Following a November to remember, which saw tremendous market gains following the election of Donald Trump, December has started off on the back foot, with US equity futures lower, European stocks halting a two day advance ahead of the Italian referendum, US Treasury yields higher and the US dollar backing away from a 9 month high.
One place where recent euphoria has continued was oil, where following yesterday's OPEC oil deal and 9% surge in crude, WTI continued its ascent and was trading above $50 in early trading, however skepticism about the rally is building with stories such as "Oil price rally likely short-lived as OPEC deal not enough to reduce glut" from Reuters and "Hangover Awaits as OPEC Celebrates Its Biggest Accord in Years" from Bloomberg.
Analyst were also skeptical: “Oil could go up to $60, but then the shale drillers come out and the price will likely come back down,” Keigo Matsubara, chief financial officer of the Japanese trading house said in an interview Thursday. “Oil can’t continue over $50.”
"The question is whether this (production cut) is going to put a floor under the oil price from here. The answer to that could well depend on what happens with the global economy in the coming year," said Simon Smith, chief economist at FXPro.
All eyes are now on whether the OPEC deal will hold together. If the bounce in oil prices gathers pace after the OPEC deal it was expected to have a broad implication on the global economy. OPEC's output cut is also seen as a boon for U.S. shale producers, rivals to the oil cartel. The S&P energy index .SPNY jumped nearly 5 percent on Wednesday.
While November may have been one of the most unforgettable months in markets in years, December is shaping up just as exciting: this is the month of the Italian referendum, the Austrian election (where Europe's first far right leader since WWII could be elected), a probable Fed hike (only the second in 10 and a half years) and a big ECB decision on what next for QE.
Ahead of these events, the U.S. dollar declined against most of its 16 major peers before a payrolls report on Friday, while a measure of euro volatility jumped to the highest since before the Brexit vote as investors brace for Italy’s referendum and Austria’s presidential election on Dec. 4 and the European Central Bank’s policy decision in a week’s time.
The jump in oil prices added to inflation expectations in the United States, which were already rising on prospects that president-elect Donald Trump would adopt reflationary policies using a large fiscal stimulus. As a result the rout in U.S. Treasuries resumed, with yields pushing higher, especially on longer-dated bonds.
The overnight slump in Treasuries extended the biggest climb in 10-year yields since 2009. The 10Y Treasury yield increased three basis points to 2.41% after surging nine basis points Wednesday to their highest close since July last year. It jumped 56 basis points last month. The 30-year yield has climbed more than 40 basis points since the Nov. 8 presidential election, heading back towards a 14-month peak of 3.09 percent marked last week.
"Higher oil prices, talk of ultra-long issuance in the U.S. and strong U.S. data all helped push U.S. yields higher," RBC Capital markets said in a note to clients on Thursday. "This remains our key theme for next year as well – we believe U.S. yields will keep leading the charge higher on improving macro backdrop and rising inflation expectations."
10Y German bunds added 4 bps to 0.31%. Not surprisingly, according to Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management’s Australia unit, "a lot of people are beginning to think that it is the end of the bull rally." The Bloomberg Barclays Global Aggregate Total Return Index of bonds fell 4 percent in November, biggest decline since index started in 1990.
The Stoxx Europe 600 Index lost 0.5% as all but three of the 19 industry groups retreated. S&P 500 Index futures slid 0.1 percent, signaling U.S. shares may continue their Wednesday decline. Glencore Plc gained 3 percent after saying its debt reduction plan is on track and it will reinstate its dividend next year. Banco Popular Espanol SA rose 3.5 percent after a report the lender is weighing a potential merger with another bank and has approached Banco Bilbao Vizcaya Argentaria SA, among others. Daily Mail and General Trust Plc rose 6.4 percent after it reported 2016 revenue that beat estimates.
"We are all waiting for the NFP tomorrow, the referendum in Italy this weekend and the ECB next week,” Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, said in an email. “It’s consolidation ahead of key events."
Today, traders will be looking to non-farm payrolls data for more clues on the pace of interest-rate increases, after ADP Research Institute reported the biggest jump in private-sector workers since June.
