"This Looks More Frightening": Global Stock, Bond Selloff Accelerates Amid Risk-Parity Rumblings

Yesterday's Japan flash-crash inspired selling continues for a second day, with global equities - and bonds - sliding early Friday on concerns U.S. tax reform - and corporate tax cuts - will be delayed after Senate Republicans unveiled a plan that differed significantly from the House of Representatives’ version. After suffering their biggest plunge in 4 months on Thursday, European stocks failed to find a bid along with Asian stocks, while U.S. index futures pointed to a lower open (ES -0.5%, or -10), the Nikkei 225 ended 0.8% lower, Treasuries yields are up 1-4bps across the curve in steepening fashion, with the 10y at 2.370%, while the Bloomberg Dollar Spot Index declined for a third day. The VIX has jumped 6% this morning trading through 11 while WTI crude oil is little changed trading north of $57/bbl.

And here is one for the streak watchers: on Thursday the global MSCI index failed by one day to post its longest winning streak since 2003 as it fell 0.4% following 10 days straight of gains. The MSCI world index gained more than 18% so far this year and some investors believe a pullback is due. “I think there’s a feeling out there that there’s a long awaited correction, and no one wants to be caught by surprise,” said Emmanuel Cau, global equity strategist at JP Morgan.  “When the market is down a bit people tend to extrapolate. But I think it’s simply a bit of profit taking and digesting from a very strong September and October.”

Europe's benchmark Stoxx 600 reversed an early rebound, falling 0.2% on high volume;  It is on track for its worst week in three months, if it falls on Friday , its fourth drop in row. Carmakers and retailers led the index to its biggest two-day drop since August as third-quarter earnings season continues, with aerospace-electronics maker Leonardo SpA crashing 20% after cutting sales forecasts.

In Asia it was more of the same, with stocks declining after a rally that saw them touch a record high less than 48 hours earlier, as shares in Japan extended losses following abrupt swings on Thursday. Asian stocks fell, tracking weakness in U.S. equities after the U.S. Senate released a tax plan that would delay cuts to the corporate rate until 2019, defying President Donald Trump. The MSCI Asia Pacific Index dropped 0.4 percent to 171.18, trimming its weekly advance to 0.8%; The MSCI Asia Pacific ex-Japan index fell 0.3%, while Japan's Nikkei lost 0.8%, slipping off Thursday's 21-year high after a 16% rally in the past two months. The decline was led by Japanese equities, which extended a loss Thursday on the heels of the largest one-day swing in a year. The Asian benchmark gauge has risen for six straight weeks, posting gains in 16 of the past 18 weeks. Thursday’s close was less than half a point from a record.

“Investors are unwinding expectations on Trump’s ambitious tax reform,” Margaret Yang, a Singapore-based strategist at CMC, said by phone. “Delay in tax cuts is the perfect excuse to book profits, but long-term fundamentals remain positive for Asian equities.” While most Asian markets fell, Hong Kong stocks traded higher, and Shanghai’s benchmark index headed for its best week since August, led by brokerages.

Meanwhile, in a move that smacks of a risk-parity deleveraging unwind, instead of dipping - as a risk-haven - 10Y TSY yields rose a third day, and core European bond yields followed suit not to mention the ongoing rout in junk bonds.

Indeed, as the Stoxx 600 dropped, Germany leads the bond market lower, sending 10-year Bund yield to a two-week high. Treasuries decline in tandem with the long-end underperforming and finally steepening the 5s30s curve from the narrowest level in a decade.

The world looks, if anything, more frightening given declines in both bonds and stocks,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, Denmark, said by email. “Higher lows and lower highs following the U.S. presidential election a year ago shows a market in need of a proper spark. So far that spark remains illusive.”

In macro, majors FX pairs were trapped in familiar ranges, while bonds stole the spotlight yet again as yields ticked up steadily across traders’ screens; the Bloomberg Dollar Spot Index attempted a feeble recovery after short-term accounts took profit on shorts, but the gains lacked conviction; the pound flapped about, seeking a decisive direction, ahead of a key Brexit briefing; Treasury 10-year yields were inching closer toward the key 2.40% level. WTI crude was steady above $57 a barrel.

The catalyst for the move was yesterday's tax reform fireworks, where Republican senators said they wanted to slash the corporate tax rate in 2019, later than the House’s proposed schedule of 2018, complicating a push for the biggest overhaul of U.S. tax law since the 1980s. The House was set to vote on its measure next week. But the Senate’s timetable was less clear.

“Things look fluid, including on when the tax cut deal will be reached,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.  “I would say a compromise will be reached ...But if they indeed decide to delay the tax cut by a year, there is likely to be some disappointment.”

