S&P Futures Hit Record High As European Euphoria Takes Over Forgotten China Rout

Yesterday's China stock market rout, in which the Shanghai Composite tumbled the most since June 2016 to three month lows, and which prompted traders to question the dedication of Beijing's plunge protection team, appears to have been forgotten, with the Composite closing unchanged on Friday after some early session weakness, as Chinese yields declined broadly across the board from 3 years highs. As a result, world stocks hovered just below record highs, and set to reverse two straight weeks of losses, and with Asian markets mostly in the green, as MSCI's Asia-Pacific ex Japan index rose 0.2%, the optimism spread to Europe where Germany's IFO Business Climate hit a new record high...

... and now points to a Y/Y GDP growth of 4%.

It is worth keeping in mind that while European business optimism has never been higher, 90% of the responses to the survey were submitted before Angela Merkel’s coalition talks collapsed. Still, the IFO print was in line with the latest November Markit PMIs, which also printed strong and beat consensus, with Eurozone’s flash composite PMI rising to a 6.5 year high (57.5 vs. 56 expected) and is at a level that is broadly consistent with 3.5% yoy GDP growth, which Deutsche Bank called "a stunning figure for the continent." In addition to the strong IFO data, there was more good news out of Germany where the SPD is now reportedly ready to negotiate with Merkel to form a government and end the political deadlock. In response to these two developments, the EURUSD rose to the highest level since October 13...


... and despite the strong currency European stocks which were in the red in early trading, turned positive, helped to an extent by news Asia would slash import tarfiffs in a boost for consumer goods companies, benefiting European exporters. The Stoxx Europe 600 advanced, also thanks to bank shares as Italian lenders were buoyed by a new proposal to deal with bad loans.

“It’s a bit of a Goldilocks situation (for economic growth). It is finely balanced and I think the European Central Bank has very much hinted at that in its actions, but at the moment I can’t really see how this is going to be up-ended,” said Ken Odeluga, market analyst at City Index.

Ironically, as Germany's crisis appeared to easing, a new crisis emerged in Ireland, whose bond yields climbed to a 10-day high. The standoff over the Irish deputy leader may lead to an early election at a time when the government has to make key decisions on the Brexit process.

Finally, with the US coming back from Thanksgiving holiday for a half-trading Friday, S&P futures are up 6 points, in fresh record territory, with early optimism among merchants expected to benefit from strong Black Friday sales.

In FX, the US dollar remained under pressure after the minutes from the U.S. Federal Reserve’s latest policy meeting highlighted concerns over persistently low inflation, pushing the DXY 0.2% lower. The Bloomberg Dollar Spot Index headed for its third week of losses, the longest losing streak since July, and is down 1.6% this month.

While a drop in Treasuries supported the gauge initially, gains were capped by a rally in cable and demand for the yen after London open, although post-Thanksgiving volumes remained subdued. In Europe, bonds slipped as equities were mixed and crude oil rose. Indeed, as Bloomberg writes, a rebound in Treasury yields wasn’t enough for the dollar to sustain early gains as the London session started off with decent demand for the euro and the pound amid modest post-Thanksgiving flows. Downside Dollar risks prevail on the charts, with momentum driven by the dovish tone from Federal Reserve Chair Janet Yellen earlier in the week amid lack of progress on U.S. tax reform.

Meanwhile, "euro bulls added longs in the spot market, according to traders in Europe and London, albeit in low volumes, with some desks understaffed on Friday" Bloomberg added.  As we discussed earlier, the common currency rose to its strongest level in six weeks, with hedge funds and interbank accounts leading the move higher. The latter look more confident on euro gains after the latest European Central Bank account showed that a pickup in inflation isn’t a prerequisite for policy makers to end monetary stimulus.

The South African rand heavily underperforms as S&P and Moody’s are due to reassess South Africa sovereign rating and potentially cut further.

In commodities, crude futures hit a two-year high on the shutdown of Keystone pipeline, a major crude pipeline from Canada to the United States. WTI crude futures were up 0.9% at $58.53 a barrel from their last settlement. Brent was flattish at $63.46, down 0.1% on the day. In a sign of a tightening market, both crude benchmarks are in backwardation, making it unattractive for traders to store oil for later sale.

