U.S. index futures declined for the second day in a row, dipping 0.1% to the lowest in more than a week following declines in Asian and European shares. European stocks tried and failed to shrug off the negative sentiment that spurred broad-based declines in Asia following another month of disappointing Chinese macro data...
... eventually reversing gains as the euro strengthened on German growth data. The euro was up a fifth day, rising above 1.1700 for the first time in nearly three weeks after data showed that German GDP was on track for its best year since 2011, forcing Europe's Stoxx 600 Index to retreat. The U.K.’s FTSE 100 Index jumped 0.1 percent, while Germany’s DAX Index gained less than 0.05%.
Mining companies led the drop, with many commodity prices also falling in the wake of data showing China’s economy moderating. That also weighed on Asian equity gauges, though the Nikkei closed little changed after dropping for four days. The yield on China’s 10-year debt briefly breached 4 percent for the first time in more than three years. China’s CSI300 Index slid as much as 1%, its biggest intraday drop this month, as tech shares lead decline. Sanan Optoelectronics Co. slumps 7% to pace declines on the CSI300 Index; Unigroup Guoxin Co. -5.2% as second-worst performer.
Earlier, Asian stocks dropped headed for a third day of declines, as data showed China’s economy is moderating. The MSCI Asia Pacific Index retreated 0.4 percent to 169.44, with telcos and energy producers leading losses. Despite earlyer gains, the Nikkei closed fractionally in the red again as foreigners resumed selling after a record month of buying in October. The Yen pared losses against the dollar, as traders wait on U.S. inflation data from Tuesday and look for progress on the tax reforms. Japan’s Topix dropped 0.3% while South Korea’s Kospi lost 0.2%. Australia’s benchmark index slumped 0.9% after Royal Dutch Shell Plc sold its entire stake in Woodside Petroleum Ltd., sending the latter’s shares down the most in more than a year.
According to Bloomberg, Asian equities were taking a pause from a world-leading 2017 rally as traders tuned in to China’s economic data. Numbers released Tuesday show the country’s expansion dialed back a notch as factory output, investment and retail sales all decelerated.
"Investors have concerns about a possible fourth-quarter slowdown in China," said Ronald Wan, chief executive at Partners Capital International in Hong Kong. MSCI Inc. announced the results of its November 2017 semi-annual index review which included the deletion of Qantas Airways Ltd. and the addition of Japan’s Sumco Corp.
Markets have been under pressure for the past few days after a global rally took U.S. stocks to records and Japan’s to the highest in a quarter century. This morning market participants were monitoring an ECB conference featuring appearances by Mario Draghi, Janet Yellen, Mark Carney and Haruhiko Kuroda. Meanwhile, U.S. inflation and retail sales numbers that could influence Federal Reserve interest-rate hike odds are on the docket tomorrow, and U.S. tax discussions are ongoing. Fed's Kaplan stated that the Fed are actively discussing lifting rates next month
Elsewhere, and as reported earlier, Venezuela was declared in default by S&P Global Ratings after missing two interest payments on its debt. Indian sovereign bonds fell for a third day, with the benchmark 10-year yield reaching the highest since September 2016, on accelerating consumer inflation data. Bitcoin edged higher after three days falling.
The common currency heads for a bullish reversal of its trend since the 2 1/2 year high of 1.2092 hit on Sept. 8 as the short- squeeze started on Thursday gained momentum. Investors that are short the euro see their trailing stops being filled, while short-term accounts were stopped out on Tuesday’s run up to 1.1720 high, traders in London and Europe told Bloomberg.
“It is not the dollar that is weak, it is the euro that is strong,” said John Hardy, Saxo Bank’s head of FX strategy. Combined with signs of a move up again in European bond yields, that suggested some traders were back to pricing in an end to the ECB’s stimulus, he said.
In geopolitical developments, overnight President Trump tweets: "After my tour of Asia, all Countries dealing with us on TRADE know that the rules have changed. The United States has to be treated fairly and in a reciprocal fashion. The massive TRADE deficits must go down quickly!" Russian PM Medvedev says Russia has stake in peace on Korean Peninsula, as South Korean President Moon calls for enhanced 'strategic' dialogue between South Korea & Russia. US House Ways & Means chair Brady says that the GOP leadership is confident that it has votes for passage of tax bill, major changes to house tax bill are unlikely at committee stage.
