European, Asian stocks fell while S&P futures rebounded as investors assessed a mixed batch of earnings reports while the dollar strengthened to 9 month highs versus most peers on rising confidence that the Fed will raise rates this year, pushing global bond yields higher.
Top overnight news included the surprising profit by Deutsche Bank as well as the 35% jump in Barclays earnings on rising bond trading revenue; in macro the biggest overnight event was the UK Q3 GDP report which rose 0.5% handily beating expectations of 0.3% rise in the first quarter of Brexit. Yields on Britain’s gilts jumped to the highest since the Brexit vote. 2Y gilts rose four basis points to 0.31% in early trading and touched 0.33 percent, the highest since June 23. Germany’s 10-year bund yield climbed seven basis points to 0.15 percent, a fifth-straight increase, and Treasury 10-year note yields added three basis points to 1.82% as a December rate hike looking increasingly likely.
Norway’s krone surged after the central bank kept its benchmark interest rate unchanged for a fourth meeting. Crude oil traded below $50 a barrel amid doubts that OPEC will implement its first output cuts in eight years, further pressured by rising oil. The Bloomberg Dollar Spot Index was 0.1 percent higher. Europe’s Stoxx 600 fell 0.3 percent after rising as much as 0.5 percent.
Markets are now pricing in a 74-percent chance that the U.S. Federal Reserve will raise interest rates at its December meeting following a series of hawkish comments from Fed policymakers. Bets that the Fed will hike rates have driven the dollar to nine-month highs against a basket of currencies this week and have supported U.S. 10-year Treasury yields.
The "steepening of the US yield curve works as a magnet for capital coming at this point in particular out of low yielding environments such as Japan and Switzerland," said analysts at Morgan Stanley, adding that these flows will continue to support the dollar.
An overnight slide in oil prices and underwhelming results from Apple soured the mood in Asian stocks where technology sectors led losses in Japan. Europe's STOXX 600 was up 0.3 percent, however, though defensive sectors such as healthcare and utilities provided the biggest boost to the index, reflecting investor caution. Banks among the worst performing sectors in Europe this year, rose 0.5 percent helped by a surprise third-quarter profit at Deutsche Bank and forecast-beating numbers from Barclays which, like its U.S. rivals, enjoyed a significant pick-up in bond trading revenue.
Data from the European Central Bank showing lending growth to euro zone companies and households grew at a steady pace last month was also seen helping the sector.
On the earnings front it’s another busy day with 62 S&P 500 companies scheduled to release their latest quartiles including Ford Motor, ConocoPhillips and UPS either prior or at the open, and Alphabet after the close.
Bulletin Headline Summary from RanSquawk
- European equities have traded in a relatively choppy manner all morning before turning lower ahead of the US open with earnings continuing to dictate sentiment.
- A busy morning in FX, heightened by the usual month end flow — which is said to favour the USD — with the Riksbank and Norges bank rate decisions preceding the key Q3 UK GDP number which exceeded expectations
- Looking ahead, highlights US Durable Goods Orders, Weekly Jobs and Pending Home Sales
- S&P 500 futures down 0.2% to 2130
- Stoxx 600 down 0.3% to 341
- FTSE 100 down 0.2% to 6942
- DAX down 0.3% to 10674
- German 10Yr yield up 5bps to 0.14%
- Italian 10Yr yield up 5bps to 1.5%
- Spanish 10Yr yield up 5bps to 1.18%
- S&P GSCI Index up 0.4% to 372
- MSCI Asia Pacific down 0.6% to 139
- Nikkei 225 down 0.3% to 17336
- Hang Seng down 0.8% to 23132
- Shanghai Composite down 0.1% to 3112
- S&P/ASX 200 down 1.2% to 5296
- US 10-yr yield up 3bps to 1.82%
- Dollar Index down 0.03% to 98.6
- WTI Crude futures up 0.3% to $49.34
- Brent Futures up 0.6% to $50.27
- Gold spot up 0.2% to $1,269
- Silver spot up 0.1% to $17.65
Global Headline News
- Deutsche Bank Posts Surprise Profit on Trading Jump, Costs: Litigation, restructuring costs lower than analysts forecast
- Barclays Posts 35% Jump in Profit on Bond Trading Revenue: Fixed-income unit reports highest revenue in more than 2 years
- VW Struggles to Emerge From Crisis as Audi Takes Profit Hit: Audi return on sales will be ‘considerably below’ target range
- Treasury Selloff Is About to End If Consensus Forecast Is Right: Rate hike has been priced in, says Mitsubishi UFJ Kokusai
- Verizon, Danone Pushing Company Bond Sales to Six-Week High: Borrowers rush in as borrowing premiums close to 18 month low
- Tesla Posts Rare Quarterly Profit as Musk Readies for SolarCity: Earnings surprise aided by cost-cutting, zero- emission credits
- Viacom Said Close to Naming International Chief Bakish CEO: Choice fills leadership void as company weighs deal with CBS
- Apple Delays AirPods Wireless Headphones Announced With IPhone 7: Didn’t provide a technical reason for the delay or indication as to when the product will be shipped
