It was a relatively quiet session until a little after 5am ET when all early-morning market moves were superseded by aggressive cross-asset reaction (as Bloomberg puts it) - largely in the form of dumping anything US-linked - to a Bloomberg report that China is reconsidering its UST holdings. The dollar, US equity futures and US Treasurys all sold off on the report, while spot gold spiked higher.
E-minis tumbled immediately on the news, suffering their first sharp drop of the new year.
The dollar pared its weekly gains, and is back to a 92.00 level, as the UST curve steepens while the yen extends a rally on growing speculation the Bank of Japan may taper its unprecedented monetary easing, a process which was unveiled on Monday night.
Treasury yields spiked on news that Chinese officials reviewing foreign-exchange holdings are said to have recommended slowing or halting purchases of Treasuries, with the yield rising as high as 2.59%, just shy of Jeff Gundlach's 2.63% red line.
Reduced asset purchases by the world’s top central banks, rising commodity prices and looming U.S. debt sales all support the case for higher bond yields, but until now they have proved resilient. The move in benchmark Treasuries on Tuesday - into what bond veteran Bill Gross declared a bear market - has left traders weighing where yields will go from here and what impact the change will have on other assets. And, as Jeff Gundlach discussed last night, once 10Y yields rise above 2.63%, all bets are off, even for the S&P.
Volumes in the euro and the pound remained low initially before jumping on speculation central banks might shift reserve allocation out of the dollar. Oil continued to rise while equities traded mixed.
In global markets, the Stoxx Europe 600 Index headed for its first down-day in six, following moves lower in a handful of Asian equity gauges. In commodities, WTI extended gains from the highest close in more than three years as U.S. industry data signaled crude stockpiles dropped for an eighth week.
In Asia, the yen climbed for a second day as traders unwound short positions in the wake of the Bank of Japan paring back purchases of ultra-long dated bonds. China’s central bank weakened its daily fixing on the yuan by the most since September, one day after a report showed it has adjusted its currency-fixing mechanism, a move interpreted as an embrace of greater fluctuation in the exchange rate.
While all overnight news are of secondary importance, in a tangential update, overnight China reported that its December headline CPI inflation inched up to 1.8% year-on-year from 1.7% yoy in November, slightly below consensus of 1.9% yoy. In month-on-month terms, headline CPI inflation picked up to 2.0% (seasonally adjusted annual rate), from 1.1% in November. For the full year in 2017, CPI inflation averaged at 1.6%, lower than 2.0% in 2016. PPI inflation decelerated further to 4.9% yoy from 5.8% yoy in November. This implies an annual rate of +2.7% (s.a.) in November, slightly up from an increase of 2.5% annualized in November
Commenting on the report, Goldman said that CPI inflation will likely be higher in Q1 this year, primarily on higher food prices, reflecting both a very low base (food prices declined significantly in Q1 of last year) and impacts of the record-breaking low temperature and snowstorm in some regions in the first half of January (though the China Meterological Administration expects the temperature will normalize to the historical average in the second half). Oil prices have increased notably recently, but there should be limited upwards pressure in the coming months suggested by our commodity team’s forecasts. As a reminder, a big reason behind the great inflationary scare of 2011 was surging - and transitory - Chinese food inflation, which also helped facilitate the Arab Spring revolutionary movement. 7 years later, are we about to get a repeat?
Meanwhile, in Brexit news, EU Brexit Negotiator Michel Barnier said that the risk of a disorderly Brexit has decreased and that the UK is ready to take responsibility for its choice. However, separate reports suggest that the EU is said to warn UK companies of being shut-out should a no-deal Brexit occur. Additionally, opposition from Germany reportedly risks derailing UK hopes for a bespoke post-Brexit trade deal. The reports suggest that Merkel considers the idea another ruse for Britain to “have its cake and eat it”.
