Global Rally Shattered, Europe Slides As Brexit Turmoil Returns

US futures pared earlier gains, European stocks slumped and the pound tumbled after the Brexit crisis returned with a bang to the forefront after a series of British ministers quit in protest at Theresa May’s Brexit deal, plunging the U.K. government into crisis and sparking fresh fears about a May ouster and a hard Brexit.

Today's turmoil started around 4am ET when Brexit Secretary Dominic Raab announced his resignation on Twitter, the highest profile of several departures on Thursday morning. “No democratic nation has ever signed up to be bound by such an extensive regime, imposed externally without any democratic control over the laws to be applied, nor the ability to decide to exit the arrangement,” he said in his resignation letter. His, and subsequent resignations, threw into doubt May’s ability to secure Parliament’s support for her plan and even to survive as leader.

The pound, which rebounded strongly on Wednesday after May announced she had won cabinet support for the withdrawal draft, tumbled 3 big figures almost instantly on the news, dropping as much as 1.9%, its biggest plunge since 2017.

GBP

“The reaction is sterling shows that the chance of no Brexit deal has spiked,” said Tim Graf, Head of Macro Strategy for EMEA at State Street Global Markets. “It also introduces thoughts of a leadership challenge (for British Prime Minister Theresa May) which seems likely now.”

While the prime minister defended her plan as the only way to protect the union of the U.K when addressing law makers in the House of Commons, the renewed threat that May could be replaced and Britain could crash out of the EU with no deal is an unpredictable and high-risk scenario for markets. As the resignations rolled in, the FTSE 100 Index trimmed gains as trading volumes soared to double the 30-day average while gilts surged. European stocks, which started the session in the green, pared all gains and dropped to yesterday's lows, down 0.4%.

"The truth is no one can accurately predict how this will play over the next few days and weeks," said Epworth Investment Management Chief Investment Officer Stephen Beer. "However, in some important respects, nothing has changed since the referendum. It remains the case that Brexit is likely to be economically worse for the U.K. than remaining in the European Union. What we have now is more people realizing that."

S&P 500 had been solidly up before they pared much of their advance, although they have since rebounded to near session highs once more. The yen rose, and gold and the Swiss franc were steady, suggesting the market was not too concerned by the latest Brexit turmoil.

The S&P 500 had fallen for a fifth straight day overnight, with financial stocks hit by fears of tighter regulations once the Democratic Party takes control of the House of Representatives. U.S. stocks were also pressured by concerns that earnings growth might be peaking, trade tensions and a slowing global economy - factors that had triggered a rout in riskier assets in October.

The European turmoil followed a relatively calm Asian session with the MSCI Asia index rising 0.8%, as Hong Kong shares jumped after Tencent earnings beat expectations while Chinese equities rose 1.4%, cheering news that China and the United States were back in contact about their bitter trade disputeas after a report that Chinese officials had sent a letter to the White House outlining a series of potential concessions to the Trump administration, despite subsequent reports that the offering by China was insufficient to meet Trump's demands. Japanese stocks edged lower while the Australian dollar jumped after a strong local jobs report.

There was some good news overnight: in a closely watched question-and-answer session late on Wednesday Federal Reserve Chairman Jerome Powell played down recent turbulence in equities, saying volatility was only one of many factors that the Fed takes into account. Then again, Powell's admission confirmed that the Fed put is hundreds of points lower than the S&P's latest price, which likely means that stocks have a long way to fall before Powell gets truly concerned about the Fed's beloved "wealth effect."

UK turmoil also boosted demand for safe-haven German government bonds. Ten-year Bund yields fell over three basis points to 0.36 percent, the lowest in over two weeks.

“While it’s difficult to pin-point a specific event for the risk-off move, recent themes appear to be keeping markets cautious include oil’s recent plummet, Apple’s fall, U.S. political gridlock, China’s slowing growth, tightening liquidity, a hawkish Fed, earnings peak, Italian jitters, and Brexit uncertainty,” wrote economists at ANZ.

Elsewhere, West Texas crude resumed its slide following Wednesday’s rebound from a record losing streak. Emerging-market shares rallied and their currencies strengthened.

