Bank Stocks, Dollar Slide Hit By Fresh Tax Reform Doubts

U.S. equity futures are little changed as European and Asian shares retreated, led by sliding bank stocks and a drop in the dollar as doubts over republican tax cuts and ongoing bond curve flattening hurt sentiment and prompted fresh questions over the viability of the US expansion.

Investor concerns also returned to geopolitics as Trump continued his tour of Asia with a mission of rallying the world to stand up to the North Korean threat. Calling out by name Russia and China, he said Wednesday that all responsible nations must join forces to deny Kim Jong Un’s regime any form of support. As Bloomberg reports, Trump is also expected to discuss trade with his Chinese counterpart, Xi Jinping. But the biggest overnight catalyst was a renewed fear about the fate of GOP tax cuts, as fresh doubts emerged about tax reform progress after the Washington Post reported Senate Republican leaders were considering holding cuts back by a year, while they are also said to be considering repealing deductions for state and local taxes.

Derek Halpenny, head of research at Mitsubishi UFJ in London told Reuters he was dubious over the progress of the tax cuts program being urged by U.S. President Donald Trump’s campaign. “The initial phases of discussions within the House (of Representatives) have brought up a lot of divisions and problems ... If the story is true that they’re considering a delay of one year to the corporate tax cut, those big differences will need to be sorted,” he said. Francois Savary, chief investment officer at Prime Partners, said the doubts over the tax issue reinforce the case for some consolidation in the market, which has been fully priced for good news. “It’s something that would impact the domestic stocks in the U.S. and would be a setback for the market in general (and) it’s more than stock specific as people would reassess earnings growth expectations to the downside,” he said.

In addition to hitting the dollar, tax fears also led to renewed flattening in the yield curve, which sent Goldman shares 1.5% lower and weighed the most on the main stock index. The 2s10s curve dropped below 69bps and has now flattened for 8 sessions in a row which is the longest run since November 2015. The 5s30s curve also fell below 79bps and both are at 10 year lows. Clearly rates markets are saying something about the prospect of the tax bill as it stands so it’ll be interesting to see if that changes when we see the Senate version.  Ongoing flattening, which precedes an inversion, also implies that investors are expecting a slowdown if not recession.


European bonds were also snared by yield curve flattening, with yields on long-term German bonds falling to two-month lows on Wednesday.

In European equities, the Stoxx Europe 600 Index declined, with banks underperforming following disappointing results from Credit Agricole SA. European banking stocks were the worst performing sector as share indexes across the continent opened lower, following a poor session for U.S. banks. The two main European banking indices suffered the most, falling 1.1% and 0.9%, respectively, dragging an index of pan-European stocks lower 0.2%.

Elsewhere, in a largely risk-off session seen through the European periphery without a clear catalyst, Spanish bonds led a sell-off, with the 10Y Spain underperforming Italy by 2.5bps as large block trade sent bund futures to session high. European equity markets mirror peripheral underperformance, with smaller Italian banks particularly weak, while Credit Agricole slumped -4.5% after a poor earnings report. The retail sector was supported by Marks & Spencer (+0.9%) after positive trading numbers. In the U.K., Prime Minister Theresa May was weighing whether to fire a member of her cabinet only seven days after her defense secretary quit in a sexual harassment scandal.

Earlier, Asian shares wrung out another decade peak as data showed China’s demand for imports remained buoyant, pushing the MSCI world equity index to a fresh high. Beijing reported imports in October rose 17.2% from a year earlier, beating forecasts of 16%, but export growth was just under estimates at 6.9%.  Some more from Goldman on China's trade numbers:

October exports and imports growth moderate, in line with consensus


Exports growth for China moderated to 6.9% yoy in October from 8.1% yoy in September, and import growth also slowed to 17.2% yoy from 18.6% yoy in September. Both readings are in line with consensus. The moderation in year-on-year growth may be partially due to the mid-autumn festival distortion, though probably to a lesser extent compared to those seen in Korea and Taiwan data. In sequential terms, exports fell 0.1% mom sa non-annualized, down from a modest increase of 0.2% in September. Imports increased by 0.3% mom sa non-annualized, moderating from 2.5% in September. The trade surplus increased to US$38.2bn from US$28.6bn in September.


For exports to major destinations, growth of exports to the EU and Japan improved to 11.4% yoy and 5.7% yoy, from 10.4% yoy and 0% yoy in September, respectively, while that to the US and ASEAN moderated to 8.3% yoy and 10.1% from 13.8% yoy and 10.7% in September.


