The start of the Fed's most eagerly awaited two-day policy meeting in years has finally arrived with the market expecting Yellen to announce the first 25 bps rate hike in 9 years tomorrow with nearly 80% probability, and so far US equity futures are enjoying a last minute relief rally, while emerging market stocks rose for the first day in ten after the longest losing run since June. Europe's Stoxx 600 Index has also rebounded from a five-day losing streak, the worst in over four months.
While yesterday stocks started off weak on the latest commodity carnage only to rebound following some truly ridiculous action, so far today's session has been a mirror image, with oil rebounding from February 2009 lows and WTI printing above $37 at last check, even as China closed just off its lows, the Nikkei tumbled led by a strong Yen, and the broader commodity complex once again sliding as can be seen in the Bloomberg Commodity Index, which tracks 22 materials, and which just dropped to the lowest since March 1999 despite the modest oil rebound which briefly took WTI above $37 but has failed to sustain the highs.
If yesterday was any indication, it would not be at all surprising to see today's early strength be wiped out and the S&P closes at its lows as the reality of an $800 reduction in overall liquidity finally hits market participants.
Somewhat surprisingly the dollar has fallen against most of its major 16 peers. Bloomberg believes that investors have had time to adjust to the prospect of higher U.S. interest rates since Oct. 28, when the Fed signaled a December move was likely. We are less sanguine about just what is priced in especially since all other central banks will continue to aggressively easy and devalue their own currencies, most notable case in point of course being China.
And while there is a long way to go before the week ends, including not only the Fed's first potential tightening in nearly a decade, but also the largest S&P option expiration on Friday in many years (as profiled before), which in this illiquid market means a lot of volatility is imminent, but for now here is where we stand:
- S&P 500 futures up 0.9% to 2027
- Stoxx 600 up 1.9% to 356
- FTSE 100 up 1.7% to 5977
- DAX up 2.3% to 10370
- German 10Yr yield up 6bps to 0.63%
- Italian 10Yr yield up 2bps to 1.66%
- MSCI Asia Pacific down 0.7% to 127
- US 10-yr yield up 2bps to 2.24%
- Dollar Index down 0.16% to 97.45
- WTI Crude futures up 0.6% to $36.51
- Brent Futures up 1.2% to $38.39
- Gold spot up less than 0.1% to $1,060
- Silver spot up 0.3% to $13.72
A closer look at the markets, shows that Asian stocks saw choppy price action following the positive close on Wall St. as energy prices rebounded, while prospects of a looming Fed rate hike kept sentiment cautious. ASX 200 (-0.4%) initially traded with minor gains with the energy sector underpinned by the recovery in crude, while healthcare outperformed after Greencross shares soared 30% on buying interest for a 15% stake in Co. However, the index then shrugged-off gains to print a fresh 2-year low. Elsewhere, Chinese markets traded mixed before both the Hang Seng (-0.2%) and Shanghai Composite (-0.3%) closed in the red, while Nikkei 225 (-1.7%) underperformed despite JPY weakness with investors cautious ahead of the FOMC meeting. Finally 10yr JGBs traded higher as Japanese equities lag.
Top Asian News:
- Apple Said to Open Secret Lab in Taiwan to Develop Displays: Engineers developing LCD, OLED technologies for devices
- RBA Says Recent Data Positive, Repeats Scope to Ease Further: Australia’s central bank said low interest rates are supporting household spending and weaker exchange rate aiding local cos.
