Global Bond Rout Eases As Nervous Traders Watch For "Selling On The Tax News", Catalan Vote

U.S. equity futures are little changed with the GOP Tax Plan now a done deal and no more daily "pricing in" of tax reform possible, as traders nerviously look to see if others will now be "selling the news", a preview of which we got yesterday when US equity indexes closed red across the board despite Trump's biggest legislative win to date, while bonds were spooked by the blowout in government debt needed to fund the giveaways. Having spent more than a year anticipating the bill, its actual passage proved anticlimatic for Wall Street as the Dow, S&P and Nasdaq all closed red.  Indeed, most of the action was in bond markets where yields on U.S. 10-year notes jumped to the highest since March at 2.50 percent, in the process making a bearish break of a key chart level at 2.47 percent, and leading to the biggest 3 day steepening since the Trump election.

In politics, focus now turns to avoiding a government shutdown by Saturday.

An election in Catalonia, which has become a de facto referendum on its independence movement, was another test for European assets late in the year, though there was only modest stress in Spain’s markets and none on the euro. “It (the Catalan election) cannot be ignored going into year-end,” said Orlando Green, European fixed income strategist at Credit Agricole. “But the secession movement has been significantly diminished and would need a decisive move to revive it.”

Speaking of the GOP tax bill, Trump will take his time to make it the "Trump Tax Bill" and not the "Congress Tax Bill" by signing it on January 3rd. In addition, there were comments from President Trump and his chief econ advisor, Gary Cohn, that markets have not fully priced in tax reform. Many, however, disagree, as bond investors are concerned that adding fiscal stimulus at a time of full employment will only reinforce the Federal Reserve’s determination to raise interest rates, thus pushing up short term yields. At the same time, many assume the unfunded tax cuts will lead to an explosion in government borrowing, increasing the supply of new bonds and pressuring prices across the curve. The impact is all the greater as the Fed has begun to unwind its massive bond holdings, as have central banks elsewhere.

Meanwhile, looking forward, House Republican leaders are said to be unsure if there are enough votes to pass the stop-gap measure and avert a shut-down by Saturday, while there is no schedule yet for a vote, according to lawmakers. Furthermore. House Republicans were also said to be arguing with each other over the defense spending level in the stop-gap funding bill.

However, as usual some resolution will be found in the last minute, and markets are not worried. And speaking of markets, in Europe, stocks steadied after two days of declines, with the Stoxx 600 Index rebounding into the green after earlier sliding as much as 0.4% while most of the region’s bonds continued to fall as traders found little reason for renewed optimism going into Christmas. All eyes are on Spain on Thursday, as an election day in Catalonia gives voters another chance to express their view on whether the region should press ahead with its fight to break away.

As Bloomberg writes this morning, a plunge in German government debt is spurring European stock investors to dump bond proxies, but they are showing little love for the usual suspects that benefit on such occasions - banks. Real estate and utility shares, which typically track debt moves because of their income-like properties, are among the biggest losers on the Stoxx Europe 600 Index on Thursday. Yet a gauge of lenders, that ought to benefit from rising yields, is down 0.2%. Investors are displaying caution, weighing political risks including a key vote in Catalonia where polls close early in the evening.  For the technicians, at the start of the session, the Euro Stoxx 50 fell as much as 0.5% hit by a strengthening euro and investor caution ahead of today Catalonia’s vote. Technical chart shows the index breaking below a bullish trendline started in mid-2016 and testing its 200-DMA; Euro Stoxx 50 has fallen 4.7% since a peak in early November. The Stoxx 50 has so far rebounded from this key support level. Separately, the VStoxx gauge of stock volatility has rebounded from a record low of 10.4 reached just two days ago, on December 19, and is up nearly 30% since then.