For commodity imports, the imports growth decelerated both in volume and value terms. Specifically, in volume terms, iron ore imports fell 1.6% yoy, vs. +10.6% yoy in September; crude oil imports grew 7.8% yoy, vs. 11.9% yoy in September; steel products imports contracted 12.0% yoy, vs. +9.7% yoy in September. In value terms, iron ore imports decelerated to 16.9% yoy from 30.2% yoy in September; crude oil imports grew 29.1% yoy, vs. 29.4% yoy in September; steel products imports decelerated to 9.3% yoy, from 28.6% yoy in September.

Both exports and imports growth moderated in October

An index of Asian stocks held steady at a decade high following the WaPo report that Senate Republicans are considering a one year delay in the implementation of a corporate-tax cut. The MSCI Asia Pacific Index rose 0.2% to 171.76 at 4:28 p.m. in Hong Kong after earlier rising to its highest since 2007 for a second day following little change in U.S. stocks on Tuesday. Consumer discretionary stocks including Sony Corp. and Toyota Motor Corp. gained, while energy companies dropped. The regional benchmark has to add less than a point to set a new record.

“The U.S. tax cut plan is looking like a long-drawn process and thus softer leads from equities overnight are weighing on Asian stocks,” said Jingyi Pan, market strategist at IG Asia Pte in Singapore. A lack of tax cuts as the earnings season draws down may set Asian stocks up for a correction, she added. Japan’s Topix index rose to the highest close since November 1991 amid optimism over corporate earnings, while the Nikkei 225 Stock Average retreating from its highest close since January 1992 marked Tuesday.

Emerging-market stocks slipped for the first time in three days, led by declines in the Middle East, while currencies were little changed. Goldman and Blackrock both said the developing-nation equity rally has further to go.  Shares in Saudi Arabia continued to decline even as kingdom sought to ease tension among global investors over a crackdown that’s seen princes and billionaires arrested. Stocks indexes in the U.A.E., Qatar, Oman and Saudi Arabia fall, led by a 1.9% drop in Dubai’s DFM General Index, the steepest in a year; Saudi Arabia’s anti-corruption purge and deepening feud with Iran spur a selloff across Gulf stock markets to the tune of almost $7 billion in three days.

The dollar weakened vs all G-10 peers except the pound and Treasuries were underpinned by the abovementioned corporate tax delay report; EUR/USD rose to session high in London trading with interbank names unwinding euro shorts. The pound fell a second day against the dollar, weighed by concern that U.K. PM Theresa May could lose a second member of her cabinet within a week as she is pondering whether to fire her International Development Secretary Priti Patel who held unauthorized meetings with Israel behind May’s back. USD/JPY was sold by leveraged accounts in Tokyo. Aussie gains despite weaker-than- forecast China trade surplus.
Chinese crude imports slipped they lowest level in a year, pushing oil prices lower, although traders said the overall market remains well supported because of OPEC-led supply cuts. WTI was also pressured ahead of the release of U.S. crude stockpiles data, while Treasuries were supported after bunds rallied on the back of block trades. U.S. crude oil was lower 0.2% at $57.06 while Brent crude futures were steady at $63.72 and off a over two-year peak of $64.65 hit earlier in the week.

Expected economic data include MBA mortgage applications and crude inventories. 21st Century Fox, Manulife Financial and Monster Beverage are among companies scheduled to report earnings

Market Snapshot

  • S&P 500 futures little changed at 2,586.70
  • STOXX Europe 600 down 0.06% to 394.40
  • MSCI Asia up 0.1% to 171.74
  • MSCI Asia ex Japan down 0.04% to 560.49
  • Nikkei down 0.1% to 22,913.82
  • Topix up 0.2% to 1,817.60
  • Hang Seng Index down 0.3% to 28,907.60
  • Shanghai Composite up 0.06% to 3,415.46
  • Sensex down 0.6% to 33,180.32
  • Australia S&P/ASX 200 up 0.03% to 6,016.27
  • Kospi up 0.3% to 2,552.40
  • German 10Y yield rose 0.5 bps to 0.332%
  • Euro up 0.1% to $1.1601
  • Italian 10Y yield fell 8.3 bps to 1.437%
  • Spanish 10Y yield rose 5.0 bps to 1.458%
  • Brent futures up 0.2% to $63.79/bbl
  • Gold spot up 0.3% to $1,279.04
  • U.S. Dollar Index down 0.08% to 94.83

