US Futures, Global Shares, Dollar All Jump On Brexit, Basel News, Averted US Shutdown; Payrolls Loom

U.S. equity index futures have bounced on the last day of the week, along with European and Asian shares, oil and the dollar following overnight news that the UK and EU have reached a successful conclusion on Phase 1 of Brexit negotiations, that Congress averted a government shutdown with another can-kicking 2 week measure until December 22, after strong Chinese trade data and an upward revision to Japanese GDP, and ahead of the November nonfarm payrolls data which is expected to cement the December Fed rate hike. 

Setting the bullish mood this morning was Christmas coming early for Theresa May, who managed to forge an agreement - if only for the time being - with the EU in the early hours of Friday morning to pave way for phase 2, with talks set to move to trade with support being voiced by Senior Brexiteers, Gove and Johnson. In reaction to this, GBP initially hit a 6-month high, however once the agreement had been confirmed, the pound saw a "buy the rumour sell the news" price action, while gilts were met with selling pressreure with the price making a firm move below 124.00.

Also after the close on Thursday, the House voted 235-193 and Senate voted 81-14 to pass the stopgap spending measure which will avoid a government shutdown and fund government through to Dec. 22nd, kicking the can on and averting a government shutdown for another two weeks.

European stocks advance in a broad rally amid optimism over a newly-struck deal between Britain and the European Union to unlock divorce negotiations and proceed to discussing a future trade deal. The Stoxx Europe 600 Index rises 0.7%, with the index heading for a weekly gain of 1.3%. Banks advance the most, up for a second day, as the sector emerged relatively unscathed from global regulators’ final batch of Basel III post-crisis capital rules, with few lenders needing to raise major new funds. Miners are also among the best indusreptry group performers, following copper prices higher. The FTSE 100 is trailing other European indexes, trading little changed, as the pound climb.

Asia equity markets took the impetus from a positive tone in US where all indices finished higher and tech continued its rebound, while Congress also voted to pass the stop-gap spending bill to fund the government till December 22nd and avert a shutdown. ASX 200 (+0.3%) and Nikkei 225 (+1.4%) were higher in which the latter outperformed as exporters benefitted from a weaker currency and after a stellar upward revision to Q3 GDP figures. Hang Seng (+1.2%) and Shanghai Comp. (+0.6%) were also in the green amid better than expected Chinese trade data, although gains were capped in the mainland after the PBoC refrained from open market operations for a total net weekly drain of CNY 510bln. China's trade data in a nutshell:

  • Chinese Trade Balance (USD)(Nov) 40.2B vs. Exp. 35.0B (Prev. 38.2B)
  • Chinese Exports (USD)(Nov) Y/Y 12.3% vs. Exp. 5.3% (Prev. 6.9%)
  • Chinese Imports (USD)(Nov) Y/Y 17,7% vs. Exp. 13.0% (Prev. 17.2%)

Finally, 10yr JGBs eked mild gains despite the broad positive risk tone, as prices eyed the 151.00 level and amid the BoJ’s presence in the market for JPY 840bln of government bonds.

The positive moves for many markets will be a welcome reversal for investors, who earlier in the week booked profits amid a stock rotation and waning risk sentiment. With the U.S. debt deadline nudged back, tax reform becoming more likely, and a breakdown of Brexit negotiations averted for now, solid economic data of the kind seen today could give fresh legs to the rally in risk assets.

The Bloomberg Dollar Spot Index rose a fifth day, its best run in nine months, before the U.S. jobs report (full preview here). The gauge was on track for its best week this year, supported by year-end funding demand. The pound orbited $1.35 as Brexit breakthrough met profit-taking amid thin liquidity. The broader dollar index headed for its best week in 2017 as year-end funding and a report that the U.S. president will release a long-promised infrastructure plan next month supported the greenback.  The euro slipped a sixth day as the yen led losses among G-10 currencies. Gilts slumped, dragging bunds and Treasuries lower, while stocks advanced.

In rates, the yield on 10-year Treasuries rose two basis points to 2.38 percent, the highest in more than a week. Germany’s 10-year yield gained two basis points to 0.31 percent. Britain’s 10-year yield climbed six basis points to 1.318 percent, the highest in more than a week. Japan’s 10-year yield dipped less than one basis point to 0.053 percent.

Meanwhile, oil rose above $57 a barrel in the second day of gains. Gold edged up slightly in Asian trade amid bargain hunting after the yellow metal dropped below its recent trading range to hit the lowest in more than four months overnight. However, prices did fail to make a break above 1250. Copper futures in Shanghai rose after data showed a jump in Chinese imports. WTI and Brent crude futures up modestly, however prices have pulled back from the highs, having met resistance at USD 57 and USD 62.50 respectively.

