China Commodity Carnage Continued Overnight As Brexit Fears & Bitcoin Cheers Dominate

Once again weakness in the US carried through to Asia with stocks unable to hold any National-Team-inspired gains, but it was the contagion to commodities that was most notable (as a hike in exchange fees snuffed out a lot of speculative fervor)

  • European equities have followed suit from their Asia-Pac counterparts to trade higher across the board
  • Markets await Brexit headlines amid Barnier deadline
  • Looking ahead, highlights include US weekly jobs and potential comments from ECB’s Draghi.


Asia equity markets somewhat shrugged off the subdued tone on Wall St and mostly rebounded from the prior day’s losses, aside from China which underperformed amid continued regulatory concerns. ASX 200 (+0.5%) and Nikkei 225 (+1.5%) were lifted from the open, in which the Japanese benchmark led the gains amid short-covering from yesterday’s 2% slump and as it coat-tailed on the bounce in USD/JPY. Conversely, Hang Seng traded (+0.7%) indecisive while Shanghai Comp. (-0.3%) lagged after the CBRC drafted new requirements for banks to curb liquidity risks, and although the PBoC conducted Reverse Repos for the 1st time in 5 working days, this still amounted to a net neutral daily position after expiring operations were accounted for. Finally, 10yr JGBs were uneventful as focus was centred on riskier assets, while a mixed 30yr JGB auction result also failed to spur demand.

China's banking regulator drafted new requirements for banks to curb liquidity risks which will go into effect March 2018. (Newswires)

  • PBoC injected CNY 120bln via 7-day reverse repos, CNY 50bln via 14-day reverse repos and CNY 100bln via 28-day reverse repos, which represents a net neutral daily position when maturing operations are accounted for. (Newswires)
  • PBoC set CNY mid-point at 6.6195 (Prev. 6.6163)
  • Australian Trade Balance (AUD)(Oct) 105M vs. Exp. 1,375M (Prev. 1,745M, Rev. 1,604M). (Newswires)
  • Australian Exports (Oct) -3.0% (Prev. 3.0%)
  • Australian Imports (Oct) 2.0% (Prev. 0.0%)


EU's chief Brexit negotiator Barnier said UK has 48 hours to agree a text on potential deal over Irish border or else talks will not move on to the next phase. (Guardian)


European equities have followed suit from their Asia-Pac counterparts to trade higher across the board (Eurostoxx 50 +0.3%) with the Nikkei 225 (+1.5%) the notable outperformer in a recovery from yesterday’s losses. Once again, European specific newsflow remains on the light side with markets awaiting any Brexit-related updates and developments in the US tax /shutdown legislation. In terms of sector specifics, health care names are the only sector in the red whilst outperformance is seen in the telecom sector with markets appeased by the latest strategy update by Orange (+1.5%). Other notable individual movers include Sky (+1.8%) who have been supported by reports that Comcast is looking to push for a deal for Fox (FOXA) assets in a move which could see it take full control of Sky.

Fixed Income

Solid Spanish auction results did not set the tone for Eurozone semi-core and UK bond sales, but have underlined the relative attraction of Eurozone periphery paper and demand for premium despite ECB QE depressing yields most at the margins. French OATs were not greeted that well, like yesterday’s 10 year German Bund, but UK Gilts drew even less demand despite appealing to the investment portfolio needs of institutional buyers (normally). Hence, a downturn in Eurex debt futures and Liffe’s core 10 year contract to new session lows at 163.27 for Bunds, 157.28 for OATs and 124.24 for Gilts (-1/4 point, -23 ticks and -43 ticks vs +8, +8 and +10 ticks at the other end of the scale). US Treasuries also feeling some contagion having traded to fresh overnight highs earlier amidst a decent clip of 10 year note buying.


USD index has inched over the 93.500 level that has been hindering the Greenback’s recovery from recent lows for a while. However, a significant element of the more concerted rebound is due to weakness in other currencies rather than outright Dollar strength. GBP is holding up pretty well, above yesterday’s lows around 1.3360 in Cable and EUR/GBP just over 0.8800, despite yet another deadline for the UK Government to sort differences with the DUP over the Irish border. NZD is suffering more than the AUD in percentage terms vs the USD despite a double-dose of negatives for Aussie unit in the form of a big downside miss on trade and a meltdown in iron ore prices with NZD/USD having recently topped out around 0.6900.

The continued rise of GBP/USD implied volatility that covers the period of the EU summit next week is less surprising when one considers that Theresa May appears to have misjudged the positions of her own party and a number of countries within the EU.

Two-week implied volatility is around 2.0 vol higher than 1 month, the widest spread since the time of the June general election.


Energy markets have been relatively quiet amid a lack of drivers, although WTI crude futures are off worst levels and just about reclaimed the USD 56/bbl level to provide some mild reprieve from this week’s product inventory-triggered pressure. Gold and copper were also uneventful overnight with the former stuck near 4-month lows as participants await this Friday’s key-risk NFP data. The main mover in metals markets was Dalian Iron ore which crashed by 7.5% amid ongoing demand concerns from China.

