Global Bond Rout Accelerates Even As Dollar Rally Fizzles

In a continuation of trading patterns observed over the previous two days, on Thursday the global bond rout deepened in the aftermath of the release of President Trump’s tax-cut plan, Janet Yellen's recent hawkish comments and renewed optimism over the health of the U.S. economy. While global stocks were mostly mixed as investors tried to assess the implications of the much-anticipated tax proposal, there was less doubt in the bond market, where 10Y Treasurys tumbled as a result of heavy stop loss selling once the 200-DMA (2.3255%) was taken out, sending yields to three month highs around 2.35% as accelerating selling spread to all global rate products.

Bund futures slid from the open, with yield curves steepening as 10y yield briefly breached 0.5% for the first time since early August amid a surge in volume after the Treasury sell-off gained momentum in Asian hours.

“The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans,” said Commerzbank analyst Rainer Guntermann. “At the same time, this gives the Fed more ammunition to hike rates in the coming months.” Trump’s tax plan offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.

Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying. At the same time, others said it could be an uphill battle to get the changes approved. “It is hard to expect this proposal to pass the Congress smoothly.” Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities. “We have to pay attention to how the Republicans will view this,” he added “It is possible that the net fiscal spending will be smaller than what the stock markets expect.”

Meanwhile, after rising early in the session to a six-week high, the US dollar pared gains as the euro rose with German regional inflation data pointing to continued potential overheating. That offered some support to Treasuries, after a slide in Asian hours as a global selloff in core bonds continued.

  • German Hesse State CPI YY (Sep) 2.1% (Prev. 1.8%)
  • German Hesse State CPI MM (Sep) 0.3% (Prev. 0.0%)
  • German Brandenburg State CPI YY (Sep) 1.6% (Prev. 1.8%)
  • German Brandenburg State CPI MM (Sep) 0.2% (Prev. 0.1%)
  • German Saxony State CPI YY (Sep) 2.0% (Prev. 1.9%)
  • German Saxony State CPI MM (Sep) 0.2% (Prev. 0.2%)
  • German Bavaria State CPI YY (Sep) 1.8% (Prev. 1.8%)
  • German Bavaria State CPI MM (Sep) 0.2% (Prev. 0.2%)
  • German NRW State CPI MM (Sep) 0.1% (Prev. 0.1%)
  • German NRW State CPI YY (Sep) 1.9% (Prev. 1.9%)

US futures were little changed, with European stocks were steady holding onto recent gains as rising banks balanced retailers, while Asian stocks were mixed, generally lower except Japan where the latest Yen weakness sent local stocks up 0.5%. Gold touched the lowest in a month.

In Europe, the Stoxx Europe 600 Index fell less than 0.01% as publication time. The U.K.’s FTSE 100 Index climbed less than 0.05 percent, while Germany’s DAX Index jumped 0.3 percent to the highest in more than 12 weeks. Banks rose to fresh seven week highs, though that was partly offset as miners struggled and as underwhelming results from one of Europe’s biggest fashion chains, H&M, weighed on retailers, while weakness in Chinese commodity markets continued overnight.  Financials began where they left off yesterday and behave as one of the outperforming sectors in the Stoxx 600. And despite the positive open some EU markets lost early gains, as a fall among basic resources and the more defensive, consumer and health sectors weigh.

Emerging markets were the big losers from the surging dollar and as Treasury yield spike higher. MSCI’s emerging markets equity index was down 0.6% and was on course for its sixth straight daily decline.

Asian markets slipped as they headed to cap a third straight quarter of gains, the longest such winning streak since 2013. Japanese equities rose as the dollar strengthened, while Chinese shares fell ahead of a week-long holiday from Monday. The MSCI Asia Pacific Index dropped 0.2 percent, declining for a sixth day, the longest stretch of losses since Dec. 27. Energy stocks paced the retreat as crude oil fell for a third day, with China Petroleum & Chemical Corp. and PetroChina Co. the biggest drags on the industry gauge. ASX 200 (+0.1%) and Nikkei 225 (+0.47%) initially picked up on the recent US momentum however, Asia-Pac bourses pulled back from best levels amid a lack of catalysts to fuel the advances and as China clouded the tone with Hang Seng (-0.80%) and Shanghai Comp. (-0.2%) both subdued as investors took risk off the table ahead of the mainland’s week-long closure for National Day holidays.