Today's data include non-farm payrolls, unemployment, wholesale inventories and U. of Mich. Consumer Sentiment Index. Johnson Outdoors is reporting earnings

Top Headline News from BBG

  • The U.K. and the European Union struck a deal to unlock divorce negotiations, opening the way for talks on what businesses are keenest to nail down -- the nature of the post-Brexit future
  • The U.S. Congress sent President Donald Trump a two-week extension of federal funding that averts a government shutdown this week but defers contentious decisions on spending on defense and domestic programs
  • Republican Senator Rob Portman, one of the chief tax writers, said he’s “pretty confident” that GOP lawmakers will be able to set a corporate rate of 20% in their final tax bill -- below 22% figure that some lawmakers have sought: Tax Debate Update
  • U.K. factory output rose 0.1% m/m in October, marking six consecutive increases for the first time since modern records began in 1997. Overall industrial production was unchanged as warmer weather reduced energy demand
  • China’s exports unexpectedly jumped as global demand remained firm, while import growth continued to outpace sales abroad
  • China will prevent major risks and effectively control leverage ratio next year, according to a politburo meeting on 2018 economic work, Xinhua reports
  • Wall Street sees muted 2018 credit returns as opportunities expected to narrow
  • With just a few days left until Cboe Global Markets Inc. debuts futures contracts on the cryptocurrency, many banks are still weighing whether to offer them to clients -- and if so, how to handle the mechanics
  • Steinhoff Share Price Plunge Nears 90% as Debt Cut to Junk
  • Inside Big Banks, Bitcoin Futures Are Riling Trading Executives
  • Bitcoin Wildness Highlights Worries as Futures Trading Nears

Market Snapshot

  • S&P 500 futures up 0.3% to 2,649.00
  • STOXX Europe 600 up 0.8% to 389.67
  • MSCI Asia up 0.6% to 169.02
  • MSCI Asia ex Japan up 0.8% to 549.09
  • Nikkei up 1.4% to 22,811.08
  • Topix up 1% to 1,803.73
  • Hang Seng Index up 1.2% to 28,639.85
  • Shanghai Composite up 0.6% to 3,289.99
  • Sensex up 1% to 33,263.86
  • Australia S&P/ASX 200 up 0.3% to 5,994.37 
  • Kospi up 0.08% to 2,464.00
  • German 10Y yield rose 1.9 bps to 0.312%
  • Euro down 0.3% to $1.1736
  • Italian 10Y yield fell 4.8 bps to 1.414%
  • Spanish 10Y yield rose 1.0 bps to 1.42%
  • Brent futures up 0.6% to $62.60/bbl
  • Gold spot down 0.15% to $1,245.46
  • U.S. Dollar Index up 0.2% to 94.01

Asia equity markets took the impetus from a positive tone in US where all indices finished higher and tech continued its rebound, while Congress also voted to pass the stop-gap spending bill to fund the government  till December 22nd and avert a shutdown. ASX 200 (+0.3%) and Nikkei 225 (+1.4%) were higher in which the latter outperformed as exporters benefitted from a weaker currency and after a stellar upward revision to Q3 GDP figures. Hang Seng (+1.2%) and Shanghai Comp. (+0.6%) were also in the green amid better than expected Chinese trade data, although gains were capped in the mainland after the PBoC refrained from open market operations for a total net weekly drain of CNY 510bln. Finally, 10yr JGBs eked mild gains despite the broad positive risk tone, as prices eyed the 151.00 level and amid the BoJ’s presence in the market for JPY 840bln of government bonds.

Top Asian News

  • PBOC Is Said to Meet With Big Banks on Bond Market Amid Rout
  • The $64 Million Question: Is Goldman Embracing Tiny Asian IPOs?
  • HNA Mystery Charity Begins ‘Difficult’ Job of Valuing Assets
  • ICICI Is Said to Pick Banks for IPO of $3 Billion Brokerage Arm
  • Mysterious Late Drops Stoke Taiwan Dollar Intervention Talk
  • HNA Says It Won’t Default in Coming Years After Yield Surge
  • India Invokes Rarely-Used Measure to Gain Control of Realty Firm

Aside from Brexit, banks across Europe are rallying this morning as reforms to Basel 3 have appeared to be kinder to European banks than had been expected. Alongside this, the rise in EGB yields have further bolstered the strength in banking names. Elsewhere, consumer staples are the only sector in the red with gains otherwise relatively broad-based. Gilts have edged up a handful of ticks in wake of the UK data raft and BoE survey, but not really on anything revealed in the releases. Instead, the 10 year benchmark is consolidating off the lows and deriving some support as the cash yield crosses 1.30%. In fact, Bunds have actually seen more downside in recent trade and since the more bearish Liffe open, with the core German bond extending losses to 48 ticks at one stage before regaining some composure as well. Elsewhere, US Treasuries are sitting tight and also appear to be in pre-NFP idling or biding time mode after yesterday’s declines on the White House funding reprieve. Curve flattening also took a breather, and the next big driver on that front is likely to come from the FOMC rather than BLS report given that a hike is virtually factored in. SEP details will be key and the central views on Fed Funds ahead.

