Global shares hit another record high on Wednesday, propelled higher by what increasingly more call (ir)rational exuberance, and investors’ unflagging enthusiasm for tech stocks. That said, S&P futures are unchanged the morning before Thanksgiving (at least before the market open ramp), as are European stocks (Stoxx 600 is flat), despite the euphoria in the Asian session which saw the MSCI Asia Pac index hit a new all time high...
... as oil jumped, rising as much as $1.15 to $57.98/bbl, the highest since July 2015, following yesterday's API report which showed crude stocks fell another 6.4mmbbls and a Keystone pipeline outage shaprly tightened the market, while the dollar fell after Janet Yellen warned against raising rates too fast and the euro gained amid new moves to end Germany’s political impasse.
Emerging markets too were on a roll, lifted by a weaker dollar and inflows into Asian assets, with little sign of spillover from Turkey where the lira plumbed a new record low.
As SocGen previews today's action, "the US has durable goods orders, U-Mich consumer sentiment, jobless claims and FOMC Minutes out today, but none of these matters as much as Thanksgiving preparations." In other words, expect a much slower trading day, with the key event - the Fed minutes - delivered at 2pm to trading desks staffed by the sub-30 year old team.
So as we prepare for even more all time highs amid the stock euphoria, the bond market has been showing fixed-income traders are more concerned that the U.S. economy may slow, with the 2s10s flattening further below 60 bps. Outgoing Fed chair Yellen warned Tuesday that tightening too quickly risked stranding inflation below the Fed’s 2 percent target, with investors awaiting the release of minutes from the last FOMC meeting for more clues about the policy path. As a result, the Bloomberg Dollar Spot Index dropped 0.2%, hitting a one-month as cautious Yellen and curve flattening underpin selling momentum.
As we noted earlier, Asian stocks hit new all time highs, with Hong Kong's Hang Seng jumping 1%, and rising above 30,000 for the first time in 10 years, as Hong Kong-listed Tencent leapt past Facebook this week to become the world's fifth-most valuable company.
The mood was slightly less buoyant on European shares which opened flat to marginally firmer. Britain's benchmark rose 0.2 percent just before finance minister Philip Hammond presents a crucial budget to a country facing faltering economic growth. After yesterday's jump, European stocks struggled to follow the global rally that drove global benchmarks to record highs. The Stoxx Europe 600 Index tracked sideways amid mixed fortunes for regional bourses. Earlier, we noted that the MSCI Asia Pacific Index climbed above its 2007 peak, with shares up from Tokyo to Sydney, and the major American equity indexes reached all-time highs. Australia’s S&P/ASX 200 Index rose 0.4%; South Korea’s Kospi index added 0.4%; . The Hang Seng Index jumped 0.8% as Chinese financial shares climbed. The Shanghai Composite Index gained 0.6% . The MSCI Asia Pacific Index advanced 0.6 percent. The MSCI Emerging Market Index extended a rally that took it to the highest in more than six years.
The only fly in the Asian ointment was that China’s government bonds extended declines, with the benchmark 10-year yield rising 4 basis points to 4.03% to head for the highest close since 2014. How much longer before China finds itself in a funding squeeze and the recent euphoria crashes?
“The earnings picture is dominant and that’s of course what has, and will continue, to move markets,” Bob Doll, chief equity strategist at Nuveen Asset Management, told Bloomberg TV. “Icing on the cake is the tax bill and that does boost earnings but a lot of people are already baking that into their assumption.”
While there was little of note in global bond or equity markets, the biggest overnight story is the on-going strength of oil prices, jumping to more than 2 year highs as a result of the latest API inventory numbers and the Transcanada pipeline interruption, which helped NOK and CAD within G10 currencies. Haven currencies also outperform on potential hedging amid a global stocks and oil rally; euro gains to stay below pivotal 55-DMA resistance amid chances that a German grand coalition may be achieved.
“WTI is, for a change, in the driving seat,” says Ole Hansen, head of commodity strategy at Saxo Bank. “The spread is tightening and if we have a prolonged disruption then that will play its part in bringing down inventories further in the US.”
On the US political front, US Senator Murkowski who is seen as a key moderate swing vote, is said to support repealing of ObamaCare's individual mandate. Earlier, Janet Yellen said the Fed must keep an open view and not be trapped by forecasts and said so far so good in terms of reducing the balance sheet. Yellen also commented that she is uncertain whether low inflation is transitory and is keeping an open view that it could be long-lasting.
