Global Markets Bounce As Germany, China, Spain Lift World Stocks, Turkey Crash Ignored

With no North Korean nuclear test over the weeknd contrary to a Friday morning rumor, S&P futures rebounded and edged higher as European stocks gain, led by Spanish shares after mass demonstrations in favor of Spanish unity and speculation Catalonia may back down on unilateral independence demands, while Chinese mainland stocks reopened catching up to gains missed during the holiday week following last weekend's RRR cut.

World shares rose to start the week, with Chinese stocks hitting 21-month highs and the German index setting a new record, while political uncertainty triggered big moves in sterling, the Turkish lira and Spanish debt. US futures are also pushing higher in anticipation of the start of Q3 earnings season which begins later this week, with a number of Wall Street banks including JPMorgan, BofA and Citi set to report. While equities are open, the US bond market is closed today for the Columbus day holiday, while Asian markets were relatively quiet following holidays in Japan, South Korea and Taiwan.

European stocks climbed at the start of a week in which investors were closely watching developments in Catalonia as well as U.S. earnings season kicks off. The Stoxx Europe 600 Index adds 0.23%, following four straight weeks of gains. All industry groups except miners climb. The IBEX 35 Index is up 1% as a senior member in the Catalan administration calls for dialogue with Spain, although the gauge is still down 1.2% since Catalans voted for independence in an illegal referendum. After a weekend of mass demonstrations in favor of Spanish unity, Raul Romeva, foreign affairs chief for the separatist government in Barcelona, insisted that the door was open for talks if Prime Minister Mariano Rajoy was willing to grasp the opportunity

As Bloomberg breaks down local markets, 18 out of 19 Stoxx 600 sectors rise; 407 Stoxx 600 members gain, 171 decline. Top Stoxx 600 outperformers include: CaixaBank +2.6%, Centamin +2.5%, TDC +2.4%, Man Group +2.4%, Metro Bank +2.0%. The Stoxx Euro 600 Index also received a boost from data showing German industrial output rebounded from a summer lull with its best month in six years. The euro nudged higher, while most European bonds rose. Gold climbed and crude oil erased earlier gains.

“As regards Catalonia, it is difficult to have much conviction with respect to the eventual outcome,” JPMorgan Chase & Co strategist Mislav Matejka said in a note. “However, we believe that this will be seen as a localized issue, where the dips should be bought.”

Sterling rose 0.6 percent to $1.3112 on reports that British Prime Minister Theresa May, facing threats to oust her, might sack her foreign minister, Boris Johnson. Reports stated that the UK is said to be searching and hoping for the best, but is also continuing making preparations in case it should end up with no deal in Brexit talks. (Telegraph) Further to this, PM May is set to warn EU leaders today that Britain will make no more concessions on Brexit until they compromise on opening trade and transition talks. (Times) UK PM May reportedly suggested over the weekend that she is prepared to demote Foreign Secretary Boris Johnson as part of a cabinet rejig.  However, separate reports suggest that if May was to fire him, he will simply say ‘no’, according to his allies.

“If Boris Johnson were to leave or be demoted as the weekend press is suggesting, that would be showing May’s leadership and that her vision of Brexit is the one that (the government) will be going forward with and that markets should be aligned to,” said Viraj Patel, an FX strategist at ING Bank in London.

The most notable event in European trading was the plunge in Turkey’s lira which slumped to a record low against a basket of currencies including the euro and the dollar, and the nation’s stocks slumped, after U.S. and Turkey each suspended visa services for citizens looking to visit the other country.

Also in Europe, German Chancellor Merkel’s CDU/CSU agreed on refugee cap issue which clears a major hurdle in pursuing coalition discussions.  Germany and France reportedly dashed UK hopes of fast-track talks on transition deal and said that a divorce bill must be resolved first.  EU was reported on Friday to significantly step up backroom Brexit talks with Labour Party over concerns PM May’s government will fall.  Pressure on the BoE to raise interest rates may be building more rapidly than first thought after a mistake by the ONS led to domestic inflation being understated with companies’ employment costs rising faster than previously expected.

