Global Stocks Drift Lower As US Futures Rebound From Overnight Scare, Oil At 2 Year Highs

Following an early shaky start, which saw the Hang Seng tumble as much as 1.6% driven by weakness in financials and real estate names following the latest warning by PBOC governor Zhou about "sudden, complex, hidden, contagious, hazardous" risks In markets and a decline in local real estate prices, and pressure global risk, US equity futures have recouped all losses and are back to unchanged on monday morning, as President Trump continues on his first official trip to Asia. An "anti-corruption" purge in Saudi Arabia, including the arrest of Prince Alwaleed bin Talal will put stocks including Citigroup, Twitter and Apple - some of his major holdings - in focus according to Bloomberg. it also helped sent oil prices to the highest level since July 2015. In company news, talks between Sprint’s majority owner, SoftBank, to combine the carrier with T-Mobile US collapsed over the weekend.

Following a torrid weekend for newsflow, when among other things we learned that NY Fed president Bill Dudley is retiring, Monday morning has been a far more subdued affair, and European markets have enjoyed a quiet start to the week, apart from ongoing speculation over Dudley’s departure; USD unwinds small overnight rally, with USD/JPY retracing gains seen after Trump’s comments on trade initially weakens JPY; GBP/USD approaches high set on Friday in reaction to non-farm payrolls. European stocks hold small losses across the board, banks underperforms. Telecom sector also weakens after Deutsche Telekom falls 3.7%, spurred by collapse of the Sprint/T-Mobile deal. Overnight gains in iron ore futures helped support mining stocks and other base metals. As Bloomberg's rates commentators note, reduced supply this week drives up core EGBs, led by bund futures; USTs rise in tandem. Large BTP/bund block trade pushes peripheral spreads marginally wider.

European stocks were mixed before edging slightly lower after their seventh weekly advance in eight, even as the latest European PMI prints indicated strong survey momentum has continued at the start of the fourth quarter. Basic resource shares outperformed as the Bloomberg Commodity Index rose to the highest since March, but they were offset by retreating banks and telecom companies.

The Stoxx Europe 600 Index fell less than 0.1%, with miners headed for their highest level since January 2013, and leading gains as they track metal prices higher. SBM Offshore slides after making a provision of $238m in relation to a reopened investigation into legacy issues and Unaoil, based on discussions with the U.S. Department of Justice.

News out of Asia was a dominant theme for many assets, with inflation comments from Bank of Japan Governor Haruhiko Kuroda, remarks on excessive leverage from his Chinese counterpart Zhou Xiaochuan and the grievances on trade from Trump. The yen declined before erasing the loss, and stocks in the region were mixed. Asian stocks edged lower for a second consecutive session after China’s central bank Governor Zhou Xiaochuan warned that the mainland’s financial system is becoming significantly more vulnerable due to high leverage. The MSCI Asia Pacific Index was down 0.1% to 169.72. Financial stocks led the decline, with AIA Group Ltd. being one of the biggest drags. Westpac Banking Corp. also fell after its full-year profit missed estimates. The Topix index retreated from the highest level in more than a decade as technical indicators suggest the gauge is overheating.

“Zhou highlighting concerns of excess leverage and thus more regulation is weighing down on stocks,” said James Soutter, a Melbourne-based fund manager at K2 Asset Management Ltd. “If they do that, it might slow down China’s growth, which may impact the region.” Gains by technology stocks such as Tencent Holdings Ltd. and Sony Corp. helped pare the earlier decline of as much as 0.6 percent in MSCI’s broadest gauge of Asian stocks. MISC Bhd rose as much as 8 percent, the most in four years, after reporting a surge in profit for the third quarter. Analysts upgraded the stock after highlighting improvement in all business

Oh, and speaking of that Hang Seng early drop, don't worry: the BTFDers emerged, and Hong Kong’s benchmark gauge erased a drop of as much as 1.6% to close little changed. AAC Technologies Holdings and Tencent Holdings climbed while the city’s developers slumped; AAC Technologies surges 10% to a record price, while Tencent adds 2.5%. As a result, the Hang Seng Index closes little changed at 28,596.80 even as Hang Seng China Enterprises Index dropped 0.7%, paring an earlier loss of 2%. Additionally, the Shanghai Composite Index adds 0.5%, erasing a retreat of 0.5% while the ChiNext Index added 1%.