Today's data include MBA mortgage applications and wholesale inventories. Lennar, MSC Industrial and Aphria are among companies reporting earnings. Fed speakers include Evans, Kaplan, and Bullard.
• S&P 500 futures down 0.3% to 2,744.50
• STOXX Europe 600 down 0.07% to 399.82
• MSCI Asia Pacific up 0.06% to 180.67
• MSCI Asia Pacific ex Japan down 0.4% to 587.39
• Nikkei down 0.3% to 23,788.20
• Topix up 0.2% to 1,892.11
• Hang Seng Index up 0.2% to 31,073.72
• Shanghai Composite up 0.2% to 3,421.83
• Sensex down 0.04% to 34,428.35
• Australia S&P/ASX 200 down 0.6% to 6,096.68
• Kospi down 0.4% to 2,499.75
• Brent futures up 0.3% to $69.04/bbl
• US 10Y yield rose 3.9 bps to 2.59%
• German 10Y yield rose 6.9 bps to 0.535%
• Euro up 0.05% to $1.1943
• Italian 10Y yield rose 5.0 bps to 1.766%
• Spanish 10Y yield fell 0.8 bps to 1.507%
• Gold spot up 0.3% to $1,314.68
• U.S. Dollar Index down 0.2% to 92.37
Top overnight News from Bloomberg: China Sours On U.S. Debt Treasuries, Dollar Smacked by Review; Bond Bull Run Still Has Legs: Gundlach; Big U.S. Stockpile Drop Lifts Crude
• Officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries; Chinese officials are said to see Treasuries as less attractive; they recommend slowing or halting in Treasury purchases
• Jeffrey Gundlach, the billionaire bond manager, says the S&P 500 Index will end the year with a negative return and is dubious of the long-term value of bitcoin
• The 10-year U.S. Treasury yield climbed to the highest level in about 10 months, leading Bill Gross at Janus Henderson Group to declare a bond bear market just as a deluge of debt sales began
• Investors won’t be as focused on the bottom line as Wall Street banks report 2017 results
• Deep-water driller Ocean Rig UDW Inc. is working with Credit Suisse Group AG to explore strategic options including a sale
Asia has failed to sustain the positive lead from Wall Street where all US majors resumed their record setting performance, with the regional bourses mostly lower as profit taking crept in. ASX 200 (-0.6%) was negative in which commodity names led the index’s pullback from decade highs, while Nikkei 225 (-0.3%) was subdued on continued JPY strength. Shanghai Comp. (+0.3%) and Hang Seng (+0.2%) were initially mixed with the mainland indecisive after the PBoC resumed open market operations for the 1st time in 13 sessions, although its efforts still amounted to a net neutral position after maturing operations were accounted for and as participants digested mixed CPI and PPI data. Finally, 10yr JGBs were lower in a continuation of yesterday’s post-Rinban pressure and in tandem of rising global yields, while a mixed 10yr auction result also failed to inspire demand. Chinese CPI YY (Dec) 1.8% vs. Exp. 1.9% (Prev. 1.7%). Chinese PPI YY (Dec) 4.9% vs. Exp. 4.8% (Prev. 5.8%) PBoC injected CNY 60bln via 7-day reverse repos and CNY 60bln via 14-day reverse repos. PBoC set CNY mid-point at 6.5207 (Prev. 6.4968)
Top Asia News
• Philippines Posts Record Trade Deficit as Machine Imports Rise
• Modi Eases Rules to Lure Foreign Investors as India Growth Slows
• CICC Cuts Its Forecasts for Mobile Phone Shipments in China
• HNA Group Has So Many Companies It’s Running Out of Names
• Sony Is Planning a Whole Range of Robots After Its Aibo Dog
• The $100 Million Game Turkish Officials Worry Is Pyramid Scheme
European equities initially kicked the session off with little in the way of firm direction as macro newsflow remained light from a European perspective. In terms of sector specifics, financial names outperform their peers in the wake of the continuing moves seen in global yields with RBS near the top of the FSTE 100 following a positive broker move at Morgan Stanley. Other notable movers include Sainsburys (+1.4%) who now see FY 17/18 underlying pretax profit to be moderately ahead of market consensus. Despite initially seeing muted trade, equities were dealt a blow in line with other global asset classes after news that Chinese officials are said to see Treasuries as less attractive.