Looking at regional markets, we start in Asia where it has been a subdued session as equities fell albeit mildly so with earnings continuing to dictate much of the price action. In light of the negative sentiment, safe-haven flows into the JPY hindered Japanese exporters and the Nikkei 225 (-0.3%). The 1st of the large banks in Australia provided their financial results with NAB (+1.8%) announcing that cash earnings rose 4%, while they maintained their dividend. However, this failed to lift the ASX 200 (-1.2%), as the index was dragged lower by energy names. The Shanghai Comp (-0.1%) and the Hang Seng (-0.8%) were also softer in the wake of industrial profits rising at a slower pace than the prior month. In credit markets, focus in JGB's has been in the short end, with the 2-yr outperforming post the strong 2-yr auction, resulting in an unwind of the recent curve flattening. BoJ Governor Kuroda said the BoJ may not need to purchase JPY 80trl to keep zero goal in the future, although it doesn't plan to lower JGB holdings at this stage. Kuroda further commented that the yield curve is moving inline with what was desired at prior policy meeting. Chinese Industrial Profits in September rose Y/Y 7.7% declining from a multi-year high of 19.5%.
Top Asian News
- China Steps Up Yuan Rhetoric as Currency Tumbles to Six-Year Low: Volatility gauge most muted in year as officials show support
- Nomura’s Second-Quarter Profit Climbs 31% on Trading Income: 2Q net income 61.2b yen vs est. 45b yen
- OCBC Quarterly Profit Beats Estimates on Wealth, Insurance: Non-interest income climbs 25%, interest income falls 6%
- Samsung Scion’s Reign Begins Amid Note 7 Smartphone Crisis: Lee gains corporate power with Samsung Electronics board seat
- Ousted Tata Chief Warns Group Faces $18 Billion in Writedowns: Cyrus Mistry defends his record in letter to Tata’s board
European equities have traded in a relatively choppy manner all morning before turning lower ahead of the US open with earnings continuing to dictate sentiment. Stocks were initially led higher by pre-market earnings, with the likes of Deutsche Bank (flat) and Barclays (+1.8%) initially impressing investors to trade in the green before investor sentiment turned less receptive to Deutsche Bank with many concerns seemingly persisting around the company and a broader move lower in stocks also hampering sentiment. Finally, the likes of T-Notes and Bunds followed the lead from Gilts, which took out last week's lows in the wake of UK GDP. As such the German benchmark has fallen over 50 ticks, slipping back below 162.50 and taking out 163 in the process. T-Notes also printed fresh lows in the wake of the report, consolidating below the psychological 130 level with the 10yr yield hitting its highest level since Brexit.
Top European News
- Brexit Likely to Cost Banks Easy Access to EU, Trade Chief Says: Inflation is ‘inevitable’ side effect of depreciation, Mark Garnier says
- Telefonica to Cut Dividend After Failing to Sell 02 in U.K.: Carrier continues to battle with high debt load, deal flops
- ABB Tumbles After Quarterly Orders Decline More Than Forecast: Swiss company names ex-Nokia executive Ihamuotila as new CFO
- Swedish Central Bank Prepares for More Easing to Spark Inflation: stands prepared to extend bond purchases into next year and will keep interest rates lower for longer
- BBVA Third-Quarter Profit Beats Estimates on Asset Sale, Trading: makes 94 million-euro provision for restructuring costs
- U.K. Power Reserve No Cure for Biggest Price Surges Since 2008: French nuclear outages to influence market volatility
In FX, it has been a busy morning with the Riksbank and Norges bank rate decisions preceding the key Q3 UK GDP number which exceeded expectations coming in at +0.5% vs +0.3 consensus. The YoY rate was 2.3% vs 2.1% expected, but so much negativity over the expectations in the EU negotiations ahead, GBP is struggling for traction on the upside. In the Scandies, the SEK saw a minor bid after the Riksbank held rates unchanged, but maintaining the prospect of prolonged QE at the Dec meeting while keeping further rate cuts on the table, we saw a marked turnaround. This was exacerbated by the neutral stance at the Norges bank, keeping their outlook unchanged. NOK/SEK was the major move, pushing up into the upper 1.0800's to erase some of the modest clawback seen in the SEK in recent sessions. Elsewhere, USD/JPY continues to probe higher levels, unrelenting in the push for 105.00. EUR/USD is struggling for upside traction also, but despite dovish comments from ECB sources late yesterday regarding QE extension, the lead spot rate is finding firm bids below 1.0900. AUD and CAD remain under the cosh in the meantime, with .7700+ sellers in the high(er) yielder looking past the headline rise in inflation yesterday and sending the pair down close to a cent so far. USD/CAD is still grappling with sellers ahead of 1.3400, but refuses to give up on a break higher as Oil prices have also slipped in recent sessions.