Iron ore climbed to a two-month high, while industrial metals headed for the best weekly gain in six. Crude oil surged as OPEC and Russia were said to have agreed on a framework to extend supply cuts.

Expected economic data include November PMIs. Canada’s Valener is reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,597.25
  • STOXX Europe 600 up 0.2% to 387.68
  • MSCI Asia up 0.1% to 173.08
  • MSCI Asia ex Japan up 0.2% to 568.34
  • Nikkei up 0.1% to 22,550.85
  • Topix up 0.2% to 1,780.56
  • Hang Seng Index up 0.5% to 29,866.32
  • Shanghai Composite up 0.06% to 3,353.82
  • Sensex up 0.3% to 33,682.74
  • Australia S&P/ASX 200 down 0.06% to 5,982.55
  • Kospi up 0.3% to 2,544.33
  • German 10Y yield rose 2.3 bps to 0.37%
  • Euro up 0.1% to $1.1864
  • Italian 10Y yield rose 1.9 bps to 1.518%
  • Spanish 10Y yield rose 1.8 bps to 1.481%
  • Brent futures down 0.1% to $63.62/bbl
  • Gold spot down 0.1% to $1,290.27
  • U.S. Dollar Index down 0.1% to 93.10

Top Overnight News

  • Former national security adviser Michael Flynn’s lawyers have notified President Trump’s legal team in recent days they can no longer discuss special counsel’s investigation, NYT reports, adding it’s an indication that Flynn is cooperating with prosecutors or negotiating such a deal
  • China said it will further cut import taxes for a wide range of consumer goods in a bid to boost consumption
  • Germany’s biggest opposition party said it’s open to talks on backing a government led by Chancellor Angela Merkel. The move came after the Green party urged Merkel to forge a coalition with the SPD, while ruling out further attempts to gain a place in any alliance.
  • German Ifo business confidence rose to a record high of 117.5 in November vs estimate of 116.7 and 116.8 in October
  • BOE official Silvana Tenreyro said two more rate increases will probably be needed to get inflation back to target, but Brexit will be the real determinant of where policy goes next
  • The U.K. financial services regulator confirmed all 20 banks have agreed to support the London interbank offered rate until 2021 and will work toward developing an alternative benchmark
  • ECB executive board member Benoit Coeure said ECB deposit rate will stay at minus 0.4% for a long time
  • U.K. consumer confidence tumbled to 106.6 in November, the lowest level since the aftermath of the Brexit vote, according to a poll by YouGov and the Centre for Economics and Business Research
  • Ireland's deputy PM is pressured to resign by opposition due to historical conduct; potential for fresh elections as PM support for deputy leads to standoff
  • In a Thanksgiving address to troops, Trump credited his policies for allowing progress in Afghanistan and against Islamic State, and warned about sending sophisticated weapons to American allies that one day could become the enemy.
  • U.K. Prime Minister Theresa May will meet European Union President Donald Tusk Friday as the country seeks guarantees that the bloc will allow stalled Brexit talks to make progress in exchange for new assurances over money.
  • Dalian Exchange cuts trading fees for some iron ore futures contracts
  • Noble Group Risks Equity Wipeout as Shares Retreat Yet Again
  • Credit Suisse-Backed WeLab Is Said to Plan $500 Million IPO
  • Temer Said to Agree on Brazil Pension Vote With House Chief