In Europe, Angela Merkel’s party is betting on a revived alliance with the Social Democrats to dodge the risk of new elections after coalition talks with two other parties broke down, Bloomberg reported although other news sources were skeptical. The goal is to avoid new elections and appeal to the need for German stability at a critical time for the country and the European Union "amid nationalist pressures and challenges posed by Brexit."
The yield curve in Germany, the euro zone’s benchmark government bond issuer, flattened to its lowest in more than two months, catching up with the U.S. curve. According to Bloomberg, there was heavy bear flattening seen in early trade, with the 5Y sector underperforming with focus on Coeure’s speech yesterday which suggested moving forward guidance away from QE and onto rate hikes. USTs were dragged lower in tandem, however U.S. curve is marginally steeper.
Morgan Stanley analysts said flattening curves were not cause for concern just yet. “Those looking at U.S. yield curve flatness as a potential bearish risk factor may be reminded that during the last 30 years, it has taken at least a year after the initial inversion before the recession set in,” they told clients.
While most currencies did little overnight, the Turkish lira plunged to fresh record low. Fears are growing for Turkey where expectations are growing of emergency central bank action to counter the lira's slide to record lows. Will the next emerging market crisis start in Turkey, and if so when?
Commodity markets too are benefited from the improved global growth outlook, with copper futures rising to two-week highs CMCU3. Oil prices too jumped, with Brent crude up almost $1 a barrel due to cuts in piped Canadian crude and expectations of a prolonged OPEC-led production cut.
Bulletin headline Summary from RanSquawk
- European stocks are relatively directionless with the EuroStoxx 50 trading flat in what has been a light session of macro newsflow thus far
- Fixed income markets feel the squeeze in Europe amid a rapid turnaround with the front end of the curve giving way first
- Looking ahead, highlights include the UK budget, US durables, weekly jobs, DoEs, FOMC minutes and Baker Hughes
Market Snapshot
- S&P 500 futures little changed at 2,597.70
- Stoxx Europe 600 little changed at 387.97
- MSCI Asia up 0.6% to 172.62
- MSCI Asia ex Japan up 0.5% to 568.44
- Nikkei up 0.5% to 22,523.15
- Topix up 0.3% to 1,777.08
- Hang Seng Index up 0.6% to 30,003.49
- Shanghai Composite up 0.6% to 3,430.46
- Sensex up 0.3% to 33,563.33
- Australia S&P/ASX 200 up 0.4% to 5,986.41
- Kospi up 0.4% to 2,540.51
- German 10Y yield rose 1bp to 0.36%
- Euro up 0.2% to $1.1763
- Italian 10Y yield fell 3bps to 1.51%
- Spanish 10Y yield rose 1bp to 1.49%
- Brent futures up 0.7% to $63.03/bbl
- Gold spot up 0.3% to $1,284.35
- U.S. Dollar Index down 0.2% to 93.78
Top Overnight News
- Fed officials have penciled in a gradual path for raising interest rates, but minutes of their last meeting may show increasing concern that the U.S. labor market is overheating
- Yellen however cautioned against raising interest rates too quickly and said it was dangerous to allow inflation to drift lower
- German Chancellor Angela Merkel’s party is betting on a revived alliance with the Social Democrats to dodge the risk of new elections, according to people familiar with discussions in Berlin
- Uber Concealed Hack That Exposed 57 Million People’s Data
- For the U.K. government, which has already been weakened by infighting over Brexit and the hasty departure of two cabinet ministers, a badly-received Budget could put Chancellor of the Exchequer Philip Hammond’s political future in doubt; Hammond is constrained by reduced growth forecasts while he has been tasked to wow voters disillusioned by years of austerityRussian President Vladimir Putin meets his Turkish and Iranian counterparts, Recep Tayyip Erdogan and Hassan Rouhani respectively, in Sochi for summit talks on Syria
- Tax bill update: bill contains future tax traps for multinationals
- German Chancellor Angela Merkel’s party is betting on an alliance with the Social Democrats even as she publicly stated she’s open to another election
- Fed Debate Over Rate-Hike Pace in Focus Amid Strong Job Market
- Disney Animation Legend Lasseter Takes Leave Over Misconduct
- Nippon Paint Derails Akzo Bid for Axalta in Surprise Counter
- MiFID Myth Is That Rules Will Benefit Savers, Money Managers Say
