Futures Fail To Rebound On Third US Ebola Case, Continuing Crude Bloodbath

For the fourth consecutive night, futures attempted to storm higher, and were halted in their tracks when the USDJPY failed to rebound from the recalibrated 107 tractor beam, following a statement by the BOJ's former chief economist and executive director (until March 2013) who said that now is the time for the Bank of Japan to begin tapering. Needless to say, there could be no worse news to bailout and liquidity-addicted equities as the last thing a global rigged market can sustain now that QE is about to end in two weeks, is the BOJ also reducing its liquidity injections in the fungible world. This promptly took away spring in the ES' overnight bounce.

Not helping matters is the continuing selloff in oil, which as we reported first yesterday, has hit the most oversold levels ever, is not helping and we can only imagine the margin calls the likes of Andy Hall and other commodity funds (ahem Bridgewater -3% in September due to "commodities") are suffering.

But the nail in the coffin of the latest attempt by algos to bounce back was the news which hit two hours ago that a second Ebola case has been confirmed in Texas, and just as fears that the worst is over, had started to dissipate. Expect transports to continue their bipolar moves, and following yesterday's jump - the best in one week - today will be profit taking day ahead of what is increasingly shaping up to be a big "one-time, non-recurring" fourth quarter EPS crash for airlines due to the great Ebola scare of Q4.

In terms of markets, Asian markets have bounced off their opening lows with equity benchmarks moderately higher in China, Japan and Hong Kong. This follows on the modest gains in the S&P 500 (+0.16%) yesterday as the market once again averted a four-day rout. US Banks’ results were a little bit mixed though the mood is still dictated by the ongoing question marks around global growth. Taking at a look at the movers and shakers the market was once again weighed down by Energy stocks with Oil prices taking another beating yesterday. Brent and WTI were -4.3% and -4.6% lower at US$85.0/bbl and US$81.8/bbl by the end of the US session driving them even deeper into bear market territory. IEA’s forecast of the slowest oil consumption growth since 2009 didn’t help. The impact was clearly felt by Oil producers with the likes of Chevron, Schlumberger and ConocoPhillips down -2.25%, -1.97% and -1.87% respectively on the day. The S&P 500 Energy sub-sector index officially tipped into bear market territory after yesterday’s sell-off, putting it 20.1% off its June highs.

After falling in the Asia-Pacific session, T-notes have regained some poise in the European morning, as spill-over buying in both Bund and Gilt futures pressed German 10yr yields to record lows once more after a softer start for European stock markets. UK jobs numbers initially weighed on Gilts, as real wage growth in the UK rose to -0.3% from -0.8% on an ex-bonus basis, however weaker jobless claims change numbers (-18.6K vs. Exp. -35.0K) suggested a lack of follow-through in labour market strength, prompting Gilts to reverse course and hit session highs.

Looking at the day ahead, we have the Beige Book, Retail Sales, Empire state survey, and the monthly budget from the US. Other than Germany's inflation data it should be a quiet day for European data flow. Draghi's speech in Frankfurt this morning will also grab some attention. In terms of earnings Bank of America, American Express and eBay are probably the highlights.