Top Headline News

  • U.S. Tax: Senate Rep. leaders are considering a delay in corp tax cut by 1-year; would save $100b: Washington Post
  • Eyeing 2018 Midterms, Democrats Score Wins in Key Governor’s Races
  • President Donald Trump arrived in Beijing where he’ll meet with President Xi Jinping. Representatives from about 40 U.S. companies are expected to accompany Trump’s trade mission to China and sign deals for billions of dollars
  • BOJ board member Yukitoshi Funo says the central bank won’t necessarily keep policy the same until 2% is hit
  • China data: Oct. exports 6.1% y/y vs est. 7%; imports 15.9% y/y vs est. 17.5%; trade balance 245.5b yuan vs 280.5b yuan
  • Moody’s: Healthy economic growth and synchronized global expansion seen in 2017 likely to continue next year; global sovereigns have stable outlook for 2018
  • Federal Reserve Bank of Philadelphia President Patrick Harker suggested he’ll likely support a third 2017 interest-rate increase next month, but said he wants to see signs of inflation moving higher before backing tightening next year; has penciled in three increases for 2018
  • Catalan separatists missed the deadline to form an alliance to run as a united block, boosting Spain’s chances of restoring some normality to the rebel region
  • The House tax- writing committee entered its third day of work to hammer out the details of the Republican tax cut plan
  • The Asia-Pacific Economic Cooperation (APEC) CEO Summit is held in Danang, Vietnam
  • Fed’s Harker: Fed on track for Dec. hike; wants to see progress on inflation before 2018 hikes; repeats currently 3 hikes next year are penciled in by him
  • BOE Agents’ Summary of Business Conditions: pay growth had edged up and now expected to be somewhat higher in 2018; pay settlements expected to be 2.5-3.5% next year vs 2-3% in 2017
  • API inventories according to people familiar w/data: Crude -1.6m; Cushing +0.8m; Gasoline +0.5m; Distillates -3.1m
  • China Oct. trade balance: $38.2b sv $39.1b est; Exports 6.1% vs 7.0% est; Imports 15.9% vs 17.5% est.

Asian equities traded mixed with profit taking initially dragging down major bourses, while the rally in commodities ran out of steam. Additionally, US equity futures were also off marginally following reports that Senate GOP is said to consider delaying corporate tax rate cut for a year. ASX 200 (+0.07%) initially pulled away from its recent 10yr high seen yesterday, while Commonwealth Bank shares outperformed after a firm earnings report. Similarly, the Nikkei 255 (-0.1%) also retreated from its recent highs with financials leading the losses, while Toyota shares surged higher after strong earnings. Both the Shanghai Comp (+0.5%) and Hang Seng (+0.3%) moved into positive territory fuelled by tech stocks as shares in China Literature doubled on their debut trading session, in turn shrugging off the Chinese trade data which missed analyst estimates. In credit markets, JGBs have been supported by spill over buying in USTs while the Japanese curve has been noticeably steeper with the short-end yet again outperforming as the 2yr yield falls 1.5bps.

Top Asian News

  • Thailand Holds Key Rate Near Record Low as Growth Gains Momentum
  • Bharti Airtel Drops After Qatar Fund Seeks $1.5 Billion Selldown
  • IPO Fever Hits Hong Kong Market as 1-in-20 People Try to Buy

European equities continue the week’s trade in a subdued fashion, and reside in the marginal green. Utilities outperform, led by EON and SSE, following stela earnings from the latter, leading the FTSE higher. Energy struggles, albeit marginally so as oil markets slow their weekly gains, failing to help boost the sector. We suspected that there was more positive momentum building than any real desire to push prices lower, and that it was probably only a matter of time before the previous 10 year futures high was breached. However, follow-through buying has perhaps not been as strong or pronounced as anticipated (yet), despite reports of some 15k lots purchased from  163.40 (ie a tick above yesterday’s Eurex session peak) to the new 163.51 peak. To recap, 163.69 is the closest bullish objective on some charts, and that would nudge the equivalent yield down to 0.30%, which could be sticky. Elsewhere, and in keeping with the general fixed friendly trend, Gilts have extended gains to 125.67/1.217% in cash terms and T-notes have traded at 125-15/2.31% approx.