In macro, German growth data pressured investors with short-euro exposure as the common currency hit its strongest level in almost three weeks. The dollar was broadly lower within tight ranges during Asia hours before the weakness grew in the London session. The British pound was tipped lower as inflation missed forecasts, and the dollar broke out of a tight range to weaken as traders continue to weigh the chances of a meaningful tax overhaul. Data from the CFTC released on Monday showed the net short position in the Japanese yen to be the largest since January 2014 and in the Swiss franc to the biggest since December 2016.
In rates, yields on 2Y Treasurys hit a fresh nine-year high of 1.6910% on Monday, shrinking the 2s-10s spread to near its smallest since 2007. The trend reflects market bets the Fed’s plans to raise rates in December and two or three times next year will slow the economy. On Tuesday, European bonds turned positive. Aussie bonds were hurt after business conditions printed at highest on record, while China’s sovereign bond selloff reached a fresh milestone, with 10-year yields breaching 4% for the first time in more than three years, before retracing losses and closing back under 4%.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said history suggested a flatter, and particularly an inverted, yield curve was “compelling as an early warning sign” of recession. But with the average amount of time it has taken the curve to go from flat to inverted being 18 months and another 18 months to go from inverted to recession, it suggests the expansion still has multiple years in it, said Porcelli.
In commodity markets, gold inched down to $1,272.50 an ounce. The metal has stayed broadly within $15 an ounce of its 100-day moving average, currently at $1,277 an ounce, for most of the last month. Oil prices held in a tight range as support from Middle East tensions and record long bets by fund managers balanced rising U.S. production. U.S. crude was off 19 cents at $56.57, while Brent crude futures eased 23 cents to $62.92 a barrel.
Mining shares lead the drop amid weakness in commodity prices. Economic data include small business optimism index and PPI readings, while Home Depot and TJX are set to report earnings.
Bulletin Headline Summary from RanSquawk
- Lower than expected UK CPI weighs on GBP
- EUR bid following German GDP
- Looking ahead, Draghi, Yellen, Carney, Kuroda all currently speak, with US PPI and APIs due later
- S&P 500 futures down 0.1% to 2,579
- STOXX Europe 600 down 0.08% to 385.82
- MSCI Asia down 0.4% to 169.53
- MSCI Asia ex Japan down 0.3% to 556.72
- Nikkei unchanged at 22,380.01
- Topix down 0.3% to 1,778.87
- Hang Seng Index down 0.1% to 29,152.12
- Shanghai Composite down 0.5% to 3,429.55
- Sensex down 0.2% to 32,964.82
- Australia S&P/ASX 200 down 0.9% to 5,968.75
- Kospi down 0.2% to 2,526.64
- German 10Y yield fell 0.2 bps to 0.415%
- Euro up 0.3% to $1.1706
- Italian 10Y yield fell 1.2 bps to 1.568%
- Spanish 10Y yield fell 2.7 bps to 1.505%
- Brent Futures down 0.3% to $63.00/bbl
- Gold spot down 0.4% to $1,273.54
- U.S. Dollar Index down 0.1% to 94.39
Top Headline News
- Brexit Secretary David Davis reckons it’s as close as 50-50 whether he gets a breakthrough in divorce talks by December, according to European business leaders he briefed at a meeting Monday. His spokesman later said this news was “categorically untrue” and that Davis had not made such a comment
- Trump is seeking a qualified candidate to serve as Federal Reserve chairman nominee Jerome Powell’s vice-chair; candidate doesn’t necessarily have to be Ph.D. economist
- Trump said he will be making a major statement once back in Washington
- U.K. inflation came in less than forecast as cheaper auto fuel offset the rising cost of fuel, but the measure still held close to a 5 1/2-year high
- German growth steamed ahead in the third quarter, keeping Europe’s largest economy on track for its best year since 2011. That expansion is bolstering the euro area’s upturn and supporting the global outlook. Similar data from Italy showed the economy expanded at a faster pace last quarter
- Traders are increasing bets on the divergence of the world’s three major central banks, ramping up long future positions on German bunds and Japanese debt while shorting Treasuries, if open interest is any guide
- China’s economic expansion dialed back a notch in October, as a campaign to manage credit risks took hold and the Communist Party signaled a less stringent approach to hitting growth targets
- Fed’s Kaplan: Actively considering a December rate hike; there’s a mounting case for moving ahead of signs of price increases: FT
- Brady says confident House Republicans have votes to pass tax bill
- German 3Q GDP q/q: 0.8% vs 0.6% est; y/y 2.8% vs 2.3% est.