Top European News

  • U.K. Manufacturing on Best Run in Two Decades Amid Car Demand
  • RBS CEO Sees ‘Diminishing’ Chance of DoJ Settlement This Year
  • Boring Is Beautiful as Proved by East Europe’s Currency Winners
  • BaFin Examines Trading of Steinhoff Shares in ‘Routine’ Review
  • Gilts Slide, Pound Strengthens on Breakthrough in Brexit Talks
  • Defiant Merkel Critics Press Her to Consider Minority Rule

In FX, GBP Firmer overall, albeit off best levels seen in the run up to confirmation of an agreement between the UK and EU on the divorce fee, ECJ and Irish border issue that was the outstanding element and bone of contention preventing a deal being done and blocking the passage to phase 2 of Brexit negotiations (ie transition and trade terms). UK production figures (largely in-line) did little to sway prices. USD-index has moved closer to 94.000, and discounting the Pound would almost certainly be above the big figure, with support emanating from the aforementioned Government financing extension, and the next decisive move dependent on the big monthly US jobs report. EUR/USD trading at levels not seen for a while having pivoted 1.1800 in recent sessions and big option expiries at the strike for today now look set to run off untouched. 1.1780-35 marks the boundaries so far, with bids around 1.1750 filled and stops tripped to the lows.

In commodities, old edged up slightly in Asian trade amid bargain hunting after the yellow metal dropped below its recent trading rangeg to hit the lowest in more than four months overnight. However, prices did fail to make a break above 1250. Copper futures in Shanghai rose after data showed a jump in Chinese imports. WTI and Brent crude futures up modestly, however prices have pulled back from the highs, having met resistance at USD 57 and USD 62.50 respectively.

Looking at the day ahead, the November employment report in the US is likely to be the biggest focus. Also due out in the US are October wholesale inventories and the preliminary December University of Michigan consumer sentiment reading. Away from the US, October trade data in Germany and the UK, as well as October industrial production in France and the UK are due.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 195,000, prior 261,000
    • Unemployment Rate, est. 4.1%, prior 4.1%
    • Average Hourly Earnings MoM, est. 0.3%, prior 0.0%
    • Average Hourly Earnings YoY, est. 2.7%, prior 2.4%
    • Underemployment Rate, prior 7.9%
  • 10am: Wholesale Inventories MoM, est. -0.4%, prior -0.4%; Wholesale Trade Sales MoM, est. 0.25%, prior 1.3%
  • 10am: U. of Mich. Sentiment, est. 99, prior 98.5; Current Conditions, est. 114.3, prior 113.5; Expectations, est. 90.5, prior 88.9

DB's Jim Reid concludes the overnight wrap

Morning from Geneva. If you suddenly don’t see the EMR for a few days then you’ll know that I’ve been putting my money where my mouth is with regards to the start of the end of fiat money (see our note here from a couple of months ago) and have now made enough money on Bitcoin that I don’t need to work again. At one point yesterday it was up 40% in 40 hours at over $19,000 on one exchange before falling back. It’s a bit of a side show for global markets but fascinating nevertheless. As we discussed in the fiat money note we do believe that there is something tangible in the demand for cryptocurrencies and over the years ahead there may well be more and more desire for alternative mediums of exchange. If and when inflation does take off central banks are unlikely to be able to control it given the need to instead control the excessive debt burden most countries face. So we could end up with a situation where the current crypto surge is one of the biggest bubbles in history but still see a cryptocurrency emerge as a long term success story. Interesting times. For full disclosure I should add that sadly I passed on Bitcoin somewhere in the low 1000s so you’re stuck with me for a while longer. Shame as that would have paid for my new kitchen a few times over and thrown in a full time chef for good measure.