Asia equity markets traded higher albeit with an indecisive tone as markets lacked impetus with US away from market and mainland Chinese markets reeling from yesterday’ s late sell-off. ASX 200 (-0.1%) and Nikkei 225 (+0.1%) were negative at the open with the latter dampened by a firmer currency on return from holiday, while Mitsubishi Materials underperformed as its shares dropped nearly 10% after the Co. disclosed it had falsified product data. However, Japanese stocks then reversed losses in late trade underpinned by a mild rebound in USD/JPY. Hang Seng (+0.5%) and Shanghai Comp. (-0.1%) were mixed with the mainland index jittery after its 2.3% decline on Thursday which was attributed to tighter regulations and deleveraging concerns,  as well as a slump in the bond market. 10yr JGBs were subdued with demand weighed by a reserved BoJ Rinban announcement for only JPY 390bln and in which the central bank reduced  the amount of buying in 25yr+ maturities. This also coincided with overnight weakness in USTs which tripped through stops at 125.00 to the downside. PBoC injected CNY 30bln via 7-day reverse repos, CNY 10bln via 14-day reverse repos and CNY 10bln via 63-day reverse repos, for a net weekly injection of CNY 150bln vs. Prev. CNY 810bln net injection last week. PBoC set CNY mid-point at 6.5810. China Finance Ministry said it will lower import tariffs on some consumer products from December, with import duties to be cut to an average 7.7% from 17.3%.

Top Asian News

  • After Sudden Rout, China Stock Traders Question Beijing Put
  • China Approves Taiwan ASE-Siliconware Merger with Conditions
  • Hong Kong Finance Elite’s Gym of Choice Is Said to Near Sale
  • HNA Is Said to Get Nod From Malaysia for Deutsche Bank Stake
  • Banks Squeeze India Firms Harder in $207 Billion Bad Loan Fight

In European trading, it is a somewhat calmer end to the week, with the Euro Stoxx rising 0.3% thus far. The growing prospect of a grand coalition in Germany has helped lift the DAX above 13,000. Move higher in European consumer staples has been aided by the announcement from China that they are to cut tariffs on imported consumer goods. As such, Nestle, Danone and Diageo have been leading the charge, with products including baby formula to be impacted. Bunds holding just edging new and deeper sub-163.00 lows in wake of the stronger than expected German Ifo survey overall, with only current conditions unable to match consensus, albeit still robust. The 10 year benchmark has now recoiled to 162.72 from 163.03 at best, with near term or intraday supports at 162.61 looking attractive. Note, Eur/Usd has now moved a tad higher towards 1.1880 having eclipsed its previous MTD best (1.1761) pre-9.00GMT in what appeared to be a bit of front-running and buy the rumour/sell the fact initially. Back to debt futures, Gilts are largely tracking Bunds and have fallen in sympathy to 125.10 from 125.28 at one stage and from Thursday’s 125.31 close. BBA mortgage data up next in the UK.

Top European News

  • U.K. Consumer Confidence Hits Level Last Seen After Brexit Vote
  • Man Utd.’s Fellaini Sues New Balance Over Foot-Damaging Cleats
  • Clariant to Revise Strategy Yet Won’t Bow to Breakup Demands
  • Putin Peace Plan Gets Boost as Syria Opposition Unites for Talks

In FX, the the Dollar showing some signs of stabilisation, if not recovery across the board, as the Index holds in above 93.000 after Thanksgiving and ahead of another shortened US session, which will keep trading conditions thin and choppy. The pound was an early gainer and outerperformer (albeit marginal) on more Brexit headlines, as UK PM May and the EU’ s Juncker both claim progress made in negotiations ahead of more ‘crucial’talks. Cable back above 1.3300 as a result, and Eur/Gbp sub-0.8900. The Euro is still firm vs he Greenback, with the headline pair breaching its November peak (1.1861), while the next key chart resistance resides at 1.1880. EUR had been further bolstered by firm German IFO data, in which the Business Climate figure rose to a record high. The yen was off best levels vs the Usd, as strong technical support just above 111.00 is respected (for now), but 112.10 widely seen capping the upside within a new lower range

In commodities, iron ore prices continued its recent upward trajectory, with the spot price hitting its highest level since September 20th amid stronger steel prices. Copper also edging higher with support from the softer USD. The price of the red metal likely helped by a 24hr strike announced yesterday’ s at Chile’ s Escondida copper mine, the worlds largest mine. WTI and Brent crude futures up 0.9% and 0.1% respectively, with focus on next weeks OPEC and Non-OPEC meeting where expectations are for a 9-month extension

Looking at the day ahead, in Germany we received the November IFO survey, which printed at a new record high of 117.5. In the US, we get the flash November PMIs. Black Friday also marks the traditional start of the US holiday shopping season and any clues to footfall and overall sales will be closely watched. One other event potentially keeping an eye on is S&P and Moody’s scheduled sovereign rating reviews of South Africa, with the country at risk of losing its investment grade status. The ECB’s Supervisory chair Ms Nouy will also speak today.