Top European News

  • ABN Amro Falls as Quarterly Net Interest Income Misses Estimates
  • SSE Leads U.K. Shares Higher on Retail Energy Merger With Innogy
  • Marks & Spencer Woes Deepen as New Chairman Tightens Hold
  • Paschi Declines Further as Lending and Commissions Disappoint
  • Maersk Closer to Drilling Deal After $1.8 Billion Writedown

In FX, markets are likely to await comments from BoE’s Carney and McCafferty, expected both in the early European evening. Cable has seen some marginal downside in early trade, as the majority of FX markets struggle to find any real direction following the lack of impetus from Asia. Sterling has struggled against the EUR in recent trade, edging toward yesterday’s 0.8835 highs. Falling yields have been the theme of recent trade, as the US curve trades around flattest levels since 2007. USD/JPY remains undeceive however, retaining lows around November’s 113.55- 113.70 support range and looking back toward 114.00, with the large option expires between 113.50 and 114.50 signalling that the pair will remain in a tight range. The lack of trade is evident of anticipation for the RBNZ later this evening, with rates expected to remain at 1.75%. The implied vol indicates minimal risk, at the lowest levels of the year, helped by big expiries contacting – 640mln 0.6920-25 and 651mln at 0.6950.

In commodities, WTI and Brent crude futures have retraced from 2y highs, as the bulls take a breather, as the former trades around 57.00/bbl. It has been noted that China Oct crude oil imports have dropped to their lowest levels in over a year. Precious metals have traded largely sideward throughout the European and Asian sessions, as much focus remains on global risk sentiment as Trump continues his tour of Asia.

Looking at what appears to be a fairly light day ahead, BoJ meeting minutes from the October meeting are due this evening while Germany’s Merkel speaks this morning and the BoE’s Kohn speaks around lunchtime. With little in the way of other data, expect the US tax developments to remain a focus along with President Trump’s trip around Asia. Deutsche

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.6%

* * *

DB's Jim Reid concludes the overnight wrap

A Happy Trumpiversary to all our readers this morning. Yes, believe it or not, today marks exactly 12 months since the US election on November 8th 2016. A lot has happened in the last year, not least the President increasing his Twitter following by 29,111,914 people, or slightly more than the population of Ghana.

Twelve months on from the election and while markets have been a bit mixed in the last 24 hours it feels like most investors are still somewhat sitting of the sidelines waiting for further developments on tax reform. The general feeling is that we should get the Senate bill on Thursday, which as we noted yesterday will be closely watched given that it’s likely to include some significant differences relative to the House bill. Republican Senator Ted Cruz was reported as saying yesterday that GOP lawmakers need “to do more” than what is on the table so far. In the meantime markups to the House bill continued for a second day yesterday and will likely continue into today also.

As noted above it was a bit of a mixed session for the most part yesterday although US markets did end up closing a bit firmer in the last 30 minutes or so of trading. Indeed after the Stoxx 600 and DAX had closed -0.49% and -0.66% respectively in Europe, the S&P 500 closed broadly flat (-0.02%), not helped by a softer performance for banks. It appears that the latest developments in Saudi Arabia drove the early price action with the Gulf nation expanding its crackdown on anti-corruption.

The news yesterday was that Saudi Arabia had ordered banks to freeze bank accounts for dozens of individuals who have not been arrested. Bloomberg also reported that the Saudi Arabia Monetary Authority had sent a list of  hundreds of names to lenders which told them to freeze bank accounts linked or under those names. Later on, Saudi authorities moved to calm concerns and noted that the bank accounts frozen only relate to individual suspects, not of the companies they control.

The most eye-catching move yesterday in markets though was perhaps that of peripheral bond markets. BTPs rallied 8bps yesterday to 1.689% while 10y yields in Spain and Portugal closed 6.1bps and 9.7bps lower respectively – with the latter below 2% for the first time since April 2015. We’ve been scratching our heads a bit to explain the price action. With Treasuries (-0.2bps) and Bunds (-0.8bps) little changed there was some suggestion that the move was a bit of a delayed reaction to the Sicily regional election result on the weekend given the fairly muted price action on Monday. In any case the moves stood out given the relatively benign changes elsewhere. It is however worth noting that yesterday was another day of flattening across the Treasury curve. The 2s10s curve dropped below 69bps and has now flattened for 8 sessions in a row which is the longest run since November 2015. The 5s30s curve also fell below 79bps and both are at 10 year lows. Clearly rates markets are telling us something about the prospect of the tax bill as it stands so it’ll be interesting to see if that changes when we see the Senate version.