In FX, the euro declined 0.1% to 1.1641, while sterling was 0.1% higher  at 1.3162.

In rates, the 10y TSY rose to 2.3753% , while Bund yields, as noted above, climbed to their highest level in over a week as euro zone bonds sold off across the board for a second consecutive day. The yield on Germany’s 10-year bund hit 0.40% for the first time since Oct. 27.

Among commodities, oil prices steadied on expectations of supply cuts by major exporters as well as continuing concern about political developments in Saudi Arabia. A spokesman for Saudi Arabia’s energy ministry said the kingdom planned to cut crude exports by 120,000 barrels per day in December from November. Brent crude was at $64.01 per barrel, close to the 2-year high of $64.65 reached earlier this week. WTI traded at $57.17, also just shy of this week’s more than two-year high of $57.69. Concerns about the stability of Saudi Arabia, sparked after the purge of 11 princes and arrests of dozen other influential figures since last week, are intensifying. Sources told Reuters that Lebanon believes the country’s former prime minister, Saad al-Hariri, was being held in Saudi Arabia, although Saudi Arabia denied reports he was under house arrest. Saudi Arabia accused Beirut earlier this week of declaring war against the kingdom.

Bulletin Headline Summary from Ransquawk

  • Subdued Trade across European equities
  • GBP uncertainty remerges, as Brexit concerns grow
  • Looking ahead, highlights include Uni. Of Michigan and Weekly Baker Hughes Rig Count

Market Snapshot

  • S&P 500 futures down 0.4% to 2,572.70
  • STOXX Europe 600 down 0.3% to 389.09
  • MSCI Asia down 0.4% to 171.18
  • MSCI Asia ex Japan down 0.3% to 559.89
  • Nikkei down 0.8% to 22,681.42
  • Topix down 0.7% to 1,800.44
  • Hang Seng Index down 0.05% to 29,120.92
  • Shanghai Composite up 0.1% to 3,432.67
  • Sensex down 0.3% to 33,160.16
  • Australia S&P/ASX 200 down 0.3% to 6,029.37
  • Kospi down 0.3% to 2,542.95
  • German 10Y yield rose 1.1 bps to 0.386%
  • Euro up 0.04% to $1.1647
  • Italian 10Y yield rose 6.8 bps to 1.55%
  • Spanish 10Y yield fell 0.8 bps to 1.525%
  • Brent futures up 0.4% to $64.20/bbl
  • Gold spot down 0.02% to $1,284.81
  • U.S. Dollar Index up 0.04% to 94.48

Top Overnight News

  • China took a major step toward the long-awaited opening of its financial system, saying it will remove foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers
  • Senate Republicans released their vision for a tax-cut plan Thursday that would cut the corporate tax rate to 20 percent, with a one-year delay to 2019, as Congress moves quickly to fulfill one of the GOP’s biggest and most long-awaited goals
  • President Donald Trump will not meet formally with Russian President Vladimir Putin at an Asia- Pacific summit in Vietnam this week due to a scheduling conflict, the White House said Friday, amid U.S. concerns that the meeting wouldn’t create genuine progress on key issues
  • Alibaba is expected to announce a USD bond mandate next week and price the transaction before Nov. 23, Reuters’s IFR says
  • As U.S. markets swim in sea of red, trading in the largest high-yield exchange-traded funds has skyrocketed to dizzying levels
  • San Francisco Fed President John Williams expects a December hike and three more in 2018 and that U.S. interest rate will return to “a normal level” of about 2.5%, BBC reports;He expects incoming Fed chair Powell to continue “making sure that we have a strong consensus around our policy decisions and strategy”
  • Australia’s central bank used its quarterly statement on monetary policy to flesh out its consistent recent view of accelerating growth and sluggish inflation, suggesting interest rates will stay at a record-low 1.5%
  • Oil heads for best weekly run in a year as political upheaval in Saudi Arabia roils markets
  • China Big Bang Moment Opens Banks, Funds to Foreign Control
  • Pacific Nations Scramble to Save Trade Pact After Trump Exit
  • China Says Foreign Firms Won’t Be Forced to Turn Over Technology
  • StanChart Unit Offers to Buy Stake in Singapore Crane Firm
  • World’s Biggest Wealth Fund Calls for Better FX Market Practices
  • Drahi Takes Back Control of Altice as CEO Quits Amid Debt Woes
  • ECB Warns of Complacency Risks in Surging Euro-Area Economy
  • GOP’s Dueling Tax Overhauls Struggle to Pass a Key Red Ink Test

Asian equities are set to close out the week in the red with risk sentiment dented by US tax doubts. Nikkei 225 (-0.8%) notably underperforms, extending on the losses seen from yesterday’s dramatic swing which had come ahead of the closely watch options settlement price, which settled at 22,531. Toshiba shares fell as much as 8% following reports that they are looking to raise around JPY 600bln worth of capital. ASX 200 (-0.3%) slightly pressured, however the 6000 level has been holding, while the biggest weight has come from mining stocks. Chinese markets pared initial declines following reports that China are to relax the limit on foreign ownership. JGBs are a touch weaker with the curve showing a flattening bias. The long end-outperforming with the 40-yr yield lower by 1.6bps.