In Asia, the MSCI Asia Pacific Index added 0.1% to 163.41 as of 11:40 a.m. in Hong Kong, with Australian banks leading gains after a politician said he’s opposed to a regional levy.  Stocks in New Zealand set a new record while the local dollar slipped as the major political parties vied to form the new government. The S&P/NZX 50 benchmark rose 0.4 percent, topping 8,000 for the first time. In Hong Kong, the Hang Seng Index slipped after hitting a 10-year high on Friday.

Chinese stocks rose as trading resumed after a week-long holiday but an Asia-wide benchmark was little changed as markets in Japan, South Korea and Taiwan were closed. On their first day of trade after a week-long holiday, Chinese blue-chip stocks touched their highest levels since late 2015, partly in a delayed reaction to a targeted cut in the amount of cash some banks must hold in reserve bank announced a week ago. Mainland Chinese markets rose Monday, although the advance faded as banks were unable to hold on to much of their early gains. The Shanghai Composite Index closed up 0.8% at 3,374.38 after rising as much as 1.8% to touch the highest since January 2016, while the Shenzhen Composite Index added 1.3%, the most since Aug. 28. Financials also took the lead in mainland China, where stocks tracked last week’s advance in offshore trading, after the central bank’s decision to cut reserve ratios.

Also notable was the big move higher in Chinese rates, with 10Y futures closing down 0.36%, the biggest one day move in 2 months. A big reason for this was the surge in the Yuan, which jumped over  300 pips, pushing the USDCNH below 6.62 from nearly 6.66 earlier.

Also worth noting that on Monday, Business activity in China's services sector grew at its slowest pace in 21 months in September as the pace of new business cooled, according to the Caixin Markit PMI survey, in contrast with official data from the National Bureau of Statistics (NBS) showing a faster pace of growth. Specifically, the Chinese Caixin Services PMI printed at 50.6 in September vs. Exp. 53.1 (Prev. 52.7); a 21-month low.

Oil trades around $50, as OPEC Sec-Gen Mohammad Barkindo says that oil producers are succeeding in re-balancing oversupplied market, though they may need to take further steps to sustain recovery into 2018. Production is increasing at Sharara, Libya’s biggest oil field, after it re-opened on Oct. 4, and is now expected to produce up to 250,000bbls/day/

In rates, Spain’s 10-year yield dipped six basis points to 1.645 percent, the lowest in more than a week. Germany’s 10-year yield decreased one basis point to 0.45 percent, the lowest in a week. Britain’s 10-year yield rose one basis point to 1.369 percent.

Gold hit a one-week high as tension over North Korea saw some investors seek safety in the metal. It rose 0.5 percent to $1,282 an ounce. West Texas Intermediate crude decreased less than 0.05 percent to $49.27 a barrel, the lowest in almost four weeks. Copper decreased 0.2 percent to $3.02 a pound.

In other news, Fed’s Rosengren (Non-Voter, Soft Hawk) said that the Fed must respond to very tight labor markets or may damage the economy and that prudent risk management would argue for the continued gradual removal of accommodation to minimize risk that could shorten the economic recovery. US House Speaker Ryan stated that tax reform is on track for implementation by January 2018.

Bulletin Headline Summary from RanSquawk

  • European equities trade mostly higher with Spanish assets outperforming amid hopes for some form of mediation
  • GBP remains a key focus for FX markets amid the shifting political landscape and potential understating of UK inflation form the ONS
  • Today’s calendar is particularly light. Today is US Columbus Day Holiday but markets remain open

Market Snapshot

  • S&P 500 futures up 0.1% to 2,548.00
  • STOXX Europe 600 up 0.2% to 390.24
  • MSCI Asia down 0.02% to 163.28
  • MSCI Asia ex Japan down 0.09% to 538.38
  • Nikkei up 0.3% to 20,690.71
  • Topix up 0.3% to 1,687.16
  • Hang Seng Index down 0.5% to 28,326.59
  • Shanghai Composite up 0.8% to 3,374.38
  • Sensex up 0.2% to 31,887.30
  • Australia S&P/ASX 200 up 0.5% to 5,739.26
  • Kospi up 0.9% to 2,394.47
  • German 10Y yield fell 0.7 bps to 0.452%
  • Euro up 0.03% to $1.1734
  • Brent Futures down 0.2% to $55.51/bbl
  • Italian 10Y yield fell 0.4 bps to 1.853%
  • Spanish 10Y yield fell 6.5 bps to 1.644%
  • Brent Futures down 0.2% to $55.51/bbl
  • Gold spot up 0.3% to $1,280.92
  • U.S. Dollar Index down 0.04% to 93.77

