Futures Frozen With $8.3 Billion Expiring At S&P 3,000 On Quad-Witching Friday

One week after Friday the 13th, a far more important for the market Friday has arrived: quad-witching day, when once every quarter we get the simultaneous expiration of contracts for index futures, index options, stock options, and single stock futures, and when increased volatility and an explosion in volumes usually follow. As such, these days are entirely at the mercy of dealer and trader positioning, and as Charlie McElligott pointed out yesterday, as of this moment the S&P is "shackled" by a "Long Gamma" death-grip, with some $8.3BN in expiration at the 3,000 strike, which will ensure that the S&P gravitates around 3,000 for most of the day.

Sure enough, overnight markets were largely uneventful, with European and Asian stocks climbing modestly on Friday as a busy week of central bank meetings drew to a close, while US equity futures traded up a modest 5 points to 3,013 with focus now likely to shift back to the trade war. Treasuries initially edged higher for a fifth day as dollar droped, but the entire move has since reversed.

Despite the "gamma gravity" pin, FOMC volatility, USD repo market stress and mixed macro numbers, US equities are managing to hold the line close less than 1% from a record high, while Europe's Stoxx Europe 600 Index rose as much as 0.3%, poised for its highest close since May 2018, led higher by the more defensive and bond yield-sensitive telecom, healthcare and utilities sectors: Novartis was +1.3% after sales of its Cosentyx rose 1.7%. Oil stocks, including Total, Shell also climbed, with Brent heading for biggest weekly increase since January as traders wait to see whether Saudi Arabia can fulfill promises to swiftly repair a critical processing facility attacked last weekend

Earlier in the session, Asian stocks climbed after a four-day losing streak, as health care and technology firms led gains in a week packed with monetary policy decisions. Most of the major markets in the region were up, with India’s stock benchmark poised for its biggest jump in a decade after the government unexpectedly slashed the corporate tax rate to boost economic growth. As Saxo Bank notes, "India is a train wreck with credit worsening and consumer confidence measured by new car registrations plummeting. However, today news broke that the Indian government is stimulating the economy through cutting the corporate taxes for new domestic companies. The Nifty 50 Index was up 4% breaking above the recent trading range but in the greater picture (see chart) the technical picture looks ugly. As long as the global economy is slowing down and the USD remains strong India is an equity market investors should underweight."

The Topix pared earlier gains and closed little changed as advances in health care stocks were offset by declines in utilities and industrial shares. The Shanghai Composite Index edged 0.2% higher, with Jiangsu Hengrui Medicine and Kweichow Moutai among the biggest boosts.

China's move higher was despite trader disappointment in the latest PBOC easing as analysts called for stronger monetary stimulus from Beijing after China's new gauge of borrowing costs - the Loan Prime Rate - was only slightly lowered Friday, from 4.25% to 4.20% for the 1 year rate, and kept unchanged at 4.85% for the 5 year rate which is likely to be used for mortgages, despite expectations for a modest cut. The boost to economic activity is expected to be slight. The rate is for banks’ best customers and total reductions so far, of 11 bps, are less than half of the Fed’s quarter-point rate cut on Thursday, reflecting Chinese policymakers’ concerns that much-cheaper credit could lead to unproductive investment and property bubbles.

“Since the new rate is relatively untested, the PBOC (People’s Bank of China) appears to be taking a measured approach at first,” Julian Evans-Pritchard, senior China Economist at Capital Economics, said in a note.  “However, with economic activity likely to come under further pressure in the coming quarters and monetary easing so far failing to generate much of a pick-up in credit growth, we think the PBOC will need to start engineering larger declines before long."

The move was far smaller than easings by the U.S. Federal Reserve and the European Central Bank over the past week, suggesting Chinese policymakers remain reluctant to join a global stimulus wave due to worries about mounting debt.  Still, analysts say Beijing’s restraint is being put to the test, as worsening economic data in August has raised fears that third-quarter growth could slip below 6%, breaching the lower end of the government’s 2019 target.  With higher U.S. tariffs looming, many China watchers believe more forceful measures will be needed soon to avoid a sharper slowdown.

