Global Stock Meltup Sends Nikkei To 25 Year High

The global risk levitation continues, sending Asian stocks just shy of records, to the highest since November 2007 and Japan's Nikkei topped 22,750 - a level last seen in 1992 - while European shares and US equity futures were mixed, and the dollar rose across the board, gains accelerating through the European session with EURUSD sumping below 1.16 shortly German industrial output shrank more than forecast, eventually dropping to the lowest point since last month’s ECB meeting. Meanwhile soaring iron-ore prices couldn’t provide relief to the Aussie as the RBA held rates unchanged as expected; Oil traded unchanged at 2.5 year highs, while TSY 10-year yields rose while the German curve bear steepened, both driven by selling from global investors.

The Stoxx Europe 600 Index edged lower, erasing an early advance, despite earlier euphoria in stocks from Japan to Sydney, which reached fresh milestones. Disappointing reports from BMW AG and Associated British Foods Plc weighed on the European index as third-quarter earnings season continued. Earlier, the Stoxx Europe 600 Index rose as much as 0.3%, just shy of a 2-year high it reached last week. Maersk was among the worst performers after posting a quarterly loss, saying a cyberattack in the summer cost more than previously predicted. Spain’s IBEX 35 gains crossed back above its 200 day moving average.  European bank stocks trimmed gains after European Central Bank President Mario Draghi said that the problem of non-performing loans isn’t solved yet, though supervision has improved the resilience of the banking sector in the euro region. Draghi was speaking at a conference in Frankfurt.

Over in Asia, equities rose to a decade high, with energy and commodities stocks leading gains as oil and metals prices rallied. The MSCI Asia Pacific Index gained 0.8 percent to 171.40, advancing for a second consecutive session. Oil-related shares advanced the most among sub-indexes as Inpex Corp. rose 3.7 percent and China Oilfield Services Ltd. added 4.6 percent. The MSCI EM Asia Index climbed to a fresh record. The Asia-wide gauge has risen 27 percent this year, outperforming a measure of global markets. The regional index is trading at the highest level since November 2007. Hong Kong’s equity benchmark was at its highest since December 2007 as Tencent Holdings Ltd. advanced for an eighth session. Australia’s S&P/ASX 200 index closed at its highest level since the financial crisis.

Japanese stocks climbed, bolstered by strong corporate earnings, with the Nikkei 225 Stock Average closing 1.7% higher at 22,937.60 at 3pm in Tokyo, climbing for 23 out of the past 25 trading sessions. Japan's main stock index has gained 20% this year with Tokyo Electron, Fanuc, SoftBank and Kyocera providing the biggest boosts, as the Topix index rises 1.2% to 1,813.29 from Monday, pushing it up +19% YTD.

“Oil and other commodities’ fundamentals are improving amid OPEC’s efforts, stagnating U.S. production and stable growth in China are positive for most Asian markets,” said Hans Goetti, founder of HG Research, referring to output caps put in place by the Organization of Petroleum Exporting Countries. “Economic growth differentials also are in favor of Asian markets, so the rally should continue.”

The euro declined to a four-month low and bund yields nudged higher after German industrial production fell more than expected in September. WTI crude hovered near the highest since January as political upheaval in Saudi Arabia reverberated through the market. Yen traded at 113.99 per dollar from 113.71 on Monday; currency +2.6% YTD.

In rates, the yield on 10Y TSYs rose two basis points to 2.33%; Germany’s 10-year gained 1 bp to 0.34%; Britain’s 10-year yield rose 1 basis point to 1.263% while Japan’s 10-year yield advanced one basis point to 0.032%.

Investors’ focus returned to geopolitics as Trump continued his tour of Asia, while Saudi Arabia launched a crackdown on corruption. Speaking next to South Korean President Moon Jae-in in Seoul, Trump said he saw some progress on North Korea, said that now is the time to act with urgency and determination with North Korea, and called on the rogue state to “come to the table”. He added that the U.S. and South Korea will act together to confront North Korea’s actions, and the U.S. stands ready to use its full range of military capabilities “if need be.” Meanwhile, the South Korean President Moon says that he and Trump reaffirmed resolve to peacefully end N. Korean nuclear standoff.