Top Overnight News

  • Trump demands that Congress deliver funding for his border wall and make dramatic changes to immigration policy in exchange for letting young people brought illegally to the U.S. as children stay in the country.
  • Republican lawmakers are expressing unease over the limited details about middle-class relief in the tax framework their leaders released last month.
  • Turkey’s markets took a hammering Monday amid a deepening standoff between the U.S. and President Recep Tayyip Erdogan’s government. The lira, stocks and bonds tumbled after the two NATO members suspended visa services for each other’s citizens.
  • Yuan jumped most in a month as China’s foreign-exchange reserves posted an eighth straight monthly increase in September with the pressure of cash outflows easing amid capital controls
  • German industry rebounded from a summer lull with its best month in six years, keeping Europe’s largest economy on a solid footing in the second half of the year as output increased 2.6% in August from July, compared to an estimated gain of 0.9%
  • Oil producers are succeeding in re-balancing an oversupplied market, though they may need to take further steps to sustain the recovery into 2018, OPEC Secretary-General Mohammad Barkindo said Sunday, without elaborating on any such measures
  • After a weekend of mass demonstrations in favor of Spanish unity, Raul Romeva, foreign affairs chief for the separatist government in Barcelona, insisted that the door was open for talks if Prime Minister Mariano Rajoy was willing to grasp the opportunity
  • Seafarers Fret Over New Assault on Jones Act in Wake of Storms
  • Big Pharma Gets a Boost as China Speeds Up New Drug Approvals
  • Facebook to Require Certain Ads to be Manually Reviewed: Axios
  • Russia May Restrict U.S. Media to Retaliate for RT: Izvestia
  • Equinix Buys Istanbul Data Center From Zenium for $93m Cash

Asia equity markets traded mostly higher as China reopened for the 1st time in over a week, although market closures in Japan, South Korea and Taiwan kept trade relatively quiet. ASX 200 (+0.5%) was lifted by broad strength aside from energy names which underperformed after oil prices fell 3% on Friday and Shanghai Comp. (+0.8%) surged on return from holiday as it played catch up and took its first opportunity to react to the PBoC’s targeted RRR reduction. However, some gains were later pared after a 21-month low Caixin Services PMI release, while Hang Seng (-0.5%) lagged as the mainland stole the limelight and with weakness seen in gambling and energy names. Chinese Caixin Services PMI (Sep) 50.6 vs. Exp. 53.1 (Prev. 52.7); 21-month low. Chinese Caixin Composite PMI (Sep) 51.4 (Prev. 52.4). PBoC skipped open market operations for a net daily drain of CNY 180bln, but gauged demand for MLF loans which are expected to be issued on Friday.

Top Asian News

  • Noble Group Explains Why Gas Sale Earned Less Than Expected
  • New Zealand Coalition Talks Start in Earnest, Deadline Looms
  • Yuan Jumps Most in a Month as Foreign-Exchange Reserves Climb
  • Foreigners Buy Most Mainland Chinese Shares Since August 2015
  • China Bank Rally Fizzles Out in Blow to Eager Hong Kong Traders