Elsewhere in China, the yuan climbed after the People’s Bank of China announced that it will drain funds via a bill sale in Hong Kong, amid speculation that the PBOC is orchestrating another short squeeze as the offshore yuan interbank rates, known as Hibor, jumped on Friday, with the overnight tenor rising by the most in more than a month.  The CNH overnight Hibor surged 72bps, the most since Aug. 15, to 3.02567%, while the CNH 1-month tenor +13bps to 3.30433%, its first increase in five days.

In rates, European sovereign debt traded mixed while UST bond yields traded within basis-point either side of unchanged, with a slight flattening bias on the 2-yr/10-yr spreads. The gilt curve is a slight exception, with yields 1bp-2bps higher in those maturities. US Treasurys yields first dropped, sliding as low as 1.7550%, before rebounding to session highs as traders walked into the office.

In FX, the Bloomberg Dollar Spot Index rebounded in the green after trading lower for much of the European session; Sterling was among the week’s best performers in the G-10 but its recent rally faded after Ireland’s foreign minister said a Brexit deal was not near. The euro was set for its first weekly decline in three while the yen was set for its first weekly gain since Aug.

In commodities, oil prices traded higher on Friday morning, in quiet trade that mirrors the broader lack of conviction elsewhere. In terms of recent geopolitical developments; a Saudi-led coalition conducted a military operation in Yemen, destroying 4 locations reportedly being used for assembling remote-controlled boats and sea mines. Elsewhere, there were reports that US national security officials met yesterday to draft possible action against Iran and to refine a list of potential targets to strike in the event that President Trump were to order a military retaliation. In terms of metals; Gold is higher on the day, but continues to linger around the USD 1500/oz mark. Meanwhile, Steel futures look to cap off the week on the back foot, tracking Iron Ore prices lower since Monday ahead of a week-long holiday in China, the intensity of upcoming winter restrictions on mills, and recovering mine supplies.

In the latest geopolitical news, Saudi-led coalition conducted a military operation in Yemen in which it destroyed 4 locations used for assembling remote-controlled boats and sea mines. Elsewhere, Saudi Aramco Executive states that the attacks on the Khurais oil infrastructure targeted 4 locations in their oil production facilities; "confident we will be back to full production by the end of September." Kuwait Foreign Minister is said to have received a call from Iran Foreign Minister Zarif in which they discussed regional developments as well as how to de-escalate tensions.

No major earnings are scheduled, several Fed speakers due

Market Snapshot

  • S&P 500 futures up 0.2% to 3,010.50
  • STOXX Europe 600 up 0.1% to 392.31
  • MXAP up 0.4% to 159.41
  • MXAPJ up 0.6% to 511.64
  • Nikkei up 0.2% to 22,079.09
  • Topix up 0.04% to 1,616.23
  • Hang Seng Index down 0.1% to 26,435.67
  • Shanghai Composite up 0.2% to 3,006.45
  • Sensex up 5.7% to 38,148.97
  • Australia S&P/ASX 200 up 0.2% to 6,730.75
  • Kospi up 0.5% to 2,091.52
  • German 10Y yield unchanged at -0.508%
  • Euro up 0.1% to $1.1055
  • Brent Futures up 0.2% to $64.50/bbl
  • Italian 10Y yield rose 0.9 bps to 0.545%
  • Spanish 10Y yield fell 0.9 bps to 0.24%
  • Brent Futures up 0.2% to $64.50/bbl
  • Gold spot up 0.3% to $1,503.76
  • U.S. Dollar Index down 0.01% to 98.27