Among the key weekend events, a helicopter transporting eight Saudi officials including Prince Mansour bin Muqrin (Deputy Governor of the Asir Province) reportedly crashed near Abha. Additionally, Prince Alaweed bin Talal who is the largest shareholder of Citi and the second largest shareholder  of 21st Century Fox was among 10 other princes and 4 ministers were arrested on Saturday night. This has been billed as a corruption crackdown, although what it really is, is a power grab from Crown Prince Mohammed bin Salman. 

In the UK, Chancellor Hammond is said to scrap plans to raise business rate tax by 3.9% in April.  Bank of England Governor Carney said that if Brexit turned out to be worse than policymakers currently expect, it was possible that
the BoE would not be able to cut interest rates in the future due to inflationary pressure.

Meanwhile in Japan, President Trump said that TPP agreement is not the right idea, adding that the US has suffered massive trade deficits at hands of Japan for many years.

U.S. 10-year Treasuries find support from rally in core and peripheral bonds in Europe; bund futures extend gains on higher volumes after stop losses are triggered on short positions; currency traders fail to find inspiration as majors are trapped in narrow ranges; euro dips briefly after interbank investors add to long dollar positions, though better-than-forecast euro-area PMI for October staves off a bigger drop for the common currency

In commodities, WTI gained 0.6 percent to $55.97 a barrel, the highest in about nine months. Gold increased 0.1 percent to $1,271.66 an ounce. Copper rose 1 percent to $3.15 a pound, the highest in more than a week.

All eyes today will be on retiring NY Fed President William Dudley who is scheduled to give a speech on “Lessons from the Financial Crisis” just after noon at an Economic Club of New York luncheon. Central Bank of Mexico Governor Agustin Carstens speaks at an event hosted by Comexi, the Mexican Council for International Affairs.

Ahead of a light week for economic data releases investor focus has turned to Asia and the U.S. president’s visit to the region. Trump has already brought up trade grievances about both China and Japan and has warned nations against challenging the U.S. He goes on to South Korea and China this week. News on central bankers also will be closely watched, writes Bloomberg. Federal Reserve Bank of New York President William Dudley is close to announcing his retirement, CNBC reported late on Saturday. His early departure would mean the top three positions at the Fed changing over within a relatively short period. Trump announced last week that Fed Governor Jerome Powell will be nominated to replace Janet Yellen when her term expires in February. Vice Chairman Stanley Fischer retired in mid-October.

Bulletin Headline Summary From RanSquawk

  • European bourses lead from Asia and trade on the backfoot, while oil prices rise on Saudi Royal Purge
  • USD/JPY rises to highest level since March as Trump criticises Japan’s trade practises with the US, alongside BoJ jawboning
  • Looking ahead, highlights include a possible retirement speech from Fed’s Dudley

Market Snapshot

  • S&P 500 futures little changed at 2,581.75
  • STOXX Europe 600 down 0.01% to 396.02
  • MSCI Asia unchanged at 169.84
  • MSCI Asia ex Japan unchanged at 556.69
  • Nikkei up 0.04% to 22,548.35
  • Topix down 0.08% to 1,792.66
  • Hang Seng Index down 0.02% to 28,596.80
  • Shanghai Composite up 0.5% to 3,388.17
  • Sensex up 0.3% to 33,798.88
  • Australia S&P/ASX 200 down 0.1% to 5,953.78
  • Kospi down 0.3% to 2,549.41
  • German 10Y yield fell 2.6 bps to 0.338%
  • Euro down 0.1% to $1.1596
  • Italian 10Y yield fell 0.4 bps to 1.527%
  • Spanish 10Y yield fell 0.6 bps to 1.468%
  • Brent futures up 0.5% to $62.38/bbl
  • Gold spot up 0.04% to $1,270.41
  • U.S. Dollar Index up 0.03% to 94.97

Top Overnight News

  • Trump told a gathering of business leaders in Tokyo that Japan has an unfair advantage on trade and that he intends to fix that imbalance by making it easier to do business in the U.S.
  • Ousted Catalan president Carles Puigdemont and four former members of his government were released in Brussels pending a court ruling on an international arrest warrant issued by Spain
  • Mnuchin reiterates goal to get tax reform bill to Trump in 2017
  • Carney says BOE might not be able to cut interest rates if Brexit deal worse than expected
  • PBOC’s Zhou warns China’s financial system is getting more vulnerable
  • Kuroda: BOJ will continue powerful easing; 2% inflation still a long way
  • Saudi corruption crackdown sees senior princes, top billionaire arrested
  • U.K. Prime Minister Theresa May meets other party leaders to discuss steps to tackle sexual harassment in U.K. politics