“Japanese stocks rise today is boosted by the sentiment from the weaker yen,” Andy Ferdinand, head of research at PT Samuel Sekuritas Indonesia, says by phone from Jakarta. “Some traders might decide to tidy their books before the long holiday in China to avoid any unwanted surprises.”

The greenback did check back against the yen easing off to 112.62 yen to the dollar having hit a 2-1/2-month high of 113.26 yen the previous day. The Canadian dollar also reversed losses after suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year. Canada’s loonie was last at C$1.2468 to the U.S. dollar, having early slid to its lowest in a month.

Commodities were mixed, rebounding after earlier losses, with West Texas Intermediate crude gaining 1.1% to $52.69 a barrel, the highest in more than five months, while gold dropped 0.1% to $1,281.30 an ounce, the weakest in more than six weeks. Copper increased 0.4 percent to $6,462.00 per metric ton on the largest climb in more than two weeks.

In geopolitical news, South Korea is said to believe North Korea could conduct action between October 10th-18th which coincides with North Korea's Communist Party Founding and China's Communist Party Congress, according to sources.

Brexit rumors have reemerged, with the EU Parliament saying no sufficient progress on Brexit talks, with sources saying the EU are reportedly in discussions with bringing forward talks about the Brexit transition period. At the same time, PM May has stressed the opportunity that Brexit and free markets bring.

Central bankers from the U.S., U.K. and Australia are among speakers at a Bank of England conference starting in London on Thursday, ensuring the focus will stay firmly on the policy outlook for some of the world’s biggest economies. But that won’t be the only thing on investors’ minds; data is also due on U.S. growth and spending, end-of-quarter volatility may be near and major markets including China will shut next week for a holiday.

Jobless claims, consumer comfort, 2Q gross domestic product, inventories are due Thursday

Market Snapshot

  • S&P 500 futures down 0.05% to 2,503.25
  • VIX Index retreats 1.4%, third day of declines
  • STOXX Europe 600 down 0.02% to 385.54
  • MSCI Asia down 0.2% to 160.54
  • MSCI Asia ex Japan down 0.6% to 526.47
  • Nikkei up 0.5% to 20,363.11
  • Topix up 0.7% to 1,676.17
  • Hang Seng Index down 0.8% to 27,421.60
  • Shanghai Composite down 0.2% to 3,339.64
  • Sensex up 0.1% to 31,202.16
  • Australia S&P/ASX 200 up 0.1% to 5,670.39
  • Kospi up 0.02% to 2,373.14
  • German 10Y yield rose 2.2 bps to 0.49%
  • Euro up 0.09% to $1.1756
  • Brent Futures down 0.09% to $57.85/bbl
  • Italian 10Y yield rose 2.7 bps to 1.857%
  • Spanish 10Y yield rose 1.5 bps to 1.661%
  • Gold spot down 0.08% to $1,281.80
  • U.S. Dollar Index up 0.06% to 93.42

Bulletin Headline Summary From Ransquawk

  • European markets trade mixed, financials continue to out-perform
  • Greenback gives back slight ground following Trump’s Tax Plan
  • Looking ahead, highlights include German CPIs, US GDP, PCE figures and a slew of central bank speakers