In Commodities, WTI and Brent futures both found support during European hours to move higher towards USD 49.50 and USD 50.50 respectively, albeit below yesterday's post-DOE highs with the report overshadowed by persisting concerns over the likelihood of OPEC and non-OPEC producers being able to strike a meaningful production cut. Elsewhere, price action across the metals complex has been relatively continued with just a modest bid for gold alongside the recent downtick seen in equities
Looking at the day ahead, the big data in the US this afternoon is the preliminary durable and capital goods orders data for September, which could still have an impact on Q3 GDP forecasts this Friday. The market is expecting no change in headline durable goods order, while core capex orders are expected to decline very modestly. Other data this afternoon includes initial jobless claims, the Kansas City Fed’s manufacturing survey and pending home sales. Away from the data comments from the ECB’s Mersch are expected this evening. There’s also some central bank focus with policy decisions due from Norway and Sweden (no changes expected). On the earnings front it’s another busy day with 62 S&P 500 companies scheduled to release their latest quartiles including Ford Motor, ConocoPhillips and UPS either prior or at the open, and Alphabet after the close.
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US Event Calendar
- 8:30am: Durable Goods Orders, Sept. P, est. 0.0% (prior 0.1%)
- 8:30am: Initial Jobless Claims, Oct. 22 (prior 260k)
- 9:45am: Bloomberg Consumer Comfort, Oct. 23 (prior 41.3)
- 10am: Pending Home Sales m/m, Sept., est. 1.0% (prior -2.4%)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11am: Kansas City Fed Manufacturing Activity, Oct., est. 3 (prior 6)
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DB's Jim Reid concludes the overnight wrap
Bond yields continue to rise like an oven baked Victoria sponge at the moment. Yesterday’s selloff started in Europe where yields were up anywhere from 5bps to 7bps with 10y BTP’s in particular finishing up 7.5bps at 1.457% and the highest yield since June 27th. The finger of blame was pointed at the busy day for new issuance with auctions for Gilts, Bunds and BTP’s in particular contributing, while a busy day for corporate issuance including the announcement of a near €4bn deal for Verizon also played a part. That weakness spread to Treasuries where 10y yields ended the day up 3.7bps and near the top end of the recent range at 1.794%. It’s continued this morning in Asia too where yields in the antipodeans are up 4-5bps, while 10y JGB’s have crept up a basis point too.
While those moves for bonds helped financials yesterday (European Banks +0.23% and S&P 500 Banks +0.88%), broader equity markets succumbed to another fairly mixed day for earnings and also another leg lower for Oil. The S&P 500 finished -0.17% and the Stoxx 600 ended -0.38%. While Apple (-2.25%) pared losses of over -4% at the open, the move still weighed on the wider tech sector while there were also some disappointing results in the healthcare sector from Edwards Lifesciences which resulted in shares tumbling over 17% and the most in three years. On the flip side Boeing surprised to the upside with its latest quarterly, while Coca-Cola largely met expectations. During the European session Lloyds Bank, Vinci and Bayer disappointed.
In terms of Oil, WTI finished last night down -1.56% and a shade above $49/bbl for its lowest closing level since September 30th. It was actually quite a volatile day for the complex. Prices jumped back above $50/bbl midway through the afternoon after the latest EIA data showed that stockpiles unexpectedly declined last week in the US. However once the details were digested it was revealed that the decline mainly came about due to a big drawdown in stockpiles along the West Coast which is seen as a bit isolated from the rest of the country. WTI is hovering around that closing level this morning.
