seek the outline of a deal ahead of the EU summit next week. The EC College of Commissioners will also make a recommendation on whether or not enough progress has been made on Brexit talks on Wednesday, while the UK’s Davis will update the Brexit Parliamentary Committee on the same day. So lots of headlines likely this week. If that wasn't enough on politics, Friday marks the deadline for US Congress to pass a spending measure and avoid a partial Government shutdown. Although House Republicans have announced a plan for a two week extension of federal funding that would avoid the shutdown on 8 December. Senate Majority leader McConnell was relatively upbeat, noting “there is not going to be government shutdown” and that “it’s just not going to happen”.
Elsewhere we also need to keep an eye on Germany and specifically the coalition talks with the Social Democratic Party. They are due to hold a convention in Berlin on Thursday, including a likely vote on endorsing coalition talks. In terms of data, the big release this week is the US employment report for November on Friday. The current market consensus is for a 199k (DB 175k) reading for payrolls, no change in the 4.1% (DB 4.2%) unemployment rate and a +0.3% (DB +0.3%) mom average hourly earnings print. Other notable data releases include the remaining October services and composite PMIs tomorrow in Asia, Europe and the US. The same day sees the US ISM non-manufacturing release with the ADP employment report on Wednesday and China trade data on Friday. For the day-by-day full week ahead see the end of today's edition and remember "Next week... This Week" with all of this and an easy to read cut-out and keep of all upcoming events.
Staying in the US, our economists have slightly changed their rates expectations for the next two years. They still expect a rate hike in December 17, but are now swapping their expectations for 2018 and 2019. They now see four rate hikes in 2018 instead of three, followed by three hikes in 2019 rather than four. Hence, the end point on rates by 2019 is unchanged at 3.1%. The main reasons for the change include: increased prospects of tax reforms, momentum on recent inflation readings (3 months annualised core PCE at c1.9%) and Powell’s testimony which confirmed his willingness to raise rates as needed to achieve the Fed’s targets. Refer to the link for more details.
Now briefly recapping other markets performance on Friday. Government bonds rallied on the aforementioned political developments, with core 10y bond yields down 5-10bp (UST -4.9bp; Bunds -6.2bp; Gilts -9.8bp) while peripherals underperformed with yields ranging from +1 to -3bp. As we saw above Treasuries have reversed 4bps this morning so expect other reversals at the open in Europe. Turning to currencies, the US dollar index weakened 0.17% while Euro and Sterling also fell 0.07% and 0.35% respectively. In commodities, WTI oil was up 1.67% after OPEC members confirmed production cuts to the end of 2018. Elsewhere, precious metals strengthened (Gold +0.44%; Silver +0.02%) and other base metals also advanced modestly (Copper +0.62%; Aluminium +1.16%). Note both Zinc and Iron ore jumped c2.9% on Friday, with the latter up c20% since 31 October with prices continuing to benefit from steel production cuts in China. Away from markets, the Fed’s Bullard has maintained his dovish stance. He cautioned “there is a material risk of yield curve inversion…if the FOMC continues on its present course of increases in the policy rates” and that “given below target inflation, it’s unnecessary to push normalisation to such an extent that the yield curve inverts”. Elsewhere, the Fed’s Mester noted “long rates are going up given where we’re in the economy and where we see the economy is going” and the other reason short rates are going up is “(current) financial conditions are accommodative”.
Finally, our chief Strategist Binky Chadha believes the biggest beneficiary of a cut in the corporate tax rate in the equities space are high tax companies and the simple strategy is to be long them. He thinks a 15pp cut in the corporate tax rate would increase his 2018 S&P 500 EPS target by c12%.
Before we take a look at this week’s calendar, we wrap up with other data releases from Friday. In the US, the November ISM manufacturing was a touch softer than expectations at 58.2 (vs. 58.3 expected). In the details, the production index rose to 63.9 and the new orders index rose 0.6ppt to 64.0, while the employment index nudged down to a still elevated 59.7. The final reading of the November Markit manufacturing PMI was also a tad softer at 53.9 (vs. 54 expected). Elsewhere, October construction spending was above at 1.4% mom (vs. 0.5% expected), led by an increase in the non-residential sector. Finally, auto sales continue to normalise from post-storm highs, with November total vehicle sales at 17.35m (vs. 17.5m expected). Following the latest data, the Atlanta Fed’sGDPNow estimate of 4Q GDP growth is 3.5% saar.
In Europe, the final reading of the November manufacturing PMI was broadly in line. The Eurozone was 0.1 above expectations at 60.1. Across the countries, France was 0.2 above at 57.7, while Germany and Italy were both in line at 62.5 and 58.3 respectively. Elsewhere, the UK’s flash reading was above at 58.2 (vs. 56.5 expected) – the highest in almost four years. Finally, the final reading of Italy’s 3Q GDP was softer than expectations at 0.4% qoq (vs. 0.5%) and 1.7% yoy (vs. 1.8% expected).