Top Overnight News from Bloomberg

  • Signs that stress in U.S. funding markets is rebuilding ramped up pressure on the Federal Reserve to permanently increase reserves by boosting Treasury holdings, even as it was preparing a temporary liquidity injection for a fourth straight day
  • The Irish government moved to dampen hopes of an imminent breakthrough in Brexit negotiations, a day after EC President Jean-Claude Juncker’s comment that a divorce deal is possible sent the pound to a two-month high
  • The U.K. Supreme Court spent three days listening to testimony about the lawfulness of Boris Johnson’s suspension of Parliament. The judges’ questions targeted not whether his move to prorogue the legislature was incorrect, but what they could do about it if it was
  • A rogue oil trader caused $320m loss at a unit of Mitsubishi Corp. in unsanctioned derivatives deals. The unidentified employee from Petro-Diamond Singapore Pte has been fired and reported to police, Mitsubishi said in a statement
  • India cut tax on local businesses to one of the lowest rates in Asia, while providing a more than $20 billion boost to revive economic growth from a six-year low

Asian equity markets traded mixed/flat as risk appetite picked slightly up from the indecision seen on Wall St where stocks meandered amid a slew of central bank announcements, in which the DJIA failed to hold on to early gains and finished lower and the S&P 500 returned flat despite an initial approach to within 6 points of its all-time high. ASX 200 (+0.2%) was underpinned by increasing expectations for the RBA to lower rates next month and with gold miners front-running the gains after the precious metal reclaimed the psychological key USD 1500/oz level, while Nikkei 225 (+0.2%) was also higher but with upside restricted by currency flows and amid mixed inflation data. Elsewhere, Hang Seng (-0.1%) and Shanghai Comp. (+0.2%) were indecisive following mixed trade-related rhetoric as NEC Director Kudlow suggested a softer US-China mood, while President Trump’s advisor Pillsbury warned the President is ready to escalate the trade war if a deal is not agreed soon and that tariffs could increase to 50% or 100%. PBoC actions were also somewhat ambiguous as the central bank cut its 1yr Loan Prime Rate by 5bps to 4.20% as expected but refrained from a similar anticipated cut to the 5yr Loan Price Rate of 4.85% and although it announced another substantial injection of CNY 120bln in reverse repos today, its total operations including MLFs resulted to a net weekly drain of CNY 15bln. Finally, 10yr JGBs were initially lower and yields increased amid the positive tone in Japan and after the BoJ rinban announcement in which it reduced purchase amounts in all of today’s maturities from the belly to super-long end, although prices later recovered to trade near-flat.

Top Asian News

  • Philippines May Cut Key Rate Next Week as Inflation Ebbs
  • India, U.S. Eye Middle Ground on Trade Ahead of Modi-Trump Meet
  • India Market Participants Cheer Government’s Corporate Tax Cuts
  • Dyson Plans to Add More Than 2,000 Jobs in Southeast Asia

Major European bourses are firmer (Euro Stoxx 50 +0.5%) following a mostly positive Asia-Pac lead, trading in relatively thin ranges as the market takes a breather following the prior two day’s flurry of Central Bank activity; with indices having picked up somewhat from their relatively unchanged start as the session progressed. Some choppiness has been seen however; and it is worth noting that it is Quadruple witching day, with September contracts set to expire for a number of European and US single stock, index and option futures. Underperformance is being seen in the FTSE100 (-0.3%) as GBP strengthens on the back of growing Brexit deal hopes. The sectors are relatively mixed, and unreflective of any particular risk configuration; Energy, Consumer Discretionary, Health Care, Financials, Telecoms and Utilities are higher while Materials and Industrials are lower. In terms of notable individual movers; Thomas Cook Group (-17.0%) sunk on premarket news that recapitalisation and reorganisation discussions are continuing, may result in the interest of existing shareholders being significantly diluted and poses the risk of no recovery. RBS (+3.6%) moved higher on the news that the company had hired former Natwest Markets head Alison Rose as CEO. A disappointing trade update from Investec (-6.2%), in which H1 EPS guidance was revised lower, saw shares sell off. Finally, Casino (+2.5%) moved higher on the news that the Co. had entered into discussions with Aldi France re. the potential acquisition of Leader Price.

