The overnight fireworks in Japan, which saw the Nikkei plunge by 860 intraday points and sent vol and volumes soaring (before recovering most losses), spooked traders in Asia and around the globe, and U.S. equity futures are red this morning, along with European shares and oil. As one early riser sellside desk notes, the Nikkei 225 provided the latest example of choppy markets and the 860 point intraday plunge "got us worried. Is this a warning sign for risk assets?" President Trump's challenge of China for "unfair trading practices" (which he blamed on his predecessors) did not help the calm mood.
“The stock market has run out of a little momentum since the blow-out on the (Japanese) topix so it feels like it’s temporarily paused,” said Societe Generale strategist Kit Juckes. “We are waiting for some news from the Republicans on the tax plans, there is a bond market that has stalled and we’ve got rather soggy looking emerging markets... We probably need to get U.S. Treasury yields higher to get things going again.”
In the aftermath of the Japanese vol spike, the MSCI Asia Pacific Index turned briefly negative having earlier climbed to all-time record.
Most of Europe’s main bourses also drifted in and out of the red after Japan's disturbance spooked traders and after mixed earnings and as Brexit talks resumed with low expectations in Brussels. There were a series of ECB speeches and what should be buoyant new growth forecasts due later from the European Commission, though bond markets were mostly quiet following a rally this week in benchmark U.S. Treasuries and Bunds. In fact, German Bunds were sharply offered, with yields rising 9% on the day an approaching 0.36%: the move has dragged the rest of the European bonds lower, with OATs and Gilts also moving. According to some desks, this may be due to some rotation from the European equity markets, which are broadly trading into the red today and could be following in the footsteps of Nikkei.
Already shaken by events in Japan, basic-resources shares weighed on the Stoxx Europe 600 index following a decline in industrial-metals prices. An increase in growth expectations from the European Commission failed to lift stocks as disappointing results from companies including Siemens AG and Vestas Wind Systems A/S added to the malaise. Banks gained, led by Italian lenders after BPER Banca S.p.A. earnings beat estimates. Stocks in Asia earlier rose above their 2007 peak before an intraday reversal in Japanese shares on technically-driven trading pared gains in the region. Sterling edged lower as Brexit talks resumed, while oil halted a two-day drop.
Understandably, the yen was the dominant theme of the overnight session as investors rushed to buy the Japanese currency following the Nikkei plunge; the euro found support after the European Commission raised its growth outlook for the common area, while the pound reversed earlier gains as some hedge funds turned sellers;
Investor attention has been focused on Asia this week, where Trump has embarked on an 11-day tour. In Beijing Thursday, he said China is taking advantage of American workers and companies with unfair trade practices, but he blamed his predecessors in the White House rather than China for allowing the massive U.S. trade deficit to grow. A year after Trump was elected to president, investors are also reflecting on how financial markets have fared in the interim, and a rally that has outperformed all but 4 "new president" markets in US history.
As Bloomberg adds, elsewhere in the overnight session, the New Zealand dollar held onto Wednesday’s gains after the central bank flagged it may raise interest rates earlier than expected. The Kiwi was the day's big mover, surging about 1 percent to a two-week high of before dipping to trade at $0.6956. The kiwi soared after the Reserve Bank of New Zealand (RBNZ) said the country’s fiscal stimulus and the currency’s recent fall would lead to faster inflation and likely an earlier rise in interest rates.
Treasury yields were range-bound as markets wait to see the U.S. tax proposal that will serve as the basis for further discussions. The kiwi was near two-week high after more hawkish RBNZ sends New Zealand’s 10-year yield eight basis points higher. Aussie dips briefly following surprise drop in housing finance activity and a subseqent short squeeze sent it to session highs; Australian sovereign bonds drift lower with 10-year yield up three basis points at 2.60%. JGB futures dip after mediocre 30-year auction tails 1.1bps.
The dollar index against a basket of six major currencies was 0.1 percent lower at 94.803 meanwhile, as it drifted further from the three-month high of 95.150 set in late October. A U.S. Senate tax-cut bill, differing from one already in the House of Representatives, was expected to be unveiled on Thursday, complicating a Republican tax overhaul push and increasing scepticism on Wall Street about the effort. Some also focused on fallout from Democrat wins in regional U.S. elections this week as signal for next year’s mid-term Congressional elections for U.S. President Donald Trump.
