While the world's attention remains focused on the aftermath of the Friday the 13th terrorist attack in France, which overnight took a decidedly more lethal turn when France unleashed a bombing campaign of the Islamic State capital of Raqqa, bringing the number of nations flying warplanes over Syria to 3 (in addition to the US and Russia), the biggest economic development was Japan's Q3 GDP print which as we reported overnight, badly missed expectations, and dropped significantly for the second quarter in a row, resulting in something truly unprecedented in modern Neo-Keynesian history - a quintuple dip recession.
Which, as so often happens in these upside down days, was the best thing that could happen to the market, because another economic slowdown means the BOJ, even without sellers of JGBs, will have no choice but to expand its "stimulus" program (the same one that led Japan to its current predicament of course) and buy up if not government bonds, then corporate bonds, more ETFs (of which it already own 50%) and ultimately stocks. Because there is nothing better for the richest asset owners than total economic collapse.
And, as we sarcastically observed at the time, we were wondering how long it would take the BOJ to buy up every single USDJPY it could find in the process sending equity futures soaring. The answer: just a few hours, and after a sharp steep drop initially, central banks "got this" and managed to lift both the carry pairs and equity indices in both Europe and the US (it was too late for Asia and Japan) solidly into the green.
This is where we stand currently after the latest 25 point S&P ramp on no good news and even less volume:
- S&P 500 futures up 0.3% to 2024
- Stoxx 600 up 0.1% to 370
- MSCI Asia Pacific down 1.1% to 131
- US 10-yr yield down 1bp to 2.26%
- Dollar Index up 0.1% to 99.1
- WTI Crude futures up 0.8% to $41.08
- Brent Futures up 0.7% to $44.77
- Gold spot up 0.8% to $1,092
- Silver spot up 1% to $14.38
Asian equities fell in tandem with US stock futures, following Friday's devastating attacks on Paris with Wall Street also weighed on by disappointing data and soft commodities. Nikkei 225 (-1.0%) traded in negative territory as Japan's Q3 GDP figures confirmed that the nation is in its 4th recession in 5-yrs.
Chinese bourses were on the back-foot (although closed solidly int the green as the market manipulation team was unleashed in the last hour) as officials raised margin requirements to 100% from 50%, consequently cutting half the amount that investors can borrow to purchase stocks. ASX 200 (-0.9%) declined in-sync with its regional counterparts having briefly dipped below the 5000 level for the 1st time since September. A flight to safety saw JGBs trade higher with spill over buying in USTs.
European stocks pared declines as investors assessed the fallout. "Hotels, restaurants, travel agencies as well as other companies in the tourist industry will see a drop in demand, in France but also in other countries targeted by Islamic State," John Plassard, a senior equity-sales trader at Mirabaud in Geneva, told Bloomberg.
Others, however, will do just great and the markets' reaction appeared more resilient than anticipated and equities began to claw back some ground that they lost at the open and now major indices have pared their losses (Eurostoxx 0.0%). This came after an optimistic note from Goldman Sachs, who said that the attacks are likely to have a short lived negative market impact. The CAC 40 (-0.1 %) was led higher by ArcelorMittal (+1.1 %) and Technip (+1.4%), after the Co.'s benefited from strength in the metals complex, on the back of a weaker USD and safe haven flows into gold.
Bunds have sold off to close the opening gap and fall below the 157.00 handle, given the turnaround in sentiment and in anticipation of around EUR 20bIn of supply to hit markets this week.
In FX, markets have seen volatility overnight, with Asian and European participants reacting differently to the terrorist attack in France on Friday . While EUR/USD remains in negative territory on the day, the pair have pared much of their losses to retake the 1.0700 handle to the upside, while JPY failed to benefit from a flight to safety, given that the latest GDP release showed the country is once again in recessionary territory.
Commodities head into the North American crossover in positive territory albeit off their best levels , with focus falling on the terror attacks in Paris on Friday. Gold has benefitted from safe haven flows to trade around the USD 1095 level while Brent and WTI have both moved higher during European trade amid uncertainty as to stability in the middle-east. Also of note US natgas continues its recent trend higher to extend on Friday's close, which was the highest in a week.