“If U.S. stocks are to bounce back, economic indicators will be key,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo. “Focus will be on today’s U.S. retail sales data, which will provide a view of how private consumption -the main component of economic growth- is faring.” U.S. retail sales for October will be released today at 830am ET.

Market Snapshot

  • S&P 500 futures little changed at 2,696.50
  • STOXX Europe 600 down 0.3% to 361.05
  • MXAP up 0.8% to 151.53
  • MXAPJ up 1.2% to 485.20
  • Nikkei down 0.2% to 21,803.62
  • Topix down 0.1% to 1,638.97
  • Hang Seng Index up 1.8% to 26,103.34
  • Shanghai Composite up 1.4% to 2,668.17
  • Sensex up 0.5% to 35,317.74
  • Australia S&P/ASX 200 up 0.06% to 5,736.02
  • Kospi up 1% to 2,088.06
  • German 10Y yield fell 3.9 bps to 0.359%
  • Euro up 0.09% to $1.1320
  • Italian 10Y yield rose 4.3 bps to 3.117%
  • Spanish 10Y yield rose 2.8 bps to 1.646%
  • Brent futures little changed at $66.12/bbl
  • Gold spot little changed at $1,210.57
  • U.S. Dollar Index up 0.6% to 97.34

Top Overnight News from Bloomberg

  • Prime Minister Theresa May is fighting for her political life as a growing revolt from within her own party threatens to derail her Brexit plans and force the U.K. out of the European Union with no deal
  • Chinese officials have outlined a series of potential concessions to the Trump administration for the first time since the summer as they continue to try to resolve a trade war, according to three people familiar with the discussions
  • Federal Reserve Chairman Jerome Powell said the U.S. economy is strong but could face headwinds next year as policy makers weigh how far and fast to raise interest rates
  • Apple’s outlook dims as suppliers worldwide sound the alarm, with Austrian-based AMS AG the latest to sound the alarm
  • A Saudi royal adviser and a senior intelligence official played key roles in the mission that ultimately led to the killing of government critic Jamal Khashoggi and authorities will seek the death penalty for five people who confessed to the murder

Asian equity markets were eventually mostly higher after the region gradually shrugged off the cautious lead from the losses stateside, where weakness in tech and financials saw all US majors finish in the red. ASX 200 (+0.1%) and Nikkei 225 (-0.2%) were lower throughout most the session as financials lagged although the Australian benchmark staged a late rebound and just about turned positive at the close, while sentiment in Tokyo remained pressured by a firmer currency and as blue-chip banking stocks declined post-earnings. Elsewhere, Hang Seng (+1.7%) and Shanghai Comp. (+1.4%) weathered a choppy start as outperformance in tech kept Chinese markets afloat after a beat on earnings from Hong Kong index-giant and China’s largest tech firm Tencent Holdings. Finally, 10yr JGBs were flat with only minimal support seen despite the losses in Tokyo stocks and with price  action also muted following mixed results in today’s 5yr JGB auction. China's government is said to have sent a written response to the US concerning trade reforms, which reports noted offered insufficient concessions.

Top Asian News

  • Tencent-Backed Fashion Site Is Said to Halve IPO Valuation Goal
  • Tencent’s Big Beat Falls Flat With Analysts Pining for New Games
  • Takeda Offers Mega-Euro Bond Amid Renewed Brexit Upheavals
  • Philippines Delivers Fifth Rate Hike to Curb Inflation

European indices are mixed, with the FTSE MIB (-0.5%) lagging alongside broad underperformance in Italian assets. Furthermore, Prysmian (-4.3%) have also weighed on the index after a guidance cut and STMicroelectronics (-2.5%) are lower in sympathy with AMS (-1.3%) who cut guidance pre-market. FTSE 100 (+0.1%) is bucking the trend as recent Brexit updates are weighing on Cable. However, upside for the index is being capped by losses in RBS (-7.3%) and Barclays (-6.0%) in the wake of the rate implications of today's Brexit turmoil. Elsewhere, Antofagasta (+2.1%) are lower following board approval of expansion to the Los Pelambres copper mine. In contrast Royal Mail (-5.2%) are in the red after reporting lower half year pre-tax profit.