- U.K. Oct. CPI y/y: 3.0% vs 3.1% est; food inflation largest upside contributor +4.2% y/y, most in 4 years
- German Nov. ZEW expectations: 18.7 vs 19.5 est; current situation 88.8 vs 88.0 est.
In Asian markets, Australia's ASX 200 fell over 1% at one point settling back below 6,000, with broad based losses apparent as the banks, miners, energy and property stocks weighed, while tech outperformed. The index has moved back from worst levels but closed around 0.9% lower as yet another dual-citizenship based issue led to a senator resigning from her post. Japanese stocks benefitted from Wall St.’s lead and the uptick in USDJPY in early trading, but relinquished its the early gains closing down 0.1%. JGB futures were supported heading in to 5Y supply, with decent demand at the auction underpinning the market. Australian 3-year bond yields were up just shy of 5bps on the day, moving through the 2.0% level following the record NAB Business Conditions print. 10-year Treasury futures consolidated around US session lows.
- China Industrial Production (Y/Y) Oct 6.2% Exp. 6.3% Prev 6.6%
- China Retail Sales (Y/Y) Oct 10.3% Exp. 10.4% Prev 10.3%
- China Fixed Asset Investment (YtD Y/Y) Oct 7.3% Exp. 7.4% Prev 7.5%
China's NBS suggested that rising profits and government cost cutting measures are helping firms de-leverage. The body also noted that property de-stocking has achieved obvious results, and it expects the sector to maintain a healthy trend. Finally the bureau stated that the nation’s survey based jobless rate is <5% in October, and that the country has already exceeded its FY job creation total.
Top Asian News
- China 10-Year Yield Breaks 4% as Analysts See Selloff Worsening
- China’s Economy Moderates as Retail, Factories, Investment Slow
- Reliance Communications Is Said to Default on 2020 Dollar Bond
- China Stocks Retreat as Consumer Subgauge Falls Most Since April
- Hon Hai Third Quarter Net Income Misses Lowest Estimate
European equities trade subdued, with much of the volatility coming from individual names. Telecoms outperform amid a strong report from UK listed Vodafone (+4.7%), with IT also trading in the green, being led by Infineon. The Dax was weighed upon following a bullish EUR, where EUR/USD and EUR/GBP trade near session highs. No shock to see Gilts and the Short Sterling strip rebound on the back of softer than expected UK headline inflation, even though the y/y rate remains likely to breach the upper limit at some stage, and probably soon. The 10 year debt future has now jumped around ¼ pt from fresh pre-data session lows of 124.25 to 124.53, while 3 month futures are 0.5-2 ticks ahead vs -0.5 to -4 ticks at worst. Bunds also recovering more poise on the back of their UK bond counterpart and up through the nearest upside chart resistance to 162.16, +8 ticks vs -17 ticks at the Eurex low, but probably in need of some independent buying momentum to make a clean break, especially with more Eurozone data and ECB speakers (including chief Draghi) looming.
Top European News
- U.K. Inflation Holds at 3% as Cheaper Fuel Offsets Food Prices
- Vodafone Boosts Outlook as Data-Hungry Users Ditch Wi- Fi
- Ericsson Cost-Cutting Plan Ends at R&D Department’s Doorstep
- Carrefour CEO Delays Strategic Revamp Until After Christmas
- Portugal’s Fitch Call a Potential ‘Rubicon’ Moment: Rabobank
- Italy Economy Expands At Faster Pace in Sign of Firmer Recovery
In FX, volatility has been led by data this European morning, as early EUR strength was seen following strong German GDP figures. Further bullish pressure was seen in EUR/GBP, as UK CPI has been the catalyst of the day, printing at 3.00%, lower than expected resulting in GBP selling. In the AUD, choppy trade, with support coming from an upbeat NAB business survey overnight (sentiment at record highs and outlook improved), but the AUD recovery undermined my more political concerns as another MP was forced to quit on dual nationality grounds. AUD/USD back down in the low 0.7600s having reclaimed 0.7640 at one stage, but AUD/NZD holding 1.1100+ status on Kiwi underperformance (also plagued by political and Central Bank impulses). Sterling mixed after yesterday’s pounding, with Cable back up above 1.3100, but EUR/GBP higher again as Brexit uncertainty persists (UK Minister rates chances of a divorce deal by December as only evens).