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, est. 55, prior 54.6
  • Markit US Services PMI, est. 55.3, prior 55.3
  • Markit US Composite PMI, prior 55.2

DB's Jim Reid concludes the overnight wrap

Welcome to Boxing Thanksgiving Day or Black Friday as it’s commonly known these days. I must have about 10 emails in my inbox already this morning informing me of must have bargains. On the quiet holiday inspired session yesterday the most interesting story occurred after we went to print but before you read it. Chinese bourses weakened very late in the session and ended the day 2-3% lower. The CSI 300 index fell 2.96% - the biggest daily drop since June 2016. The exact cause of the sharp drop is still a bit unclear, but candidates included: the recent domestic govt. bond market sell-off and volatility, rising corporate yields, profit taking, concerns that the government may step up initiatives to cool down the strong gains in certain stocks and further reactions from the recent regulatory tightening in the asset management sector. This aside, we note that despite yesterday’s drop, the CSI index is still up c24% YTD.

This morning in Asia, markets are trading a bit mixed. Chinese bourses are down 0.4-0.5% but then again they were down a similar amount this time yesterday before the late sell-off. The Nikkei is up 0.13% after trading resumed from a holiday. Elsewhere, the Hang Seng (+0.25%) and Kospi (+0.09%) are slightly up as we type. The US markets will be open for half day trading today, with the UST 10y yields up c2bp this morning.

Staying with China, DB’s Zhiwei Zhang takes a closer look at potential macro risks from China . In his note, he tries to gauge the impact of tightening policies on tier 3 cities and finds policy tightening to be effective with a time lag of c3 months. Hence, the impact of the 1st round of tightening should have been reflected in today's property prices, while the impact of the 2nd round is likely to be seen over the next few months. Overall, he reiterates his view that economic growth in China will slow in 4Q17 and 1H18, and that the government may have to loosen property market policy in 2Q18 to stabilise it.

Moving to Europe, the November Markit PMIs were strong and beat consensus which had anticipated a small pullback. The Eurozone’s flash composite PMI rose to a 6.5 year high (57.5 vs. 56 expected) and is at a level that is broadly consistent with c3.5% yoy GDP growth. A stunning figure for the continent. The strength was led by the manufacturing PMI, which rose 1.5pt to 60 (vs. 58.2 expected) – the highest in 17 years, while the Services PMI also slightly beat (56.2 vs. 55.2 expected). Across the region, the improvements in PMIs were broad based and driven by both core and peripherals (more later). So far, subdued core inflation has kept the pressure off the ECB to move more quickly towards tighter policy. With growth so above trend and the level of slack narrowing, the ECB may struggle to maintain expectations of a very gradual removal of easy policy. Overall, DB’s Peter Sidorov see the timing of the first rate hike at around 2020, as too far out.

Turning to Germany, there seems to be a glimmer of hope in the coalition talks to form the next government after a softening in the SPD’s position. Bloomberg reported that the Head of Germany’s biggest opposition party (SPD) Mr Schulz is now ready to hold talks with Merkel and is prepared to back her, but only for a minority led government at this stage. Notably, Ms Merkel has signalled she prefers a new election rather than a minority government. Elsewhere, other SPD members seem to be more accommodating, with SPD lawmaker Mr Lauterbach noting “…we want to help Germany and have not ruled out anything”, which includes the option of a renewed “grand coalition” with Merkel’s party, although did add this is a last resort.

Onto the ECB minutes, which did not seem to be ground breaking as the range of views had already been highlighted in recent speeches. Although, at the margin, it made us feel the first rate hike that is currently priced in at the start of 2020 may need to be moved a bit earlier. In the details, the minutes showed “a large majority” of members supported QE tapering and its  nine months extension, but there were debates on whether to set a firm end date or not. Some concerns were that the “open ended nature of [QE]…might generate expectations of further extensions” post September 2018, which ‘from the current perspective, did not appear justified in the absence of major new shocks”. Conversely, others wanted a longer purchase horizon to provide more monetary support and expressed concern of setting a firm date on when the program will stop. Finally, several members suggested delinking the relationship between QE and the inflation outlook and moving to a reference to the monetary policy stance. Elsewhere, the ECB’s Villeroy noted the ECB is clearly making progress in boosting inflation, but “as we are not yet at our target, we must maintain ample degree of monetary stimulus”.