Top European News

  • Raab Resignation Means Higher Risk Brexit Deal Fails: Nordea
  • Pound Could Fall to $1.25 After Raab, Says Mizuho’s Jones
  • Raab Resignation Signals Parliament Vote Challenge: Danske
  • Soubry: Raab’s Resignation Marks End of PM’s Withdrawal Pact
  • In Brexit Brinkmanship, Europe Was Always Going to Be The Winner
  • European Car Sales Slump Again, Testing VW’s Upbeat Outlook
  • Four Weeks That Will Determine Fate of the ECB’s Bond Buying

In FX, all eyes were on GBP as the Post-UK Cabinet approval of the withdrawal draft has been extremely short-lived, as Brexit Minister Raab resigned due to reservations over the proposal, followed by McVey (Work and Pensions Secretary and other not as high profile (so far) Government officials. Significantly weaker than forecast retail sales data merely compounded the misery for Sterling, but probably won’t be the final straw amidst reports of more MPs and aides considering their position and an official leadership challenge against PM May. Cable collapsed from 1.3000+ through 1.2900 and the recent 1.2828 low to circa 1.2750 at one stage, with only the November base at 1.2696 protecting the ytd trough (1.2662) aside from any psychological or sentimental support at 1.2700. Meanwhile, Eur/Gbp rallied from around 0.8700 to 0.8845, breaching some interim chart resistance at 0.8766 on the way, and without much effort, before partially retracing. EUR - Although the single currency is benefiting from the Gbp’s demise, it has lost ground vs the Usd after running into offers at 1.1350, but is holding in well above recent lows not far from 1.1200 and may be relatively contained by hefty option expiries at 1.1300 and 112.50-60 in 1.5 bn and 1.6 bn respectively. AUD - The clear G10 outperformer and retaining the bulk of its overnight gains vs the Greenback on the back of an upbeat Aussie jobs report – Aud/Usd currently around 0.7260 within a 0.7300-0.7230 range, and with the Aud/NZD cross back above 1.0650 as the Kiwi pivots 0.6800 against the Usd. DXY - The Dollar is mixed vs major counterparts and broadly weaker against EM currency, but the index has rebounded firmly above 97.000, largely due to the aforementioned Pound rout and knock-on effects.

In commodities, gold (+0.9%) prices have extended gains above USD 1200/oz as the dollar continues to fall from the 16-month highs that were reached at the start of the week. Separately, copper has been boosted following China sending a written response to US trade reforms, although it has been noted that it offers insufficient concessions. Brent (-0.1%) and WTI (-0.2%) initially traded higher, and were mostly unaffected by the larger than expected build in API inventory. but have since reverted into negative territory following the dollar beginning to strengthen again. Of note reports that Russia have cut oil output to 11.38mln BPD for the first two weeks of November. Markets will be looking ahead to the EIA weekly data later today.

As for today’s calendar,the highlight is the October retail sales report which will be a first look for forecasters into Q4 consumer spending. The consensus is for a +0.5% mom headline reading, and +0.4% readings for the core and control group components – the latter of course important as it’s a direct input into the BEA’s estimate of consumers’ spending on goods in the GDP numbers. Away from that we’ll also get regional November manufacturing reports from the NY and Philly Fed’s, October import price index,  initial jobless claims, and September business inventories. Away from the data it’s another busy day for ECB speakers with Coeure, Praet and de Guindos due to speak. The Fed’s Quarles will also appear before the Senate, before Chair Powell speaks again – albeit on hurricane recovery efforts so it’s unlikely to be market sensitive – and Bostic and Kashkari speak tonight. Oh and there might be a few more Brexit headlines.