Bulletin Headline Summary from RanSquawK

  • European equities have struggled to maintain the Asian and American impetus
  • RBA stood pat on rates as expected. RBNZ act looks to maximise employment as a goal
  • Looking ahead, highlights include US APIs and comments from Fed’s Yellen and BoC’s Poloz

Market Snapshot

  • S&P 500 futures little changed at 2,589
  • STOXX Europe 600 up 0.04% to 396.73
  • MSCI Asia up 0.8% to 171.40
  • MSCI Asia ex Japan up 0.6% to 560.95
  • Nikkei up 1.7% to 22,937.60
  • Topix up 1.2% to 1,813.29
  • Hang Seng Index up 1.4% to 28,994.34
  • Shanghai Composite up 0.8% to 3,413.58
  • Sensex down 0.9% to 33,424.09
  • Australia S&P/ASX 200 up 1% to 6,014.34
  • Kospi down 0.2% to 2,545.44
  • German 10Y yield rose 1.3 bps to 0.349%
  • Euro down 0.3% to $1.1574
  • Italian 10Y yield fell 0.7 bps to 1.52%
  • Spanish 10Y yield fell 0.9 bps to 1.459%
  • Brent futures down 0.3% at $64.11/bbl
  • Gold spot down 0.4% at $1,276.47
  • U.S. Dollar Index up 0.3% at 95.04

Top Overnight News

  • President Donald Trump again showed how quickly his tweets can outrun U.S. foreign-policy planning, after he backed Saudi Arabia’s king and crown prince over the arrests of dozens of officials before the State Department had completed its review of the moves
  • U.S. President Donald Trump said that North Korea should “come to the table” and make a deal on its missile and nuclear programs
  • ECB Executive Board member Sabine Lautenschlaeger would have “liked to see a clear exit” from the ECB’s asset- purchase program, she tells Bloomberg TV
  • A ninth straight annual advance for emerging-market macro hedge funds doesn’t mean investors are expecting an exodus as the world’s central bankers start turning off the taps; demand remains so brisk that some are turning new money away
  • German industrial production dropped 1.6% in September from August, when it surged 2.6 percent, the fastest pace in six years
  • There are continued signs that French bonds could be one of the big winners from the ECB’s extension of stimulus; the bank set a new record in buying the country’s securities, purchasing 1.70 billion euros ($2 billion) relative to its capital key for October, compared with 1.57 billion a month earlier
  • Saudi Arabia’s anti-corruption crackdown is expanding beyond the list of princes, billionaires and officials already arrested
  • Multinational companies including Apple Inc., Pfizer Inc. and Ford Motor Co. would face a new tax on payments they make to offshore affiliates under the House Republicans’ tax bill -- a surprise provision that has stunned tax experts
  • Broadcom Ltd. is using a tactic popularized by corporate raiders in the 1980s to convince Qualcomm Inc. and its shareholders that it has the means to complete the biggest tech deal ever
  • Biggest Danish Mortgage Bank Cancels IPO After Private Offer

Asian bourses higher across the board, having drawn encouragement from the close on Wall Street, where all three major indices touched yet more record highs over the surge in energy names amid rising oil prices. ASX 200 (+1.0%) briefly pushed through the key 6000 level for the first time since 2008 as miners lifted shares in Australia with iron prices continuing to rise. Similarly, the Nikkei 225 (+1.6%) traded at better levels, making fresh 25yr highs after topping 22,750. While, Chinese markets also eked out gains this morning with Evergrande the notable outperformer in China after the company stated that they were to sell CNY 60bln of property assets. In credit markets, across the Japanese curve, the short end outperformed with the curve somewhat steeper. JGBs had been tracking lower, in tandem with USTs as equities continue to reach new highs.

Top Asian News

  • Razer Is Said to Raise $529 Million in IPO Priced Near Top End
  • China Firms Have Found a Way to Cut Debt, at Least on Paper
  • India’s Sensex Falls from Record as Drugmakers, Oil Shares Drop
  • Hong Kong Traders Get Vertigo as Stocks Whipsaw to Decade- High
  • Tencent’s Honour Loses Top Spot in China After Year-Long Run
  • Lupin Gets FDA Warning Letter on Goa, Indore Plants; Shares Fall
  • Bank of Korea Board Split on Timing of Rate Hike, Minutes Show

European equities have followed the theme across the globe, with the majority of bourses trading in the green. Sectors see energy leading the charge once again, as oil continues to drive the unit over 1%. The Dax sees another record and is only seeing weight from BMW following their earnings – Earnings do continue to drive with the biggest moves seen in Maersk, Dialog, Siemens Gamesa and Zalando all suffering after disappointing updates. Treasuries trade near session lows, as some selling volume has helped the marginal bearish push. US 2/10s have flattened to a new low around 70bps, with the curve not seeing levels like that since Nov 2007.