Over in government bonds, changes in 10y yields were fairly muted. Bunds dipped 0.2bp, while OATs rose 1.2bp and Gilts fell 2.6bp. Notably, peripherals slightly underperformed with yields up 1-2bp.

Now briefly recapping other markets performance for yesterday. With the US markets closed for Thanksgiving, European markets were mixed but little changed. The Stoxx 600 (+0.02%), DAX (-0.05%) and FTSE (-0.02%) were broadly flat. Notably, the CAC rose 0.50% and peripherals also slightly outperformed (Spain’s IBEX +0.19%; FTSE MIB +0.37%), partly buoyed by the solid PMIs.

Turning to currencies, the US dollar index and Sterling both dipped c0.11% while Euro gained 0.25%. In commodities, WTI oil edged up 0.93% to a fresh two year high, while iron ore jumped 3.87% back to a two month high (c8% up in two days), partly driven by supportive steel rebar prices and the ongoing steel production cuts in China.

Away from the markets and onto Brexit. It seems the 4th December may be an important turning point for Brexit talks or at least a focal point. The EU President Juncker has confirmed his meeting with UK’s PM May and noted from there “we will see whether we can move forward or whether we are stuck. My hope would be that we move forward”. The FT had previously reported PM May will present her improved financial settlement offer at this meeting. Elsewhere, the ECB’s Villeroy has cautioned that “all actors should as of now undertake…necessary preparations to avoid potential cliff-edge risk” from Brexit. Finally, DB’s Oliver Harvey notes the December EU Council is likely a crunch point for Brexit talks, but achieving the UK government’s hope of wrapping up key trade talks by early next year may be easier said than done, with potential agreement at the December EU summit representing only the end of the beginning of Brexit negotiations.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In Germany, the final reading for the 3Q GDP was unrevised at 0.8% qoq and 2.8% yoy. In the details, net exports have contributed to c50% of the growth with a rise in inventories contributing the remainder. Elsewhere, both the 3Q private consumption (-0.1% qoq vs. 0.2% expected), and capital investments (0.4% qoq vs. 1.4% expected) were lower than expected, but the softness was partly due to upward revisions to prior readings.

In the UK, the second reading of the 3Q GDP was unrevised at 0.4% qoq and 1.5% yoy. The 3Q private consumption slightly beat expectations (0.6% qoq vs. 0.4% expected) to the highest since 3Q16, but fixed capital formation (0.2% qoq vs. 0.4% expected) was a bit softer. Elsewhere, the November CBI’s distributive trade survey was more upbeat following a tough October, with a net 26% of respondents noting growth in sales over the past year and a net 24% expecting growth to continue next month. Finally, in France , both the November Business confidence (111 vs. 109 expected) and manufacturing confidence (112 vs. 111 expected) were above expectations, with business confidence almost at a decade high.

For completeness, following up on the aforementioned flash PMIs across the EU bloc. In Germany, the composite PMI (57.6 vs. 56.7 expected) and manufacturing (62.5 vs. 60.4 expected) were both higher than expected, with the latter at the highest since 2011, while the services PMI (54.9 vs. 55 expected) was a tad softer. In France, the composite (60.1 vs. 57.2 expected), services (60.2 vs. 57 expected) and manufacturing PMIs (57.5 vs. 55.9 expected) all beat expectations.

Looking at the day ahead, in Germany we’ll receive the November IFO survey. In the US, there is the flash November PMIs. Black Friday also marks the traditional start of the US holiday shopping season and any clues to footfall and overall sales will be closely watched. One other event potentially keeping an eye on is S&P and Moody’s scheduled sovereign rating reviews of South Africa, with the country at risk of losing its investment grade status. The ECB’s Supervisory chair Ms Nouy will also speak today.