Stocks Smash More Records As Global Melt Up Accelerates; BOJ, PBOC Surprise Traders

The global market melt up continues, with Asian and European stocks rising, sending the MSCI all-country world stocks index to another record high as Europe’s main markets shrugged off a tech wobble in Asia and instead cheered Christmas trading updates and more forecast-beating data from Germany.

The MSCI Asia Pacific Index rose 0.3 percent on optimism earnings and economic growth prospects in the region support the stocks trading near record highs. Japan’s Nikkei closed at its highest since November 1991, catching up to the previous session’s gains as markets reopened after a holiday on Monday. Most equity benchmarks in the region rose except those of South Korea, Malaysia, Indonesia and Pakistan, while Taiwan was little changed. Offsetting Japan's euphoria, South Korea’s Kospi erased its gains and slipped 0.1 percent, dragged lower by a 3.1% drop in shares of Samsung Electronics Co. Samsung’s guidance fell short of market expectations despite a forecast for a record fourth-quarter profit, as a strong won and one-off staff bonuses offset surging DRAM prices.

European stocks likewise climbed as traders focused on strong economic data in Germany and a chaotic cabinet reshuffle in the U.K. that may bode ill for its government’s ability to navigate the next stage of Brexit talks. The Stoxx Europe 600 Index was up 0.3%, led by miners and telecommunications stocks. The U.K.’s FTSE 100 Index rises 0.4% as sterling weakens after the cabinet reshuffle. Altice NV is the Stoxx 600’s biggest gainer after the company said it will spin off its U.S. cable-television business

While stocks continue their smooth levitation day after day, there were some fireworks in FX, where first the Yen surged after the BOJ trimmed its purchases  of long-dated government bonds, reducing buying of 10-to-25 year debt by 10 billion yen to 190 billion, the first cut in the sector since Dec. 28, 2016, and also scaled back purchases of bonds maturing in more than 25 years by 10 billion yen to 80 billion, stoking speculation it could start to wind down its stimulus policy this year, and resulting in a sharp move higher in the Yen against all its G-10 peers.

Investors sold the USDJPY, with bids on bank platforms hit hard by Tokyo-based leveraged accounts following the BOJ operation, according to Bloomberg. The Japanese currency rose against all of its Group-of-10 peers, while yields for government bonds advanced.

"BOJ’s operation was a trigger for yen gain as it came amid a lack of fresh factors and as people were getting cautious about buying in the 113 levels," said Hiroshi Yanagisawa, chief analyst at FX Prime by GMO in Tokyo. "FX markets had not paid attention to BOJ last year but there may be some expectations that the situation may be changing a bit this year."

As central banks in the U.S. and Europe start to normalize monetary policies, attention is turning to Japan to see if the BOJ will follow suit, even if inflation has yet to reach its 2 percent target.  The

... followed by the PBOC announcing it was suspending its countercyclical buffer, which in turn resulted in the biggest drop in the offshore yuan since September.


Both moves took analysts by Surprise: since it adopted its yield-curve-control policy in 2016, the BoJ has occasionally tweaked its buying, but some market players seemed to take Tuesday’s move as a signal. “It shouldn’t be perceived as a monstrous signal of the end of monetary easing but it shows that even the tiniest announcement on a quiet day can have a reaction,” said Societe Generale’s global head of currency strategy Kit Juckes. “And it shows that when they start turning their ship around from this policy, the yen is going to go miles.”

Commenting on the PBOC's move, Goldman's MK Tang said that it would suggest that "the authorities are ready to allow the CNY to be more market-determined... The recent bout of CNY appreciation before today’s move—which had taken the currency’s strength against the CFETS basket close to the Sep ’17 peak—might also have been viewed as too rapid."

The dollar, meanwhile, rose for the second day against most other major currencies.

The euro - which last week approached three-year highs - slipped further away from $1.20 to a 10-day low of $1.1941. That was despite the biggest increase in German industrial data since September 2009 and suggested investors were becoming more cautious after a rally that has pushed “long” euro positions to records.

“I don’t think right now levels substantially above $1.20 are justified,” Reichelt said. “I know the market is very optimistic about the euro, but if you look at the data and the central bank, the ECB (European Central Bank) is still on an expansionary path.”  Nevertheless, euro zone bond yields rose, with traders also making room for new supply from three of the bloc’s best-rated countries at relatively attractive levels. The yield on the region’s benchmark, German 10-year debt, climbed to 0.44 percent, well above the mid-December level of 0.30 percent.