Spanish equities firmly in the green, led by the politically sensitive financial sector after demonstrations over the weekend in Barcelona and Madrid supporting pro-unity. Additionally, Caixabank (+3%) have also been permitted to move their HQ away from Catalonia. European equities in general are trading modestly higher, while the DAX yet again hit a fresh record high. Commerzbank shares are higher this morning following reports that the Credit Agricole Chief said the bank would be interested in the German lender if they were up for sale. UK Gilts lagging their core and some non-core EU counterparts, largely on reports that the ONS has miscalculated unit labour costs, which should be considerably higher (2.4% instead of the reported 1.6%), and in theory push the BoE closer towards lifting the Bank rate. Short Sterling futures also acknowledging the increased risk of near term tightening, and perhaps prone to more downside given that November hike probability remains sub-70%. Spanish debt outperforming in contrast amidst some conciliatory noises from Catalonia, with the 10 year Bono yield down around 1.64% from recent 1.80% approx. peaks and spread to German Bunds narrowing to circa 119 bp. Caution still warranted however, with the regional parliament due to convene on Tuesday and potentially ‘declaring Independence’ following the referendum. Staying with the Eurozone periphery, Portuguese bonds are in focus today as the country is high on the EU agenda, and again on Wednesday when supply comes to the table via the first cash auction since S&P upgraded the sovereign last month.

Top European News

  • German Industrial Output Jumps Most in 6 Years After Summer Lull
  • Catalonia Calls for Talks With Spain Ahead of Critical Week
  • Statoil’s Arctic Exploration Comeback Ends With Another Miss
  • This Company Says Its Software Can Pick Soccer Stars

In currencies, GBP starting the week on the front foot amid a flurry of reports over the weekend, which has subsequently led to GBP being the early outperformer. Reports over the weekend noted that PM May could look to reassert her authority with a cabinet, which may lead to Foreign Minister Boris Johnson being demoted. Alongside this, reports noted that the ONS understated its latest unit labour cost reading, consequently placing pressure on the BoE to raise rates. Last week’s decline also represents a slight opportunity to buy given expectations for a rate rise next month is at a modest 66%. NZD underperforming this morning, dampened by political uncertainty ahead of this week’s announcement by New Zealand First Party head and kingmaker Winston Peters on which party they will back to form the next government. NZD over 20 pips, which has briefly saw AUD/NZD over 1.10. TRY weakened 6% overnight after a deterioration of diplomatic ties between US and Turkey, in the latest signs of fraying relations between the NATO allies, as both sides suspended non-immigrant visa services to the citizens of the other.

In commodities, there is very little in the way of newsflow in the commodity complex, both oil and precious metal prices are firmer amid the softer greenback. Friday’s CFTC report for Oct 6th showed speculators cut net long gold and silver bets for the 3rd consecutive week BSEE stated on Saturday that 92% of current Gulf of Mexico production was shut in due to Hurricane Nate, but on Sunday reported that there was no damage to offshore oil facilities. OPEC Secretary General Barkindo stated consultations are underway for extension of OPEC cuts past March 30th and that extraordinary steps may be needed in 2018 for stability. (Newswires) Libya's Sharara oil field output has risen to 250k bpd, according to sources.

US Event Calendar: nothing major scheduled

Central Banks speakers: nothing major scheduled

DB's Jim Reid concludes the weekend wrap

It’ll likely be a slow start to this week with Columbus Day in the States today (fixed income markets closed, equities open) but it'll end with a bang with US CPI on Friday. Although if the weekend papers are anything to go by, I wouldn’t get too worried about CPI given that a guy called Dave Meade suggesting that October 15th would mark the start of a 7 year period where the world will eventually end. As of next Sunday he predicts that the world will be hit with a tempest of tsunamis, earthquakes, hurricanes and nuclear war. As an analyst who makes predictions himself I couldn’t help but look back on some of his previous calls. The most startling was that the apocalypse will take place on September 23 of this year. So unless I’ve missed something he hasn’t necessarily always been accurate. Although I’ve noticed that Liverpool haven’t won since September 23rd so maybe this is what the apocalypse feels like. Whilst we’re on the subject I certainly haven’t had a good night’s sleep since and feel shattered so the more I think about it maybe he’s on to something.

Anyway back to US CPI. As is well known now, the data missed expectations for 5 months in a row until last month so with lots of discussion about the Fed’s rate hike profile and new Chair and board composition, this number is about as big as it gets at the moment. PPI the day before will give us a teaser and the Fed minutes on Wednesday will provide some interesting context to the hawkish meeting last month. Outside of the data three US banks kick start Q3 earnings on Thursday/Friday. For a full view of the week ahead and also the key DB Research macro pieces of last week see our new document “Next week.... This week” out on Friday. This is a new document aimed at giving readers a view of the week ahead by around lunchtime UK time on a Friday. We’ve copied the text at the end for the week ahead but in the note we also include a cut out and keep table of major global events. All feedback to me as to whether you do or don’t find it useful as we’re trialling it for now.