Top Overnight News

  • Trump and Republican leaders announced a tax framework that would represent a major legislative win this year, while economists disagree on the value of cutting the corporate tax rate
  • Alphabet Inc. was ordered by regulators to stop promoting its own shopping search results over competitors’ and to make changes designed to give rivals fairer treatment by Sept. 28
  • Hong Kong’s appeal as a derivatives hub is growing as Brexit and MiFID II rules set to complicate transactions in Europe
  • The Bloomberg Dollar Spot Index extended its advance to a six- week high in Asian session before trimming gains as Europe came to the market; EUR/USD traded as low as 1.1721 before reversing losses in European session amid quarter-end flows and profit taking on shorts.
  • Treasuries continued to slide in Asian hours with futures volumes running ~200% of recent averages for the session. Losses accelerated after breaking 200-DMA. Buying of downside in options was seen, in strikes offering protection beyond 2.50% in 10y yields. Bunds futures flushed lower from the open in Europe, briefly breaching 0.50% for the first time since early August, and Treasuries extended losses before stabilizing. On the curve the 10y point has seen sharp underperformance.
  • Japan’s opposition forces appeared set to consolidate around Tokyo Governor Yuriko Koike, whose new political group narrowed a gap in opinion polls with Prime Minister Shinzo Abe’s ruling party weeks ahead of a general election
  • European Union leaders are considering going some way to meet one of the U.K.’s demands; they are discussing bringing forward talks about the transition period that would follow Brexit, according to three people familiar with the situation
  • BOE’s chief economist Haldane told Sky News he’s among the majority of policy makers who believe that the economy is “nearing the point” where a reduction in some stimulus might be warranted and that signs on pay growth have become more ‘encouraging’
  • Euro-area economic confidence surged more than economists forecast in September; “A very substantial degree of monetary accommodation is still needed in the euro area for underlying inflationary pressures to gradually build up,” ECB Governing Council member Erkki Liikanen said
  • CAD trimmed losses vs USD after drifting below 1.25 for the first time in almost four weeks in late Asian hours following soft comments by BOC’s Poloz Tuesday.
  • NZD fell a fourth day; RBNZ held official cash rate at record-low 1.75% and said monetary policy will remain accommodative for a considerable period.
  • Senate Judiciary Tech Subcmte Sets Oct. 4 Hearing on Equifax; Facebook, Twitter, Google Invited to Nov. 1 Senate Cmte Hearing

Asia equity markets traded mixed after momentum from US petered out and as China prepares for National Day Golden Week. ASX 200 (+0.1%) and Nikkei 225 (+0.47%) initially took firm impetus from the gains on Wall St, where Trump tax plans and outperformance in financials and tech led the S&P 500 to fresh intraday records. However, Asia-Pac bourses have pulled back from best levels amid a lack of catalysts to fuel the advances and as China clouded the tone with Hang Seng (-0.80%) and Shanghai Comp. (-0.2%) both subdued as investors took risk off the table ahead of the mainland’s week-long  closure for National Day holidays. 10yr JGBs were lower amid a positive risk tone in Japan and after Japanese yields rose across the curve to mirror their US counterparts, while today’s 2yr auction also failed to provide support with its b/c and lowest accepted price weaker than prior. PBoC injected CNY 50bln via 14-day reverse repos and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6285 (Prev. 6.6192) Japan's lower house of parliament was dissolved as expected ahead of snap elections.

Top Asian News

  • Hedge Funds Bet Billions on Japan Stocks Before Abe Called Vote
  • Indonesia Pledges to Guard Currency as Rupiah Nears 10-Month Low
  • Bank Indonesia Keeps Exchange Rate Target at 13,420/USD Yr- End
  • Toshiba Inks $18 Billion Deal to Sell Chip Arm to Bain Group
  • China to Start New Energy Vehicle Production Quota From 2019

European equities opened with a marginal bid, following President Trump’s tax plan, sending the greenback and global yields higher. Financials have begun where they left off yesterday and behave as one of the outperforming sectors in the Stoxx 600. Despite the positive open some EU markets lost early gains, as a fall among basic resources and the more defensive, consumer and health sectors weigh. The US fiscal package sell-off has found some support in Europe, with bund yields finding some resistance around the 0.50% level, despite a brief spike through this level we have consolidated below.