In geopolitical developments, a North Korea delegation head said that inter-Korean talks were expected to go well and that he hoped to achieve precious results. Furthermore, it was later reported after discussions finished, that North Korea is to send a delegation of high-ranking officials, athletes and cheering squad to the Olympics. The news comes as the WSJ reported on Monday that US Secretary of State Tillerson and Secretary of Defense Mattis are reportedly trying to hold President Trump back from striking North Korea, while National Security Adviser McMaster is in favour of a "bloody nose" attack.

In rates, US 10Y Treasuries come under pressure, with the yield curve steepening following decline in Japanese government bonds as focus turns to heavy global bond supply due this week. As a result, 10-year TSY yields rose as much as 2.4bps to 2.504%, the highest level since March.


In commodities, the focus remained on oil. U.S. crude prices hit their highest since 2015 on Tuesday amid OPEC-led production cuts and a dip in American drilling. WTI crude futures were at $62.16 a barrel at 0951 GMT - 43 cents, or 0.7 percent, above their last settlement. They earlier matched a May 2015 high of $62.56 a barrel.

Beyond equaling that 2015 high, which was a short intra-day spike, Tuesday’s high was the strongest for WTI since December, 2014, at the start of the oil market slump. “Speculators continued to increase their net long in ICE Brent ... According to exchange data, speculators increased their position by 4,175 lots to leave them with a record net long of 565,459 lots,” ING bank said. Meanwhile, Brent crude futures were at $68.11 a barrel, 33 cents, or 0.5 percent, above their last close. Brent touched $68.27 last week, its highest since May 2015.

Bulletin headline summary from RanSquawk

  • USD is extending recent recovery gains to just over 92.500 amid reports that the PBoC is planning to suspend the counter-cyclical factor in CNY fixes
  • Global European equities are trading higher across the board (Eurostoxx 50 +0.2%) with all sectors (ex-energy) in
  • the green
  • Highlights include APIs, Fed’s Kashkari and supply from the Netherlands, Austria, Germany, UK and the US

Market Snapshot

  • S&P 500 futures unchanged at 2,747.00
  • STOXX Europe 600 up 0.3% to 399.66
  • MSCI Asia up 0.2% to 180.15
  • MSCi Asia ex Japan down 0.1% to 589.21
  • Nikkei up 0.6% to 23,849.99
  • Topix up 0.5% to 1,889.29
  • Hang Seng Index up 0.4% to 31,011.41
  • Shanghai Composite up 0.1% to 3,413.90
  • Sensex up 0.4% to 34,479.65
  • Australia S&P/ASX 200 up 0.09% to 6,135.81
  • Kospi down 0.1% to 2,510.23
  • German 10Y yield rose 0.4 bps to 0.435%
  • Euro down 0.2% to $1.1940
  • Italian 10Y yield fell 2.2 bps to 1.715%
  • Spanish 10Y yield fell 1.8 bps to 1.464%
  • Brent futures up 0.2% to $67.88/bbl
  • Gold spot down 0.4% to $1,314.76
  • U.S. Dollar Index up 0.2% to 92.53

Top Overnight News

  • Negotiators from North Korea and South Korea met on Tuesday for talks aimed at making the Olympics a success, a move that could lead to broader discussions on Kim Jong Un’s nuclear program
  • North Korea to send athletes, officials to Winter Olympics; says wants to resolve Korean peninsula issues through dialogue and negotiations
  • Britain should be granted the “Canada plus plus plus” trade deal that Brexit Secretary David Davis has called for, Italian Economic Development Minister Carlo Calenda said in an interview
  • The Bank of Japan is considering raising its economic growth forecast for the fiscal year beginning in April at its policy meeting ending on Jan. 23, Kyodo news reported, without citing its source
  • European fund managers have cut their 2018 investment research budgets by 20 percent as they scale back the number of providers they use in response to MiFID II, according to a survey by U.S. consulting firm Greenwich Associates
  • Fed’s Bostic says ’two to three’ hikes 2018 base case, need higher inflation to justify 3-4 hikes; caution if yield curve inverting
  • Fed’s Williams says U.S. economy has fully recovered from recession; Rosengren says worth assessing if 2% inflation goal still warranted
  • U.K. December BRC like-for-like retail sales 0.6% vs 0.3% estimate
  • Japan November labor cash earnings 0.9% vs 0.6% estimate
  • Australia November building approvals 11.7% vs -1.3% estimate