US Event Calendar

  • 8:30am: Empire Manufacturing, est. 20, prior 21.1
  • 8:30am: Philadelphia Fed Business Outlook, est. 20, prior 22.2
  • 8:30am: Retail Sales Advance MoM, est. 0.5%, prior 0.1%; Ex Auto MoM, est. 0.5%, prior -0.1%;
    • Retail Sales Ex Auto and Gas, est. 0.4%, prior 0.0%; Retail Sales Control Group, est. 0.4%, prior 0.5%
  • 8:30am: Import Price Index MoM, est. 0.1%, prior 0.5%; 8:30am: Import Price Index YoY, est. 3.3%, prior 3.5%
  • 8:30am: Export Price Index MoM, est. 0.05%, prior 0.0%; 8:30am: Export Price Index YoY, prior 2.7%
  • 8:30am: Initial Jobless Claims, est. 213,000, prior 214,000; Continuing Claims, est. 1.63m, prior 1.62m
  • 9:45am: Bloomberg Consumer Comfort, prior 61.3
  • 10am: Business Inventories, est. 0.3%, prior 0.5%
  • 10am: Fed’s Quarles to Appear before Senate Banking Panel
  • 11:30am: Fed’s Powell Reviews Post-Hurricane Harvey Recovery Efforts
  • 1pm: Fed’s Bostic Speaks in Madrid
  • 3pm: Fed’s Kashkari Speaks to Minnesota AgriGrowth Council

DB's Jim Reid concludes the overnight wrap

Before we get into Brexit, inflation, oil and the likes I’d like to ask the more experienced parents out there if your children have ever had a more insignificant part in a nativity play than my three year old Maisie has just been given. In her pre-school performance at Xmas she’s been cast as a “bell”. I’ll resist the urge to storm into school and ask why she’s not playing Mary.

The bells looked like they were tolling for PM May’s Brexit deal yesterday morning, as the initial political response to her withdrawal agreement proved to be quite negative and the pound shed as much as -0.73% at its intraday lows. However, May ended the day by again rising from the flames and securing Cabinet approval for her plan, and the pound ultimately rallied +0.16% on the day to just below $1.30 by the US close but traded between $1.2882 and $1.3072 during a turbulent session.

The pound did close off the immediate cabinet backing highs as PM May described the outcome as “collective agreement,” conspicuously avoiding the word “unanimous” in a possible acknowledgement of internal pushback. The government then released the almost 600-page withdrawal agreement, which will be scrutinised by MPs and the press over the coming days for any surprises. The Parliamentary arithmetic still looks quite dicey, and it’s noteworthy that Boris Johnson waited 48 hours after Chequers to resign, so PM May is certainly still exposed to further dissent/resignations from her cabinet in the hours and days ahead.

The good thing about Brexit is that most other things that are going on in markets right now feel fairly straightforward by comparison. Despite WTI oil finally snapping its unwanted record-breaking run of 12 consecutive daily declines with a rebound of +0.84% yesterday, US markets struggled once again yesterday with the NASDAQ leading the way with a -0.90% decline, followed closely by the S&P 500 (-0.76%) and DOW (-0.81%). Apple underperformed again, down -2.82% as investors continued to digest the news of reduced upstream demand from the company’s suppliers. That’s five trading sessions in a row that the S&P has dropped now which is the third worst run this year following the two six-day consecutive loss runs in October. We’ve now had 27 down days over the 39 trading days since the index peaked on September 20, the longest such streak since November 2008 amid the post-Lehman fallout.

Late last night we did have some non-Brexit related news when Fed Chair Powell spoke positively about the US economy and downplayed concerns about financial market volatility. He argued that the US economy can continue to grow and can even pick up pace in the future, though he did note some downside risks from fading fiscal stimulus, slower growth abroad, and any greater-than-expected impacts of rate hikes. Powell mentioned that credit spreads remain tight, suggesting that it will take broader risk-off price action in markets to affect his reasoning than just an equity selloff. Finally, he asserted that all meetings will be “live” moving forward, since they will now all be accompanied by press conferences.

This morning in Asia, markets are off to a mixed start with the Nikkei (-0.50%) down while the Hang Seng (+0.61%), Shanghai Comp (+0.68%) and Kospi (+0.10%) are all up. Elsewhere, futures on the S&P 500 (-0.17%) are pointing towards a slightly negative start.

Credit markets are starting to get more and more attention of late especially in the US. Even Powell mentioned them last night - albeit in a positive light. As a reminder, our view has been that US HY has been far too expensive this year. Other indices have hit our targets, but HY has stubbornly held in. This week, the downgrade of GE has first rocked IG credit and then the significant re-pricing of oil has had an impact on HY energy bonds once again. Just to recap on US HY, in October we finally saw some cracks start to appear as spreads widened more than 70bps (tight to wide). Whilst the first week of November seemed to bring some reprieve to credit markets, the last few days have seen some further notable moves wider. USD HY has widened the best part of +40bps with HY energy more than +50bps wider. Both series are now at their wides for the year with USD HY now more than +30bps wider YTD. USD IG has widened nearly 10bps from the recent November tights and is up against their YTD wides. Similarly EUR IG and HY credit is now also at the wides for the year at around 45bps and 150bps wider respectively.