Earlier, Asian stocks traded mixed, with stock indexes in Sydney and Seoul declining, while those in Hong Kong and Shanghai rose. Australia's ASX 200 (-0.3%) and Nikkei 225 (-0.2%) were negative as the Australian benchmark continued to pull back from near-10yr highs, while participants in Japan awaited the final BoJ policy meeting of the year which proved to be anticlimactic. Hang Seng (+0.6%) and Shanghai. Comp (+0.4%) were initially in the red on continued expectations of a more restrained economy as the Central Economic Work Conference statement declared that prudent monetary policy should be kept neutral and that the floodgates of monetary supply should be controlled, although Chinese stocks later showed resilience to outperform the region amid renewed speculation China’s annual GDP growth figure could surpass the 6.7% seen last year. Finally, 10yr JGBs saw some mild short covering which helped prices recover from some of this week’s bond market sell-off, although price action was very mild with an uneventful BoJ policy announcement also largely ignored from some of its recent losses amid a continuation of the pressure across global bond markets and with the 10yr yield rising to its highest since beginning of last month. Furthermore, participants are also tentative ahead of the BoJ policy announcement later.

The bond selloff that took hold this week continued even as Treasuries stabilized, with core European yields rising for a fourth session. Those in the periphery were mostly lower.

In European rates, it remains a sellers market, and with recoveries becoming fainter and less frequent. Bunds have now breached Wednesday’s low (161.58) on their way to a 161.52 base and the next downside chart level looks almost too close (161.49) to evade the clutches of bond bears. Meanwhile, Gilts have extended losses to 23 ticks at 124.13, with 124.07 now targeted as a key Fib retracement. A crumb of comfort perhaps for buyers and intraday or short term jobbers looking to buck the trend is that volumes on this leg down have been paltry even allowing for the time of the year.

In curencies, the dollar was little changed and Treasuries edged higher before the latest reading of third-quarter U.S. economic growth data and a vote to avert a government shutdown. The euro edged higher and sterling pared losses even as data showed U.K. consumer confidence slipped to a four-year low in December.  The yen fell to the lowest in a week as the Bank of Japan maintained its policy stance and Kuroda said there was no need to reconsider the current framework.

Japan’s currency dropped against all except one of its Group-of-10 peers as Kuroda said the central bank will implement additional stimulus if price momentum is weak and policy makers won’t raise rates just because the economy is good. “Our most important goal is to achieve our 2 percent inflation target at the earliest date possible,” the BOJ chief told a news conference. “We won’t raise interest rates just because the economy is improving.” Other highlights from Kuroda's oress release:

  • Don’t see any need to change yield curve now
  • Will raise rates if stable 2% inflation becomes certain
  • BOJ’s main goal is to achieve the 2% price target

Japan’s 10-year bond yields climbed to the highest level in seven weeks before later erasing the move. “In the environment of rising global yields, the BOJ stance and policy mix, coupled with the still benign and positive risk sentiment, should keep the yen on the back foot,” said Peter Dragicevich, a currency strategist at Nomura Holdings Inc. in Singapore.

South Africa’s rand continued to whipsaw investors, reversing gains of as much as 1.1 percent after the ruling African National Congress agreed to seek a change in the constitution to allow for the expropriation of land without compensation and to nationalize the central bank.

A plunge in German government debt is spurring European stock investors to dump bond proxies, but they are showing little love for the usual suspects that benefit on such occasions -- banks. Real estate and utility shares, which typically track debt moves because of their income-like properties, are among the biggest losers on the Stoxx Europe 600 Index on Thursday. Yet a gauge of lenders, that ought to benefit from rising yields, is down 0.2 percent. Investors are displaying caution, weighing political risks including a key vote in Catalonia.

As noted briefly above, in Spain, investors will be watching the outcome of regional elections in Catalonia on Thursday that give voters another chance to express their view on whether the region should press ahead with its fight to break away or remain within Spain. The vote was called in October, when Spanish Prime Minister Mariano Rajoy fired the Catalan government and dissolved the regional parliament in a bid to snuff out the secession movement. With ousted Regional President Carles Puigdemont in self-imposed exile in Brussels, the ballot may do little to settle the bitter division over Catalonia’s bid for independence — and Rajoy’s efforts to stop it. More details here.