Asian equity markets traded mostly higher as the region mirrored the tone seen in US, where all majors posted fresh record highs but the DJIA still snapped its New Year streak. ASX 200 (+0.1%) and Nikkei 225 (+0.6%) were positive in which commodity names led in Australia and the Japanese benchmark outperformed as it played catch up on return from the extended weekend. However, some of the gains in Japan were later pared on tapering concerns after the BoJ reduced its Rinban announcement for longer dated bonds. Elsewhere, KOSPI (-0.1%) was dampened after index-heavyweight Samsung Electronics missed on Q4 preliminary results, while both Hang Seng (+0.4%) and Shanghai Comp. (+0.1%) also gained despite initial cautiousness on further inaction by the PBoC which resulted to a net daily drain of CNY 130bln. Finally, 10yr JGBs were lower by about 15 ticks on concern of BoJ tapering after the Rinban announcement saw a reduction of buying in 10yr-25yr maturities to JPY 190bln from JPY 200bln, as well as the amount in 25yr+ maturities which was cut to JPY 80bln from JPY 90bln. As reported earlier, the Yuan tumbled after China announced it would suspend the counter-cyclical factor in the CNY fix. Earlier,the PBoC skipped open market operations again for the 12th day.

Top Asian News

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Global European equities are trading higher across the board (Eurostoxx 50 +0.2%) with all sectors (ex-energy) in the green. Performance is relatively broad-based with some slight outperformance in material names. Focus has also been on the UK supermarket sector after the latest trading update from Morrisons (+2.6%) sent their shares to the top of the FTSE alongside the latest Kantar and Nielsen reports. Elsewhere, focus has also fallen on UK homebuilders with Persimmon shares initially supported by upbeat guidance before upside momentum then dissipated. British American Tobacco shares have been supported after stating that the impact of new US tax legislation would result in a benefit of 6% to FY 2018 EPS. A somewhat belated and limp uptick in Bunds and Gilts given the well-received German and UK supply offerings with the only slight fly in the ointment perhaps coming via the 2027 DMO average yield. The rather muted price moves suggest more supply related topside pressure looming ahead of the start of US refunding and with plenty of EU issuance still to come this week, not to mention corporate deals. US Treasuries also seem to have supply in mind with a steeper bias across the maturity curve, and the 10 year yield just crossing 2.5% again.

Top European News

  • German Industry Output Rebounds on Strong Investment Demand
  • Spanish Emblem of Real-Estate Bust Returns to Market With IPO
  • Sweden Has ‘Crazy’ Surplus as Soaring Tax Revenue Swells Coffers
  • U.K. Scrimps at Department Stores to Fund Holiday Feasts
  • World’s Biggest Covered-Bond Market Tests Extreme Rate Territory

In FX, USD is extending recent recovery gains to just over 92.500, with the Greenback getting a boost from reports that the PBoC is planning to suspend the counter-cyclical factor in CNY fixes, which saw USD/CNH spike to 6.51520 from 6.50340 following the earlier 6.4968 USD/CNY mid-point setting. JPY firmer and the G10 outperformer on reduced Rinban activity overnight which alongside monthly BoJ data suggests a concerted slowdown in JGB buying. USD/JPY down to 112.50 from 113.00+ at one stage, but bids around the low held and broader US Dollar gains now nudging the pair back up towards 113.00 again. EUR is still on the back foot across the board as more long positions are trimmed, with EUR/USD now under 1.1950 and eyeing stops said to be in place at 1.1925. AUD/CAD/NZD all off best levels vs their US counterpart, with AUD/USD above 0.7850 on much better than expected Aussie building approvals data overnight, but now back down under 0.7825, USD/CAD looking firmer over 1.2400 after another dip below the figure (another uptick in oil prices and solid BoC business outlook survey supporting the Loonie) and NZD/USD down around 0.7170 having almost touched 0.7200.