- Chinese Backpedal From U.S. IPO Market as Mainland Deals Surge: Total value of U.S offerings declines 98% to $666m
- Japan’s Giant Leveraged ETF Says Won’t Use Swaps as Fund Reopens: Fund starts taking new orders on Dec. 18 after 2- mo. halt
- Shanghai’s Worst Smog in Two Years Spurs Production Limits: City orders schools to keep children indoors and factories to limit production
- Murder-Free Days Underpin Property Boom in Top Pakistan City: Karachi has seen real estate prices rise 22% in past year
- Indonesia Nov. Exports Fall 17.58% Y/y; Est. 11.5% Drop
European equities reside in a sea of green this morning (Euro Stoxx: 1.9%) as risk on sentiment returns after bearish sentiment dictated play yesterday. Equities have been lifted by energy names as sentiment is bolstered after the energy complex held onto yesterday's gains overnight and with WTI extended above the USD 36/bbl level throughout the morning. One of the notable movers in European hours has been Syngenta (+1.8%), who benefitted after source reports suggesting that ChemChina is set to make new bid for the Co. after talks, while Syngenta also remain in talks with Monsanto (MON).
Bunds edged lower throughout the session, moving below 158.00 level and then the 21 DMA line at 157.85 in the process, with the next major support coming in at the 50DMA line at 157.17.
Top European News:
- ChemChina Chairman Said to Meet With Syngenta as Talks Progress: Syngenta also holding informal discussions with Monsanto
- Rio CEO Says Iron Ore Rivals ‘Hanging On by Their Fingernails’: Iron ore industry on verge of unprecedented shake-out
- VW’s Europe Market Share Declines Most Since Emissions Crisis: VW’s sales rose at less than one-third of market gain
- UBM Agrees to Sell PR Newswire for $841 Million to Cision: Shareholders to get 245m pounds in special dividend
- U.K. Inflation Rate Is Above Zero for First Time in Four Months
- German ZEW Investor Confidence Gains After ECB Steps Up Stimulus
In FX, In terms of FX markets, a fairly busy morning has seen strength in EUR/SEK after the Riksbank elected to keep rates and their QE programme on hold, while UK CPI release saw a relatively muted reaction given that the data was mostly in line with expectation (Y/Y 0.10% vs. Exp. 0.10%), with participants also shrugging off the latest German ZEW survey (Expectations 16.10 vs. Exp. 15).
Separately, source reports suggesting that China stand prepared to act if the CNH were to see sharp falls and is ready to intervene if CNH/CNY spread widens to a destabilising effect has also seen some traction this morning. This comes as the continued softness in CNY against the USD in focus ahead of the FOMC rate decision later this week, with USD/CNY printing fresh multi year highs overnight. Of note, European names are touted as sellers in USD/CNH.
The energy complex has extended on gains seen ahead of yesterday's close and resides in positive territory heading into the North American crossover, with WTI Jan'16 futures in close proximity to the USD 37.00/bbl level, with the Brent counterpart close to USD 39.00/bbl. This comes ahead of the US API crude oil inventories later today, with last week's reading showing a drawdown of 1900k.
Elsewhere, gold has benefitted from a softer USD and has seen a mild rebound overnight, while copper prices traded lower amid cautiousness ahead of a possible hike in US rates, with iron ore futures gaining for a 3rd consecutive day as prices continue to bounce from last week's record lows, alongside a recovery in steel prices
On today's US calendar, we have the US CPI and Empire manufacturing releases, as well as Fonterra's GlobalDairyTrade auction.
Bulletin headline summary from RanSquawk and Bloomberg
- European equities reside in a sea of green this morning (Euro Stoxx: 1.9%) as risk on sentiment returns after bearish sentiment dictated play yesterday
- The energy complex has seen a bid today, with Brent and WTI both heading into US hours in positive territory
- Today's highlights include US CPI and Empire manufacturing releases, API crude oil inventories as well as Fonterra's GlobalDairyTrade auction
- Treasuries decline before Fed begins two-day meeting amid expectations it will raise rates for first time since 2006.