Top Asian News

  • Singapore’s Stocks Haven’t Lured This Much Cash in a Decade
  • Noble Group Needs More Funds as Default Risk Persists, S&P Warns
  • Kobe Steel Blames Lax Controls, Focus on Profits for Scandal
  • State Bank of India Surges as Margins, Bad-Loan Ratio Improve
  • Brewer Sabeco to Sell Stake of at Least $2.9 Billion in 2017
  • China Fintech IPO Fever Wanes as Regulators Weigh Crackdown
  • Jewelers Say Haven’t Smiled in the Year Since India Cash Ban

Once again, European equities (Eurostoxx 50 -0.1%) have seen little in the way of noteworthy price action in what has been a week void of substantial European-specific macro events. In terms of sector-wide moves, financial names were granted some modest support at the open in the wake of earnings from Allianz (+1.2%) with material names also higher given the latest trading update from steel heavy-weight ArcelorMittal. To the downside, utility names in the UK have seen some pressure in the wake of reports that Ofgem is to stop gas and electricity suppliers from charging as much as GBP 900 when they forcibly install pre-payment meters in households struggling to pay bills. Bonds have continued to retreat, initially in corrective trade, but then as more sell-stops were triggered on a break of technical support levels. However, some respite amidst dip-buying has helped Bunds and Gilts  recoup losses. 10 year benchmark yields have flirted with sensitive if not particularly key cash markers – UK through 1.25% and up to 1.30%, Germany resisting 0.4%. The overall trend remains bearish and curves are retracing broad flattening patterns in thinner trading conditions.

Top European News

  • Catalan Speaker’s Bail Set as Rajoy Seeks Release of Separatists
  • Germany Could Escape Carbon Hole at Home by Investing Abroad
  • U.K. Industrial Output Jumps, Construction Shrinks in September
  • Richemont Finalizes Management Revamp by Promoting Lambert
  • Telecom Italia Earnings Decline Amid Tough Wireless Competition

In FX, GBP has been a key focus for FX markets once again with a slew of potentially negative Brexit reports overnight, including a potential curve ball from Ireland regarding the Northern Ireland border as well as pressure from UK and European business bodies. It was also reported, that May could up her Brexit bill offer, which would be an increased cost to the UK but potentially a positive step in terms of getting the ball rolling in negotiations. Thereafter, GBP then took the lead from the main UK data releases of the week which saw manufacturing and industrial numbers exceed expectations and sent GBP/USD back into positive territory before later paring a bulk of the move. Elsewhere, AUD remains under pressure after the RBA’s SOMP (Statement On Monetary Policy) saw the central bank cut their inflation outlook, while they also saw underlying inflation not reaching their 2% target until 2019. USD remains steady after seeing a bid early doors which saw the DXY bounce off worse levels ahead of 94.40 (Last week’s low). The RBA's Quarterly Statement On Monetary Policy (SOMP) lowered inflation forecasts, while underlying inflation is not expected to reach 2% until 2019. i) Forecasts CPI at 2% to June 2018, then 2.25% to December 2019. ii) Forecasts GDP 2.5% to December 2017 and 3.25% for December 2018/19. iii) Further rise in AUD would slow pick-up in economic growth and inflation.

In commodities, WTI and Brent crude futures continue to remain firm and are on course to log their fifth straight week of gains, on hopes of supply cuts by major exporters as well as continuing concern about political developments in Saudi Arabia. This morning has also seen comments from the UAE energy minister who stated that he is optimistic about 2018 and does not expect any big challenges against OPEC's decision to extend the output cut deal. Dalian iron ore futures slipped up for a third session overnight amid concerns over a reduction in consumption as Chinese producers slash production over winter. Analysts also note that iron ore prices could drift even lower over the coming months as cuts to steel output and other industrial activity could last until mid-March.