In commodity markets, gold was underpinned by the softer dollar to stand at $1,265 an ounce. Oil prices steadied after rising on a larger-than-expected drop in U.S. inventories and the continued outage of the North Sea Forties pipeline system. U.S. crude futures CLc1 were off 11 cents at $57.97 a barrel, having rallied 53 cents overnight. Brent crude edged back 30 cents to $64.25 a barrel.

Economic data today includes the latest weekly initial jobless claims and the final revision of Q3 GDP.  Nike, Accenture and CarMax are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

  • European equities trade mostly lower across the board (Eurostoxx 50 -0.2%) as relief surrounding progress on US tax legislation is mitigated by concerns over stop-gap measures to avoid a government shutdown
  • In FX markets, the USD Index has recovered from sub-93.300 overnight lows
  • Highlights include US GDP, PCE, Philly Fed and Canadian CPI

Market Snapshot

  • S&P 500 futures up 0.1% at 2,684.25
  • STOXX Europe 600 down 0.2% to 387.65
  • MSCI Asia Pacific down 0.2% to 171.33
  • MSCI Asia Pacific ex Japan down 0.2% to 557.57
  • Nikkei down 0.1% to 22,866.10
  • Topix up 0.08% to 1,822.61
  • Hang Seng Index up 0.5% to 29,367.06
  • Shanghai Composite up 0.4% to 3,300.06
  • Sensex up 0.06% to 33,796.66
  • Australia S&P/ASX 200 down 0.3% to 6,060.36
  • Kospi down 1.7% to 2,429.83
  • German 10Y yield rose 1.7 bps to 0.422%
  • Euro up 0.08% to $1.1881
  • Italian 10Y yield rose 2.4 bps to 1.67%
  • Spanish 10Y yield rose 0.6 bps to 1.482%
  • Brent futures down 0.2% to $64.44/bbl
  • Gold spot up 0.02% to $1,265.82
  • U.S. Dollar Index unchanged at 93.31

Top Headline News from Bloomberg

  • An election in Catalonia Thursday gives voters another chance to express their view on whether the region should press ahead with its fight to break away or remain within Spain
  • U.S. Republicans want to channel momentum from the GOP’s victory on taxes into a push to overhaul the nation’s welfare programs, though some of President Trump’s advisers prefer a less controversial infrastructure plan at the top of his agenda
  • House leaders in the U.S. released a plan late Wednesday that would maintain funding for government operations through Jan. 19. The House is set to vote on a bare-bones stopgap funding plan that would avert a government shutdown on Saturday and likely force the Senate to abandon attempts to add other provisions
  • Britain’s PM May is flying to Poland to seek a Brexit ally from its new government. May faced a setback on Wednesday as her First Secretary of State Damian Green was forced to resign after an official investigation found that he’d made misleading statements about pornography
  • U.K. consumer confidence slipped to a four-year low in December and risks weakening further in 2018, according to a GfK report Thursday
  • The Bank of Japan left policy unchanged in 2017’s final meeting, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation

Asia stocks traded mixed after another lacklustre day on Wall St where all majors finished with mild losses despite Congress passing tax reforms, as focus now turns to avoiding a government shutdown by Saturday. In addition, the latest headlines from Washington DC suggested GOP leaders were unsure if they had enough votes to pass the stop-gap measure and that there was no exact schedule yet for a vote. ASX 200 (-0.3%) and Nikkei 225 (-0.2%) were negative as the Australian benchmark continued to pull back from near-10yr highs, while participants in Japan awaited the final BoJ policy meeting of the year which proved to be anticlimactic. Hang Seng (+0.6%) and Shanghai. Comp (+0.4%) were initially in the red on continued expectations of a more restrained economy as the Central Economic Work Conference statement declared that prudent monetary policy should be kept neutral and that the floodgates of monetary supply should be controlled, although Chinese  stocks later showed resilience to outperform the region amid renewed speculation China’s annual GDP growth figure could surpass the 6.7% seen last year. Finally, 10yr JGBs saw some mild short covering which helped prices recover from some of this week’s bond market sell-off, although price action was very mild with an uneventful BoJ policy announcement also largely ignored from some  of its recent losses amid a continuation of the pressure across global bond markets and with the 10yr yield rising to its highest since beginning of last month. Furthermore, participants are also tentative ahead of the BoJ policy announcement later.