Ahead of CPI, it was the average hourly earnings that stole the show within Friday’s payroll report. This was much less impacted by the hurricane and saw the YoY rate rise to 2.9% (2.6% expected) with a 0.2% upward revision to the previous month. 10 year US treasuries spiked from 2.364% to 2.40% in the aftermath but headlines suggesting that North Korea is planning to test missiles capable of hitting the US west coast returned them to 2.36% (+1bp) at the close. Later on, Trump tweeted that “…only one thing will work!” re NK and when asked to clarify his earlier comments on “the calm before the storm”, he said “you’ll find out”.

Back to inflation and it’s very easy to say that there’s no price pressures, but after Friday US annual average hourly earnings are now at their highest since June 2009. A few weeks ago we also showed a graph that suggested US CPI lags growth by around 18 months so it’s possible the soft inflation patch in 2017 reflects weak growth in late 2015/ early 2016. So perhaps the stronger growth since H2 2016 will mean inflation surprises an unprepared market in early 2018. Obviously many people have wrongly called the end of the disinflation trend over the last decade (perhaps longer) and been burnt but we stand by our view in last year’s long-term study that 2016 will mark the multi decade inflection point for inflation and bond yields. From this point on because of demographics, populism and the start of a shift from monetary to fiscal policy we’ve felt the trend is slowly reversing. It won’t be a straight line but for us the start of a trend is already in place.

This morning in Asia, markets are trading broadly higher. Chinese bourses (Shanghai comp +1.24%; CSI +1.85%) are up following the Golden week break, led by the banks (ICBC +2.67%) as a delayed reaction to the reserve ratio cut announced last weekend. The ASX 200 is up 0.60%, but the Hang Seng is down 0.30%, while the Nikkei and Kospi are closed today for holidays. Elsewhere, the September  Chinese Caixin composite PMI came in slightly lower than the prior month (51.4 vs. 52.4 previous).

Turning to Spain’s Catalonia, over the weekend there has been more pressure on Catalan authorities to avoid declaring independence. On Saturday, a business delegation (Cercle d’Economia - with board members from CaixaBank and Banco Sabadell) met with Catalan President Puigdemont and “asked him to directly remove the shadow of a declaration by saying that it won’t happen”. Then on Sunday, crowds reportedly numbering 350k marched through Barcelona chanting “I’m Catalan and Spanish”. That said, President Puigdemont said on Sunday that “what’s happening in Catalonia is real, whether they like it or not…millions of people have voted”. Notably, the Catalan regionalgovernment was supposed to meet today (9th October) to potentially proclaim independence, a meeting which the Spanish Constitutional Court has since suspended. So we shall find out more in the coming days on how this evolves and whether they defy the courts. Finally, for those who may have missed, please refer to DB’s Marc de-Muizon’s “Catalan independence Q&A” note for background.

Over to Brexit, the FT noted that according to European diplomats, Germany and France have demanded more clarity from UK on the Brexit divorce bill before negotiations proceed to talks on a post Brexit transition deal. The fifth round of talks will resume today, so we shall find out more then. Elsewhere, UK’s PM May is apparently busy pondering a cabinet reshuffle, when asked about Foreign Secretary Boris Johnson, she said “I’m the PM, and part of my job is to make sure I always have the best people in my Cabinet.”

Quickly recapping market performance on Friday. US equities softened, with the S&P 500 (-0.11%) and Dow (-0.01%) down marginally while the Nasdaq rose 0.07%. The S&P didn’t therefore add to its run of 8 consecutive days of gains with most sectors modestly in the red (Telco -2.0%; consumer staples -0.95%), but partly offset by stronger tech stocks (+0.29%). European markets also retreated modestly, with the Stoxx 600 (-0.40%) and DAX (-0.09%) both down, but the FTSE rose 0.20%. Elsewhere, the VIX rose 0.46 to 9.65, but remains below 10 for the 8th consecutive day.