Asian markets began the week on the backfoot. ASX 200 (-0.10%) slightly lower following a soft earnings report from Westpac (- 2.5%), subsequently failing to reach the 6000 mark. Chinese markets, in particular the Hang Seng (-0.02%) underperformed as PBoC Governor Zhou warned of risks over debt and the need to eliminate zombie companies. President Trump kicked off his tour of Asia in Japan, whereby the President stepped up his rhetoric of a tough stance being needed over North Korea. Additionally, the President also criticised the TPP agreement, noting that the US has suffered massive trade deficits with Japan for many years. PBoC sets CNY mid-point at 6.6247 (Prev. 6.6072). Bank of Japan meeting minutes from Sep 20-21 states that momentum towards price goal is being maintained. One member said current yield curve is not sufficient to achieve 2% inflation target, adding that a further increase in demand needed to raise prices. Bank of Japan Governor Kuroda expects Japans economy to steadily move toward achieving 2% inflation target, adding that the BoJ will persistently continue powerful easing.

Top Asian News

  • Turkey Central Bank Boosts Lenders’ FX Buffers on Weak Lira
  • Billionaire Olayan Family Is Said to Put Saudi IPO Plans on Hold
  • San Miguel to Sell Unit’s Shares After Merging Liquor Assets
  • PBOC Chief’s Latest Warnings Seen Signaling Tougher Debt Stance
  • DBS Profit Sinks as Bank Tries to Put Bad Energy Loans Behind It
  • Evergrande’s Unit Hengda Raises 60b Yuan in Third Round Funding
  • China is Finally Going After Click Farms and Fake Online Sales

European equities traded heavy across the board with a risk off tone seemingly creeping into the market. The crackdown on corruption in Saudi Arabia has been a likely catalyst to this, one iconic target of the purge is billionaire tycoon, Prince Alwaleed bin Talal, a significant investor in the likes of Twitter, Citigroup, Accor and Twenty-First Century Fox. Accor trades as one of the laggards in the Cac following the aforementioned probe, with Deutsche Telekom the notable European underperformer following news that merger talks between Sprint and T-Mobile US have ended. Elsewhere, material names trade in the marginal green, buoyed by the a buoyant iron ore market. JGBs set the tone in fixed income markets, rallying strongly through Monday’s trade, a bullish bond market flooded into European bonds, with a 10k Bund order seeing the future contract trade firmly through 163.00 with the next touted resistance to be at 163.43. The Saudi international bond spreads have now widened by about 5bps following the anti-corruption crackdown.

Top European News

  • SocGen Drags Banks Down as Analysts Cut EPS Ests., Price Targets
  • Deutsche Telekom Falls On Sprint Deal Collapse; Watch Towers
  • U.K. October Car Sales Plunge 12% in Seventh Consecutive Drop
  • Euro-Area Economic Boom Spurs Fastest Job Creation in a Decade

In currencies, USD Non-farm Monday trade has set the tone this European morning, with the Greenback trading in a rangebound fashion throughout the Asian and early EU sessions. EUR/USD longs have struggled following Friday’s NFP release, with the pair trading back below 1.60, however, the consolidation does continue, trading around the 1.60 area, with bears looking for a clean break below. GBP: weekend commentary from BoE Governor Carney, stating that if Brexit turned out to be worse than policy makers expectations, it could be possible that the BoE would be unable to cut interest rates in the future due to inflationary pressures. Sterling was relatively unfazed, following the subdued tone. JPY: The US President, on his tour of Asia, is currently in Japan. He has commented on trade, stating that TPP agreement is not the right idea, adding that the US has suffered massive trade deficits at hands of Japan for many years. The Japanese currency has been very marginally weaker overnight, following a fail of a test of 115.00.

In commodities, oil markets have been dictated to by the Saudi Arabian news, with the uncertainty resulting in oil prices seeing a 2 year high, as WTI crude futures briefly retook USD 56.00/bbl. Precious metals have come off post NFP lows with bids supported by the growing risk tone, Gold’s 1265.00 area continues to behave as key support, with silver seeing a simultaneous bounce around 16.75.

Looking ahead, there is no data due in the US however the NY Fed’s Potter and Fed’s Dudley are both due to speak. Euro area finance ministers will also discuss completing the banking union and fiscal rules for the EMU.

