Spanish Stocks Tumble On Growing Catalan Crisis; Dollar Weakens As China Jumps

Tyler Durden's picture

While U.S. equity futures were little changed in a rerun of every other morning this month ahead of a diagonal ramp that closes the S&P at daily all time highs, things were more volatile elsewhere with the dollar sliding as investors weighed the possibility that current Fed Governor Jerome Powell, seen widely as far more dovish than Kevin Warsh, might take the reins from Janet Yellen, who Bloomberg reported was said to be getting the cold shoulder.

Both the Bloomberg Dollar Spot Index and 10-year Treasury yields retreated from recent highs following the a Bloomberg report that Trump had been presented with a shortlist of Fed chair candidates, among them, ex-board member Kevin Warsh has criticized the central bank for trying to do too much with monetary policy while current Governor Jerome Powell has voted in sync with Chair Janet Yellen, who’s term is up in February and who was said to have gotten little support from Trump's group of close advisors.

Following the report, Jerome Powell's odds of replacing Yellen soared to second behind Kevin Warsh, and were at 35% most recently, ahead of John Taylor and Gary Cohn, with Janet Yellen in 5th spot.

While the latest September econ data out of Europe was solid, pushing the euro higher, Spanish assets tumbled as a Catalan spokesperson reiterates commitment to becoming a republic and the regional leader scheduled a press conference; the bund/bono spread was wider by 7bps and Spanish IBEX heavily underperforms as domestic banks decline. Spanish notes slumped on news that Catalonia’s leader Carles Puigdemont would release a statement at 9 p.m. CET after promising a formal announcement to regional lawmakers of the referendum results, triggering a 48-hour countdown to a unilateral declaration of independence. This prompted a sharp drop in Spanish assets, with the IBEX sliding as much as 2.5% on surging volumes more than twice 30DMA, led lower by Catalan exposed banks such as Banco de Sabadell (4.7%), CaixaBank (4.5%), Banco Santander (2.7%) and BBVA (2.7%); the drop sent the IBEX into correction territory now down 10% from intraday peak on May 8.

"As far as market reaction is concerned the short-term effect is that investors would be reluctant to hold Spanish exposure ahead of this event risk,” said Antoine Bouvet, an interest-rate strategist at Mizuho. Others chimed in with a bearish take: "A pause in the global stock market rally is necessary and the political stress coming from Spain could become one of the triggers", said Jerome Troin-Lajous, cross-asset sales trader at Louis Capital Markets. "This could revive the grim view of some U.S. investors that Europe is a political can of worms." The deteriorating Spanish politics acted as a drag on positive read-across from the record highs on Wall Street, says Jasper Lawler, head of research at London Capital Group

The EUR/USD continued to find bullish pressure, following the support seen yesterday around the 1.17 handle, triggered by option expiries in the pair, with around 4.6bln between 1.17 and 1.18. EUR has seen subdued price action through early European trade, as much anticipation lies on pending European Markit PMI data, alongside later commentary from ECB’s Draghi.

Meanwhile, as Spain tumbled, Chinese (offshore) stocks soared and Hong Kong equities added to yesterday’s surge on optimism about monetary loosening. With the mainland closed this week for holiday, offshore Chinese shares extended gains to the highest in almost a decade, as most lenders continued to climb following the central bank’s decision to reduce their RRR in 2018, while real-estate developers rallied.  MSCI China Index rises 0.5%, at highest since December 2007; Hang Seng China Enterprises Index advances 0.8% in Hong Kong, taking 3-day gain to 4.8%; Hang Seng Index adds 0.7% for 3-day advance of 3.5%, most since July 2016. Property developers were among main gainers in Hong Kong, with Country Garden Holdings Co. rising 7.2% for 3-day gain of 9.1%. Sunac China Holdings Ltd, Shimao Property Holdings Ltd, China Vanke Co., Guangzhou R&F Properties Co. among top 10 performers on MSCI China, all rising at least 3.8%.

Elsewhere in Asia, Japanese stocks were little changed, while Australia stocks declined -0.8%.

In rates, the yield on 10-year Treasuries decreased one basis point to 2.32 percent. Germany’s 10-year yield dipped two basis points to 0.45 percent, the lowest in more than a week. Britain’s 10-year yield advanced less than one basis point to 1.355 percent. Spain’s 10-year yield climbed five basis points to 1.77 percent.

In currencies, the Bloomberg Dollar Spot Index dipped 0.2 percent. The euro advanced 0.1 percent to $1.1756. The British pound gained 0.3 percent to $1.3272. The Japanese yen increased 0.3 percent to 112.56 per dollar. The DXY suffered overnight, as reports of President Trump’s shortlist for the forthcoming available Fed Chair seat began to price into markets. The likelihood of a banker with a dovish skew in their views is growing, with the candidates being spoken about: Current Fed Chair Yellen, Warsh, Powell, Cohn, and outside calls of notable dove Kashkari, alongside University of Stanford’s Taylor. Despite no official announcement, a Presidential aide declared that Trump is set to deliver a shortlist in the near future. DXY broke through its hourly ‘head and shoulders’ formation, trading below the neckline and consolidating just above 93.30.