Top Asian News

  • BOJ Maintains Stimulus as Inflation Lags Behind Growth
  • China’s Didi Cashes Up to Go Global in Next Stage of Uber Battle
  • Indonesia Wins Fitch Rating Upgrade Months After S&P Move
  • Hong Kong Dollar Tumbles to Weakest Level in Nearly Two Years
  • China’s Yuan Breaks Out of Narrow Range to Hit Three-Month High
  • China Gas Shortage This Winter Means Boon for Diesel Demand
  • Melbourne Pedestrians Hit by SUV in ‘Deliberate’ Act, Police Say
  • Noble Group Gets Breather With Waiver as Debt Talks Drag On

European equities trade mixed as relief surrounding progress on US tax legislation is mitigated by concerns over stop-gap measures to avoid a government shutdown in Washington. Across the Atlantic in Europe, events continue to settle down with the only notable event for traders being today’s Catalonian election which is seen as more of a proxy for the independence campaign than a vote on domestic issues and legislation. In terms of sectors, modest underperformance has been seen in telecom and utility names with individual movers on the light side as stock specific newsflow dries up heading into year-end.

Top European News

  • Iberdrola Is Said to Consider Sale of Engineering Assets
  • BASF Says Brudermueller to Succeed Bock as CEO at Chemical Giant
  • ECB Loses Sway in Sweden With Riksbank Looking for Stimulus Exit
  • U.K. Posts Lowest November Budget Deficit Since 2007 on Tax
  • Ukraine Detains Suspected Russian Spy From Within Cabinet Office
  • Uber’s Loss in Europe Shows Trans-Atlantic Split Over Technology
  • Renault Is Said to Be Considering Successors to Ghosn as CEO

In FX markets, the USD Index has recovered from sub-93.300 overnight lows, but remains largely unimpressed by the passage of the tax reform bill through Congress as the focus swiftly shifts to more immediate financial matters and the looming threat of a Government shutdown. Hence, the DXY looks prone to more downside pressure towards 93.000 while unable to mount a sustained return to 93.500+ levels. Eur/Usd has slipped back from peaks just above 1.1900, having respected or rejected further gains beyond a key chart fibo around 1.1904 after clearing resistance at 1.1863 late on Wednesday. Cable remains unable to maintain 1.3400 status or higher amidst the latest UK political upheaval. AUD and NZD holding just below recent recovery highs around 0.7660 and 0.7000 vs the US Dollar respectively, with the Kiwi deriving some support from stronger than consensus GDP data overnight, and upgrades to the previous quarter.

In commodities, WTI and Brent crude futures have pulled away from best levels to move into negative territory with reports from Ineos suggesting that repairs on the Forties pipeline are going well and work will be completed by Christmas. Elsewhere, the metals complex has been fairly uneventful with gold giving up its mild early gains, copper trading sideways amid an indecisive risk tone. Closure of Libyan oil ports (Es Sider, Zueitina and Brega) due to bad weather – sources.

Looking at the day ahead, we’ll get the third and final revision for Q3 GDP in the US, while the October FHFA house price index and November leading index will also be out across the pond. In Europe December confidence indicators in France and November public sector net borrowing data in the UK are due. Also worth keeping an eye on will be the regional elections in Catalonia.