On the menu today is a payroll print that isn’t quite the draw it sometimes is, as the markets’ focal point now is all around inflation. Pretty much everyone assumes job growth is going to be broadly decent so the big story is really about prices and wages. As such, the average hourly earnings number today will attract a decent amount of attention and could be the swing factor. For the record, our US team expects non-farm payrolls to rise 175k (vs. consensus 195k) with an unemployment rate of 4.2% (vs. 4.1%), while we’re in line with the market on average hourly earnings growth of 0.3% mom.

Elsewhere today, this morning may be a key turning point for Brexit talks. Last night, the EU President Tusk informed the media that he will make a press statement on Brexit at 7:50am (6:50am GMT) but did not elaborate more. This is just as this mail will hit inboxes. Overnight, Bloomberg noted UK officials were increasingly confident of a deal on the Irish border, while EU officials expected PM May to be in Brussels this morning by 7am if a deal was sealed overnight. Then at 1:18am London time, PM May’s Chief of Staff tweeted “home for 3 hours of sleep, then back to work” and as we go to print it’s been confirmed that Mrs May will be in Brussels by 7am. So lots to look forward to. Circling back to yesterday, GBPUSD jumped 0.60% after Reuters cited an unnamed Irish official noting that Ireland and Britain are “very close” to a Brexit deal. GBPEUR has traded close to 1.15 this morning having been as low as 1.131 yesterday morning.

Over in the US, a partial government shutdown this Saturday has now been averted. Both the House (235-193) and the Senate (81-14) have voted in favour of extending the government funding for two weeks until 22 December. Senate Majority leader McConnell noted “we want to resolve all of these issues (spending limits) in the next couple of weeks”. Elsewhere, the Senate has also formally named eight Republican lawmakers to be part of the Conference committee to reconcile the House and Senate’s versions of the tax bill. Staying in the US, as I’m sure you’re wading through 2018 outlooks at the moment, it’s worth highlighting that one of the more accurate forecasters for the US equity market in 2017 suggested that he’s holding out for up to 6% US GDP growth. The exact quote was “I see no reason why we don’t go to 4, 5, even 6 percent,”. The forecaster in question was Mr Trump who said this to reporters at a cabinet meeting on Wednesday. I missed this story yesterday but it’s a fun one to look back on. Last time we saw growth with a 6-handle was 1984!

This morning in Asia, the final reading of Japan’s 3Q GDP was above market at 0.6% qoq (vs. 0.4% expected) and 2.5% yoy (vs. 1.5% expected). Markets have follomowed the positive lead from the US and are trading higher, with the Nikkei (+1.34%), Hang Seng (+0.96%), China’s CSI 300 (+0.70%) and Kospi (+0.01%) all up as we type. Elsewhere, China’s November exports and imports were both above expectations, leading to a higher trade surplus of $40.2bn (vs. $35bn expected).

Now recapping markets performance from yesterday. US equities were all higher with gains supported by tech stocks and improved sentiment with regards to the tax bill. The S&P was up (+0.29%) for the first time in four days, while the Dow (+0.29%) and Nasdaq (+0.54%) also advanced. Within the S&P, gains were led by the industrials and tech sectors, with only consumer staples and telco stocks modestly in the red. European markets were a bit mixed, with the Stoxx 600 virtually flat (+0.02%) while the FTSE fell -0.37%, impacted by higher terling. Elsewhere, the DAX (+0.36%) and CAC (+0.18%) both rose and the VIX dropped 7.8% to 10.16.

Government bond were also mixed, with 10yr UST 10y and Gilts rising c2.5bp, partly impacted by news that President Trump is planning to release his infrastructure plans in early January and the aforementioned Brexit developments. Other core bond yields were broadly flat (Bunds and OATs -0.2bp). Peripherals outperformed with yields down 3-6bp, partly supported by the prospect of lower supply until year end.

Turning to currencies, the US dollar index firmed (0.2%) for the fifth consecutive day, while the Euro and AUD fell 0.19% and 0.70% respectively, with the latter down to a six month low following weaker trade balance and 3Q GDP stats over the past two days. In commodities, WTI oil was up 1.30% while Gold fell 1.28% to the lowest in four months. Elsewhere, other base metals continue to soften (Copper -0.02%; Zinc -0.22%; Aluminium -0.21%).

Away from the market and onto banks and capital levels. The Basel committee has announced a package of Basel 3 reforms (aka Basel 4) and confirmed a floor limit of 72.5% which seeks to limit the reduction in capital requirements available to banks using their own capital models relative to those using the standardised approach. Overall, the EBA noted “the reforms have a limited aggregate impact on regulatory capital ratios”, with the agreement to reduce the weighted average core tier 1 ratio of EU banks by c0.6ppt relative to the status quo. For a detailed analysis of the impact on individual banks, refer to our colleagues’ note.