WTI and Brent crude futures remain pressured after yesterday’s API report which showed large builds in gasoline and cushing, despite the large than expected draw in the headline figure. Libya's Sharara oilfield (280k bpd) restarted this morning, according to a Libyan oil source. Libya National Oil Corp lifts force majeure on loadings of Sharara crude oil from Zawiya, according to sources.  Gold advanced 0.3 percent to $1,275.86 an ounce. Copper decreased 0.4 percent to $2.95 a pound, the lowest in a week.

Market Snapshot

  • S&P 500 futures down 0.05% to 2,531.50
  • STOXX Europe 600 down 0.2% to 390.06
  • MSCI Asia up 0.2% to 162.97
  • MSCI Asia ex Japan up 0.3% to 537.25
  • Nikkei up 0.06% to 20,626.66
  • Topix up 0.01% to 1,684.56
  • Hang Seng Index up 0.7% to 28,379.18
  • Shanghai Composite up 0.3% to 3,348.94
  • Sensex up 0.5% to 31,657.11
  • Australia S&P/ASX 200 down 0.9% to 5,652.06
  • Kospi up 0.9% to 2,394.47
  • German 10Y yield fell 1.0 bps to 0.453%
  • Euro up 0.2% to $1.1763
  • Italian 10Y yield rose 0.9 bps to 1.872%
  • Spanish 10Y yield rose 4.1 bps to 1.764%
  • Brent Futures down 0.9% to $55.52/bbl
  • Gold spot up 0.3% to $1,275.61
  • U.S. Dollar Index down 0.2% to 93.42

Bulletin Headline Summary

  • Spanish assets slump amid the rift between Spain and Catalonia
  • GBP supported by firm Services PMI
  • Looking ahead, highlights include, US ADP as well as comments from Fed’s Yellen and ECB’s Draghi

Top Overnight News

  • Trump is heading to Las Vegas in the wake of a massacre, where he will confront recurring questions of whether restrictions on firearms can prevent another tragedy
  • As part of an investigation into how Russian-linked operatives harnessed social media during the 2016 U.S. election, lawmakers are focusing on Google services including YouTube and Gmail
  • Crisis in Spain: While King Felipe VI criticized Catalan separatists for “unacceptable disloyalty,” Catalan President Carles Puigdemont has promised a formal announcement of the referendum results, triggering a 48- hour countdown to a unilateral declaration of independence
  • Punters see ex-Fed board member Kevin Warsh as the most likely nominee to take over from Janet Yellen, who is also running for another term: PredictIt.org
  • Euro-zone composite PMI climbed to a four-month high 56.7 in September as new orders rose to a six- year high, a final reading showed; services PMI increased to 55.8, beating the flash number of 55.6
  • Spain’s King Felipe VI came to PM Rajoy’s support by telling Catalan separatists trying to break up his country that their “unacceptable disloyalty” has no place in any democratic state, as he vowed to keep Spain together
  • Iron ore shipments from Australia are rising as miners boost cargoes, with vessel-tracking data signaling that nationwide flows expanded again last month to near an all-time high of 74.36 million metric tons
  • Trading of European stocks on dark markets will probably triple as a result of MiFID II overhaul, the opposite of what architects of the law intended, as the new rules give some venues flexibility in how they price shares
    Trump Aides Are Said to Deliver Shortlist of Fed Candidates; Fed Chair Hopeful Warsh Draws Opposition From Left and Right 
  • Trump Suggests Puerto Rico’s Debt Will Need to Be Wiped Out
  • MiFID Is Seen Tripling Dark Trading in Europe as New Venues Soar

Asia stocks traded mostly higher after another record setting session in the US where all major indices printed fresh all-time highs for a consecutive day and automakers advanced on strong September car sales data. The positive momentum supported the Nikkei 225 (+0.1%) but with gains capped on a firmer JPY. Hang Seng (+0.8%) continued to lead the upside in the region as financials remained underpinned by lower reserve requirements for next year and ASX 200 (-0.8%) lagged with energy names reeling after oil briefly slipped below USD 50/bbl to a 2-week low. 10yr JGBs traded higher from the open as yields declined across the curve and with prices also supported by the BoJ’s presence for JPY 990bln in JGBs ranging from 1yr-10yr maturities. World Bank raised 2017 China GDP growth forecast to 6.7% from 6.5% and raised 2018 forecast to 6.4% from 6.3%.

Top Asian News

  • China’s Reserve Cut Excites Investors as Analysts Cautious
  • HSBC Lowers Hong Kong Stocks to Underweight Amid Tightening
  • India Seeks to Rework More LNG Contracts Amid Surplus, GAIL Says
  • RBA May Raise Rates Even If Inflation Below Target, Edwards Says
  • Russia to Challenge U.S. LNG Wave With Sevenfold Boost in Output
  • Unusual Ltd. Shares Rise to Record High; Co. Receives SGX Query

In Europe, the IBEX is the underperformer, slipping 2% with Spanish banks leading the declines. Aside from Spain, European bourses are trading higher marginally, with the FTSE 100 supported by the rise in Tesco shares, following positive earnings and the supermarket restoring their dividend. DAX outperforming as German participants play catch up after the market closure for Unity day. Spanish bonds taking a whack this morning as the stand-off between Spain and Catalonia looks to take a turn for the worse with the Catalonian Leader Puidgemont holding a news conference at 8pm London time. 10yr Bono’s rose as much as 7bps to levels last seen in March, moving within close proximity to 1.8%. Bono’s unsurprisingly underperform against all major counterparts with the GE-SP spread widening by 6.6bps.