In the commodities complex, WTI and Brent crude prices were initially trading in close proximity to recent highs in a continuation of sentiment yesterday after expectations of a draw of 4.1mln bbls for this week’s inventory data. Furthermore, OPEC officials suggested that the Iran situation was being monitored, and output will only be raised in the event that there is a significant and sustained disruption to output. However, prices then began to be dragged lower after comments from the Iranian energy minister who claimed that OPEC does not want oil prices above USD 60/bbl. In metals markets, the recovery in the USD placed some weight on precious metals (Silver tested USD 17.00/oz to the downside) after a relatively uneventful Asia-Pac session. Elsewhere, Chinese iron ore futures were seen higher overnight as production cutbacks in China continues to sway sentiment. Iran oil minister Zanganeh says OPEC does not want oil prices above USD 60/bbl. Indian Trade Ministry official says comprehensive gold policy will likely be prepared by March and that there is also a likelihood for the recommendation of lower import tax on gold.

Looking at the day ahead, the November unemployment rate for the Eurozone came in (8.7%, Exp. 8.7%, Last 8.8%), along with Germany’s IP (3.4%, Exp. 1.9%, last -1.2%). Over in the US, there is the December NFIB small business optimism index and JOLTS job openings. Onto other events, the Fed’s Kashkari speaks at a moderated panel.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 107.8, prior 107.5
  • 10am: JOLTS Job Openings, est. 6,025, prior 5,996
  • 10am: Fed’s Kashkari Speaks on Moderated Panel

DB's Jim Reid concludes the overnight wrap

The eyes of the holders of US equities continue to stream tears of joy at the moment, as yesterday marked the 5th up day out of 5 so far this year for the S&P (+2.77% so far). Since 1928 we’ve only seen the first 5 days of the year to be consecutively up 7 times and this is the first occurrence since 2010. When the first 5 days are up, the average price return for the year is +13.44%, with the low of +2.03% and high of 20.09%. Notably, the longest streak was in 1976 and 1987 when the S&P rose for 7 consecutive days at the start of the year.

Staying in the US, in a quiet week for data leading up to Friday’s CPI, Fed speakers grabbed the headlines yesterday. The Fed’s Bostic seemed dovish and noted “I’m comfortable continuing with a slow removal of policy accommodation”, but “I would caution that doesn’t necessarily mean as many as three or four moves per year”. On inflation, his main concern is that inflation expectations risk becoming anchored below 2% and if this happened, “it would be increasingly difficult for the Fed to hit our 2% target”. In terms of impacts from the tax cuts, he is making a “positive, but modest boost” to his near term GDP growth profile for the coming year, but is treating a more substantial breakout of tax reform related growth as a “upside risk” to his outlook.

Elsewhere, at the Inflation targeting conference, the Fed’s Rosengren said his “own view is that we should be focused on inflation range (rather than the 2% target), with flexibility to move within the range as the optimal inflation rate changes”. He added that a range of 1.5%-3% could provide flexibility and “don’t think most people are going to notice”. The former Fed governor Bernanke also noted there will be “some pretty serious discussions” on monetary policy frameworks over the next 18 months under the new Fed leadership.

Turning to the US’s 4Q17 earnings season kicking off today, our equity strategists expect the S&P’s 4Q EPS growth to rise to near a 6-year high of 14.6% (vs. 3Q: 7.8%), with earnings supported by stronger US and foreign economic growth, a weaker USD, higher oil price and a dissipation of hurricane related losses. On a sector basis, median growth is expected to be led by the energy (+138%), tech (+18.6%) and financial (+16.6%) sectors while  growth from industrials is the relative laggard at 4.8%, impacted by GE. Looking to 2018, our team expect the aggregate S&P effective tax rate to fall from 27% to 19%, with all sectors to benefit but the bigger relative beneficiaries are energy, retailing and telco sectors, while the laggards are Pharma, insurance and tech companies.  The new 2018 S&P target is 3,000 (c9% above current levels).

Over in Europe, our Economists have published a note posing five key questions for the Euro area in 2018. The first question is whether the euro area’s growth will reach new cyclical highs in 2018? Their answer is “possibly”, as their forecast for CY18 of 2.3% is close to the 2.3%-2.4% that they estimate for CY17, and they see the risks around their forecast as broadly balanced but skewed to the upside in early 2018. Moving on, the team expect 2018 to be a year in which market perceptions of inflation improves, albeit that normalisation may be slow, complicated by rigid inflation regimes in some countries, structural changes and the appreciation of the EUR more recently. Notably, the German wage settlements could influence such perceptions as one third of employees are up for renegotiations in 2018 (in metalwork our team expect a settlement clearly above 3%). Elsewhere, our team also pose questions on: iii) will the ECB be able to engineer a soft landing for financial conditions iv) will “integration” or “exit” be the dominant political theme and v) whether the EU27 and the UK will reach a deal in 2018. For more details, please refer to their report.