US Event Calendar

  • No major econ releases scheduled
  • 12:10pm: Fed’s Dudley Speaks on Lessons from the Financial Crisis

DB's Jim Reid concludes the overnight wrap

It'll be a quieter week to be in the US as the post payrolls period is always on the lighter side data wise but this week we'll have plenty of newsflow on the US tax plan and we'll likely wake up to new Mr Trump headlines most mornings as his Asian tour is now in full flow.

Today will kick start the process for markups of the tax bill and the House is expected to vote on a final draft towards the end of the week. At the same time, the Senate will release its own version of the bill, which could differ significantly from the House’s. In our economist's view, the sticking points remain the same: the capping of the mortgage interest deduction and proposed repeal of the state and local tax deduction. Already, the National Association of Homebuilders and the National Federation of Independent Business have voiced opposition to the House bill, which is noteworthy given their relatively conservative leanings. So work still to be done. DB are hosting a conference call today (Kelly, Hooper & Slok) at 8am EST on what to expect from this and from new Fed Chair Powell. Details at the very end. For the full week ahead and easy to read cut-out and keep of all events click on "Next   week... this week". The day by day week ahead is copied at the end today.

On Saturday night, Saudi Arabia’s King Salman announced a sweeping anticorruption drive and ordered the arrest of Prince Alwaleed bin Talal, ten other senior members of the royal family, four cabinet ministers and former top officials. Bloomberg noted initial public reaction within the country may be positive with many sharing a video clip showing the Crown Prince Mohammed bin Salman noting no one is above the law. It is too early to know the follow on implications, but note that Prince Alwaleed is the world’s 50th richest person with worth of $19bln and has stakes in Citigroup, Twitter and His investment firm Kingdom Holding Co’s share price dropped 7.6% on Sunday.

Over in Japan, President Trump told a group of business leaders that “for the last many decades, Japan has been winning (on trade). You do know that…right now our trade with Japan is not fair and it isn’t open”, and that Japanese car makers should “try building your cars in the US instead of shipping them over”. Elsewhere, he reiterated that his decision to withdrawal from the Tran-pacific partnership free trade agreement will be “ultimately proven right”, and that he sees easing trade restrictions in other ways, although did not elaborate.

Turning to Catalonia which had a new twist over the weekend. Back on Friday, a Spanish judge issued an arrest warrant for ousted Catalan President Puigdemont and four others currently living in Belgium, noting they promoted “violent force” and incited “insurrection”. Then on Sunday, Puigdemont voluntarily turned himself in to Belgium police, saying “I won’t flee justice….but to real justice”, noting that Spanish courts “can’t guarantee a fair and independent sentence that will be free of the enormous weight and influence of politics”. Later on Monday morning, a Belgium judge has released Puigdemont, but he is required to reappear before a court in Brussels within 15 days, which will potentially decide to carry out an extradition process or not. Interestingly, Puidgemont’s PdeCAT party has put his name forward as a candidate for the upcoming regional election to be held on 21 December, while the Spanish Government spokesman Mendez de Vigo said “any politician can run in the election unless he / she has been convicted of a crime”. Elsewhere, according to a new poll by La Vanguardia, it shows the Catalan secessionist coalition could win the new election with 66-69 seats, but this may not be enough to secure a clear majority in the regional assembly as 68 seats are required. The Spanish IBEX fell 0.96% and 10y yields fell 0.4bp last Friday.

Now onto China, after issuing a verbal warning of a “Minsky moment” two weeks ago, China’s central bank Governor Zhou published an article on the bank’s website over the weekend, noting that while the overall health of the financial system is good, risks are accumulating with some that are “hidden, complex, sudden, contagious and hazardous” and that “high leverage is the ultimate origin of macro financial vulnerability”. His comments could add to the concerns that regulators may intensify the deleveraging drive in China. Elsewhere, as per Bloomberg he also noted: i) China’s financial regulation lags international standards…ii) China should increase direct financing and expand the bond market, reduce intervention in the equity market and reform the IPO system, iii) China should let the market play a decisive role in the allocation of financial resources and iv) China should improve the coordination among financial regulators. Interesting stuff!

This morning in Asia, markets are trading slightly lower. The Hang Seng has pared back losses to be down 0.59%, partly impacted by Governor Zhou’s comments on leverage and softness in property developer stocks.  Elsewhere,the Nikkei is marginally higher (+0.08%) while the Kospi (-0.34%) and ASX 200 (-0.10%) are down slightly as we type. 