But Chinese stock weakness spread to the commodity markets - which had promised so much growth previously - as Reuters reports, China’s commodity exchanges have hiked transaction fees and margin requirements for a range of futures this year in their latest effort to curb speculative trading that Beijing says has spurred recent price surges in markets from sugar to ferro-silicon.

As Bloomberg's Mark Cranfield notes, China's iron ore future is doing it's best to shock global markets in the way copper did earlier this week. Partially thanks to top miner Vale SA, the metal is having a high volume swoon on the Dalian exchange, which could be the tipping point for another commodity complex slide as Europe gets going.

Things to keep an eye on today:

  • 7:30am: Challenger Job Cuts YoY, prior -3.0%
  • 8:30am: Initial Jobless Claims, est. 240,000, prior 238,000
  • 8:30am: Continuing Claims, est. 1.92m, prior 1.96m
  • 9:45am: Bloomberg Consumer Comfort, prior 51.6
  • 12pm: Household Change in Net Worth, prior $1.7t
  • 3pm: Consumer Credit, est. $17.0b, prior $20.8b

Market Snapshot

  • S&P 500 futures up 0.2% to 2,634.90
  • STOXX Europe 600 up 0.3% to 387.42
  • MSCI Asia up 0.4% to 167.94
  • MSCI Asia ex Japan up 0.1% to 544.14
  • Nikkei up 1.5% to 22,498.03
  • Topix up 1.2% to 1,786.25
  • Hang Seng Index up 0.3% to 28,303.19
  • Shanghai Composite down 0.7% to 3,272.05
  • Sensex up 0.9% to 32,894.90
  • Australia S&P/ASX 200 up 0.5% to 5,977.72
  • Kospi down 0.5% to 2,461.98
  • German 10Y yield rose 0.6 bps to 0.301%
  • Euro down 0.03% to $1.1793
  • Italian 10Y yield rose 2.0 bps to 1.462%
  • Spanish 10Y yield unchanged at 1.433%
  • Brent futures up 0.6% to $61.61/bbl
  • Gold spot down 0.4% to $1,257.82
  • U.S. Dollar Index up 0.05% to 93.66

Top Overnight News from Bloomberg

  • President Trump will meet with congressional leaders Thursday to negotiate on a long-term budget deal as Congress is on track to avoid a government shutdown
  • Trump recognized Jerusalem as Israel’s capital and announced he would begin moving the U.S. embassy there, despite warnings from global leaders that the move would undermine peace efforts and spark violence.
  • Germany’s Social Democratic Party holds convention that’s expected to vote on endorsing coalition talks with Chancellor Angela Merkel
  • Hamas Leader Calls for Another Intifada Against Israel
  • GVC in Talks to Buy Ladbrokes Coral for Up to $5.2 Billion
  • Bitcoin Frenzy Like No Other Has Koreans Paying 23% Premium
  • Steinhoff Falls Further Amid Plan to Raise $1 Billion From Sales
  • Bitcoin Fails to Win Over Giants of Finance in Scandinavia
  • Banks Seen Losing 15% of European Stock Trading Under MiFID
  • Goldman, BlackRock, Blackstone Vie to Keep Wall Street Crowns
  • IMF Joins Criticism of Ukraine’s Crumbling Anti-Graft Efforts
  • U.K. House Prices Rise for a Fifth Month on Dearth of Supply
  • Italy’s Banca Carige Misses $590 Million Share Sale Target

DB's Jim Reid concludes the overnight wrap

The show rolls on to Switzerland this morning. The only good thing about being away most of this week is that I’ve missed two design consultations at home for our new kitchen. We don’t move in for a year, need to knock down several walls and then build a kitchen from scratch. It’s a crazy thing to do when trying to cope with new born twins and a toddler. In the ?rst meeting about kitchens I started to glaze over when we discussed tap options. Which one of the ten metallic ?nishes we wanted was a question I really couldn’t answer. Multiply that by about 100 di?erent decisions that need to be made to spec up a kitchen and then duplicate that across the two companies we’re getting quotes from and it’s a maddening process. If I was in charge we’d probably get stuck with a microwave and a few plates. However they’d be a very good TV hung expertly on the wall to watch while the microwave was being ?red up.

Markets have heated up a little this morning after the Nikkei dropped the most since March yesterday (-1.97%; +16% YTD) although like most microwaved food there are some hot and cold bits. The Nikkei is up 1.36%, the Hang Seng and ASX 200 are both up c0.5%, while other markets are down as we type (Kospi -0.32%; China’s CSI 300 -0.74%).