In commodities, the latest IEA monthly oil market report saw 2017 and 2018 oil demand growth forecast being cut by 100k BPD to 1.5mln and 1.3mln respectively. Trade was light however, with much of the oil volatility seen in yesterday’s session. Iraqi/Kurd oil flows to Ceyhan have fallen to 180k bpd, according to a port agent Gold saw a stop hunt through last Friday’s lows and as such, the selling pressure moved across other precious metal markets, with Silver now looking towards its last Friday lows.
US Event Calendar
- 6am: NFIB Small Business Optimism, est. 104, prior 103
- 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.4%; Ex Food and Energy MoM, est. 0.2%, prior 0.4%; PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2%
- 8:30am: PPI Final Demand YoY, est. 2.4%, prior 2.6%; Ex Food and Energy YoY, est. 2.2%, prior 2.2%; Ex Food, Energy, Trade YoY, prior 2.1%
DB's Jim Reid concludes the overnight wrap
After a chilly day yesterday, markets heat up today and tomorrow with China's monthly data dump just out (see below) and lots of global inflation data out today and tomorrow. We also have an audience with the four most important central bankers in the world at 10am GMT this morning hosted by the ECB in Frankfurt which will be a rare and interesting opportunity to hear from the fantastic four on one stage. However it's not likely to be ground breaking given that Yellen is soon to be replaced, Draghi is figuratively leaning back deep into his armchair for a few months, Kuroda is unlikely to change course soon (see comments from yesterday below) and Carney is waiting on Brexit developments. Elsewhere UK PM May’s Brexit legalisation (the EU withdrawal bill) is the subject of two days of line-by-line examination in Commons. The debate starts at 12pm GMT so plenty of headlines likely after a weak day yesterday for Sterling (-0.61% vs Dollar, -0.57% vs Euro) post the weekend news that there may be increasing party support for a leadership challenge. In terms of inflation data, ahead of the US CPI tomorrow we get the final October CPI report in Germany (+0.0% mom expected and no change from flash), UK CPI/RPI/PPI for October, and US PPI (+0.2% mom core expected). UK inflation being the most interesting with RPI likely above 4% - the first time since December 2011. We will also get the flash 3Q GDP for the Eurozone (+2.5% yoy expected), Germany (+2.3% yoy) and Italy (+1.7% yoy) too.
In the US, the House Ways and Means Chairman Brady appear confident that the House’s version of the tax bill will be passed this week, noting that “we don’t expect major changes” as “a lot of the work’s been done” already. Before that, President Trump is expected to address the full conference of House Republicans this Thursday morning to rally support on tax reform. Elsewhere, the Senate Finance Chairman Hatch said the mark up process of the Senate’s version of the tax bill “leaves us with some work to do in order to make the reforms permanent”, but “we are working to ensure that the reduced (corporate) rates and…reforms designed to bring investments back to the US…remain in place past the 10 year budget window”.
Now over to China. Both the October IP (6.2% yoy vs. 6.3% expected) and retail sales (10% yoy vs. 10.5% expected) were softer than expectations, but fixed assets formation was in line at 7.3% yoy. Elsewhere, monthly property sales turned negative for the first time since March 2015, dropping to -1.7% yoy from 1.6%. The slower growth is partly due to monetary and fiscal policies that have become less expansionary. Overall, our China economists maintain their view that GDP growth will slow to 6.6% yoy in Q4 and 6.3% in Q1. T his morning in Asia, markets are trading a bit mixed. The Nikkei (+0.36%) and Hang Seng (+0.05%) are up slightly, while the Kospi (-0.24%) and Chinese bourses (c-0.6%) are down as we type, with the latter partly impacted by softer consumer stocks.
Ahead of the fantastic four appearance later today, BOJ’s Kuroda and ECB’s Constancio both sounded a bit dovish on monetary policy yesterday. Kuroda noted that “it’s not easy to quickly dispel the deflationary mindset that has formed over the course of 15 years of deflation” (Sep. core inflation at 0.7% yoy vs. target of 2%). However, with a steadily improving output gap, companies should gradually raise wages and prices. For now, “the bank will continue to persist with powerful monetary easing to ensure that such positive developments are not cut short.” Elsewhere, the ECB’s Constancio reiterated that “the euroarea economy is experiencing a broad-base, robust and resilient recovery”, although he cautioned that “we know this process still relies significantly on our monetary policy support…..it’s not self-sustained yet….we must be patient and persistent”.