- S&P 500 futures down 0.1% to 2196
- Stoxx 600 down 0.5% to 340
- DAX down 0.7% to 10569
- German 10Yr yield up 4bps to 0.31%
- Italian 10Yr yield up 1bp to 2%
- Spanish 10Yr yield up 1bp to 1.57%
- S&P GSCI Index up 0.5% to 378.9
- MSCI Asia Pacific up 0.6% to 137
- Nikkei 225 up 1.1% to 18513
- Hang Seng up 0.4% to 22878
- Shanghai Composite up 0.7% to 3273
- S&P/ASX 200 up 1.1% to 5500
- US 10-yr yield up 3bps to 2.41%
- Dollar Index down 0.27% to 101.23
- WTI Crude futures up 0.5% to $49.70
- Brent Futures up 0.7% to $52.21
- Gold spot down 0.4% to $1,168
- Silver spot down 0.8% to $16.38
Top Global News
- Starboard Said to Push Rockwell Collins to Reassess B/E Deal: Activist said to take Rockwell Collins stake to push for sale
- Destructive Hacks Strike Saudi Arabia, Posing Challenge to Trump: Multiple attacks eminated from Iran, digital evidence suggests
- China Factory Gauge Jumps as Borrowing Boosts Old Drivers: Manufacturing PMI rises to 51.7, services advance to 54.7
- Credit Suisse Said to Freeze Accounts in Search for U.S. Assets: U.S. prosecutors now asking why $200 million was hidden
- Goldman Sees Oil Breaking $60 If OPEC Deal Done as Promised: Full OPEC compliance, Russia’s curb bullish for oil
- United May Amend $12.4 Billion Airbus Deal to Take Smaller Jets: CFO Levy says A350-1000s may be swapped for smaller aircraft
- SAC Capital to Pay $135 Million to End Last Insider Case: Steve Cohen’s old firm agrees to settle with Elan shareholders
- Georgia Won’t Publish Chicken Price This Week on Lack of Data: Agriculture department says too few producers participating
- Russia Weaponized Social Media in U.S. Election, FireEye Says: Senate Democrats want data on Russian hacking declassified
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Looking at regional markets, Asia stocks shrugged off the weak close in the US and traded higher across the board amid encouraging Chinese PMIs and strength in energy following the OPEC output deal. Energy names led in the ASX 200 (+1.1%) on the back of an almost 10% surge in oil prices after OPEC reached an agreement to cut output by 1.2mln bpd to 32.5mln bpd starting in January. Nikkei 225 (+1.2%) initially soared to its best level this year on JPY weakness after USD/JPY broke above 114.00 in the prior session, although the index failed to maintain YTD highs on profit taking and a pull-back in USD/JPY. Shanghai Comp (+0.7%) and Hang Seng (+0.3%) were underpinned after Chinese Official Mfg PMI topped estimates to post its highest since July 2014 and although the Caixin Mfg PMI was at a slight miss, it still represented a 5th consecutive month of expansion. 10yr JGBs saw spill-over selling from USTs, with demand for JGBs also dampened amid gains in stocks. However, 10yr JGBs pared some losses despite a softer 10yr auction than the previous month, as the results were deemed roughly consistent with this year's averages.
- Chinese Manufacturing PMI (Nov) 51.7 vs. Exp. 51.0 (Prey. 51.2), highest level since July 2014.
- Chinese Non-Manufacturing PMI (Nov) 54.7 (Prey. 54.0) highest level since June 2014.
- Chinese Caixin Manufacturing PMI (Nov) 50.9 vs. Exp. 51.0 (Prey. 51.2).
Top Asian News
- PBOC Seen Shifting Focus in Yuan Battle as Foreign Reserves Drop: China said to have set up new hurdles for yuan, M&A outflows
- India Manufacturing PMI Slips From 22-Month High After Cash Ban: Nov. reading was 52.3, first indicator since cash decision
- Rupee’s November Swoon Casts Shadow on India Unhedged Debts: India Inc. due to repay $10 billion of overseas debt by March
- Alphadyne Said to Spin Off $2 Billion Singapore Hedge Fund Unit: Transition to new firm said to start in first half of 2017
- DBS Eliminates a Dozen Jobs at Brokerage as Trading Slumps: Value of shares traded in city-state down 24% from 2013
European equities have spent the session in the red (Euro Stoxx: -0.4%) with underperformance seen in defensive names. This comes after the significant strength seen during yesterday's session in tandem with the OPEC deal, with energy names continuing to outperform today. Financials are also higher this morning, with Deutsche Bank leading the way higher in the DAX, Italian Banks the best performers in the FTSE MIB and Banco Popular the best performer in Europe after dual reports of potential interest from BBVA and reports that the chairman may be replaced. Fixed income markets have seen yields rise, with the US 10Y breaking above 2.4% to reach its highest level since July 2015, while over in Europe outperformance has been seen in the periphery. Also of note, today sees supply from both Spain and France.