- France Bombs Islamic State Targets as Attacks Tied to Syria: France warplanes to bomb Islamic State’s nerve center in Raqqa, Syria, police raid suspects in 5 French towns after Europe’s worst terror attack in a decade
- Airline, Luxury Stocks Slump on Concern Attacks to Sap Demand: Travel, luxury-goods shares drop on concern Paris terrorist attacks will deter tourism and consumer spending
- Paris Attacks Won’t Derail Europe Stock Year-End Rally: JPMorgan: Terrible Paris events won’t help sentiment but historically terrorist incidents don’t weaken markets for long, JPMorgan says
- Terrorism, Climate Rift, Putin-Obama and Merkel: The G-20 So Far: Meetings on Sunday dominated by aftermath of attacks in France, leaders discussed intelligence sharing in fight against Islamic State, war in Syria
- Japan’s Economy Contracted, Entered Recession in 3rd Quarter: GDP data shows slumping business investment hurt the economy; Report could put pressure on Abe, BOJ’s Kuroda for action
- UN Chief Ban to Visit North Korea This Week, Yonhap Says: Ban would be first UN Secretary-General to visit North Korea
- Event-Driven Hedge Funds Are The ‘Worst Disappointment,’ Says K2: K2 has cut amount of allocations to event-driven hedge funds
- Terror Overshadows Debate, But Rivals Cede No Ground to Clinton: Underdogs Sanders and O’Malley band together to attack her positions on everything from foreign policy to Wall Street
Bulletin headline summary from Bloomberg and RanSquawk
- On Friday night, deadly attacks in Paris by gunmen and suicide bombers left at least 132 people dead and hundreds wounded. (BBC)
- The attacks have been described by President Hollande as an "act of war" organised by the Islamic State (IS) militant group, with the French President declaring 3 days of national mourning, putting security on highest level. (BBC/AP)
- Analysts state that French equities, including those connected with the country's large tourism sector, could be most at risk of large falls with the tourism sector accounting for about 7.5% of French GDP. (BBC) However, GS note that the attacks are likely to have a short-lived negative market impact. (BBG)
- In retaliation to Friday's attack, France have conducted extensive airstrikes against Islamic States's stronghold in Syria , according to a French Defence Official while US Defence officials helped with the targeting. (WSJ/Washington Post)
- Treasuries steady, long end pares overnight gains as stocks in Europe gain; France sent warplanes to bomb Islamic State’s nerve center in Syria while PM Valls warned terrorists are plotting more attacks.
- The mass murders in Paris have decimated the EU belief in open borders; as French investigators probe the backgrounds of the killers, some French-born, one possibly a Syrian jihadist who slipped into Europe as a refugee, anti- immigration parties are in the ascendant
- The deadly violence is the latest in a series of attacks with strong links to Belgium, adding to mounting evidence the country has become one of the main havens for radicalized young men intent on terrorizing Europe
- Japan’s economy contracted in the third quarter as business investment fell, confirming what many economists had predicted: The nation fell into its second recession since Prime Minister Shinzo Abe took office in December 2012
- Hillary Clinton’s claim at the Democratic debate that she has a good relationship financial industry because of terrorism triggered rate on Twitter, spite from her rivals and surprise among allies
- Sovereign 10Y bond yields mixed. Asian stocks slide, European stocks mixed, U.S. equity-index futures rise. Crude oil and gold higher, copper falls
US Event Calendar
- 8:30am: Empire Manufacturing, Nov., est. -6 (prior -11.36)
- TBA: MBA Mortgage Foreclosures, 3Q (prior 2.09%)
- TBA: Mortgage Delinquencies, 3Q (prior 5.3%)
Central Bank Speakers:
- ECB's Mersch stated that an expansion to the QE programme has not been decided on, adding that inflation is expected to rise at the beginning of next year. (Les Echos/BBG)
- ECB's Constancio states that policy is not dictated by FX objectives. (BBG)
- Fed's Rosengren (Non-Voter, Dove) stated that he favours a gradual increase in short-term interest rates, with the pace of growth in the commercial property sector and risk-taking in parts of corporate lending a case for a quicker pace of rate rises. (FT). As a guide, Rosengren will be a voter on the FOMC in 2016.
DB's Jim Reid completes the overnight wrap
Europe and France were already torn over the migration crisis and these events are only going to complicate matters further. Merkel's open immigration policies which are partly aimed at securing a superior economic future have caused her significant domestic political and social pressure and this is now unlikely to fade. For France, regional elections in three weeks will be very closely watched. Front National were already tipped to do well and it's possible that Friday's events will cement this. Europe is currently fortunately to be in a positive economic cycle which is dampening the support of extreme parties to a degree. However the migration crisis is impacting this and one can only imagine what would occur politically if this occurred simultaneously with a recession - worst still if it coincided with an important election. Another ramification of Friday's attacks is the likely confidence hit to the French economy which may in turn increase the dovishness at the ECB meeting in just over two weeks.