Top European News
• ECB Hawks Take the Lead on QE Debate as Doves Stay Quiet for Now
• U.K. Factories in Best Growth Run Since 1997 Amid Global Upswing
• Norway’s $1 Trillion Fund Wants to Invest in Private Equity
• ‘Bad Brexit’ Would Hurt the U.K. Economy for More Than a Decade
• BlackRock-Backed Gold Miner May Join Rush of Russian IPOs
• EU Risks Financial Crisis If It Blocks Brexit Deal, U.K. Warns
In FX news, the JPY is extending gains and outperformance vs G10 and other peers via accelerated moves overnight. USD/JPY down through 112.00 stops to a circa 111.75 low. The move in USD/JPY was then exacerbated by mass-USD weakness after the aforementioned comments from Chinese officials suggesting they recommend slowing or halting in Treasury purchases; USDindex extending losses below 92.50, pushing EUR/USD briefly back above 1.2000. NOK and SEK both firmer vs the EUR, former in wake of stronger than expected Norwegian inflation data and latter on hawkish views revealed in the latest Riksbank policy meeting minutes (time to normalise policy nearer and scope to hike before the ECB. EUR/NOK down below 9.6000 and EUR/SEK sub-9.7600. NZD 2nd to the rampant JPY among G10 currencies and retesting 0.7200+ levels vs the USD, while its AUD antipodean counterpart back above 0.7850 vs the Greenback and the AUD/NZD cross under 1.0900, perhaps hampered by soft Chinese CPI data. GBP initially unfazed by latest stellar production figures after being offset by the widest trade deficit in 5 months, before eventually moving lower with GBP/USD now through key support at 1.3495
In commodities, energy prices remain near their highs in the wake of a significantly larger than expected draw down in headline API crude inventories (-11.19M vs. Exp. -3.90M). The move also came in the context of the EIA raising its forecast for 2018 world oil demand growth by 100k BPD, now forecasting a 1.72mln BPD Y/Y increase. In metals markets, gold prices have seen a modest recovery in European hours and continue to track fluctuations in the USD. Elsewhere, copper was rangebound during Asia-Pac trade amid an indecisive risk tone in the region while Chinese futures remain supported by the Chinese supply crackdown, however, analysts remain wary over the potential demand impact from adverse weather conditions.
US Event Calendar
• 7am: MBA Mortgage Applications, prior 0.7%
• 8:30am: Import Price Index MoM, est. 0.4%, prior 0.7%; YoY, est. 3.1%, prior 3.1%
• 8:30am: Export Price Index MoM, est. 0.3%, prior 0.5%; YoY, prior 3.1%
• 10am: Wholesale Inventories MoM, est. 0.7%, prior 0.7%; Wholesale Trade Sales MoM, est. 0.55%, prior 0.7%
Central Bank Speakers
• 9am: Fed’s Evans Discusses Economy and Policy Outlook
• 9:10am: Fed’s Kaplan Speaks in moderated Q&A in Dallas
• 10:15am: Fed’s Kaplan Speaks in moderated Q&A in Dallas
• 1:30pm: Fed’s Bullard Speaks on U.S. Economic Outlook in St. Louis
DB's Jim Reid concludes the overnight wrap
Equities again saw blue skies yesterday but bond markets saw their own ‘bomb cyclone’ as yields soared across the globe. It was the Treasury market which stole the limelight however with 10y yields breaking up through 2.50% to close last night at 2.552% (+7.1bps). That is the highest closing yield since 14th of March last year when yields topped out at 2.601%, with Bill Gross calling yesterday the start of the ‘bond bear market’. In today’s PDF we replicate a chart that some are using to say we’ve broken the three decade plus down channel in 10 year US yields.