Elsewhere this morning, bourses in Asia are generally trading with a softer tone too with results also starting to ramp up in the region. The Nikkei (-0.29%), Hang Seng (-1.01%), Shanghai Comp (-0.22%) and ASX (-0.60%) are all in the red, with the Kospi (+0.26%) the only market currently up. US equity index futures are also tracking lower, while EM currencies are generally weaker. There’s also been some data released in China this morning. Industrial profits were reported as increasing +7.7% yoy in September, down from that bumper +19.5% reading in August. The latest print means that for the nine months through September, profits are up +8.4% yoy.
Moving on. There were a few other interesting stories which attracted a bit of attention yesterday. Late last night after the US close Bloomberg ran a story suggesting that global lenders and insurance companies would probably lose their passporting rights to provide services in the EU following Brexit. The story was based on the outline of a plan from UK trade minister Mark Garnier. Interestingly the article went on to suggest that an alternative system, known as ‘equivalence’, was being floated however with the drawback that the UK may have to accept all future EU regulations as handed down from Brussels. One to keep an eye on.
Meanwhile, another story which attracted some brief attention was a Reuters report suggesting that the ECB is ‘all but certain’ to extend QE beyond March and at the same time ease the rules around purchases. The details were a little less impressive though. The article quoted ‘central bank officials’ rather than governing council members and so in our view raises credibility questions again much like the tapering story. The story also went on to say that ‘whether the current monthly volume of purchases will be maintained or reduced after March has not been decided and will depend on incoming economic data’. The Euro chopped around a bit with the story but there wasn’t ultimately much of a reaction in markets to it.
Staying with the ECB, board member Praet was fairly downbeat in his comments yesterday. He said that ‘although the euro-area recovery is showing signs of resilience, material downside risks remain, mainly stemming from the external environment and significant uncertainties following the outcome of the UK referendum’. Praet also said that underlying inflation has ‘yet to show clear signs of a more dynamic upward movement’ and that it’s ‘imperative that decisive action is taken now in order to propel the on-going cyclical recovery into a structural recovery’. He did however also add to this that ‘such reforms are outside of the scope of monetary policy and fall under the remit of other national and European policy makers’,
Away from this, yesterday evening hopes seemed to have been on the rise for a last minute reprieve of the trade deal between Canada and the EU, known as CETA. The President of the European Commission, Juncker, said that he expected Belgium’s French-speaking southern region of Wallonia to sign up imminently and so allow Belgium to endorse the pact. All other 27 EU members states are ready to sign the agreement according to the FT. While talks are due to resume this morning, overnight the press secretary to the Canadian International Trade Minister has said that the Canada delegation won’t be travelling to Europe today, so it remains to be seen what the outcome will be.
Before we look at today’s calendar, the largely second tier data in the US yesterday was generally a little better than expected. The flash services PMI for this month printed at 54.8 which was up 2.5pts from September and also well above market expectations of 52.5. It is also the highest reading since November last year and, combined with the manufacturing print, puts the composite reading at 54.9. Elsewhere, the usually volatile new home sales were up an unexpected +3.1% mom in September (vs. -1.5% expected) and wholesale inventories rose +0.2% mom in September. The other data yesterday was the advance goods trade balance for September which revealed a shrinking of the deficit to $56.1bn from $59.2bn after expectations were for a slight widening. We’ve yet to see any changes to Q3 GDP trackers following that. There wasn’t much to report from the data in Europe other than a modest decline in Germany consumer confidence (9.7 from 10.0).
Looking at the day ahead now, this morning in Europe the main highlight is the advance Q3 GDP report in the UK. The market consensus is for a +0.3% qoq print which follows the +0.7% qoq reading in Q2. Our Economists are also pegging a +0.3% qoq growth forecast. While the Brexit vote should show up more clearly in the Q3 GDP data there may be some upside risks given the resilience of short term data post the referendum. Elsewhere in Europe this morning the M3 money supply reading will also be released for the Euro area. The big data in the US this afternoon is the preliminary durable and capital goods orders data for September, which could still have an impact on Q3 GDP forecasts this Friday. The market is expecting no change in headline durable goods order, while core capex orders are expected to decline very modestly. Other data this afternoon includes initial jobless claims, the Kansas City Fed’s manufacturing survey and pending home sales. Away from the data comments from the ECB’s Mersch are expected this evening. There’s also some central bank focus with policy decisions due from Norway and Sweden (no changes expected). On the earnings front it’s another busy day with 62 S&P 500 companies scheduled to release their latest quartiles including Ford Motor, ConocoPhillips and UPS either prior or at the open, and Alphabet after the close. VW is also due to report in Europe.