Asia equity markets were higher across the board as the regional bourses received a lift from their US counterparts, where tech outperformed and all major indices posted fresh record levels. ASX 200 (+0.4%) was led by energy names as crude prices extended on post-API gains after the latest inventory report showed the largest drawdown in 3 months, while Nikkei 225 (+0.5%) shrugged off a firmer currency and jumped aboard the tech-rally ahead of tomorrow’s market closure. Elsewhere, the Taiex (+0.4%) posted a 27-year high, while Hang Seng (+0.6%) rose to its highest in a decade above the 30,000 level after the PBoC upped its liquidity operations again, with blue-chip energy names also underpinned. Finally, 10yr JGBs shrugged off the positive risk tone across the region and traded higher with mild support seen amid the BoJ’s presence in the market for nearly JPY 1tln of JGBs ranging from 1yr-10yr maturities. PBoC Governor Zhou said China should allow markets to play a decisive role in financial resource allocation, while he added they will reduce FX intervention and push ahead on CNY internationalization. PBoC injected CNY 100bln via 7-day reverse repos, CNY 80bln via 14-day reverse repos & CNY 10bln via 63-day reverse repos. PBoC set CNY mid-point at 6.6290 (Prev. 6.6356). Sources state that although the BoJ sees no immediate need to withdraw stimulus, officials are now more vocal on increasing costs of prolonged ultra-loose policy which could be a hint that the next move would be to cut back stimulus rather than widen it.
Top Asian News
- Hedge Funds Are Demanding China Buyers Pay More in M&A Deals
- Indian Steel Tycoon Is Said to Hire StanChart Banker to Lead M&A
- Yuan Interbank Rates Jump in Hong Kong Amid Year-End Demand
- Hong Kong’s Hang Seng Index Rises Above 30,000 to Decade- High
- Anbang Is Said to Be Required to Cut Bank Stakes Under New Rules
- Gulf Energy Prices $733 Million Thailand IPO at Top End of Range
European stocks are relatively directionless with the EuroStoxx 50 trading flat. Newsflow has also been on the lighter side ahead of the UK Autumn Budget. Among the biggest movers is Thomas Cook, slipping some 13% after its earnings report. Although, profit figures had come in-line or ahead of analyst estimates, focus was on the tighter margins and aggressive discounts, signalling potential warnings over heightened competition. On a sector basis, basic materials and oil names are faring better, with the latter bolstered by the rise in oil prices, in which WTI is now at fresh 2-yr highs. More colour and analysis around the rapid turnaround in bonds courtesy of market contacts, as we hear that the front end caved first. Dec 2 year contracts breached the pre-October ECB QE tapering low at 112.2400 (low now 112.200), while 5 year Bobls have been underperforming since the off on spreads and some positioning after Coeure hinted at more forward guidance before September 2018 to flag the end of bond buying. There is also talk about 10s vs 30s flattening trades, and block sales of Bunds in 10k lot clips, one at the 162.67 low, but set more than 10 ticks higher, and the other vs an option strategy (162.50/160.50 put spread against 163.50 calls). Some consolidation off the lows in Eurex contracts in wake of a strong 30 year German auction, with the retention at the lower end of norms, albeit not a big offering to place.
Top European News
- Germany Heaps Pressure on SPD to Bow to Call for New Merkel Pact
- Riksbank Takes On Housing Correction Fears, Sees Krona Gains
- Poland’s ‘Wait-and-Sleep’ Stance on Rates Alarms Zubelewicz
- Oil Dealmakers Seek Boost in U.K. From North Sea Tax Change
- Denmark’s Nationalists Suffer Surprising Blow in Local Elections
In currencies, the DXY dollar Index is back below 94.000 yet again on broad USD losses ahead of Thanksgiving, with comments from outgoing Fed Chair Yellen weighing as she expresses serious doubts about inflation reaching target due to factors that may not be transitory. The DXY is holding around 93.770, but in danger of revisiting recent multi-week lows under 93.500 if the Greenback succumbs to more selling pressure in holiday-thinned volumes. The EUR/USD has trimmed its early gains after initially rebounding strongly from sub-1.1720 lows as residual offers from 1.1780-1.1800 continue to obstruct re-tests of the highs above 1.1800. Option expiries could exert more direction influence as Thanksgiving approaches and nearest strikes to watch in decent size are at 1.1750-75 (1.2 bn) then 1.1800-30 (2.4 bn). Cable also firmer and just under 0.8900, with potential for volatility around the Frankfurt fix (385 mn expiry at the figure too). Yen was initially the firmest of the G10 vs the Dollar, with the pair chopping and changing above 112.00 (1.4bln expiry), and a market contact also noting selling in the GBP/JPY cross through 148.50 (program offers reportedly) and key chart support at 147.50.