- Fed policy makers risk making a mistake that will be difficult to correct if they raise interest rates on Wednesday, according to former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini
- U.K. inflation edged back above zero in November for the first time in four months, a move that still leaves the rate a long way from the Bank of England’s target
- Fidelity, Capital Group Cos., Waddell & Reed and Nuveen Investments said their high-income strategies don’t make them distressed credit funds and their holdings of CCC bonds are either selectively positioned or weighted toward better- quality debt within that tier
- While Wall Street is having a 2007 flashback as a high- yield debt rout triggers nightmares of hard-to-trade assets plunging in value and funds halting redemptions, traders and analysts say this isn’t the making of another financial crisis
- The SEC said Monday it was “on site” at Third Avenue and closely evaluating the wind-down process of the credit fund, which saw investors yank $734 million of its assets over the past four months
- German investor confidence rose to 16.1 in December from 10.4 in November
- Sovereign 10Y bond yields higher. Asian stocks mostly lower. European stocks and U.S. equity- index futures gain. Crude oil, gold higher; copper lower
US Event Calendar
- 8:30am: Empire Manufacturing, Dec., est. -7 (prior -10.74)
- 8:30am: CPI m/m, Nov., est. 0% (prior 0.2%)
- CPI Ex Food and Energy m/m, Nov., est. 0.2% (prior 0.2%)
- CPI y/y, Nov., est. 0.4% (prior 0.2%)
- CPI Ex Food and Energy y/y, Nov., est. 2% (prior 1.9%)
- CPI Index NSA, Nov., est. 237.204 (prior 237.838)
- CPI Core Index SA, Nov., est. 244.088 (prior 243.698)
- Real Avg Weekly Earnings y/y, Nov. (prior 2.1%, revised 2.4%)
- 10:00am: NAHB Housing Market Index, Dec., est. 63 (prior 62)
- 4:00pm: Net Long-term TIC Flows, Oct. (prior $33.6b); Total Net TIC Flows, Oct. (prior -$175.1b)
- FOMC starts two-day policy meeting
Top Global News
- Sumitomo Mitsui to Buy GE Japan Leasing Arm for $4.8b: Second deal between companies this year as GE sells assets
- House Democrats Said to Be Open to Lifting U.S. Oil-Export Ban: Negotiations with Republicans center on various tradeoffs
- Sanofi in Asset Swap Talks With Boehringer for $25b Deal: Boehringer’s consumer health assets, Sanofi’s Merial in deal
- Hudson’s Bay Said to Near Deal to Buy Gilt Groupe for $250m: WSJ: Would combine online luxury retailer with Off 5th Business
- Lumber Liquidators Surges After Critic Ends Bet Against Company: Short seller Whitney Tilson said he stopped betting against co.
- Third Avenue Sought Internal Loan Approval Before Fund Collapsed: Fund-to-fund bridge lending helps firms avoid fire sales
- Valeant Said to Cut Prices With Walgreens Distribution Pact: Valeant to lower prices by 10% on skin, eye product
- NetApp May Make $1.2b Bid for SolidFire, CRN Says: Bid could be announced as soon as this week
- Puerto Rico’s Governor Won’t Seek Re-Election in 2016: Won’t seek re-election so administration can focus on cutting debt
- Xerox Rises After Carl Icahn Reports Increased Stake: Icahn reports 8.1% stake, up from 7.1%
- Boeing Raises Qtrly Dividend 20%, Boosts Buyback to $14b: Replaces existing $12b repurchase program of which $5.25b remained
DB's Jim Reid concludes the overnight wrap
The tone in markets at the moment is certainly being dictated to a large degree by what’s going on in US HY. Sentiment took another knock yesterday on the back of the news of another fund (the third in recent days) announcing that it plans to liquidate its entire $900m portfolio and return money to investors. Nerves are also being tested increasingly by recent comments from some of the more high profile money managers around the asset class, the latest coming from Bill Gross who fired warning signs about US HY liquidity in particular in comments yesterday.