US Event Calendar

  • 8:30am: Philadelphia Fed Business Outlook, est. 21, prior 22.7
  • 8:30am: GDP Annualized QoQ, est. 3.3%, prior 3.3%; Personal Consumption, est. 2.3%, prior 2.3%; Core PCE QoQ, est. 1.4%, prior 1.4%
  • 8:30am: Initial Jobless Claims, est. 233,000, prior 225,000; Continuing Claims, est. 1.9m, prior 1.89m
  • 8:30am: Chicago Fed Nat Activity Index, est. 0.5, prior 0.7
  • 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.3%
  • 9:45am: Bloomberg Consumer Comfort, prior 51.3; Economic Expectations, prior 53
  • 10am: Leading Index, est. 0.4%, prior 1.2%

DB's Jim Reid concludes the overnight wrap

Welcome to the shortest/longest day of the year depending on where you are. It might feel like the latter to me as I had a rare night out last night and I’m struggling to keep my eyes open typing this. To be honest though after a large meal and a few beers I felt exhausted and excused myself at a sociable time so I could collapse in bed. What the 20, 25, 30 and maybe 35 year old version of me would have made of such behaviour is anyone’s guess. Problem is I’m doing the same thing again on Saturday with a different crowd and I’m already feeling tired thinking about it. Two nights out a year on my own is too much these days.

Talking of sleepiness, bond markets have certainly woken from their 2017 slumber as we hit the home stretch of the year. Indeed 10 year US Treasuries nudged up against 2.50% last night (closed 2.497%), +3.3bp higher on the day and +10.3bp over two days. For all the talk about bond yields being resolutely anchored, and with many in the market struggling to work out what could drive yields higher, it’s interesting that there have only been 11 trading days in 2017 where US 10 year yields have closed higher than last night’s levels.

For comparison, Bund yields have closed higher 92 days in 2017 but this would have been 191 had we calculated on Monday night before we moved from around 0.3% to the 0.403% close last night (+2.7bp on the day). Elsewhere, Gilts slightly underperformed (+4.6bp) while the US 2s10s steepened c3bp to 63.9bp yesterday.

We went through the main reasons for the sell-off yesterday but the final passing of the US tax bill by the Senate and then the revote by the House meant that Mr Trump got his tax bill delivered to him by Xmas. Although expected now for a few days, the final passage seemed to add another reason for the sell off to continue. Notably, President Trump is expected to sign the bill into law on 3 January to ensure automatic spending cuts to Medicare and other programs don’t take effect.

Over in Spain, Catalonia will hold its regional election today with polls showing neither side will win a clear majority. Bloomberg noted the median results of the seven surveys published on the final day of polling showed the separatist bloc could get 47% of the votes and those against independence could get 44%. On an individual party basis, the pro-Spain Ciudadanos Party could win 23% of the votes, then closely followed by the pro-separatist party Esquerra Republicana at 22%. Indeed it feels like a neck and neck race.

In Japan, the BOJ has left its monetary stimulus on hold – as widely expected. Notably, the vote on continuing asset purchases was unanimous but the vote on rates was 8-1 with the new member Mr Kataoka dissenting. There could be more clues for 2018 as Governor Kuroda will hold a press conference at 3:30pm (Tokyo time, 5:30am UK time and as we go to print).

This morning in Asia, markets are mixed. The Hang Seng (+0.45%) and China’s CSI 300 (+1.0%) are both up while the Nikkei (-0.07%) and Kospi (-1.56%) are down, with the latter impacted by weakness in Samsung’s share price (-3.2%) as we type. Treasuries are slightly firmer with UST 10y trading c1.5bp lower.

Now recapping other markets performance from yesterday. US bourses softened with the S&P 500 (-0.08%), Dow (-0.11%) and Nasdaq (-0.04%) all marginally lower. Within the S&P, losses were led by real estate and utilities with partial offsets from the energy and telco sector. European markets also retreated, with the Stoxx 600 (-0.68%), DAX (-1.11%) and FTSE (-0.25%) all down, partly impacted by the higher EUR and weakness in tech (-1.11%) stocks. The VIX fell for the first time in three days to 9.72 (-3.09%).