Looking at the day ahead, a fairly quiet end to the week with September industrial production data in France and the flash November University of Michigan consumer sentiment print and October monthly budget statement in the US due. With it being Veterans Day in the US, bond markets will be closed however stock markets remain open. The ECB’s Mersch is slated to make comments while President Trump will take part in the APEC summit

US Event Calendar:

  • 10am: U. of Mich. Sentiment, est. 100.9, prior 100.7; Current Conditions, est. 116.3, prior 116.5; Expectations, est. 91, prior 90.5

DB's Jim Reid concludes the overnight wrap

In a low vol world, yesterday was fascinating and a small shock to the system. Equities, bonds and spreads were all weaker which can happen when everything is expensive but perhaps markets had given up on the short-term possibility of it. Since the ECB’s dovish taper two weeks ago, the general perception was that one of the last chances to see vol in 2017 outside of the US tax plan had gone. As such we’ve seen carry trades get yet another lease of life with the assumption that they’ll be low risk into year end. However this week has seen some flies in the ointment. The US YC had hit the flattest for 10 years, there has been more widespread expectation that US tax reform may get pushed back, the Saudi anti-corruption drive has unsettled some, the oil price rise is starting to influence carry expectations, EMFX has been  weak, a couple of high profile US HY ETFs have fallen to 8-months lows with heavy volumes yesterday, Japanese equities saw a 3.6% swing yesterday (largest for a year) and European bond yields rose unexpectedly.

The Japan swing was the talk of the town yesterday with lots happening late in the session after we went to print. Some suggested it was due to profit taking after a strong run to a 25 year high, others pointed to position adjustments ahead of Friday’s special quotation of some futures and options. This morning in Asia, markets have followed the negative leads from US and are trading lower. The Nikkei is down -0.85%, led by losses from telco and utilities stocks but is trading close to where it opened so no real acceleration of selling has occurred so far. Elsewhere, the Kospi (-0.35%) and ASX 200 (-0.3%) are down slightly while Hang Seng is up 0.11% as we type. Chinese stocks are slightly higher and this morning, China’s Vice Finance minister Zhu has confirmed that foreign firms will be allowed to own controlling stakes (up to 51%) in local Chinese securities joint ventures. This is another step towards liberalisation of the economy.

Before all this late in the US session last night, the Senate has released their version of the draft tax bill which does not stray too much from prior press reports but is still quite different to the House’s bill. In the details, the plans
included: i) corporate tax cuts to 20% delayed by one year (vs. Jan. 2018 as per the House’s tax bill), ii) existing mortgage interest deduction for home purchases up to $1m will be retained (vs. a cut to $0.5m) , iii) state and local tax deductions for individuals will be entirely repealed (vs. mostly repealed), iv) seven individual tax brackets will be retained with the top tax bracket reduced 0.9ppt to 38.5% (vs. consolidate to 4 tax brackets and unchanged top tax rate of 39.6%), while v) the standard deductions for individuals ($12k and $24k couples) are the same. Elsewhere, in the mark up of the House tax bill, the House Ways Committee is reportedly considering lifting the one-time tax rate on US companies’ accumulated offshore earnings, from 12% to 14% if the income was held as cash (vs. 10% as per the Senate tax plan). Looking ahead, the two versions of the tax bill will be further debated, negotiated and then somehow reconciled before final voting, which was expected to be before Thanksgivings (23 November). The market is having a lot of doubts about this timetable.

Over in government bonds, UST 10y yields rose modestly (+0.7bp) yesterday before moving slightly higher this morning after the Senate tax plans were formally released. However, European bonds experienced a mini-sell off from nowhere yesterday with core 10y yields up 4-5bp (Bunds +5bp; OATs +5.3bp; Gilts +3.7bp) – the biggest moves in three weeks. Peripherals also rose 4-7bp, led by Italian bonds. We are scratching our heads a little on this, perhaps it was driven by a combination of the following; marginally higher inflation forecasts by the European Commission, more hawkish ECB talk and profit taking after the stronger bonds performance post the October ECB meeting.

Following on from this, the European Commission raised its GDP and inflation forecasts for the Euro area yesterday. GDP growth in 2017 is now expected to be the highest in a decade at 2.2% (+0.5ppt) and 2.1% (+0.3ppt) in  2018, with Germany and Spain expected to perform strongly, while forecasts for the UK have been lowered to 1.3% next year (vs. DB estimate of 1%). Elsewhere, the inflation forecasts for 2018 was marginally increased (+0.1ppt) to 1.4% in 2018 and 1.6% in 2019. The Bank of France Governor Villeroy noted “Euro area growth will be sustained in the next two years thanks to strong investment and thanks to increased convergence among countries”.