In commodities, brent and WTI crude futures are firmer this morning, with sentiment bolstered by the sizeable drawdown in last night’s API crude report (largest drawdown in 3-months). As such, WTI rose to a fresh 2-yr high, however did fail to push through USD 58. Elsewhere, gold prices are modestly higher amid the support from the softer greenback. US API weekly crude stocks (Nov 17) -6.356M (Prev. 6.513M).
Looking at the day ahead, we will get the FOMC minutes from the latest monetary policy meeting, while in the UK the big focus will be Chancellor of the Exchequer Philip Hammond’s Budget statement in Parliament. The most significant release of note is the flash October durable and capital goods orders data in the US. The latest weekly initial jobless claims data is also due along with the final November University of Michigan consumer sentiment reading.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 3.1%
- 8:30am: Initial Jobless Claims, est. 240,000, prior 249,000; Continuing Claims, est. 1.88m, prior 1.86m
- 8:30am: Durable Goods Orders, est. 0.3%, prior 2.0%; Durables Ex Transportation, est. 0.5%, prior 0.7%
- Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 1.7%; Cap Goods Ship Nondef Ex Air, est. 0.3%, prior 0.9%
- 9:45am: Bloomberg Consumer Comfort, prior 52.1
- 10am: U. of Mich. Sentiment, est. 98, prior 97.8; Current Conditions, prior 113.6; Expectations, prior 87.6
- 2pm: FOMC Meeting Minutes
DB's Jim Reid concludes the overnight wrap
The highlight today is likely to be the UK budget where I’ll find out how much more tax I’ll have to pay over the next 12 months and beyond. As our economists highlight, a stronger fiscal starting point over the last six months is likely to be wiped out by downward revisions to productivity from the OBR, leaving the chancellor slightly less space in meeting his fiscal mandate. Nevertheless, DB anticipate Hammond will spend at least some of what remains, in response to political pressure over austerity and in anticipation of slowing growth next year. See the full preview here.
In terms of markets, can I be the first to declare the start of this year’s Santa Clause rally? Yesterday saw the S&P 500 (+0.65%) cross 2600 for the first time ever, before closing at a fresh record high just below that mark. In fact the DOW (+0.69%) and Nasdaq (+1.06%) were also at record highs.
The one spoke in the wheel as far as I’m concerned is the continued flattening of the US yield curve. 2s10 closed at 58.4bps and below 60bps for the first time in a decade. We still get worried by a flat yield curve as we think it risks cutting off animal spirits. The flatter the yield, the less attractive longer-term investments/activity becomes. The opportunity cost of keeping money safe at the front end gets lower and the risk is economic participants/investors become more defensive. In more recent cycles (since the early 80s) we’ve needed it to invertfor it to be a precursor to a recession but virtually all recessions over the last 70 plus years have followed a flattening of the yield curve. In a low yield world markets may keep reaching for every last bit of carry as the curve flattens but the closer the yield curve gets to zero the more the risks build. Obviously the Fed have to be conscious of this in 2018. It’s difficult to plough through and raise rates if the back end doesn’t budge. Our base case is that it does as inflation increases but a risk is that long end rates get anchored at low levels by BoJ/ECB buying elsewhere and we could see an inverted curve if the Fed dots are accurate. So one to keep an eye on.
Staying with the Fed, our economists put out a piece last night suggesting that in recent weeks, many Fed officials have raised the possibility of re-considering the Fed's current policy framework of targeting a 2% inflation rate. Today’s minutes could provide further indications that this is becoming a lively debate among Fed officials. Given the breadth and the increase in the intensity of this discussion, our guys think markets should take note and they go through the pros and cons of all the possible alternatives to the 2% inflation target.