Turning to currencies, the US dollar index dipped 0.17%, while Euro advanced 0.16% but Sterling fell 0.40%. This morning, Lira/USD fell 2.96% back to its recent lows in April. Over the weekend, the US and then Turkey have each suspended Visa services for citizens seeking to visit the other country. The move follows the arrest of a Turkish national who works at the US consulate in Istanbul for alleged involvement in the July 2016 coup attempt against Erdogan. In commodities, WTI oil fell 2.95% to $49.29/bbl on Friday, partly in anticipation to potential impacts from hurricane Nate which hit US Gulf  Coast over the weekend. However, early reports suggest damages were less severe than expected, with Oil now trading c0.3% higher this morning. Elsewhere, precious metals were modestly higher on Friday (Gold +0.67%; Silver +1.45%) following higher geopolitical tensions, while other LME base metals (Copper -0.50%; Aluminium -0.85%; Zinc -1.61%) fell slightly.

Away from markets and onto US central bankers’ commentaries where the messaging on rates was a little mixed. On the wait and see side, the Fed’s Kaplan said “I’m open-minded about December (rate hike), but I’m not there yet.” Then the Fed’s Bostic (who votes in 2018), said “If we continue to see strength and that robust energy in the economy, I will be comfortable with a conversation about increasing rates. But we have to wait and see about those things.” Finally, the Fed’s Bullard reconfirmed his more dovish take, noting that “I’m getting more concerned that we might make a policy mistake.”

Conversely, the NY Fed Dudley noted that “even though inflation is currently below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually”. Then the Fed’s Rosengren followed up with “prudent risk management would argue for the continued gradual removal of monetary policy accommodation…” and that inflation “is still not at the level that I would expect it to be, but we’re definitely seeing that tight labour markets are causing wages and salaries to gradually go up as well”. Further, he noted that inflation “will be much closer to 2%” a few months into 2018. The odds of a December rate hike is now 78.5% (up c5ppt from Thursday - as per Bloomberg).

Staying in the US, the rhetoric between Trump and Senator Bob Corker intensified over the weekend after Trump tweeted that Corker “didn’t have the guts to run (for a third term), (he) wanted to be Secretary of State, I said No Thanks”. In response, Corker wrote back “it’s a shame the White House has become an adult day care centre”. It will be interesting to see how the normally budget deficit focused Corker will vote on the upcoming tax reforms now that he won’t be running a third term.

Elsewhere, as per Bloomberg, Germany’s Merkel may be one step closer in forming the Jamaica coalition government (with CDU and CSU) after agreeing to cap the annual limit on migration to 200k p.a.

We wrap up with other data releases from Friday. In the US, the September nonfarm payrolls fell for the first time since 2010 and was materially below market expectations at -33k (vs. 80k expected), mainly reflecting the disruptions from Hurricane Harvey and Irma and the difficulties in estimating this impact (consensus ranged from -45k to +260k). In the details, the leisure and hospitality sector posted a 111k fall in jobs, likely the most impacted sector from the storms. Elsewhere, the employment data was solid, with the unemployment rate at a 16 year low of 4.2% yoy (vs. 4.4% expected) and stronger than expected average hourly earnings at 2.9% yoy (vs. 2.6%, coupled with a 0.2% upward revision to previous month). Finally, the final reading of August wholesale inventories was revised slightly lower to 0.9% mom (vs. 1% expected), while consumer credit grew $13.1bln (vs. $15.5bln expected).

In Europe, the macro data was broadly higher than expected. Germany’s August factory orders beat market expectations at 3.6% mom (vs. 0.7% expected) and 7.8% yoy (vs. 4.7%). The increase in August was broad-based, with domestic orders up 2.7% mom and foreign orders up 4.3% mom. In France, the August trade balance deficit was narrower than expected at $-4.5bln (vs. -$5.4bln). Over in Spain, the industrial output for August was stronger than expected at 1.8% yoy (vs. 1%). In the UK, the Halifax house price index also beat expectations at 0.8% mom (vs. 0%) and 4.0% yoy (vs. 3.6% expected). Finally, Italian retail sales were lower than expected at -0.3% mom (vs. 0.2%) and -0.5% yoy (vs. 0.8% expected).