Turning to currencies, the US dollar index and Sterling dipped 0.09% and 0.07% respectively, while the Euro strengthened 0.26%. In commodities, WTI oil rose 0.92% following EIA data showed that US oil stockpiles fell the most in four months. Elsewhere, precious metals edged 0.3% higher (Gold +0.31%; Silver +0.34%) and other base metals also increased modestly (Zinc +0.41%; Aluminium +0.72%; Copper +1.23%).

Away from the markets and onto China, where its’ Central Economic Work Conference (CEWC) has now concluded. Our China economist noted the press release sends conflicting messages. It reiterates the importance of maintaining stability, which suggests the economic growth target will stay at 6.5%. However, it also indicates that the fiscal policy stance will not be as supportive as in 2017. While the central government deficit may stay near 3% of GDP, the statement talked of strengthening “local government debt management”. The statement also suggests that containing financial risks ranks at the top of policy priorities, together with poverty reduction and environmental protection. Overall, our economists maintain their view that growth will slow in 1H given the tighter policy stance, and the government will loosen policy in Q2. Refer to the link for more details.

Over in Germany, Ms Merkel’s CDU/CSU bloc and SPD have put out a joint statement noting exploratory talks to form the next Government will begin on 7 January, with the aim of reaching a preliminary agreement by 12 January. It was unclear whether the talks will focus on a grand coalition or a minority led government, although party officials noted “good discussions in an atmosphere of trust”. Earlier on, Norbert Lammert, the former president of Germany’s lower house of Parliament for Ms Merkel’s CDU during 2005 to 2017 seemed less convinced, he noted “the constant declarations that there will definitely be a grand coalition are the surest way to stop one”.

In the US, negotiations to avoid a partial government shutdown from this Saturday are evolving without firm offers from either side. That said, Senate Majority Leader McConnell didn’t seem to be too worried. He noted a shutdown is “not going to happen” as “we’ll work it out, we always do”. Elsewhere, when asked if the tax bill will pay for itself, House speaker Ryan noted “nobody knows the answer to that question, because that’s in the future”. Looking into 2018, he added that Congress will focus on “getting people from welfare to work” and give the States more flexibility with Medicaid.

Turning back to Brexit. In response to EU Chief negotiator Barnier’s earlier comments of no cherry picking of rules for Brexit talks, particularly for financial service firms, the BOE Governor Carney argued that was too negative, noting that “I don’t accept that just because it has not been done in the past, it can’t be done in the future”. After all, “the City of London is actually the banker for Europe” as UK’s PM May noted in her parliamentary address yesterday. Elsewhere, PM May’s effective deputy Damina Green has resigned, adding to the recent turnover in her cabinet.

Before we take a look at today’s calendar, we wrap up with the other data releases from yesterday. In the US, the November existing home sales were above market and rose 5.6% mom to 5.81m (vs. 5.53m expected) - the highest in c11 years. Across Europe, Germany’s November PPI was a tad below expectations at 0.1% mom (vs. 0.2%) and 2.5% yoy (vs 2.6%). Elsewhere, the UK’s December CBI retail report survey was in line at 20. In Sweden, the Riksbank left its cash rate on hold at -0.5% as was widely expected. The Bank confirmed that its QE bond purchase programme will end but still pledged support for the debt markets into early 2019, with the bank planning to reinvest c65bn Kronor in returns and front-load investments from maturing debt. The Bank continues to forecast a gradual rise in its policy rate from the middle of next year.

Looking at the day ahead, all eyes will be on BOJ Governor Kuroda’s press conference which you’ll know more about by the time you read this. Away from that we’ll get the third and final revision for Q3 GDP in the US, while the October FHFA house price index and November leading index will also be out across the pond. In Europe December confidence indicators in France and November public sector net borrowing data in the UK are due. Also worth keeping an eye on will be the regional elections in Catalonia.