Top European News

  • Ireland Warns U.K. Divorce Deal Is Not Close: Brexit Update
  • Argentum Bonds Convertible Into Wirecard Shares Priced at 107.1%
  • Pound Set for Longest Winning Streak Since January; Dollar Drops
  • Funding Markets Are Unhappy and Things May Be About to Get Worse

In FX, the Pound remains perky, but not quite so brimming with Brexit breakthrough optimism after EU’s Juncker sparked a short squeeze by intimating that a deal can still be done before the October 31 deadline on the premise that Irish border conditions are met by any alternative arrangement put forward by the UK. His hopeful remarks were backed up by Britain’s Junior Brexit Minister, but dampened by Irish Foreign Minister Coveney and reports that EU officials are frustrated that practical solutions have still not been provided by PM Johnson. Cable extended gains to and just beyond offers at 1.2580, but faded ahead of Fib resistance at 1.2589 and is now back below 1.2550, while Eur/Gbp stopped just short of support below 0.8800 (at 0.8777) and has subsequently rebounded through the big figure and a 0.8809 Fib.

  • CHF - Still holding a firmer line in wake of yesterday’s SNB Quarterly Policy review when benchmark rates were left unchanged against some expectations for an ease to counter last week’s 10 bp ECB cut, and inflation projections were based on steady policy throughout the forecast horizon. The Franc is consolidating around 0.9900 vs the Dollar as the DXY meanders between 98.357-139 and well off fleeting post-FOMC peaks, with Eur/Chf pivoting 1.0950.
  • EUR/JPY/AUD/CAD - All narrowly mixed against the broadly subdued Greenback, as the single currency continues to straddle 1.1050 in generally quieter trade after all the ECB induced volatility, and amidst the ongoing constrains of heavy option expiries that blanket nearest round numbers again today (2.6 bn at the 1.1000 strike, 1 bn from 1.1020-25, 1.1 bn at 1.1050 and 1.8 bn at 1.1100). Similarly, the Yen remains rooted around 108.00 following mixed Japanese inflation data, with stiff technical obstacles capping the upside, like a 108.43 Fib and expiry interest in close proximity Usd/Jpy (1.2 bn between 107.50-60 and 1.1 bn at 108.00). Elsewhere, the Aussie and Loonie are both in familiar territory on the 0.6800 handle and within 1.3275-50 parameters respectively, but Usd/Cad has another opportunity to breakout pending the nature of Canadian retail sales after failing to get much independent inspiration from CPI earlier this week.
  • NZD/NOK - The Kiwi is languishing at the bottom of the G10 table, with Nzd/Usd under 0.6300 and Aud/Nzd over 1.0800 ahead of next week’s RBNZ meeting that could underscore expectations for more easing before year end, if not culminate in an OCR cut with probability for another 25 bp move circa 30%. However, the Norwegian Krona is also underperforming and extending its retreat from post-Norges Bank hike highs on perceptions of no further policy normalisation, with Eur/Nok significantly closer to 9.9500 option expiries (1.4 bn) than interest at 9.8500 (2.1 bn) and 9.8125 or so at one stage on Thursday.

In commodities, the crude complex trades higher on Friday morning, in quiet trade that mirrors the broader lack of conviction elsewhere. In terms of recent geopolitical developments; a Saudi-led coalition conducted a military operation in Yemen, destroying 4 locations reportedly being used for assembling remote-controlled boats and sea mines. Elsewhere, there were reports that US national security officials met yesterday to draft possible action against Iran and to refine a list of potential targets to strike in the event that President Trump were to order a military retaliation. In terms of metals; Gold is higher on the day, but continues to linger around the USD 1500/oz mark. Meanwhile, Steel futures look to cap off the week on the back foot, tracking Iron Ore prices lower since Monday ahead of a week-long holiday in China, the intensity of upcoming winter restrictions on mills, and recovering mine supplies.