Bulletin Headline Summary from Bloomberg and RanSquawk

The FTSE-100 lags European equities as AbbVie’s decision to reconsider their deal with Shire (SHP LN) wipes GBP 6bln from the Co.’s market cap
Softer equities have provided further support for fixed income products with the German 10yr yield once again printing a record low and the Dec’14 Bund printing yet another contract high
Looking ahead, attention turns towards as slew of US data points, with empire manufacturing, retail sales, PPI and API’s all due for release.
Treasuries steady, with 10Y yields at lowest since June 2013, 2Y at lowest since May; oil in a bear market amid signs global growth is slowing.
Central bankers are discovering that cheaper energy can be a headache, especially when warding off deflation is the economic challenge du jour
Amid questions of whether U.S.-led airstrikes can stop the extremist Sunni group from gaining territory in Iraq and Syria, Obama defended his strategy as he met yesterday with top military commanders from 21 countries allied with the U.S.
A second health-care worker in Texas tested positive for Ebola after caring for a patient with the deadly viral illness, adding to concern that infection controls at U.S. hospitals aren’t strong enough
Concern about the deadly disease has started to affect investor psychology, contributing to a decline in global airline stocks; the S&P 500 Index fell 1.2% in an hour on Oct. 13 following reports that plane passengers in Boston were hospitalized with flu-like symptoms
The BOJ should start paring its unprecedented easing soon or risk hurting people, the bank’s former chief economist Hideo Hayakawa said in an interview, as pushing inflation to a 2% target in a short period will raise living costs without boosting employment or growth
U.K. unemployment fell more than forecast to the lowest in six years and wage growth picked up for a second month
Russia warned that Ukraine is running risks by allying with Europe and faces deadlock unless it decentralizes power as Ukrainian forces repelled another attack by separatists on Donetsk Airport
Hong Kong police said they would investigate a complaint alleging officers beat a pro-democracy protester during clashes early this morning over control of a key road
Sovereign yields mixed, with U.K., Germany and U.S. lower, EU peripherals higher; Greece 10Y at 7.369%. Asian stocks mostly higher, European stocks, U.S. equity-index futures decline. WTI crude falls, Brent slumps as much as 2% to lowest since Nov. 2010; gold and copper lower

US Event Calendar

7:00am: MBA Mortgage Applications, Oct. 10 (prior 3.8%)
8:30am: Empire Manufacturing, Oct., est. 20.25 (prior 27.54)
8:30am: Retail Sales Advance m/m, Sept., est. -0.1% (prior 0.6%)
- Retail Sales Ex Auto, est. 0.2% (prior 0.3%)
- Retail Sales Ex Auto and Gas, est. 0.4% (prior 0.5%)
- Retail Sales Control Group, est. 0.4% (prior 0.4%)
8:30am: PPI Final Demand m/m, Sept., est. 0.1% (prior 0.0%)
- PPI Ex Food and Energy m/m, est. 0.1% (prior 0.1%)
- PPI Final Demand y/y, est. 1.8% (prior 1.8%)
- PPI Ex Food and Energy y/y, est. 1.7% (prior 1.8%)
10:00am: Business Inventories, Aug., est. 0.4% (prior 0.4%)
11:00am: Treasury Budget Statement, Sept., est. +$90b (prior +$75.1b)
2:00pm: Federal Reserve releases Beige Book
2:00pm: ECB’s Draghi speaks in Frankfurt Supply
11:00am: Fed to purchase $950m-$1.15b in 2018-2019 sector
11:30am: U.S. to sell $33b 4W bills, $25b 1Y bills

FIXED INCOME

EQUITIES

Markets wiped GBP 6bln from Shire’s market-cap this morning after AbbVie warned they could withdraw their USD 55bln bid from the UK pharma name in the wake of the US Treasury’s crack-down on tax inversion based M&A. Unsurprisingly then, the healthcare sector is the poorest performer, with energy names also sustaining losses as Brent crude futures fell to four-year lows for the fourth consecutive session.

After-market yesterday, Intel traded higher by over 2% after shipping 100mln chips in a quarter for the first time in the Co.’s history as Q3 revenue USD 14.6bln vs. Exp. USD 14.44bln and sees Q4 revenue USD 14.2bln-15.2bln vs. Exp. USD 14.5bln. Earnings pre-market include Bank of America, BlackRock and American Express.

In FX markets, commodity-linked currencies traded markedly lower with CAD, NZD and AUD all weaker amid macro fund led selling, helping. Consequently, USD/CAD trades at 5yrs highs while further downside in AUD/USD has been reprieved by chatter of central bank activity, which was initially observed on Monday, at around the 0.8680 level. Elsewhere, real wage growth in the UK rose to -0.3% from -0.8% on an ex-bonus basis at today's UK jobs numbers, which provided a minor lift in GBP/USD to hit highs of 1.5939, however the gains were not sustained as weaker jobless claims change numbers (-18.6K vs. Exp. -35.0K) suggested a lack of follow-through in labour market strength.