“There’s very much a risk of disappointment. The U.S. dollar could go through a weakening phase on the back of uncertainty around that tax reform,” said Steven Dooley, currency strategist for Western Union Business Solutions in Melbourne. Meanwhile, stalled Brexit talks resume on Thursday in Brussels with no indication that a breakthrough is in reach.
In commodity markets, Brent and U.S. crude oil futures were modestly lower, having hit two-year highs earlier in the week following a 40% surge since July. U.S. data showing a rise in domestic crude production had weighed on sentiment overnight but the Middle East uncertainty in Saudi Arabia limited the losses. Gold added 0.2 percent to $1,283.45 an ounce after rising to a three-week high of $1,287.13 an ounce the previous day. Palladium hovered near a 16-year high of $1,019 while nickel fell by more than 2 percent in London to its weakest since October as hype over potential electric vehicle demand that has been driving it higher eased. The nickel market had been ignoring downside risks from policy developments in supply markets Indonesia and the Philippines, and instead focusing on potential future demand from electric vehicle batteries, said Morgan Stanley in a report.
“We (have) heard little to alter our view that producing NiSO (nickel sulphate) isn’t particularly challenging/costly and we see near-term downside risk to price,” it said.
On today's calendar, the ECB said economic growth in the U.K. is headed for a prolonged slowdown even as the euro-area economy is forecast to expand at the fastest pace in a decade this year. And in the U.S., tax reform discussions continue. The Senate is due to release a “conceptual mark” of a proposal Thursday, according to a spokeswoman. Expected economic data include jobless claims and wholesale inventories. Dish, Disney, Johnson Controls and TransCanada are among companies reporting earnings.
Bulletin Headline Summary from RanSquawk
- European markets remain subdued, as equities trade mixed with a lack of any real direction
- GBP weaker amid a late follow-through of concerning Brexit commentary
- Looking ahead, highlights include US weekly jobs, ECB’s Lautenschlaeger and Constancio
- S&P 500 futures down 0.1% to 2,588.30
- STOXX Europe 600 down 0.2% to 393.82
- MSCI Asia up 0.1% to 171.99
- MSCI Asia ex Japan up 0.3% to 561.79
- Nikkei down 0.2% to 22,868.71
- Topix down 0.3% to 1,813.11
- Hang Seng Index up 0.8% to 29,136.57
- Shanghai Composite up 0.4% to 3,427.80
- Sensex up 0.06% to 33,239.47
- Australia S&P/ASX 200 up 0.6% to 6,049.43
- Kospi down 0.07% to 2,550.57
- German 10Y yield rose 0.2 bps to 0.328%
- Euro up 0.05% to $1.1601
- Italian 10Y yield rose 4.5 bps to 1.482%
- Spanish 10Y yield rose 3.0 bps to 1.515%
- Brent futures down 0.1% to $63.41/bbl
- Gold spot up 0.2% to $1,283.82
- U.S. Dollar Index down 0.06% to 94.81
Top Overnight News
- President Trump said China is taking advantage of American workers and American companies with unfair trade practices, but blamed his predecessors in the White House for allowing the U.S. trade deficit to grow
- The European Commission’s chief Brexit negotiator, Michel Barnier, and U.K. Brexit Secretary David Davis resume talks on the terms of Britain’s exit from the EU. Timing and duration in Brussels to be determined
- ECB’s head of banking supervision, Daniele Nouy, signaled that she’s willing to compromise on controversial plans to toughen rules on bad loans after criticism from the European Parliament that sent Italian bank shares soaring
- EU is giving U.K. an informal deadline of two to three weeks to set out how much it is prepared to pay in the Brexit divorce settlement, the Financial Times reports, citing an unidentified senior EU negotiator
- Hearing on Powell for Fed Chair set for Nov. 28
- Saudi Billionaires Said to Move Funds to Escape Asset Freeze
- AT&T CEO Says He Won’t Sell CNN as Antitrust Tension Rises
- Boeing Wins China Orders for 300 Planes Worth $37 Billion
- London House-Price Slump Persists as Brokers See Sales Tumble
- Vestas Plunges Most in 6 Years on Tougher Wind Competition
- BOE’s McCafferty Says Banks May Leave Before Brexit Deal Agreed
Risk on sentiment had been in full swing in Asia as stocks continued to edge higher at the beginning of the session, before later paring initial advances, particularly in Japanese assets. Nikkei 225 had been the notable outperformer although reversed gains of 2% as US equity futures dipped, subsequently sparking safe haven flow in the JPY, while some investors also touted profit taking. Elsewhere, the ASX 200 hovered around 10yr highs with iron ore prices seeing another day of gains, consequently supporting miners. Chinese markets traded in mixed fashion with the Hang Seng keeping afloat after encouraging Chinese CPI and PPI data which tops analyst estimates, while the Shanghai Comp fluctuated between gains and losses. 10yr JGBs are a tad lower, while underperformance has been observed in the belly of the curve with the 10yr yield ticking up 0.1bps.