Top European News

  • EU Is Said to Consider Brexit Compromise on Transition Talks
  • Carney Hails BOE Independence, But Says It Can’t Do Everything
  • Liikanen Sees Need for Very Substantial Degree of Accommodation
  • Novartis Is Said to Consider Acquisition of Advanced Accelerator
  • Deutsche Boerse Said to Take Stake in Big Data Company Trifacta
  • Etihad Airways Appoints Tony Douglas as CEO to Lead Overhaul

In currencies, the greenback remains on the front foot with this being down to somewhat of a corrective move which may continue in the short term. The strength in the USD has been pushed USD/JPY through 113.00 with bulls eyeing key levels of 114.00 through 114.50 (July high). Slight uncertainty from the German election has pressured EUR down to the low 1.17s. EUR relatively flat this morning with month-end buying in EUR/GBP providing some modest support. German CPI regional figures have been mixed, with EUR not finding any momentum following the figures, with anticipation likely to now be on the headline German CPI figure. Last night the RBNZ kept the key interest rate unchanged as expected, stating that accommodation will remain for some considerable time. This is seen in the futures where a hike is not fully priced in until the back-end of next year. The RBNZ also toned down its rhetoric on the currency, given the slightly TWI easing of NZD and as such from the release there was a muted reaction.

In commodities, WTI continues to trade within the week’s range, yet does continue to recede at the top end, bulls will look to break through this 52.50 area to spur further pressure toward this run. Markets have been aided by early comments from a KPC official says, expects OPEC to extend oil supply cuts beyond March 2018. Gold continues to grind lower amid the recent risk tone, now trading to an over one-month low, weighed upon by the week’s bullish dollar.

Looking at the day ahead, there is the third reading of 2Q GDP (3% expected), Core PCE and personal consumption. Elsewhere, the Kansas City Fed manufacturing activity index, August wholesale inventories and stats on continuing claims and initial jobless claims are also due. Onto other events, the Fed’s George and Fischer will speak. In the UK, the BOE will hosts the “20 years on” independence conference from the government, with BOE’s Carney, Praet and Lautenschlaeger due to speak

US Event Calendar

  • 8:30am: GDP Annualized QoQ, est. 3.0%, prior 3.0%; Personal Consumption, est. 3.3%, prior 3.3%
    • GDP Price Index, est. 1.0%, prior 1.0%; Core PCE QoQ, est. 0.9%, prior 0.9%
  • 8:30am: Initial Jobless Claims, est. 270,000, prior 259,000; Continuing Claims, est. 1.99m, prior 1.98m
  • 8:30am: Advance Goods Trade Balance, est. $65.1b deficit, prior $65.1b deficit, revised $63.9b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.6%; Retail Inventories MoM, prior -0.2%, revised -0.1%
  • 9:45am: Bloomberg Consumer Comfort, prior 50.6
  • 9:45am: Fed’s George Speaks on Economy and Monetary Policy
  • 11am: Kansas City Fed Manf. Activity, est. 14.5, prior 16
  • 10am: Fed’s Fischer Speaks at BOE Independence Conference, London
  • 1:30pm: Fed’s Raphael Bostic to Speak about Careers in Economics

DB's Jim Reid concludes the overnight wrap

Today sees a very high quality conference of speakers to celebrate the 20th anniversary of the Independence of the Bank of England. How time flies! Watch out for headlines emanating from the event. The surprise announcement just after the UK election in May 1997 was the main reason I’m in Research today as the events around that day proved how average I was at my job at the time. I realised I had to find a new one. Yes as a young bond salesman the shock BoE Independence announcement led to a huge rally in Gilts that day and every client was on the phone to us simultaneously to try to buy Gilts. I got a call from my biggest client to buy him tens of millions of the 7% 2002 issue. However at the same time every other client was trying to do the same thing and quite frankly their sales person was older, more pushy and more aggressive than me. I was at the back of the queue. From that moment I’d worked out that sales was actually quite difficult. So to all the salespeople on this list....... I admire you!! To all the clients I covered.... “I’m sorry”.