COMMODITIES

Heading into the North American open, both WTI and Brent crude futures trade firmly in the red in an extension of the recent losses, with WTI slipping below the USD 81.00/bbl level and Brent hovering around USD 84.00/bbl. Prices tripped stops through yesterday’s lows after Kuwait joined Saudi Arabia, Iraq and Iran in cutting their official selling prices for crude destined for Asia, while BofAML have also cut their 2015 Brent and WTI prices forecasts. Elsewhere, the metals complex trades in the red with the broadly stronger USD weighing on prices.

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DB's Jim Reid completes the overnight recap

We been discussing for a while that the Fed is likely to do QE again, probably during the next US recession. The rationale being that the terminal Fed funds rate will probably not be able to get high enough this cycle for conventional policy alone to be enough by the time we get to the next recession. By this time the ECB may be fully into QE and the BoJ may have done more, so without Fed QE the dollar might also be becoming too strong for comfort. However after the events of the last few weeks could the Fed actually re-start purchases before a recession?

Well Fed Williams made some interesting comments yesterday, albeit ones that were caveated. He was quoted as saying that "If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider." However he did say it would take a big shift in the U.S. economic outlook for the Fed to restart its bond buying and that he still felt it would likely be appropriate to begin lifting rates from zero in the middle of next year. So a fairly big bid-offer on how Fed policy might evolve over the next 12 month but another small sign from the Fed that there is some recent anxiousness about global growth and inflation.

While lower crude prices are negative for oil producers it may start to provide some offset for heavy users of the commodity too. The S&P 500 Airline sector index rallied strongly yesterday (+5%) to post their first daily gain in more than a week. Joe LaVorgna was also quick to highlight that gasoline prices have fallen to US$3.30/gallon last week from the peak of US$3.70 at the end of June. If sustained, Joe thinks this 40 cent decline will give US households a sharp lift to their cash flows. He has highlighted this several times in the past but it is worth remembering that every one cent annual change in gasoline prices is worth approximately US$1bn in annual US household energy consumption. So the bottom line is that if the current 40 cent decline in energy costs is maintained, consumer cash flow would improve by roughly $40 billion - which is equivalent to almost three-tenths on annualized GDP growth.

Energy prices aside what is also on the way down again are inflation readings globally. Overnight we saw Chinese CPI for the month of September come in at +1.6% yoy, the slowest since January 2010. The CPI print is below the +2.0% seen in August and slightly short of market consensus of +1.7%. PPI readings were also lower at -1.8% yoy vs consensus of -1.6% and previous month of -1.2%. Chinese PPI yoy growth has been negative every month since March 2012. Falling commodity prices clearly doesn’t help but it perhaps goes to show the excess capacity that is currently in place for the industrial sector. Away from China the inflation readings in the UK yesterday weren’t great either. September CPI and PPI both came in softer than expected with the former falling to 1.2% yoy (or a 10 year low for the series). Core inflation fell to 1.5% yoy from 1.9% yoy previously which is also the lowest since Spring of 2009. PPI output also fell more than expected (-0.4% yoy v -0.3% consensus). Away from the UK we also saw a weaker-than-expected inflation reading from France (+0.3% yoy v +0.4% expected) although Spain and Italy's equivalent were broadly in line with expectations. Germany’s latest inflation update is due today.

Bringing our focus back to markets US credit was a notable underperformer yesterday given the modest gains in stocks. The CDX IG closed around 3bps wider on the day with the HY index out by 15bp in spread terms. In terms of cash, HY was around 17bps wider yesterday and is now about 40bps wider on the month or around 150bp wider from the YTD tights seen in June. Interestingly the ETF market held up better yesterday. Both the SPDR Barclays High Yield Bond ETF and the iShares iBoxx $ High Yield Corporate Bond ETF were around two to three tenths of a percent higher yesterday.

Away from Credit, core rates were the main outperformers in the fixed income space yesterday. The UST 10yr has rallied around 7bps since the end of last week to around 2.217% as we type. Hovering at its year to date low and we haven’t seen such levels since June last year. Remarkably the 30yr UST is now below 3% at a levels which is only around 15bp away from its pre Taper-tantrum levels in May last year. European core yields are also making new lows with 10yr government bonds in Germany and France now at around 0.84% and 1.20% respectively.