Top European News

  • Fortum CEO Seeks Talks With Uniper Head as Germany Approves Bid
  • Credit Agricole Unit Agrees to buy Italy Wealth Manager Leonardo
  • U.K. Retail Sales Weaken as Cash-Strapped Consumers Hold Back
  • German Industrial Output Drops as Manufacturing Takes Breather
  • SocGen Faces French Criminal Probe Into Suspected Libya Bribery
  • Draghi Says Banks’ Non-Performing-Loans Problem Isn’t Solved Yet
  • Serbs Mull New IMF Deal as Weak Growth Mars Healthier Budget
  • Siemens Is Said to Ready Job Cuts Amid Slump in Power Orders

In FX, USD A second wave of USD buying has been evident in European trade, with a push clear in USD/JPY, as Monday’s 114.73 how is set to behave as the next resistance level. Focus remains political, with eyes on the GOP tax bill, coinciding with President Trump’s visit of South Korea and later comments expected from current Fed Chair Yellen. The Kiwi was one of the movers overnight, finding volatility as the New Zealand PM outlined the review of RBNZ act, which will include maximising employment as a goal, however, further stated that there is no desire to have the exchange rate in the review. The initial spike higher in the NZD retraced through the Asian session and opened Europe back below pre-announcement levels. Australian RBA Cash Rate (Nov) 1.50% vs. Exp. 1.50% (Prev. 1.50%). RBA says forecasts are largely unchanged with the forecast remaining that inflation will pick up. Higher currency would slow the economy, adding that it is restraining price pressures. Labour market has continued to strengthen, although inflation remains low and will likely do so for some time. New Zealand Financial Minister stated that they will retain the 1-3% inflation target for RBNZ. There is no desire to have NZD included in the RBNZ review. The RBNZ review to include maximising employment as their goal.

In commodities, Oil continued to gain through yesterday’s session continuing to print fresh highs, the next clear resistance is likely to be 2015 highs, just through 60.00/bbl. Precious metals have been pushed lower, led by gold, largely in line with the bullish pressure seen in the USD this morning

Looking at the day ahead, datawise we’ll get Germany industrial production for September, Euro area retail sales for September and September JOLTS and October consumer credit in the US. The holds a forum on  Banking Supervision which will include a speech from President Draghi. The Fed’s Quarles is also due to speak in the evening at the Clearing House annual conference. The OPEC world oil outlook will also be presented.

US Event Calendar

  • 10am: JOLTS Job Openings, est. 6,075, prior 6,082
  • 12:35pm: Fed’s Quarles Speaks at Clearing House Conference
  • 2:30pm: Yellen to Receive Award for Ethics in Government
  • 3pm: Consumer Credit, est. $17.5b, prior $13.1b

DB's Jim Reid concludes the overnight wrap

Given the fairly light calendar elsewhere it feels like developments in and around Washington will likely hog the spotlight this week. With that in mind it was interesting to hear the latest view of DB’s Washington specialist Frank  Kelly yesterday on his conference call. Unsurprisingly Frank thinks that the tax bill has little chance of passing in its current form. He made the point that the bill is likely to face an extraordinary amount of lobbying and noted three very powerful groups in the association of homebuilders, realtors and independent businesses. So the current House version is seen as more of an opening bid but as the days go on the lobbying will ramp up intensely. What is hugely important in Frank’s view though is the parallel developments in the Senate. Indeed early next week, or possibly late this week, the Senate Republicans will unveil a plan of their own which is likely to look very  different to the current House bill legalisation, certainly in being a lot less sweeping. This morning, Bloomberg noted that the Senate’s tax plan may keep the mortgage interest deduction limit at $1m instead. Politico also ran an article yesterday saying that reconciling the difference between the two chambers could end up being the biggest hurdle. So keep an eye on that as the next important event in addition to any press snippets in terms of mark ups on the current House version.

In terms of timing Frank thinks that it’s very unlikely that we get the bill passed before Thanksgiving. Instead we might see something around the Holiday Season or possibly as late as early next year depending on how contentious it is. Frank is a bit more upbeat about getting something however given the health reform debacle. So all in all expect this to rumble on for some time.

Unlike politics, markets have had a slightly less complicated start to the week. Having dipped into the red at the open following the Saudi Arabia, China and Trump headlines from the weekend, equity markets largely closed on the front foot last night. In Europe the Stoxx 600 finished +0.13% while across the pond the S&P 500 also eked out a +0.13% gain by the end of play – the 5th day in a row it has closed higher – helped by a decent rally for energy stocks after WTI rose +3.07% and to the highest in two years on the back of those Saudi developments. The broader move higher was also despite the telecom sector doing its best to drag the index down after the news that Sprint and T-Mobile were officially ending merger talks. In fact M&A has been a bit of a theme over the last 24 hours particularly in the tech sector.

Bond markets were slightly firmer yesterday too. Bunds ended the session 2.8bps lower at 0.332% while Treasuries were 1.4bp lower to 2.316%. The Treasury curve was actually a bit flatter yesterday with the 2s10s curve dipping below 70bps intraday and to the lowest since early November 2007. It’s hard to know if the latest leg had anything to do with the weekend news of the NY Fed’s Dudley announcing his plan to retire by the middle of next year and before the end of his term in 2019. The board of the NY Fed will now choose the next President. The announcement means that the last member of the Yellen-Fischer- Dudley triumvirate will now step down and at face value one would think that this makes ‘continuity’ under Powell certainly more of a challenge given that Yellen was seen as having significant support from both Fischer and Dudley. So the decks have certainly been cleared for a Fed leadership change which is something to keep in mind as we approach 2018.