Bonds yesterday went the other way to that seen on that fateful 1997 day. Yields rose across the globe as firstly Yellen’s words the previous night set the tone but more importantly optimism over Trump’s tax speech later in the day grew. Strong Durable Goods didn’t harm the story either. The reality has been for some time that tax reform is looking increasingly tough but that markets were pricing a near zero probability of anything passing. Such an outcome might still be the case but when expectations are so low any hopes can help the reflation trade.

On the back of Mr Trump’s tax framework, the S&P 500 rose 0.41% back towards its record high, 10-year treasury yields jumped 7.5bps to 2.311% and the US dollar index gained 0.42% yesterday. Before we recap Mr Trump’s proposals, it’s worth noting that his plans are unfunded and initial estimates by DB’s Peter Hooper and Brett Ryan suggests it could cost up to US$3trn over 10 years, so it will be interesting which part of his plans will eventually make it to formal legislations.

In terms of specifics it seems to be broadly similar to the leaked details as mentioned in our note yesterday, which includes: 1) cutting the corporate tax rate to 20% (from 35% existing) with businesses allowed to immediately write off their non-building capex for at least five years, 2) companies with untaxed offshore profits (c$2.6trn est.) will be subject to a one-time tax, but the rate is unclear, 3) simplify and cut the individual tax rate to 12%, 25% and 35% (from 39.6%), but leaving the door open for Congress to set a fourth tax bracket for high income earners, 4) middle income earners will benefit from a $12k deduction (c2x higher), 5) for pass-through entities (eg: partnerships and limited liability companies), their tax rate will be capped at 25%, and 6) repealing the existing individual alternative minimum tax (AMT), the estate tax and eliminating most itemized deductions (tax incentives for home mortgage interest and charitable contributions are retained).

Early reactions on the political front have been somewhat mixed. Trump called the tax framework as “revolutionary change” and the 20% corporate tax rate as a “perfect number” and non-negotiable. Elsewhere, House speaker Ryan said “this is a now or never moment” and “we can finally get this done” and the Ways and Means Chairman Kevin Brady of Texas said the committee “is ready to turn this framework into legislation”. Conversely, the Senate Finance committee Chairman Orrin Hatch has pledged his committee “would not be a rubber stamp” of the plans, and Senator Bernie Sanders said the  plans are “providing hundreds of billions in tax breaks to the wealthiest people and most profitable corporations”. We shall wait and see how Mr Trump’s plans evolve into legislations. Our US team’s early take is that they see a prospect of some reforms occurring at the corporate level (particularly for small corporates), but the potential for substantive reform of personal tax is much lower.

Turning to the bond market sell-off. In the US, 10y treasury (2y: +3.5bp; 10y: +7.5bp yesterday) yields arenow up c30bp since early September and back at similar levels to late July. They’ve climbed another +2.7bps overnight to 2.337%. In Europe, core bond yields rose c6p (Bunds 10y +6bp; Gilts +5bp; OATs +6bp) while peripherals slightly outperformed with yields up 3-6bp (Italian BTPs +3bp; Portugal: +6bp; Spain +4bp). At the 2 year part of the curve, core bond yields rose by c2bp with US yields hitting 9-year highs.

This morning Asian markets are trading mixed but little changed. As we type, The Nikkei (+0.30%) and ASX 200 (+0.13%) are up slightly, while the Kospi (-0.14%), Hang Seng (-0.34%) and Shanghai Comp. (-0.17%) are marginally softer.

Back onto markets performance yesterday now. US bourses have all strengthened back towards their record highs. The S&P rose 0.41%, with gains led by the financials (+1.30%) and tech (+1.14%) sectors, while utilities and real estate names fell, partly reflecting the prospects of higher yields. Elsewhere, the Dow (+0.25%) and Nasdaq (+1.15%) have traded higher. In Europe, markets were also higher, with the Stoxx 600, DAX and FTSE all up c0.4%, while the peripherals slightly outperformed (FTSE MIB +0.85%; IBEX 35 +1.76%). Notably, the US small cap index (Russell 2000) had one of the best days since March, rising 1.92% yesterday on the back of Trump’s tax plans.