A late risk-on rally into the close yesterday masked what had been another largely weak day of price action for the bulk of risk assets. The S&P 500 finished +0.46% having been nearly 1% lower intraday, while CDX IG rebounded to finish 3.5bps tighter with the gains coming in the last hour of trading. Of particular focus was CDX HY which closed up +0.4pts (or in spread terms finished 9bps tighter) although that was after having dipped well over half a point lower mid way through the US session. The big US HY ETF’s (HYG and JNK) also pared some earlier steeper falls but still finished the session nearly 1% down on the day and have now closed lower on 10 out of the last 11 days. US HY energy spreads finished +43bps wider yesterday which means they are now +99bps wider over the last two days alone and a whopping +217bps wider in the month of December so far. That already far exceeds any month we have data for going back to the start of 2010. Chesapeake in particular is gaining plenty of attention now as it seeks a restructuring of its debt. Seen as something of a benchmark name in the US HY energy market, its 8-year bonds were down another 3.5pts yesterday and are now trading at just 27c. That’s after having traded north of 75c back in September.
The negative tone spiraling out of the US HY market spilled over into European credit yesterday, with Crossover closing +16bps wider and Main out nearly +4bps wider. Financials were hit hard also, with iTraxx sub-financials in particular nearly +9bps wider. In the cash market sentiment was weak but there was little in the way of panic. European stocks felt the full force of an early dip lower for Oil markets with bourses generally down 1.5-2% at the close. Just on Oil, the early afternoon saw both WTI and Brent hit fresh near 7-year lows after tumbling below $35 and $37 respectively (down 3% and 4%). Both turned around with the US session however, seemingly on the back of short-covering. WTI eventually finished up +1.94% and back above $36, while Brent finished more or less unchanged and slightly below $38.
It’s been a bit of a mixed start for markets across Asia this morning. Credit markets have followed the lead from that late rebound in the US with the iTraxx Asia currently 2bps tighter. It’s a bit of a weaker start for equities however where Japan in particular has seen steep declines with the Nikkei currently -1.53%. There are modest losses for bourses in China with the Shanghai Comp currently -0.31%, while the Hang Seng is flat. Both the Kospi and ASX are posting small losses, while the same can be said for Oil markets this morning too. The latest in the FX space has seen the PBoC set the Yuan fix lower for seventh consecutive session, this time by 0.1%.
Overnight the HouseView team have published their latest Infographic taking a look at the upcoming highly likely Fed rate hike tomorrow. In it they dig deeper into the mechanics of a 25bp hike and note that while the upper and lower limits will be moved to 50bps and 25bps respectively, the likely rise in the effective fed funds rate will closer to 20bps rather than 25bps, reflective of the premium to what will be the new reverse repo rate set equal to the lower limit.
Aside from the moves and headlines emerging from US HY yesterday it was relatively quiet elsewhere. Treasury yields reversed much of the sharp leg lower that we saw on Friday with 2y and 10y yields up +6.9bps and +9.5bps respectively and pretty much back to where we finished Thursday. With no data out in the US, Euro area industrial production was the only release of note with the October monthly increase of +0.6% mom coming in ahead of market expectations for +0.3%. Curiously ECB President Draghi was speaking yesterday at a speech in Italy, although his comments seemingly got overshadowed by price action in markets. The ECB President talked up his expectations of Euro area inflation hitting its target, saying specifically that ‘after the re-calibration of our instruments put in place this month by the Governing Council, we expect inflation will reach our objective without undue delay’. Draghi went on to reiterate that ‘within our mandate, there are no restrictions to our choice of which tools we use or how’.
Looking ahead now to what’s set to be a busier day for economic releases today. Kicking off the European session this morning we’ll have the November inflation numbers out of the UK with the CPI, RPI and PPI prints all expected. This will be followed by the Q3 employment numbers for the Euro area before we get the German ZEW survey. The BoE is also set to publish its Quarterly Bulleting around midday. Over in the US this afternoon the main focus will be on the November CPI numbers with current market expectations at 0.0% mom for the headline and +0.2% for the core which are in line with the view of our US economists. Also due out will be the December Empire manufacturing print, real average weekly earnings and finally the NAHB housing market index for December. Of course the two-day FOMC meeting begins today with the main event coming with its conclusion tomorrow.