This morning in Asia, markets continue to be modestly higher. The Nikkei is up 0.53% after trading resumed post yesterday’s holiday, Hang Seng is up 0.24% while Kospi pared early gains to be down 0.51% as we type. Elsewhere, the North and South Korean delegates have started their first high level talks time since 2015, with discussion topics such as North Korea joining next month’s Winter Olympics.

Now recapping market performance from yesterday. The S&P (+0.17%) and Nasdaq (+0.29%) recovered from earlier losses and edged higher for the fifth consecutive day, while the Dow dipped 0.05%. Within the S&P, modest gains in the utilities and real estate sectors were partly offset by losses in healthcare and financials. European markets were broadly higher, with the Stoxx (+0.27%) and DAX (+0.36%) up modestly, while the FTSE (-0.36%) was weighed down by profit downgrades in the tech and healthcare space.

In government bonds, core 10y European bond yields fell c1bp (Bunds & OATs -0.7bp; Gilts -0.8bp) while treasuries were broadly flat. Peripherals outperformed with Portugal’s 10y yields down 6.7bp, in part due to a reversal of weakness back in the end of 2017. Turning to currencies, the US dollar index gained for the second consecutive day (+0.44%), while Sterling and the Euro weakened 0.04% and 0.52% respectively. In commodities, WTI oil rebounded 0.47% to $61.73/bbl.

Elsewhere, precious metals (Gold +0.06%; Silver -0.55%) and other base metals were mixed, but little changed (Copper +0.04%; Zinc +0.79%; Aluminium -0.47%). Away from markets, an unnamed White House official has told Bloomberg that President Trump is close to making a decision on who to nominate to be the next Vice Chairman for the Fed. Elsewhere, Politico has reported that President Trump’s administration is preparing to unveil an aggressive trade crackdown in the coming weeks that is likely to include new tariffs aimed at countering China and other economic competitors’ alleged unfair trade practices.

In the UK, PM May has reshuffled her cabinet with key posts such as Foreign Secretary Johnson, Brexit Secretary Davis and Chancellor Philip unchanged, but the Education Secretary Justine Greening has quit after the PM has offered her an alternative role – the work and pensions portfolio. Health minister Hunt also persuaded her to change her mind about being moved from his position. Mrs May seemed to start the year with a little bit of momentum but most of the British press has seen yesterday’s reshuffle as shambolic and reflective of her weak political position.

Elsewhere the latest ECB holdings were released yesterday, but there was little relevant info as it only contained a few days of secondary purchases data. Net CSPP purchases last week were €0.3bn and Net PSPP purchases €2.5bn. This left the CSPP/PSPP ratio at 12.4% last week (vs. 11.5% before QE was trimmed in April 2017). We expect more meaningful data from next week when we get the first clues to the PSPP/CSPP taper split post January’s QE cut.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the November consumer credit data rose the most in 16 years, with total credit up $28.0bln (vs. $18bln expected), mainly driven by strong credit card spending which rose the most in 12 months. The confidence indicators for the Eurozone were broadly above market. The December economic confidence index was above expectations at 116  (vs. 114.8) and to the highest since October 2000, with the rise due to an improvement in the outlook for industry and services. The January Sentix investor confidence was also above market at 32.9 (vs. 31.3 expected) - slightly below the 10 year high back in November. Elsewhere, the final reading of consumer confidence was in line at 0.5 while the November retail sales print was above expectations at 2.8% yoy (vs 2.4%). Over in Germany, November factor orders fell 0.4% mom (vs. 0% expected), but prior revisions meant the annual growth remained solid at 8.7% yoy (vs 7.8% expected). In the UK, the December Halifax house price index fell for the first time in six months (-0.6% mom vs. +0.2% expected), so annual growth for the past quarter slowed to 2.7% yoy (vs 3.3%  expected).

Looking at the day ahead, the November unemployment rate for the Eurozone and Italy are due, along with Germany’s IP. Then the trade and current account balance stats for France and Germany are also due. Over in the US, there is the December NFIB small business optimism index and JOLTS job openings. Onto other events, the Fed’s Kashkari speaks at a moderated panel.