Top Asia News
- Noble Group Posts $3 Billion Year-to-Date Loss as Crisis Deepens
- Inside Noble-Vitol Deal Shows Colonial Pipeline as Top Asset
- Malaysia Says It May Consider Review of Monetary Accommodation
- Malaysian Bonds Face Specter of First Rate Hike Since 2014
- Philippines Holds Benchmark Rate as Inflation Seen on Target
- Bakrieland Says Singapore Court Approves Debt Restructuring Plan
European equities trade with little in the way of any notable price action after a directionless lead from Asia after initial gains were erased. On a sector specific basis, performance has largely been off the back of individual earnings from across the continent with notable movers including Vestas Wind Systems (-16.9%), Burberry (-10.5%), Sainsbury’s (-2.9%), Siemens (-2.6%) and Commerzbank (+2.6%). Upside in Commerzbank shares has subsequently lead to some outperformance in financial names with Italian banks also providing some support amid UniCredit’s latest trading update and a sector bounceback from yesterday’s losses. No sign of any investor angst or dampened demand whatsoever, as 2023 supply was snapped up with only a 1 tick price tail. This, despite a sharp retreat in yields following the BoE rate hike and not much in the way of concession going in to the DMO tap. Note also, the issue does not fall into the more normal 5 year bucket until next year and the average auction yield was just a shade below yesterday’s closing level. However, 10 year benchmark Liffe futures have retreated from best levels to marginal new lows for the session (125.45), albeit largely alongside a general downturn in fixed (Bunds just off a new Eurex base of 163.23). In truth, debt markets are lacking clear direction and consolidating recent gains/yield declines/curve flattening.
Top European News
- Denmark’s Negative Rates Are Seen Persisting Into Next Decade
- ECB’s Nouy Bends on Bad-Loan Plan as Italian Bank Shares Soar
- U.K. Likely to See More Utility Mergers If SSE Deal Approved
- Euro-Area Growth Forecast Lifted Again as U.K. Outlook Dims
In FX, a broadly softer Greenback, largely due to ongoing US tax reform uncertainty, and supportive RBNZ impulses has enabled the Kiwi to recoup more lost ground after the RBNZ stood pat on rates at 1.75%. Accordingly, it brought forward rate hike projections to June 2019 from Q3 previously, while Governor Spencer also contended that the NZD is now fair value (although his deputy McDermott thinks a bit more depreciation is desirable). EUR is back to pivoting around the 1.1600 level vs the Dollar where large (1.7 bn) option expiries reside. USD/JPY has seen very choppy trade in line with the Nikkei, but ultimately firmer on safe-haven grounds, as USD/JJPY retreats from 114.00 again towards November lows. Currently around 113.50, bids are seen at 113.40 and then 113.00, while offers are said to be layered from 114.00-20. Riksbank meeting minutes see several members emphasising the importance of the exchange rate for the economic outlook and inflation prospects.