Over in Germany, at the SPD party conference, a majority of members voted for a resolution to allow its leader Mr Schulz to engage in coalition talks with Ms Merkel’s CSU/CDU bloc, but it’s unclear whether the talks relate to forming a potential grand coalition or a minority led government. Schulz noted “we don’t have to govern at any price, but we also can’t reject governing at any price”. Elsewhere, he posed the question of “why don’t we work to make a United States of Europe a reality by 2025 at the latest?” Bloomberg noted that Ms Merkel declined to endorse his proposal later on.

Finally, DB’s FX team has published a report showing how tax reform would help fix the extremely large distortions on the US balance of payments (BOP). They calculate that the proposed changes could halve the US trade deficit, an improvement of $250bn. The change would merely be an accounting shift in BOP reporting, which could happen quickly, without any disruptions to global trade. Further, these changes to the US BOP would meet the goals of the Trump administration in reducing the trade deficit and reversing US investment abroad. It is a "low-hanging fruit" because it would result from changing the anomalous ways in which US corporates currently account for their global earnings. Finally they make the point that this statistical improvement would be politically valuable ahead of the next presidential election and could reduce the pressure on the administration to resort to outright protectionist measures to improve the trade balance. Refer to their note for more details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the Fed reported that household net wealth grew to US$1.74trn in 3Q, which lifted the ratio of wealth to disposable income to a new high of 6.73x. Further, firms are now sitting on liquid assets of US $2.4trn, which is also at a fresh high. Elsewhere, the October consumer credit was above expectations at US$20.5bn (vs. $17bn expected), while the weekly initial jobless claims (236k vs. 240k expected) and continuing claims (1,908k vs. 1,919k expected) were broadly in line.

In Europe, the final reading of the Eurozone’s 3Q GDP was unrevised at 0.6% qoq, but prior revisions saw annual growth revised up 0.1ppt to 2.6% yoy. In Germany, the October IP was below market at -1.4% mom (vs. 0.9% expected) and 2.7% yoy (vs. 4.3% expected). Note that according to the Economy Ministry, output was impacted by workers taking extra vacation days during the month. In the UK, the November Halifax house price index was above expectations at 0.5% mom (vs. 0.2% expected), but earlier revisions meant annual growth was in line at 3.9% yoy. Finally, Italy’s 3Q unemployment rate was in line at 11.2%.

Looking at the day ahead, the November employment report in the US is likely to be the biggest focus. Also due out in the US are October wholesale inventories and the preliminary December University of Michigan consumer sentiment reading. Away from the US, October trade data in Germany and the UK, as well as October industrial production in France and the UK are due.

Comments

MonetaryApostate MFL5591 Fri, 12/08/2017 - 08:10 Permalink

The truth about money, in short. (Pass it on!) There are exactly 1,757,599,824,240 x New $100 USD Bills that were recently printed, yes that's 1.757 Trillion of these new $100 bills alone, & it is 2nd mint of the $100 bill within just 10 years! (There have been other mints as well!) https://www.uscurrency.gov/security/100-security-features-2013-presentThe calculation I used was as follows. (99999990 x 26 x 26 x26), because each letter is 26 possible combinations, & the 0 in the first # = 10 x 9,999,999.There are 1,757,599,824,240 x New $100 USD Bills that were recently printed, THINK LONG & HARD ABOUT IT, that's over $175 Trillion Dollars for just the NEW $100 bill, there is still the other $50/20/10/5/1 notes!Essentially, there have been.. $326,913,567,308,640 US Dollars printed on every year found on a US Dollar Note, e.g., 2009, 2013, etc, & banks can loan out $90 for ever $1 on deposit, just think hard about that!Fake money, fake debt, fake value, fake news, fake investments, fake markets, fake history, fake leaders, fake events, fake elections, yes fake everything!https://plus.google.com/collection/QorNbB Zero Doubt it's all BS!

In reply to by MFL5591

Bring the Gold MonetaryApostate Fri, 12/08/2017 - 13:16 Permalink

Can you please cite that all possible number and letter combinations will be used in full during printing? You are making that assumption and I find it hard to believe they would print Trillions in paper currency unless they were ready to destroy the dollar forever. That of course will occur eventually I just feel you are making a HUGE assumption as to that specific figure and your math is completely based on that assumption. Unless you have proof all digit/letter combinations within the range will be used.

In reply to by MonetaryApostate

nmewn Fri, 12/08/2017 - 07:15 Permalink

Life is like a poker game, if you're gonna bluff by pushing all your non-essential personnel into the middle of the table, be prepared to lose them ;-)