Yesterday’s fall in Asia dragged European markets initially much lower - opening down c1%. However sentiment improved through the day with key markets ?nishing modestly lower (Stoxx 600 -0.11%; DAX -0.38%; FTSE +0.28%). Across the pond, US equities fluctuated as a rebound in tech shares was broadly offset by weakness in energy and telcos. By the close, the S&P 500 was flattish (-0.01%), the Dow dipped 0.16% and Nasdaq edged higher (+0.21%). In commodities, WTI oil dropped 2.86% following an EIA report that showed a buildup in gasoline stockpiles but LME copper’s losses have moderated (+0.11%).

Staying in the US, plans to avoid a partial government shutdown seems to be moving the right way. The House Rules Committee has approved a plan to extend government funding for two weeks until 22 December. The bill will be up for a House ?oor vote today, then the Senate will have until the end of Friday to pass the bill to avoid a partial shutdown this Saturday.

Onto Brexit now and we remain in somewhat of a stalemate position, but the prior deadline of achieving a breakthrough this week now seems more ?exible, with Bloomberg noting EC President Juncker is prepared to meet PM May “any day ahead of the run-up to next week’s EU summit”. In terms of the latest headlines, Brexit Secretary Davis noted “no quantitative assessment” was made before the UK cabinet decided to leave the EU trade bloc. Elsewhere, the SUN reported that some supporters of Mr Davis are planning to launch a bid to replace PM May by Christmas. On the Irish border issue, both PM May and Irish PM Varadkar agreed on the importance of “no hard border or physical infrastructure at the border…”, and later on Wednesday evening, Mr Varadkar noted PM May “wants to come back to us with some text tonight or tomorrow”. So still lots bubbling along.

In Europe, the ECB’s Mersch sounded cautious on giving markets too much longer term guidance. On QE, he noted that if stimulus is removed too quickly, the economy may su?er, but risks also increase the longer QE runs, so “to contain those risks, a credible perspective of an exit is needed”. On rates, he noted that given the di?culty in measuring in?ation pressures, the ECB might be “running behind those developments without being aware of it”. On forward guidance, he posed the question of whether guidance is reaching out too far into the future and noted “when the time comes in the course of next year…we should think carefully how much we pre-commit (our monetary policy course)”.

Now recapping other markets performance yesterday. Government bonds were firmer with core 10y bond yields down 2-3bp (UST -1.8bp; Bunds -2.4bp; Gilts -2.9bp) while peripherals underperformed. Note 10y Bunds are back below 0.3% for the first time since late June and the 30y treasuries are at a three month low, although the 5s30s has steepened slightly to 60.3bp.

Turning to currencies, the US dollar index was 0.17% stronger while Euro and Sterling fell 0.26% and 0.42% respectively, with the latter partly impacted by the stalled Brexit talks. In commodities, precious metal continued to soften (Gold -0.11%; Silver -0.71%) while losses from other base metals moderated somewhat (Zinc -0.49%; Aluminium -1.42%). Elsewhere, the VIX fell 2.74% to 11.02.

The price of Bitcoin has jumped to US$15,200 a piece this morning and is up c15x YTD. To put the rally in a di?erent context, it took 100 trading days for Bitcoin’s price to rise from $1,000 to $2,000, but getting through the subsequent $1,000 increment has been much faster, at 55, 5, 43, 12, 3, 12, 5, 2 days and then only 7 trading days for it to rise from $10,000 to >$15,000 if it closed at similar levels today. We are cognisant that as Bitcoin’s price gets higher, the hurdle to go up each $1,000 increment is easier in percentage terms, but we thought it was an interesting stat nonetheless.


Away from the markets, the European Commission has unveiled more details on the future of a tighter Europe. Some of its key proposals include: i) expanding the role of the European Stability Mechanism (ESM), such as acting as a backstop for the single resolution fund to wind down failed banks, and potentially transform the ESM into a type of EU monetary fund, ii) new budget instruments within the EU budget framework, potentially to provide funds for structural reforms and iii) creation of a dedicated EU minister of economy and ?nance. Looking ahead, EU leaders will meet next week to discuss next steps with plans for an agreement by next June.

Looking into 2018, DB’s global fixed income team now expect 10Y UST to approach 3%, Bunds to approach 1% and Gilts to approach 2% by the end of next year. Some of the key themes in their outlook report include: i) rising core in?ation and easier ?scal and regulatory policies will support further monetary policy tightening, ii) the US economy enters 2018 with strong momentum and prospects for easier ?scal and regulatory policies. Absent an external shock, monetary policy will have to be tightened and rates will have to rise before growth slows down materially and iii) they expect the ECB to be more hawkish than current market expectations. Refer to their note for more details.

Looking at the day ahead, politics might well be the main focus for markets again with Germany’s Social Democratic Party due to hold a convention in Berlin. A vote on endorsing coalition talks is expected. Datawise, we’ll get October industrial production in Germany, the October trade balance in France and weekly initial jobless claims and October consumer credit in the US. The ?nal reading of Q3 GDP for the Euro area will also be released.