It was the long-end which weakened the most, with 30y yields closing up 8.4bps at 2.896% and the highest since 27th October while the spread between 2y and 30y yields steepened by the most (+7.3bps) since November 2016. Core yields in Europe were between 2.9bps and 4.6bps higher prior to this with 10yr Bunds +3.5bps to 0.464%.
There appeared to be a few reasons for justifying the price action. The ‘stealth taper’ of sorts by the BoJ certainly seemed to get the most airtime though after the BoJ cut long-end bond purchases. While it seemed to come as a surprise, it’s worth noting that the absolute purchase level was still within the BoJ target range of purchases, and with the BoJ also focused on controlling the yield curve the bigger test is perhaps the BoJ’s tolerance to let 10y JGBs move north of the 10bp ceiling should Treasuries sustainably move higher. For what it’s worth JGBs are up 1.3bp this morning but seem relatively calm while the Yen has strengthened c0.3%.
Also weighing on rates yesterday was primary issuance with a fairly decent pickup in sovereign and corporate issuance expected this week. Around $60bn of combined issuance is expected from sovereign deals from the US, Japan, Germany and the UK this week according to Bloomberg while €20bn of European corporate issuance is expected and US domestic IG issuance is also active with $14.7bn in total pricing.
Remember that in our outlook we showed that 2018 will likely be the first year in seven where QE doesn’t increase relative to net supply of government bonds (see figure 18 and page 16 of this doc). We think we’re at a turning point for the technicals in government bonds around now and perhaps as the technicals turns, sell-off can occur more easily than when we were at peak QE and peak technicals. Yesterday’s BoJ news was pretty minor so imagine the scenario if something major happened! However it will probably still take inflation beats to really turbo charge any bond sell off. We think there’s a decent chance we get closer to this after Q2 this year but before that Friday’s US CPI is an obvious focal point in which to test the bond market.
Elsewhere, it probably shouldn’t be overlooked too that Oil prices have moved sharply higher over the last 24 hours with WTI (+1.99%) in particular now above $63/bbl and to the highest since July 2015. 10y breakevens in the US were supported in part by that and are now at 10 month highs as a result at 2.041%. One other thing which caught our eye yesterday from our screens is the spread between Treasuries and the S&P 500 dividend yield. Yesterday the spread for the 10y and S&P widened to 70bps which now puts it at the highest since September 2014. That comes after the yield on 2y Treasuries last week overtook the S&P 500 dividend yield for the first time since 2008. It certainly feels like we’re hitting new extremes in more and more markets now.
Finally China also got in on the act yesterday after the announcement that the PBOC had made a small change to how it manages the Yuan fixing (by suspending a counter-cyclical factor) with the end result seemingly being that the PBOC has greater control over the currency. Afterwards the CNY weakened by the most (0.46%) since January yesterday, but is up c0.1% this morning.
Elsewhere this morning, China’s December CPI was slightly lower than expectations at 1.8% yoy (vs. 1.9%) and PPI slowed mom but was above market at 4.9% yoy (vs. 4.8% expected). Equities are trading mixed as type, with the Nikkei (-0.21%), Kospi (-0.41%) and China's CSI 300 (-0.14%) slightly lower while the Hang Seng (+0.22%) is up. Elsewhere, UST 10y bond yields are up c0.5bp.
Moving on. Yesterday DB’s George Saravelos and his FX strategy team published their 2018 Blueprint titled ‘Don’t Stop me now’. The report notes that 2018 is likely to see a continuation of the global environment low volatility, a falling dollar, and continued EM performance. The combination of solid global growth, slow moving inflation and highly predictable central banks closely mirrors the 2004-06 pre-crisis period. Back then growth and financial conditions proved selfreinforcing, encouraging the build-up of leverage even in the face of tightening monetary policy. The team go on to note that as the world's global funding currency the dollar weakened despite Fed hikes. It would be a clear oversight to forget what followed 2006. But the team’s assessment is that the current mood music can keep going for a while longer. Click on the following link to see the report.