US Event Calendar

  • 8:15am: Fed’s Williams Gives Presentation at SNB Conference
  • 11:20am: Fed’s Rosengren Speaks in New York
  • 12pm: Household Change in Net Worth, prior $4.69t
  • 1pm: Fed’s Kaplan to Speak in Moderated Q&A

DB's Jim Reid concludes the overnight wrap

For many sports fans, much attention today will be on the Rugby World Cup opening game in Japan. Despite being a big sports fan I’ve always been a little on the apathetic side towards rugby as when I was 13 my rugby master made me cry. In the first two years at senior school we were quasi forced to play rugby. I was in the team as I was fairly big for my age and I could catch and pass. However I was getting less and less keen on being continually taken out by 13 year olds that were starting to benchpress. As such I asked to play football instead. My rugby teacher shouted at me, told me he was very disappointed, and that I would be wasted in football. I fought back the tears and went to play football averagely for the next 5 years but at least I had a lot of fun! So I’ll be cheering England on but will be relatively relaxed about the outcome due to insecurities from 30 plus years ago about children having bigger biceps and pectorals than me.

It’s been a scrum of central bank activity over the last 36 hours but without any real direction at the end of it. Indeed the price action yesterday was pretty muted on the whole, with the S&P 500 and the Nasdaq closing unch and +0.07% respectively. 2y and 10y yields ended -2.4bps (a further -0.9bps this morning) and -1.2bps (a further -1.7bps) lower respectively which steepened the curve a touch to 4.6bps (3.8bps this morning). I was off EMR duties yesterday but my main problem with Wednesday’s FOMC was the re-flattening of the curve it encouraged. We were back above 8bps earlier in the day on Wednesday pre the FOMC announcement and have flattened back since to as low as 1.25bp yesterday morning. So one to watch with the Fed seemingly comfortable being behind market expectations.

Back to yesterday and following two days of declines, Brent Crude pared back gains of +3.10% at the intra-day peak to close up +1.26% while Gold also pared back gains to close +0.34%. Brent is now c.+7% above Friday’s closing price, having been up +14.61% on Monday. The moves came as the Iranian foreign minister, Javad Zarif said in a CNN interview that there would be “all-out war” in the event of a strike by the US or Saudi Arabia, though this was tempered with him also saying that “I am making a very serious statement that we don’t want to engage in a military confrontation.”

One topic that’s been a bit quiet over the last few days is Brexit. There were some interesting developments yesterday though as the UK submitted some confidential documents to the EU that “reflect the ideas the UK has put forward”. Many would have thought these would have been quickly dismissed by the EU but a few hours later European Commission President Jean-Claude Juncker told Sky News that talks earlier this week with Mr Johnson were "rather positive" and that a deal could be reached in the next few weeks. He also said that “if the objectives of the backstop are met through alternative arrangements, we don’t need the backstop”. It’s unlikely that this was a direct response to the submitted documents, and Juncker himself said they’d arrived the previous evening and he hadn’t read them yet, but the fact there were positive EU comment could be seen as some small progress. Sterling immediately rallied 50 cents just after London went home on these comments before dipping a touch to close up +0.43% (up a further +0.20% this morning) at $1.2526, its highest level in two months. The other development yesterday was the end of the Supreme Court hearings on the prorogation of Parliament where Lady Hale, the Supreme Court President, said we’d hear the outcome of that “early next week”.

Staying in the UK, as expected there was no change in policy from the BoE with the MPC voting unanimously to keep the bank rate on hold at 0.75%. Our economists noted that the overall tone was undoubtedly more dovish, noting three changes to the August inflation report. The first was the MPC added to its forward guidance with regards to Brexit, specifically in the situation of an extension. The second was the MPC continued to talk up risks surrounding the UK economy and the third was highlighting mixed signals from the labour market. In terms of what this means for policy, the Brexit endgame will ultimately dictate the near and medium term BoE outlook so we’re in limbo for now.