Asian equities are lower on a broad based risk off move as we kick things off for the week. The Nikkei, The Hang Seng and the KOSPI are down 1.0%, 1.6% and 1.3%, respectively as we type. The Shanghai Composite is down 0.5%, not helped by late Friday's announcement that the local two main stock exchanges will raise margin requirements from 23 Nov onwards. News that the CNY is likely to be included in the IMF’s SDR basket (more below) is perhaps helping to offset some of the weakness. Away from equities, Asian credit spreads are broadly wider across the board. In the FX space, the EUR hit a 6-month low earlier against the USD (1.0687) on further easing hopes from the ECB although it has backed off those lows to around 1.0726 as we type. The flight to quality trade is also giving Gold and the USTs a boost overnight. Gold is +0.8% to $1093/oz. The UST 10yr yield is down -3bps overnight to 2.237% extending the downtrend we saw on Friday (mainly led by weak US data discussed below) The already delicate geopolitical situation in Middle East will probably show little signs of easing after France launched an airstrike against Syria on Sunday. This clearly has implications on energy prices as we saw Brent rally over 3% overnight in Asia to nearly $45/bbl as we type.
The Paris headlines came late on Friday just moments before the US closing bell so markets on both sides of the Atlantic will likely open weaker this morning The bulk of Friday’s market moves were in response to weak economic releases. US retail sales were overall disappointing with PPI also coming in meaningfully softer than expected. Low inflation is also affecting expectations which saw the year-ahead inflation expectations within the UofM Consumer Sentiment index easing to 2.5% yoy in November even though the headline UofM print came above consensus. The S&P 500 ( -1.12%) closed lower for its third consecutive day. The UST 10yr yield fell 5bps to 2.265%.
Back to overnight’s developments, Japanese GDP pretty much confirmed that the country had tipped into a recession in Q3. Q3 GDP contracted an annualized 0.8% QoQ in Q3 (expectations: -0.2%). Looking beyond the headlines it appears that most of the drag was due to businesses running down on inventory while investments remained weak. Consumption actually positively contributed to growth. All eyes will be on BoJ policy meeting later this week.
Also in Asia IMF staff proposed that the Board include the RMB in the SDR basket as a fifth currency, alongside the British pound, euro, Japanese yen, and the U.S. dollar. The board will discuss on 30th November and are expected to approve, although note the inclusion is likely to be October 2016. According to our Chinese economist Zhiwei Zhange, the most important implication of the SDR inclusion is the potential boost for reforms in China. He thinks the progress of structural reforms in China has been slow with the exception of financial reforms and this could persuade the market that the reformers are holding sway in the Government. It will also help to strengthen confidence in the RMB exchange rate after a few months of international suspicion post the shock devaluation.
Markets sentiment will probably remain fragile in the near term after the events in Paris. The G20 meeting in Turkey started on Sunday and the attacks will likely dominate the agenda. Bloomberg has already obtained a draft of the communiqué where leaders continue to pledge job creation and to bolster inclusiveness but a separate statement on terrorism will also touch on tightening border controls. Elsewhere this week, as expectations for European easing continues to build, Draghi’s keynote speech at a Frankfurt banking congress on Friday will be closely watched by markets in light of recent events.
On the economic data front and starting in the US, key events will include NY Fed Empire state survey (DB:-10, Nov) later today, US CPI (DB: +0.2%, Oct), industrial production (DB:-0.5%, Oct), NAHB housing market index (DB: 63, Nov) on Tuesday, housing starts (DB: 1.125m, Oct) and Oct FOMC meeting minutes on Wednesday, Philly Fed (DB: -4, Nov) and leading economic indicators (DB: +0.7, Oct) on Thursday. There will also be a handful of Fed speakers this week including Fed’s Tarullo, Dudley, Kaplan, Lockhart, Bullard and William. As we come towards the end of earnings season the highlights will likely be the retailers which include Home Depot, Wal-Mart, Dollar tree, Ross, Target and Gap.
In Europe, the key releases include Eurozone CPI today, Germany ZEW survey, Italy trade balance and UK PPI and CPI on Tuesday, Eurozone construction output on Wednesday, Eurozone current account, Spain trade balance and UK retail sales on Thursday and by end of the week on Friday we will get Eurozone’s consumer confidence, and Germany PPI European Q3 reporting season also draws to a close this week.
Finally in Asia there are no major releases from China We will get Japan’s trade balance and machine tool orders on Thursday but all eyes will likely be on BoJ’s monetary policy meeting scheduled for Thursday.