Now recapping other markets performance from yesterday. US equities edged higher with the S&P up for the sixth consecutive day (+0.13%) – a record only matched at the start of the year in 1964 and 2010 (6 days) and beaten only in 1976 and 1987 (7 days). European markets were all higher, with the Stoxx 600 up 0.43% to the highest since August 2015 while the DAX was the relative laggard at +0.13%. Turning to currencies, the US dollar index strengthened 0.15% while the Euro and Sterling slipped 0.26% and 0.21% respectively. Elsewhere, precious metals weakened c1% (Gold -0.58%; Silver -0.95%) and other base metals also softened (Copper -0.09%; Zinc -0.50%; Aluminium -0.33%). The VIX rose 5.88% to above 10 for the first time in six days (10.08).
Away from the markets, the Fed’s Kashkari noted the stock market is pricing in this trend of lower interest rates “structurally over time” which partly explains the higher asset prices. Elsewhere, he advocates for “lower interest rates to get wages up and to get inflation back to our 2% target”. On tax, he is “skeptical” tax cuts will drive a material increase in investments, in part as these big companies already have large cash balances and can borrow at low rates, so if there are good investments to be made, “they would already be making those investments”.
Back onto Brexit, the EU Brexit negotiator Barnier has maintained his stance that UK based financial companies will lose their rights to operate freely across the EU post Brexit, but seem to have offered a glimmer of hope by noting that there may be cases where the EU could “consider certain UK rules as equivalent, based on a proportionate and risk based approach”. Elsewhere, the UK Brexit Secretary Davis called for an “imaginative and inventive” new relationship with the EU. Although, the Telegraph reported Germany’s Ms Merkel is strongly opposed to the UK’s plans for a bespoke trade deal with the EU post Brexit, as the UK should not “have its cake and eat it” too.
Finally, the World Bank has lifted its forecast for global GDP growth to 3.1% for 2018 (+0.2ppt), driven by increased investment and manufacturing activity as well as supportive monetary conditions. Growth is expected to slow to 3% in 2019 and 2.9% in 2020. Despite the improved forecasts, the IMF also warned that risks to the outlook remained skewed to the downside, which includes a sudden tightening of global financial conditions, rising geopolitical tensions and escalating trade restrictions.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the December NFIB small business confidence index was below market at 104.9 (vs. 108 expected) but still solid as it retreated from last month’s 34-year high. Elsewhere, the November JOLTS Job openings were below expectations at 5,879 (vs. 6,025), while the quits rate remain at a cyclical high of 2.2% for the third consecutive month.
In Europe, the November unemployment rate for the Eurozone and Italy both edged down 0.1ppt mom and were in line at 8.7% and 11% respectively, with the former at the lowest since early 2009. In Germany, the November IP was above market at 5.6% yoy (vs 3.9% expected) and the highest since 2011, while its trade surplus also beat at €23.7bln (vs. €21.3bln), with both exports and imports higher than expected. In France, the November trade deficit widened more than expected to -€5.7bn (vs. -€4.7bln), while the UK’s BRC same store sales rose to 0.6% yoy (vs. 0.3% expected) and total sales rose 1.4% yoy, both mainly driven by higher spending on food.
Looking at the day ahead, the November IP and manufacturing production for the UK and France are due, followed by the UK’s November trade balance. Over in the US, there is the November wholesale inventories along with December stats on exports and imports. Onto other events, the Fed’s Evans discusses the economy and policy outlook, while the Fed’s Kaplan speaks in a moderate panel. Elsewhere, the US Chamber of Commerce CEO Donohue will deliver his annual address and the South Korean President will host a New Year’s news conference.