Staying with central bankers commentaries, the Fed’s Harker has tweaked his expectations for a December rate hike from pencilled in to “lightly pencilled in” and that he would be more confident with three more rate hikes in 2018 if underlying inflation picks up above 2%. On inflation, he reiterated that its “one area that not only continues to elicit caution, it even constitutes a conundrum”, but with a tight labour market, inflation “is likely to reassert itself at some point”. On the Fed’s balance sheet unwind, he believes it will be “utterly uninteresting”. In the UK, the BOE’s Haldane noted that inflation is running well above the 2% target (consensus expects 3.1% yoy for Oct.) and “are expected to remain above target for the next few years”. Further, he noted this was one of the main reason why BOE tightened rates last month, but that “small adjustments” to interest rates were “unlikely to have a significant impact” on the daily lives of most people.
Staying in the UK, when Brexit Secretary Davis was asked by the Head of BusinessEurope Ms Marcegaglia on whether he thought a breakthrough for Brexit talks can be achieved by December, Davis was said to have noted that “there was a 50/50 chance of getting a deal” without elaborating more.
Now onto markets performance for yesterday. US bourses nudged up c0.1% (S&P & Nasdaq +0.10%, Dow +0.07%) ahead of a bumper week in terms of CPI and tax plans. Beneath the surface, GE shares dropped 7.17% after the new CEO announced turnaround plans which included lower FY18 earnings guidance, dividend cuts for the second time since 1938 and plans to divest $20bln of assets to shrink the group to 3 core business lines (power, aviation and healthcare). European markets were broadly lower, with the Stoxx 600 down (-0.66%) for the fifth consecutive day – the longest run since May, with all sectors excluding consumer staples modestly in the red. The softness was partly impacted by weaker corporate results, with French utility company EDF down 10.39% after lowering its 2018 guidance. Across the region, the DAX (-0.40%), CAC (-0.73%) and FTSE (-0.24%) all fell modestly. Notably, the VSTOXX remains close to a one month high after slipping 0.49% yesterday, while the VIX rose 1.86% to 11.50.
Over in government bonds, core 10y bond yields were little changed (UST +0.7bp; Bunds +0.6bp; Gilts -1.3bp), but peripherals outperformed, with Spanish and Portugal yields down 4.0bp and 7.1bp respectively. Turning to currencies, the US dollar index gained 0.13% while Euro was virtually flat and Sterling weakened 0.61% as mentioned earlier. In commodities, WTI oil was broadly flat (+0.04%) and precious metals strengthened (Gold +0.25%; Silver 1.02%) post the modest risk off bias. Elsewhere, copper gained 1.40% partly due to increased optimism on global demand while other base metals were little changed (Zinc +0.08%; Aluminium +0.06%).
Away from the markets, the latest IMF World economic outlook report has upgraded the economic growth outlook for the Euro area, with 2017 now expected to be 2.1% yoy (+0.5ppt from April), 2018 at 1.9% (+0.3ppt) and 2019 at 1.7% (+0.1ppt). The agency noted “the strengthening domestic-demand-driven recovery in Europe has boosted global trade,” and that “Europe’s contribution to the growth of global merchandise imports in 2016-17 is similar to that of China and the US combined”.
Finally, the latest ECB holdings were released yesterday. Net CSPP purchases last week was €1.73bn and Net PSPP purchases €12.78bn. This left the CSPP/ PSPP ratio at 13.6% last week (13.6% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). We still think the ECB will likely keep CSPP relatively unscathed when they halve their APP in January.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the October monthly budget statement was bigger than expected at -$63.2bln (vs. -$59.0bln). Over the past three months federal receipts are little changed yoy, weighed down perhaps by storm-related weakness in August and September. In the UK, the November Rightmove house price index was up 1.8% yoy (vs. 1.4% expected), but prices in London fell 2.4% yoy. In Spain, the number of home sales rose 11.0% yoy in September.
Looking at the day ahead, a packed 24 hours from start to finish. The data highlights will likely be the final revisions to October CPI reports in Germany and the UK, Q3 GDP for the Euro area (second reading), US PPI for October and the late evening release of Q3 GDP in Japan. Away from the data the ECB’s Draghi, Fed’s Yellen, BoE’s Carney and BoJ’s Kuroda are all scheduled to participate on a policy panel hosted by the ECB. Also scheduled to speak throughout the day are the Fed’s Bullard, Evans and Bostic and the ECB’s Coeure and de Galhau. If that wasn’t enough then politics will also get its fair share of attention with President Trump due to attend the East Asia Summit and UK PM Theresa May’s Brexit legislation the subject of two days of examination in the House of Commons.