In commodities, iron ore prices continued to surge higher overnight with Dalian iron ore rising as much as 2% amid the persistent rise in steel prices. Precious metals gained a slight bid following the turnaround in risk sentiment, where Japan equities reversed its 2% rise to trade with losses of 1.5%. WTI and Brent crude futures trade relatively sideways with little in the way of notable newsflow other than Goldman Sachs sticking to their USD 58bbl year-end call for Brent whilst noting the ‘potential for high spot price volatility in the coming weeks’.
Looking at today's calendar, data wise, September Germany trade data along with UK industrial production are due. Elsewhere, US initial jobless claims and wholesale inventories are also due. We’ll also receive the latest EC economic forecasts while the ECB’s Villeroy de Galhau, Coerue, Mersch, Lautenschlaeger and Constancio are due to speak. Brexit talks are due to resume between Barnier and Davis while President Trump holds meetings with China’s Xi and Li Keqiang.
US event calendar
- 7:45am: Bloomberg Nov. United States Economic Survey
- 8:30am: Initial Jobless Claims, est. 231,500, prior 229,000; Continuing Claims, est. 1.89m, prior 1.88m
- 9:45am: Bloomberg Consumer Comfort, prior 51.7
- 10am: Wholesale Trade Sales MoM, est. 0.9%, prior 1.7%; Wholesale Inventories MoM, est. 0.3%, prior 0.3%
DB's Jim Reid concludes the overnight wrap
Needless to say that the focus for markets today will be on what details emerge from the Senate’s version of the GOP tax bill. It’s unclear just how much detail we’ll get though with some conflicting reports out there. Axios reported that the release of the bill will be delayed however Politico reported separately that GOP leaders are ready to walk through the bill with the GOP conference at 11.30 EST. Thereafter it will be released to the public but the timing is a bit up in the air so we might have to wait and see. Overnight, a spokeswoman for the Senate Finance Committee, Ms Lawless, noted that today’s tax proposal will be a “conceptual mark” rather than the legislative details.
Over in markets, the one year Trump anniversary was one of the less exciting days that we’ve had so far. Initially the tone felt a bit more risk-off with European markets generally closing a bit softer. US markets did however pare early losses into the close at least with the S&P 500 ending +0.14%. That masked another difficult day for banks however, partly influenced by the Washington Post article that did the rounds suggesting that the Senate GOP tax bill could delay the cut in the corporate tax rate by one year. Later in the day, Treasury Secretary Steven Mnuchin also refused to rule out a possible phase-in of corporate tax cuts. Meanwhile victory for the Democrats in the two Governor races in New Jersey and especially Virginia also appeared to play a factor given the midterm elections next year. It remains to be seen whether that will transpire into taking back votes across the rest of the country but nevertheless it was a statement of intent.
Meanwhile EM tensions continue to bubble under the surface with headlines never too far from the front pages. EM sovereign debt has certainty had a tough time of it in the last week or so but we’re also starting to see some signs of selling pressure in DM HY credit with Crossover and CDX HY 11bps and 7bps wider this week, respectively. All the talk in bond markets at the moment though is the flattening across the Treasury curve. Yesterday saw both the 2s10s and 5s30s curves flatten for the 9th and 10th successive day respectively. The former dropped to 68bps and has now flattened by 16bps during that run. The latter was only modestly flatter at 78bps but is still also 12bps flatter over the same time.
So as we know the Treasury curve is the flattest it’s been in 10 years and there is plenty of ongoing debate as to what is driving the recent price action. Various reasons have been suggested. Our US rates strategists have previously noted that even with a tax plan, overseas investors and pension buying of the long-end is depressing term premium and yields. Another suggestion is that with 2y yields somewhat anchored relative to the Fed’s effective rate and therefore further rate hikes, the long-end is instead being weighed down by long-end Euro rates. Unsurprisingly there is plenty of discussion about how the recent moves are indicating late cycle tendencies. One thing we would note though is that the NY Fed recession model is only showing a 9% probability of a recession in the next 12 months. While that’s up from 3% at the end of last year the overall level is still clearly fairly low based on their model but it’s worth keeping an eye on. Also worth monitoring perhaps is the whether the flattening has had much impact on bank lending when we receive the next Fed Senior Loan Survey. In the last 3 days, US banks have dropped -3.53%, so the sector has certainly materially underperformed.