In Germany, the political gridlock continues but behind the scenes there has been more initiatives to avoid a new election with sources (per Bloomberg) claiming a grand coalition between Merkel’s party with the Social democrats may still be possible even though SPD’s leaders have been publicly against this. The German President Steinmeier has also met with the FDP and Greens party, asking them to consider re-joining the coalition talks with Chancellor Merkel. Elsewhere, the longest serving Finance minister Mr Schaeuble has urged German political parties to work together and start building a government, while the FDP leader Mr Lindner has noted “the experiment of a four-party coalition is unfortunately finished”.
Across the pond, the US Senate Finance Committee has released the text of its draft tax bill yesterday, with Republican leaders expecting a full chamber vote on it, potentially as soon as next week on the 30th November.
This morning in Asia, markets are trading higher again, with the MSCI Asia Pac. index c0.7pts away from its 29 year high. The Nikkei (+0.72%), Kospi (+0.31%) and ASX 200 (+0.54%) are all up modestly, while the Hang Seng (+0.90%) jumped above 30,000 to a fresh decade high as we type.
Now recapping other markets performance from yesterday. As discussed earlier US bourses strengthened to record highs with little material new news flow, although trading volumes in the S&P were c15% below average. Within the S&P, all sectors excluding telco (-0.54%) were in the green, with gains led by tech (+1.19%) and heath care stocks. European markets were broadly higher, with the Stoxx 600 (+0.44%), DAX (+0.83%) and FTSE (+0.30%) all up modestly, while Spain’s IBEX fell 0.32%. The risk on bias was evident again with the VIX index down for the fourth consecutive day and now back below 10 (-8.64% to 9.73).
Sovereign bond markets were slightly firmer with core bond yields down 1-3bp (UST 10y & Bunds -1.2bp; Gilts -1.8bp; OATs -2.6bp) while peripherals modestly outperformed (down c3bp). In currencies, the US dollar index dipped 0.13% while both the Euro and Sterling rose 0.08%. The Turkish Lira pared losses to be down 0.7% vs. the greenback (c14% down since September) after its central bank took steps to strengthen the currency by providing funding from its late liquidity window which will raise the weighted average cost of funding by 25bp. In commodities, WTI oil rose 0.83% yesterday and is trading c1.7% higher this morning as API data show crude stockpiles continuing to decline. Precious metal rebounded slightly (Gold +0.31%; Silver +0.37%) while most other base metals advanced (Copper +1.39%; Zinc +2.23%) but aluminium fell 0.83%.
In Europe the ECB’s Coeure reiterated his expectations that interest rate guidance rather than QE bond purchase will “gain importance over time”, he noted “I expect the link (between inflation and QE) to change when the governing council is sufficiently confident that net asset purchases are less needed” to support inflation and that “I expect it will come at some point between now and September 2018”. Elsewhere, when asked if QE should end in September, he noted “for me, it’s the logical conclusion”, although he reiterated that he is part of the large majority of council members that believe a substantial degree of monetary accommodation is still needed.
In the UK, Brexit Secretary Davis pushed back on EU negotiator Barnier’s earlier claims for an unique solution on the Irish border, Mr Davis noted “we must start talking about our future (trade) relationships…the Northern Ireland border cannot be fully addressed if we’re not taking into account the shape of our future…with the EU”. We wait and see if a breakthrough occurs before the EU summit on 14th December but it’s increasingly seems likely that the UK will up its settlement offer soon.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the October Chicago Fed national activity index was materially above expectations at 0.65 (vs. 0.20) – the highest since January 2012, with the strength likely aided by the post storm rebuild efforts. The existing home sales also beat at 5.48m (vs. 5.40m expected) – a four month high. Sales grew 2% mom, with modest growth seen across all four regions, although annual growth was still down 0.9% yoy.
In the UK, both the October underlying private sector net borrowing (8.0bln vs. 7.1bln expected) and public sector net borrowing (7.5bln vs. 6.5bln expected) was modestly higher than expectations. Elsewhere, the CBI’s Industrial trends survey posted a 19pt mom rebound in the new orders index to +17 in November – the strongest reading since 1988. The export orders index also rose to its highest level since 1995.
Looking at the day ahead, the big focus in the UK will be Chancellor of the Exchequer Philip Hammond’s Budget statement in Parliament, due at midday. In the evening we will also receive the FOMC minutes from the latest monetary policy meeting. Datawise, the most significant release of note is the flash October durable and capital goods orders data in the US. The latest weekly initial jobless claims data is also due along with the final November University of Michigan consumer sentiment reading.