Away from the markets and onto central banker’s commentaries. BOE Governor Carney noted that the BOE is working on the assumption that Brexit transition will be eventually smooth, but when asked if Brexit was much worse than expected, could it prevent the BOE from cutting rates even when growth is slowing, he noted “that’s an extreme possibility but it’s a possibility”, although “we’ll supply as much support as we can during this course of adjustment”. Elsewhere on Brexit, the Confederation of British Industry President Drechsler noted “I’m reminded of a prime-time soap opera (re Brexit), with a different episode each week…” and appeal for a “single, clear strategy” for transition as Brexit is “only 508 days away, but for many businesses, their alarm clock are set even earlier than that”.

With Fed Governor Powell’s nomination as the next Fed Chair now official, our US economists take a closer look at the key implications of what this could mean for the markets, including: i) continuity of monetary policy, ii) reasonably high degree of continuity in terms of leadership style, and iii) changes to the Fed’s communication policy, potentially to be more brief and to the point. For more details, refer to link.

Staying in the US, a new poll by ABC News & Washington Post showed President Trump’s approval rating is now 37%, the lowest since 1946 for any president at this point in their first term based on polling data. Approximately 55%  +14ppt since April) say the President is not delivering on major campaign promises. Perhaps this will add impetus to deliver the tax reforms by Christmas as per President Trump’s plans.

Over the weekend, there were also more rhetoric on the tax plan via Sunday talk shows. Republican senator Lankford noted that he can’t support the party’s tax bill “if the measures balloons the debt (too much)”. Elsewhere, VP Mike Pence said the “right type of tax cuts” such as immediate cut to corporate tax rates could lead to GDP growth of 3.5%-4%, which is a claim also backed up by House Majority Whip Steve Scalise. Finally, House speaker Ryan said the Republicans have learned from past experience, so the House and Senate will better coordinate and move together, so the difference from the two version of the tax bills should be small.

Now quickly recapping markets performance on Friday. US equities strengthened further (S&P +0.31%; Dow +0.10%; Nasdaq +0.74%) to fresh record highs, supported by Apple which guided to higher than expected salesfor the  upcoming December quarter (shares +2.6%). Within the S&P, modest gains in IT and health care sectors were partly offset by losses from financials and materials names. European markets were broadly higher with both the Stoxx 600 & DAX up 0.28%, while the FTSE rose marginally (+0.07%) and Spain’s IBEX underperformed (-0.96%). The risk on bias contributed to the VIX falling 8.0% to a new all-time low of 9.14.

Over in government bonds, yields were little changed with UST 10y down 1.3bp following the miss on headline non-farm payrolls. Core European bond yields were marginally lower, with Bunds and OATs down 0.9bp and 0.7bp respectively, while Gilts were broadly flat. Turning to currency, the US dollar index and Sterling gained 0.27% and 0.14% respectively, while the Euro fell 0.43%. In commodities, WTI oil rose 2.02% to $55.64/bbl and back towards its YTD high.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the macro data was a bit mixed. The headline change in October nonfarm payrolls was lower than expected at 261k (vs. 313k), but is more in line if factoring in the upward revision of 51k to the prior month’s reading. The labour market remains solid with the October unemployment rate down to 4.1% (vs. 4.2% expected) - the lowest since December 2000. However, labour force participation rate has declined to a six-month low of 62.7% and the average hourly earnings growth was weak, flat for the month (vs. 0.2% expected) and 2.4% yoy (vs. 2.7% expected). Last month’s spike could have been more storm related than previously thought.

The October ISM non-manufacturing composite was above expectations at 60.1 (vs. 58.5 expected) – the highest since August 2005 and the September factory orders also beat at 1.4% mom (vs. 1.2% expected). Moving along, the final reading for September durable goods orders was unrevised at 2% mom but core capital goods orders was revised 0.4ppt higher to 1.7% mom. Elsewhere, the trade deficit for September was broadly in line at -$43.5bln (vs. -$43.2bln expected). The October Markit PMI composite was slightly lower than last month at 55.2 (vs. 55.7 previous) while the services PMI was softer than expected at 55.3 (vs. 55.9 expected). Finally, following the recent data updates, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth has fallen back to 3.3% saar, broadly similar to the NY Fed’s Nowcast estimate of 3.2% saar.

The UK’s October Markit PMI for composite was above consensus at 55.8 (vs. 53.8 expected) and the services PMI was also higher at 55.6 (vs. 53.3 expected) – the highest since April 2017.