As for the other central bank meetings yesterday, there was no change in policy from either the SNB or SARB, as expected, however a slight surprise was the 25bp hike by the Norges Bank. Nevertheless, the message that this would perhaps be the last hike in the cycle may put to an end the Norges Bank’s run as the lone big central bank still hiking.

Continuing with central banks, for the third day in succession the Fed injected cash into the funding market, totalling $75bn. With the repo rate normalising again back towards its typical range, concerns appear to have abated for now. Nevertheless the NY Fed has planned another $75 bn overnight repo operation for today. Over at the ECB take-up for the new TLTRO allotment was very low at just €3.4bn, relative to expectations for at least €20bn. So this suggests very low demand or capacity for fresh funding and a limited willingness to roll over the new TLTRO. However our rates’ strategists did previously flag that this had the potential to disappoint given the timing of the ECB meeting. The next operation is likely to be more in focus.

Speaking of the ECB, both Coeure and Lautenschlaeger spoke yesterday. The most notable takeaway from the former was his reference to “venturing close to the line between monetary and fiscal” and that it’s time for fiscal policy “to take the charge”. The latter said that “other stakeholders have to step up too…I’m talking about using fiscal space in a sensible way when you have it”. At the margin a bit hawkish then although European bonds were fairly unmoved, with 10y Bund yields ending fairly flat.

This morning in Asia, markets are largely heading higher with the Nikkei (+0.37%), Hang Seng (+0.03%), Shanghai Comp (+0.17%) and Kospi (+0.40%) all up. Elsewhere futures on the S&P 500 are trading flat. In terms of overnight data releases, China’s September 1y loan prime rate came in line with consensus at 4.20% while 5y rate came in 5bps higher than expectations at 4.85%. We’ve also seen Japan’s August inflation data with CPI and core CPI both printing in line with consensus at +0.3% yoy and +0.5% yoy respectively while core-core CPI came in one-tenth higher than consensus at +0.6% yoy.

One of the main stories overnight has been the BoJ making cuts to its bond purchases this morning after Governor Kuroda highlighted in yesterday’s news conference that the BoJ wants a steeper curve and won’t allow a prolonged decline in yields. The BoJ used its regular operation today to lower buying across three maturity zones by a combined JPY 50bn, making it the first time since introducing the yield-curve control in 2016 where the BoJ has cut purchases in all three segments simultaneously. Purchases in the 5-10 year zone were reduced to JPY 380bn (vs. JPY 400bn previously), 10-25 years zone to JPY 120bn (vs. JPY 140bn) and 25+ years zone to JPY 30bn (vs. JPY 40bn). The curve initially steepened in response with the 10y yield up +2bps to -0.205% while the 20y yield increased by +3bps and 30y by +4bps. However 10 and 20yrs have reversed the move but 30yrs are still up +1.4bps. The Japanese yen is up +0.16%.

As for the data yesterday, the September Philly Fed business outlook weakened slightly to 12.0 from 16.8 but it did still come in marginally above expectations. That puts it in the middle of the range since last November while there was a positive read-through from the stabilisation in the capex component. Elsewhere, jobless claims stayed relatively unchanged at a lowly 208k (vs. 213k expected), which sent the 4 week moving average down to a 7-week low of 212.25k. Elsewhere, the August leading index was flat, and existing home sales rose +1.3% mom and more than expected. Prior to that the only other data came from the UK where August retail sales were broadly in line. It’s worth also noting that the OECD revised down forecasts for global growth in 2019 and 2020, to 2.9% (from 3.2%) and 3.0% (from 3.4%), which if realised would make this the first year of sub-3% global growth since 2009.

Finally to the day ahead, which is very quiet for data with only August PPI in Germany, Q2 wages in France, September consumer confidence for the Euro Area and Q2 household change in net worth in the US due. We will however hear from the Fed’s Williams, Rosengren and Kaplan which will be worth keeping an eye on in light of the FOMC meeting, while the ECB’s Rimsevics and Visco are due to speak.