Top European News
- Glencore’s Reversal of Fortune Marked by Return to Dividends: Investors weren’t expecting a dividend reinstatement, Goldman says
- Maersk Line Teams Up With Oetker Group to Buy Hamburg Süd: World’s No. 1 shipping line will take over the industry’s seventh biggest container liner
- Euro-Area Manufacturing Picks Up as Weaker Euro Bolsters Exports: Purchasing Managers’ Index for manufacturing rose to 53.7 from 53.5 in October
In currencies, the dollar slipped 0.2 percent to 114.27 yen at 10:15 a.m. in London. It weakened 0.3 percent versus the euro to $1.0616, while the pound was also up 0.3 percent to $1.2544. Bloomberg’s Dollar Spot Index slid 0.2 percent after advancing 0.5 percent Wednesday, leaving it up 3.9 percent in November, the most since September 2014. Traders are paying the most since June’s peak to protect against price swings in the euro versus the dollar, according to one-week implied volatility in the currency pair. The yuan dropped 0.1 percent onshore, reflecting dollar strength, and gained 0.2 percent offshore amid strengthening factory gauges and a crackdown on capital flow.
In commodities, West Texas Intermediate crude added 0.9 percent to $49.87 a barrel after trading as high as $50.24 earlier. It surged 9.3 percent last session, the biggest one-day gain since Feb. 12. It ended November up 5.5 percent. The OPEC-led deal was broader than many people had expected, given that it extended beyond the bloc with Russia agreeing to unprecedented cuts to its own output. U.S. natural gas futures for January rose to highest for front-month contract since December 2014 as cold weather seen sweeping west. Gold slipped 0.3 percent to the lowest level since February. Zinc gained 0.6 percent, while copper fell 0.8 percent. Metals in London in November had their best month since 2010.
Looking at the day ahead, we’ll firstly get the latest weekly initial jobless claims reading, followed then by the final manufacturing PMI revision, construction spending and the ISM manufacturing print for November (market consensus is for 52.5 versus 51.9 in October). Later the November vehicle sales numbers will also be released (expected to decline modestly). Away from the data the Fed’s Mester and Kaplan are both due to speak again, while the ECB’s Coeure is also scheduled to speak.
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, Nov. (prior -39.1%)
- 8:30am: Initial Jobless Claims, Nov. 26, est. 253k (prior 251k)
- 8:30am: Fed’s Mester speaks in Washington
- 9am: Fed’s Kaplan speaks in San Antonio
- 9:45am: Bloomberg Consumer Comfort, Nov. 27 (prior 44.8)
- 9:45am: Markit US Manufacturing PMI, Nov. F, est. 53.9 (prior 53.9)
- 10am: ISM Manufacturing, Nov., est. 52.5 (prior 51.9)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
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DB's Jim Reid concludes the overnight wrap
Welcome to December the month of the Italian referendum, the Austrian election (where Europe's first far right leader since WWII could be elected), a probable Fed hike (only the second in 10 and a half years) and a big ECB decision on what next for QE. So it is unlikely to be quiet. Ahead of this today I find out whether my second knee operation in 18 months was a success or not as the 5-month MRI results will be reviewed by the consultant. Last night I spent an hour on YouTube learning to self diagnose the CD of the scan which was probably a very silly thing to do. All I know is there is a river of swelling still slushing around my knee and that my meniscus doesn't look anything like the 25-year olds I saw on the YouTube clip.
One asset that made a very late run towards the top was Oil. OPEC yesterday announced their first oil production agreement in 8 years which will see production cut by 1.2 mmb/d to about 32.5 mmb/d for six months from the start of January 2017, with the option to extend the agreement to the end of 2017. Aggregate production has been stated in terms of the 14 OEPC members including Indonesia, although Indonesia is no longer a member as of this meeting. Non-OPEC members including Russia have also agreed to lower production by 600 kb/d. The heavy lifting though looks set to be done by Saudi Arabia who has agreed to reduce output by 486 kb/d. At the same time the Saudi’s appear to have softened their stance on Iran somewhat with the latter now freezing production at just shy of 3.8 mmb/d and marginally higher than current levels. Iraq, who had previously disputed cutting, agreed to a cut of 210 kb/d.
By the end of play WTI had closed up +9.31% at $49.44/bbl. It had been up a little more than 10% at one stage although just failed to break the $50/bbl mark. Brent had no such issue though and smashed through $50 to close +9.55% or $4.50 higher on the day at $51.84/bbl. The move for WTI in particular is the biggest one-day gain since February 12th. In fact we thought it would be interesting to see how many times WTI has risen more than yesterday on a single day. Bloomberg pricing data goes back to 1983 and in the 8435 trading days since then, yesterday ranks 33rd by largest one day moves in both percentage terms and also in Dollar terms.
Our commodity strategists pointed out in their note last night that the agreement is more bullish than market expectations in that first, the 33.0 mmb/d upper limit in the range has been omitted, leaving the 32.5 mmb/d as the sole target level. Second, the non-OPEC contributions of 600 kb/d have been described as nearly agreed, with Russia and Oman having been named as key contributors. That said while the agreement is clearly a big help for the demand-supply rebalancing, our colleagues still remain sceptical that the full non-OPEC reduction will be realised. They retain their pre-existing expectation of OPEC-14 production at 33.2 mmb/d in 2017 (32.46 mmb/d excluding Indonesia which has now left the organisation) and reaffirm their price forecasts for next year at $55/bbl for Brent and $53/bbl for WTI.