Turning to currencies, the US dollar index strengthened 0.42% (up 2.2% since early Sep.), while the Euro and Sterling fell 0.41% and 0.53% respectively. In commodities, WTI oil was little changed (+0.50%) while precious metals fell modestly (Gold -0.87%; Silver -0.29%) given the risk on bias. Elsewhere, other base metals are trading a bit mixed (Copper +0.02%; Zinc +0.14%; Aluminium -0.37%) but little changed this morning.

Away from the markets and onto central bankers’ commentaries now. In the US, the Fed’s Bullard sounded a bit dovish, noting “the current level of the policy rate is appropriate” given that inflation “has surprised to the downside in recent months”. Elsewhere, the Fed’s Rosengren said “it’s my view that regular and gradual removal of monetary accommodation seems appropriate”. Notably, the odds of a December rate hike as per Bloomberg remains at 70%. Over in Canada, after hiking rates twice since July (+0.50%) to 1%, BOC’s Governor Poloz sounded a bit more cautious, noting there is no  “predetermined path for interest rates” and “the appropriate path for interest rates in this situation is very difficult to know”.

Over in Europe, Germany’s long serving Finance Minister Wolfgang Schaeuble (c8 years in the role) is expected to leave Merkel’s cabinet and take up the role of President of the lower house. Some sees his departure as Germany becoming more accommodating towards the Euro area, but the possibility of a member from the FDP taking up the finance post could mean little will change.

Back in the UK, Bloomberg reports that EU leaders are considering bringing forward talks on the transition period post Brexit as a small concession to kick start the Brexit talks. Elsewhere, the US Commerce Department has imposed a 220% import duties on Canada’s Bombardier jets, citing a complaint by Boeing that the aircraft had received improper subsidies in Canada (Bombardier shares fell 7.49%). The reduced demand for these aircrafts could lead to job losses for workers at the Northern Ireland plants that help build these jets.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the August core capital goods orders (non-defence and ex aircraft) was above markets expectations at 0.9% mom (vs. 0.3% expected) and up 3.6% yoy. The durable goods orders (ex-transport) was in line at 0.2% mom, although the underlying reading is likely stronger given the prior month has been revised upwards by 0.2ppt. Elsewhere, pending home sales fell 2.6% mom (vs. -0.5% expected), partly impacted by Hurricane Harvey, while MBA mortgage applications fell 0.5% (vs. -9.7% previous).

In Europe,Italy’s September business confidence index rose to a 10-year high at 108.0 (vs. 107 previous). Elsewhere, confidence indicators on manufacturing (110.4 vs. 108.2 expected) and consumers (115.5 vs.110.6 expected; highest since January 2016) were also above expectations. In France, consumer confidence was a touch softer at 101 (vs. 103 expected) while the Eurozone’s M3 money supply expanded at 5% (vs. 4.6% expected). In the UK, the September CBI’s Distributive Trades Survey for September was fairly upbeat, with a net 42% of retailers reporting that sales had grown over the past year – the strongest result in two years.

Looking at the day ahead,Germany’s September CPI (0.1% mom, 1.9 yoy expected) and GfK consumer confidence readings will be due. For the Eurozone, there is a range of confidence indicators including: consumers, business climate, economy and industrial. Over in the US, there is the third reading of 2Q GDP (3% expected), Core PCE and personal consumption. Elsewhere, the Kansas City Fed manufacturing activity index, August wholesale inventories and stats on continuing claims and initial jobless claims are also due. Onto other events, the Fed’s George and Fischer will speak. In the UK, the BOE will hosts the “20 years on” independence conference from the government, with BOE’s Carney, Praet and Lautenschlaeger due to speak.