This morning in Asia, China’s October CPI was slightly above consensus at +1.9% yoy (vs. +1.8% expected) and also up from +1.6% the month prior, while PPI was steady but well above expectations at +6.9% yoy (vs. +6.6% expected). Markets are trading higher in Asia, with the Nikkei powering ahead (+0.58%) to a fresh 25 year high following sound corporate results, while the Hang Seng (+0.52%) and ASX 200 (+0.55%) are also up, but the Kospi is down 0.33%. Last night Bloomberg ran an article suggesting that the White House plans to announce $250bn of business deals with China this week based on comments from Commerce Secretary Wilbur Ross. As we go to print President Trump and China President Xi Jingping are about to hold a joint briefing. This comes after Trump called the trade relationship between the two “very one sided” and the deficit “shockingly high”. Xi said that China is to become more open to foreign investment and that the nation is “unswervingly committed” to opening up.
Moving on. In the UK, PM May’s cabinet has now lost two ministers within one week after the International Development Secretary Priti Patel offered her resignation, shortly after she admitted to holding a series of unauthorised meetings with Israeli officials without the PM’s knowledge and suggested giving British aid money to an Israeli army project. In view of the increased instability around PM May’s government, some suggested this may have knock on impacts on the progress of Brexit talks. Nonetheless, the Irish PM Varadkar has signalled that Brexit talks could have a breakthrough by December, noting that “I’m more optimistic than I was in the weeks before the October Summit”. The current round of Brexit talks will resume today in Brussels.
Following on, BoE policy maker McCafferty has warned that clarity on Brexit will be needed by early next year to better allow businesses to forward plan. He noted businesses “cannot wait until the last minute”, adding that “there’s a point…even when it becomes clear what the final deal will be – whether it’s no deal or some sort of deal – the banks will have to act”. Elsewhere, the BoE’s banking regulator Mr Woods had earlier noted that it was “plausible” the UK could lose up to 75,000 jobs in the banking and insurance sector if it left the EU bloc without a trade deal.
Staying in the UK, according to a network of UK businesses monitored by the BoE, the latest agents’ summary suggest wage growth in 2018 should improve further, now likely to be 2.5%-3.5% yoy growth (up 0.5% from prior readings), in part due to a slow-down in the availability of workers, which in some ways is not too surprising given UK’s unemployment is at a 42 year low. However, while the survey noted modest growth in spending is expected to continue for the coming year, expectations in the following two years were “weaker”.
Across the pond, the Fed’s Harker noted he has “not at this point” seen anything that would push him away from a rate hike in December, which is in line with the consensus view with the odds of rate hike unchanged at 92% (per Bloomberg). Looking ahead, he has “pencilled in three (rate) increases in 2018” but noted that this is somewhat evolving as he “will reassess that as the data comes in”. On potential tax cuts, he noted “we need more specificity as to what those programs would entail”, and that “we have not put any fiscal stimulus” in our forecasts at this stage.
Before we look at the day ahead, a quick recap of the minimal economic data from yesterday. In the US, the weekly MBA mortgage applications was flat (vs. -2.6% previous). Over in Europe, Spain’s September industrial production was above expectations at +0.1% mom (vs. -0.2% expected), leading to annual growth of +3.4% yoy (vs. +3.1% expected). In France, the September trade deficit was broadly in line at -$4.67bln, although there was a $0.3bn positive revision to the prior month’s reading. Elsewhere, the current account balance was lower than expected at -$3.1bn (vs. -$1.5bn expected). This morning in New Zealand, the central bank has the left cash rate on hold at 1.75% and noted that “monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly”. Elsewhere, inflation is now expected to trough at 1.5% yoy in 1Q18 but rebound to 2.1% yoy in 2Q.
Looking at the day ahead, data wise, September Germany trade data along with UK industrial production are due. Elsewhere, US initial jobless claims and wholesale inventories are also due. We’ll also receive the latest EC economic forecasts while the ECB’s Villeroy de Galhau, Coerue, Mersch, Lautenschlaeger and Constancio are due to speak. Brexit talks are due to resume between Barnier and Davis while President Trump holds meetings with China’s Xi and Li Keqiang.