The biggest feed through to other asset classes from the Oil move was in sovereign bond markets where the reflationary effect had yields spiking higher. 10y Treasury yields surged 9bps to 2.382% after peaking a little above 2.400%, and in the process closed at the highest yield since July 2015. Yields are now over 100bps higher than where they were just 5 months ago. There was a similar move for EM sovereigns while in Europe 10y Bund yields edged up just over 5bps to 0.271%. BTP’s outperformed again with 10y yields ‘only’ 4bps higher. Aiding the bond-selloff though was some decent data in the US. In particular the ADP employment change reading which came in ahead of consensus at 216k (vs. 170k expected) ahead of tomorrow’s payrolls. More on the other data shortly.
Meanwhile it was a much more mixed performance across equity markets. Despite a near 5% rally for the energy sector and also a strong day for financials following a positive reaction to the appointment of Steven Mnuchin as US Treasury Secretary – who has since told CNBC to expect ‘the largest tax change since Reagan’ – and the move for rates, those gains were more than offset by weakness across utilities, telecoms and the consumer staples sectors resulting in the index closing down -0.27% by the final bell. It was a slightly better tone in Europe though with the Stoxx 600 edging up +0.31% while the Italian FTSE MIB (+2.23%) concluded its second consecutive >2% bounce ahead of this Sunday’s referendum.
This morning in Asia, with Oil largely consolidating gains, a surge for energy stocks has led bourses higher in the region. The standout is the Nikkei (+2.15%) which has also benefited from a much weaker Yen yesterday, while the Hang Seng (+0.69%), Shanghai Comp (+0.52%), Kospi (+0.08%) and ASX (+0.91%) have also edged higher. Helping sentiment too was the release of the November PMI’s in China this morning. The official manufacturing PMI has risen 0.5pts to 51.7 (vs. 51.0 expected) and to the highest since July 2014, while the non-official PMI rose 0.7pts to 54.7 which is the highest since June 2014. The independent Caixin survey did however paint a slightly different picture with the manufacturing reading edging down 0.3pts to 50.9 with most sub indices also softening.
Back to the remaining US data yesterday. There was a positive readthrough from the latest personal income print which rose +0.6% mom in October (vs. +0.4% expected), with data in the month prior also revised up. Personal income rose +0.3% mom during the month (vs. +0.5% expected) but September data was revised up two-tenths meaning the YoY rate rose to +4.2% and the most since January 2015. The PCE core rose +0.1% mom as expected while the deflator rose a little bit less than expected (+0.2% mom vs. +0.3% expected). Meanwhile, the Chicago PMI rose a bumper 7pts to 57.6 (vs. 52.5 expected) which is the highest since January 2015 and a positive read across for today’s ISM manufacturing. The final data to note was the October pending home sales data where sales were reported as rising +0.1% mom as expected in October.
Before we move to today’s diary, a quick wrap up of yesterday’s data in Europe. The highlight was perhaps the flash Euro area CPI report for November which revealed headline inflation of +0.6% yoy which is up one-tenth from October and in fact the highest reading since April 2014. The core was unchanged at +0.8% yoy. In Germany retail sales rose a bumper +2.4% mom in October (vs. +1.0% expected) while Germany’s unemployment was reported as holding steady last month at 6%. In France, CPI came in slightly ahead of consensus for last month in the flash reading (0.0% mom vs. -0.1% expected), helping to raise the YoY rate to +0.5% from +0.4%. The last thing to note is the BoE’s Financial Stability Report and the latest round of stress test results. According to the report the ‘the economy has entered a period of adjustment following the EU referendum’ and so ‘the likelihood that some UK specific risks to financial stability could materialize remains elevated’. Meanwhile the stress tests revealed that there are some ‘capital inadequacies’ at three institutions. It was noted however that ‘the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario’.
Looking at the day ahead, this morning in Europe we kick off with the November Nationwide House price index reading for the UK. After that it’s all about the manufacturing PMI’s where we’ll get final revisions for Germany, France and the Euro area as well as a first look at the data for the non-core and the UK. Also due out today is the latest unemployment rate print for the Euro area. This afternoon in the US we’ll firstly get the latest weekly initial jobless claims reading, followed then by the final manufacturing PMI revision, construction spending and the ISM manufacturing print for November (market consensus is for 52.5 versus 51.9 in October). Later this evening the November vehicle sales numbers will also be released (expected to decline modestly). Away from the data the Fed’s Mester (1.30pm GMT) and Kaplan (2pm GMT) are both due to speak again, while the ECB’s Coeure is also scheduled to speak.