Top European News

  • Catalans Dismiss Spanish King’s Attacks as Police Chief Probed
  • Pirelli Shares Fall After Return to Stock Market Following IPO
  • Stoxx 600 Turns Negative as Spanish Stock Selloff Intensifies

In currencies, the US Dollar suffered overnight, as reports of President Trump’s shortlist for the forthcoming available Fed Chair seat began to price into markets. The likelihood of a banker with a dovish skew in their views is growing, with the candidates being spoken about: Current Fed Chair Yellen, Warsh, Powell, Cohn, and outside calls of notable dove Kashkari, alongside University of Stanford’s Taylor.
Despite no official announcement, a Presidential aide declared that Trump is set to deliver a shortlist in the near future. DXY broke through its hourly ‘head and shoulders’ formation, trading below the neckline and consolidating just above 93.30. The EUR/USD continued to find bullish pressure, following the support seen yesterday around the 1.17 handle, triggered by option expiries in the pair, with around 4.6bln between 1.17 and 1.18. EUR has seen subdued price action through early European trade, as much anticipation lies on pending European Markit PMI data, alongside later commentary from ECB’s Draghi. In the UK, political uncertainties have once again flooded into Sterling, with contradicting reports, as yesterday saw David Davis stick to past rhetoric, stating that ‘no deal is better than a bad deal’. However, some positive developments are evident in terms of Brexit negotiations as FT reports circulated that the UK and EU have struck an agreement on dividing up WTO quotas that govern the import of farm products. GBP is marginally higher against its major counterparts, EUR/GBP has held yesterday’s high, with offers likely stacked at the 0.8880 level and trades inside the previous day’s trading range. Cable sees similar action, residing inside of Tuesday’s range, with offers touted between 1.3300-13350. Today’s services PMI reading printed firmer than analyst estimates, subsequently pushing GBP to intraday highs of 1.3281, while focus is now turning to PM May’s closing Tory conference remarks at circa 11:30.

In commodities, WTI and Brent crude futures remain pressured after yesterday’s API report which showed large builds in gasoline and cushing, despite the large than expected draw in the headline figure. Libya's Sharara oilfield (280k bpd) restarted this morning, according to a Libyan oil source. Libya National Oil Corp lifts force majeure on loadings of Sharara crude oil from Zawiya, according to sources.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -0.5%
  • 8:15am: ADP Employment Change, est. 135,000, prior 237,000
  • 9:45am: Markit US Services PMI, est. 55.1, prior 55.1
  • 9:45am: Markit US Composite PMI, prior 54.6
  • 10am: ISM Non-Manf. Composite, est. 55.5, prior 55.3
  • 3:15pm: Yellen Gives Welcoming Remarks at Community Banking Event

 

 

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BritBob's picture

What chance do the Catalans have when Spain won't even recognize that the people of Gibraltar have the right to self-determination?  Especially futile belief after effectively ceding the territory to Britain 3x times!  Gibraltar – Spanish Myths and Agreements (1 pg):

https://www.academia.edu/34608739/Gibraltar_Spanish_Myths_and_Agreements

Spain also uses the same flawed territorial integrity excuse with Catalonia that it uses against Gibraltar to deny that the people have the right to self-determination. Gibraltar – Territorial Integrity (1 page)

 

https://www.academia.edu/29347730/Gibraltar_-Territorial_Integrity

buzzsaw99's picture

bob is mildly on topic.  my god, it's the end of the world. +1 bob, well played.

chiswickcat's picture

Bad annoying links that want access to all your contacts or won't let you read / download it. Seriously? On ZH?

Don Diego's picture

What no independence declaration yet? ...still counting those votes?

World Cash Day's picture

October 6, 83rd Anniversary of a martyr, or it won't happen.

gatorengineer's picture

Wheres the Hedge article on the US Markets Tumbling this morning?

I actually saw red premarket.... Didnt think that was still possible.

 

Sky flyer's picture

You are allowed a slightly red premarket, although once it opens if its red by even a quarter percent, watch out. The ZH article of a massive crash is coming next.

toknormal's picture

Toilet paper in a monsoon.

silverer's picture

"Spanish Stocks Tumble"

It's the central bank, dropping the ball. Everyone knows that central banks over-rule all events and threats if they're doing their printing properly.

Overflow's picture

The debate about Catalonia I expected to to find in ZH is hold in Reddit

 

https://www.reddit.com/r/europe/comments/746phy/how_does_the_incoming_ca...

 

ZH is the new huffington post.