Jumping to the overnight news now where most of the headlines are focused on Trump’s address at the National Assembly in Seoul. The President said that North Korea’s Kim has turned the nation into “a hell that no person deserves” and called for more help from Russia and China, noting “…to those nations that choose to ignore this threat…the weight of this crisis is on your conscience”. The words appear in stark contrast to a much calmer rhetoric from Trump about 24 hours ago. The President is scheduled to visit China next where he is due to have a private dinner with President Xi.

Markets in Asia appear to have largely ignored Trump’s comments overnight though with the Kopsi (+0.19%), ASX 200 (+0.13%) , Shanghai Comp (+0.38%) and Hang Seng (+0.30%) up slightly and the Nikkei (-0.19%) currently the only index in the red. After the bell in the US, Snap Inc. dropped 17% following its’ softer than expected 3Q result and that appears to be weighing on US equity futures.

Moving over to the ECB now where there was a bit of interest in a Bloomberg story yesterday which suggested that three significant ECB policymakers had pushed at last month’s policy meeting to link the overall level of monetary stimulus (rather than just asset purchases) with the outlook for inflation. The article highlighted that the three policy makers were Board member Coeure, Bundesbank President Weidmann and Bank of France Governor Villeroy de Galhau. Earlier in the month, Bloomberg reported that Coeure didn’t oppose having an open-ended QE, but hopes “this will be the last extension”.

Staying with the ECB, yesterday we heard from President Draghi who spoke on banks and bad debts. He noted that European banking supervision “has been instrumental in building a stronger banking sector” and while non-performing loan levels have been coming down, from 7.5% of loans in early 2015 to 5.5% now, “the problem is not yet solved”.

Prior to this, ECB board member Sabine Lautenschlaeger noted “I would have liked a clear exit (for QE) and a different decision” in the October ECB meeting, perhaps in part as “for (her) that was ok to say (as) we can…now move gradually… out of non-standard measures, as the monetary policy stance will still be very accommodative and very expansionary”. On inflation, Lautenschlaeger said that “I am very confident that inflation will pick up and that in the medium term… we will achieve our goal”. Elsewhere on banks, she noted profitability is low for many banks and that they need to diversify their sources of revenue and seek a sustainable business model, but “all banks have to adapt to more stringent rules…they come at a cost, but in the long run, their benefits are greater”. Finally, the head of Supervision at the ECB Daniele Nouy noted that 50 banks have discussed their Brexit business relocation plans with authorities in the EU bloc.

Over at the Fed, new Chief of Bank Regulation Randal Quarles didn’t give too much away in his public debut. He noted that in terms of regulation, “everything is up for a fresh look” and that “in a very short period of time”, the Fed will be looking for ways to make the regulatory process more transparent. Further, since starting at the Fed, he has found ‘quite an openness” for “taking a fresh look at regulation”. Elsewhere, Democratic Senator Tester noted members of the Senate Banking Committee are “getting very close” to agreeing on a bill to ease regulation on financial institutions.

Away from the markets, OPEC revealed in its annual report yesterday that it now expects North American shale output to jump to 7.5m barrels per day in 2021, which is c.56% higher than its forecasts made last year, in part as OPEC’s output cuts have supported an oil price recovery that should help the US producers. OPEC and its partners are scheduled to meet on 30th November to decide whether or not to extend the oil production cuts from March 2018. WTI oil dipped -0.26% yesterday and is trading marginally lower this morning.

Before we look at the day ahead, it was a fairly light day for economic data yesterday but for completeness we note that in the US, September JOLTS job openings were in line at 6,093k (vs. 6,075k expected), while consumer credit grew stronger than expected at US$20.8bln (vs. US$17.5bln).

In Germany, the September IP was below expectations at -1.6% mom (vs. -0.9%) and 3.6% yoy (vs. 4.5% expected), with production of capital goods and energy weighing on growth. Notably, growth in 3Q remained reasonably sound at 0.9% qoq. In Europe, both the Eurozone and Italian September retail sales beat expectations, coming in at 0.7% mom (vs. 0.6% expected ) and 0.9% mom (vs. 0.2 expected) respectively. Over in the UK, the October Halifax house price index was broadly in line at 0.3% mom (vs. 0.2% expected) and 4.5% yoy. Elsewhere, BRC reported same-store retail sales fell 1.0% yoy in October, which is the worst result since March.

Looking at what appears to be a fairly light day ahead, BoJ meeting minutes from the October meeting are due this evening while Germany’s Merkel speaks this morning and the BoE’s Kohn speaks around lunchtime. With little in  the way of other data, expect the US tax developments to remain a focus along with President Trump’s trip around Asia.