Back to markets yesterday, sentiment was actually initially positive at the open following a marginally dovish US CPI report (more on that below) but weakness soon followed and equity markets in Europe failed to hold onto an intraday recovery with the STOXX 600 finishing down -0.60% and DAX -0.52%. Bond markets were once again a sideshow with Treasuries (-1.8bps) and Bunds (-1.1bps) a touch stronger.

Talking of European equities our strategist Sebastian Raedler has published his 2019 market outlook this morning. He sees upside for the Euro area and China PMI over the coming months, implying tactical upside for the Stoxx 600 to 385 by Q1, 6% above current levels. However, from Q2 onwards, he sees renewed downside for the market as the Euro area real bond yield (i.e. the discount rate for European equities) starts rising on the back of a recovery in Euro area core inflation and the EUR appreciates in line with our FX strategists’ projections, leading the Stoxx 600 to fade to 345 by end-2019, 5% below current levels. See here for the report.

Moving on. It wouldn’t be a recap without mentioning Italy and it was interesting to hear DB’s Clemente De Lucia’s take on the letter Italy sent to Brussels late Tuesday which broadly confirmed the original version of the DBP. In Clemente’s view, the tone of the letter was tough suggesting that a compromise with Brussels is a long way from being reached. The new, higher levels of  planned privatisation is very unlikely to change the mind of the Commission. Such initiatives are very difficult to monitor and, in the past, Italy have missed their targets. As for where things stand now, a Eurogroup meeting is scheduled for December 3rd, which means we could see an EDP launched as soon as early next month. It could be an interesting final month of the year for politics in Europe with this and Brexit. The FTSE MIB closed down -0.78% yesterday and slightly underperformed the rest of Europe, while 2y and 10y BTPs rose +4.8bps and +4.5bps respectively. Talking of politics, our German experts last night published a piece on what Merkel succession race means for Europe. See here for more.

In other news, yesterday was a packed day for data although there wasn’t a huge amount to move the dial. In Germany, Q3 GDP came in slightly weaker than the downwardly revised forecast at -0.2% qoq. The first negative quarterly print since early 2015 is likely to be temporary though, with new car emissions tests disrupting car production. In France the final October CPI print was confirmed at +0.1% mom and unrevised versus the flash, while here in the UK, CPI missed to the downside slightly at +0.1% mom (vs. +0.2% expected) for the headline level, although the core did hold at +1.9% yoy as expected. Shortly after that euro area GDP for Q3 was confirmed at +0.2% qoq as expected.

Meanwhile, as mentioned above the October CPI report in the US was at the margin a tad disappointing in the context of a small rounding down in the annual rate for the core to +2.1% yoy from +2.2%. The six-month annualised reading is also now down to +1.95% which is food for thought for the Fed maybe. The October reading itself was confirmed at +0.2% mom as consensus expected (+0.1926% unrounded) with positive payback from used cars in particular.

As for today’s calendar, this morning in Europe we’ve got October retail sales data out in the UK first thing, followed later on by the September trade balance reading for the euro area. In the US the highlight is the October retail sales report which will be a first look for forecasters into Q4 consumer spending. The consensus is for a +0.5% mom headline reading, and +0.4% readings for the core and control group components – the latter of course important as it’s a direct input into the BEA’s estimate of consumers’ spending on goods in the GDP numbers.

Away from that we’ll also get regional November manufacturing reports from the NY and Philly Fed’s, October import price index,  initial jobless claims, and September business inventories. Away from the data it’s another busy day for ECB speakers with Coeure, Praet and de Guindos due to speak. The Fed’s Quarles will also appear before the Senate, before Chair Powell speaks again – albeit on hurricane recovery efforts so it’s unlikely to be market sensitive – and Bostic and Kashkari speak tonight. Oh and there might be a few more Brexit headlines.