Back to bond markets briefly, it’s worth pointing out that the latest ECB PSPP and CSPP data was released yesterday. Significantly, with regards to the former, the ECB announced that there will be €124bn of reinvestments from January to October 2018 (so an average of €12bn a month). The pace will however be slower for the first three months of next year at just €23bn total for those months before ramping up from April. So that means that the pace of QE plus reinvestments following the taper announcement nearly two weeks ago will be around €38bn for January to March and closer to €45bn from April to October. In terms of CSPP, what was most interesting from the latest data was confirmation that next year’s CSPP redemptions are a lot smaller than would be implied by the eligible universe because purchases have been concentrated in liquid new-ish issues.

The data suggest that the average monthly CSPP redemptions over the next 12 months will only be €273m (2.7% pa of the current holdings versus close to 8% in the eligible universe). The data backs up the view of DB’s Michal Jezek as per his note here from mid-October.

Turning now to markets in Asia this morning where the rally for Oil is helping equity bourses to post decent gains. The Nikkei (+1.57%) in particular is at a new 25-year high while the Hang Seng (+1.22%), ASX 200 (+1.02%) and Shanghai Comp (+0.63%) are also up. There hasn’t been any notable updates from Trump’s Asia tour while this morning we also had the RBA meeting where policy was left unchanged, as expected.

Moving on. There were a few central bank speakers yesterday but in truth there wasn’t much in it to move the dial. The Fed’s Dudley spoke post his resignation announcement and said that “…there’s not a lot of discord going into this (Fed) transition…so I think it’s going to be a very, very smooth transition” and that the Fed vacancies “has no implication whatsoever for policy right now”. Further, he added that Governor Powell and Chair Yellen “are very well aligned, so I think this is going to be very evolutionary”.

Meanwhile the ECB’s Praet sounded a bit dovish, noting that “a substantial amount of monetary accommodation continues to be necessary…” and that “overall, inflation developments, despite the solid growth, have remained subdued”. In the details, he noted 3 factors were considered when ECB recalibrated its policy on QE back in October, including: i) pace - was reduced because “the brighter economic prospects have increased our confidence” on a gradual rise in inflation, ii) horizon – was extended because ECB “has always emphasized monetary policy needs to be persistent and patient for underlying inflation pressure to gradually build up” and iii) optionality – as retaining the option to recalibrate the APP if warranted is consistent with the forward guidance on the APP.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the Fed’s latest senior loan officer opinion survey was released. In the details, respondents indicated that bank’s lending
standards was i) eased for commercial and industrial loans (C&I), ii) broadly unchanged for most commercial (CRE) and residential real estate (RRE) loans, but iii) tightened for credit cards and auto loans. Conversely, in terms of demand, a) RRE and credit card lending was broadly unchanged, but b) demand for C&I and CRE loans was weaker.

In the Eurozone, the final reading for the October PMI was revised 0.1pts higher, with the services PMI now at 55.0 and composite PMI at 56.0. Overall, our economists believe that if this level is sustained, 4Q GDP growth could be closer to 0.7% qoq rather than the 0.5% qoq that they currently expect. Across the bloc in terms of composite PMI, France’s PMI was revised 0.1pt lower to 57.4, Germany’s PMI was revised 0.3pts lower to 56.6 and Spain’s PMI fell 1.3pts to a still solid 55.1 this month, albeit the lowest reading since February. Elsewhere, Italy’s flash PMI was lower than expectations at 52.1 (vs. 52.9 expected) and composite PMI was 53.9 (vs. 54.3 expected).

Elsewhere Germany’s September factory orders were above expectations at +1.0% mom (vs. -1.1% expected) and +9.5% yoy (vs. +7.1% expected). Excluding the volatile ‘other transport’ sector, manufacturing orders were still up +8.9% yoy. Elsewhere, the Eurozone’s September PPI was above consensus at +0.6% mom (vs. +0.4% expected) and +2.9% yoy (vs. +2.7% expected), while the November Sentix investor confidence also beat at 34 (vs. 31  expected) – now slightly lower than the pre-GFC high.

Looking at the day ahead, datawise we’ll get Germany industrial production for September, Euro area retail sales for September and September JOLTS and October consumer credit in the US. The ECB is due to hold a forum on  Banking Supervision which will include a speech from President Draghi. The Fed’s Quarles is also due to speak in the evening at the Clearing House annual conference. The OPEC world oil outlook will also be presented.