Moving onto central bankers’ commentaries. ECB’s Governing council member Lane sounded a bit hawkish, noting “there are some signs that inflation is snapping back” and that “inflation does not have to reach our goal before we discuss changing our policy”. Further “if we have enough signals, we can get active and move on” as “our monetary policy does not always have to follow such a gradual and incremental approach”. On QE tapering, he noted that as we approach the time when net bond purchases end, we will “develop a clearer communication strategy on what ECB means by well past” in its guidance on interest rates.

Elsewhere, commentary by others on the economy were fairly upbeat too. ECB’s executive board member Coeure noted “we’re now at a stage in the economic cycle where the recovery is strong….in terms of robustness and balance….probably (the strongest) in almost 20 years”. The ECB VP Constancio also noted ‘we’re encouraged by the way the economy continues to grow” and that “all the new indicators…mostly so far…indicate that growth could be indeed stronger”. On QE, he noted we should not expect “very dramatic change or development” on CSPP size in any case.

Moving to geopolitics, the official Saudi Press Agency has advised its nationals to leave Lebanon due to the “situation” without elaborating more. With the ongoing tensions regarding Iran and Saudi’s own internal anti-corruption drive heating up, we watch and see how this situation will evolve.

Now recapping the rest of market performance from yesterday. US bourses pared back early losses to close modestly weaker, in part following the Senate tax plan. The S&P traded down around -1% intraday before ending the day -0.38%. The Dow (-0.43%) and Nasdaq (-0.58%) also fell modestly. Within the S&P, losses were led by the industrials (-1.28%) and materials sector, with partial offset from energy and telco stocks. European market were all lower, with the Stoxx 600 (-1.11%) and DAX (-1.49%) down the most since 21st July, with losses driven by industrials and tech stocks. The FTSE was actually the relative outperformer, only down 0.61%. After five consecutive days of <10, the VIX jumped 7% to 10.50. Away from the markets the ECB’s head of banking supervision Ms Nouy signaled a willingness to adjust plans which could have led to higher provisions for existing non-performing loans. She noted “it is a consultation (process) and everything can be changed if we are convinced we have done something not as adequate as it should have been”. Her reassuring comments partly boosted some Italian banks, with BPER Banca SpA share price up c10% (vs. FTSE MIB -0.8%).

Over to Brexit, the current round of talks remain at a stalemate. However, the FT has reported that the UK side may be working on different scenarios to “considerably increase” the divorce settlement bill from the current EUR20bn offer (vs. EU’s reported demand of EUR60bn) with the possibility that a revised financial pledge will be tied to an agreement in principle on a transitional deal that may be announced in the December summit. Elsewhere, Brexit Secretary Davis will propose an amendment in Parliament next week, making “crystal clear” that Brexit will take place at 11pm GMT on 29 March 2019.

Back to Catalonia, the El Pais newspaper noted that Spain’s Supreme Court may take over the case and free the Catalan officials who face up to 30 years in jail for charges of sedition. Elsewhere, Bloomberg suggested that sources close to PM Rajoy noted the PM wants ousted Catalan President Puidgemont to be released if he returns to Spain and participate in the 21 December election, in part as he is confident that the pro-independence side will not secured enough votes for a majority win.

Finally, in the APEC summit at Vietnam, the 11 nations have yet to decide how to salvage the TPP (Trans-Pacific Partnership) trade deal after President Trump withdrew the US from it last year. The Australian trade minister Mr Ciobo is “hopeful of securing a deal” in the next two days, but the Canadian counter party noted “it’s far more important to get the right deal than a fast deal”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the final reading of the September wholesale trade was unrevised at 0.3% mom. The wholesale sales rose 1.3% mom in  September, which meant the inventory-shipments ratio fell to 1.27 - the lowest level since December 2014. Elsewhere, the weekly initial jobless claims (239k vs. 232k expected) and continuing claims (1,901k vs. 1,885k expected) were broadly in line.

In Europe, Germany’s September trade surplus was above expectations at $24.1bln (vs. $22.3bln). Both exports (7.7% yoy) and imports (7.5% yoy) were well up on a year earlier. In France, the industrial sentiment for October was slightly higher at 106 (vs. 105 expected) – a fresh six year high. In the UK the RICS housing survey weakened in October, with just net 1% of surveyors reporting rising prices and a net 11% of surveyors expecting price declines over the next three months.

Looking at the day ahead, a fairly quiet end to the week with September industrial production data in France and the flash November University of Michigan consumer sentiment print and October monthly budget statement in the US due. With it being Veterans Day in the US, bond markets will be closed however stock markets remain open. The ECB’s Mersch is slated to make comments while President Trump will take part in the APEC summit.