Futures Whipsaw Violently In Aftermath Of Fed Hike Turmoil

Markets whipsawed violently in the aftermath of the Fed's "less dovish than expected" rate hike, with European stocks sliding to 2 year lows, and Japanese stock entering a bear market as crude oil tumbled after another mini flash crash after the European open as the dollar slumped.

US equity futures initially rose, then tumbled sliding to a new 2018 low around midnight dragged lower by Asian market fears, then once again rebounded around the time EUrope opened, and were trading mostly flat as US traders walked in.

Investors “think the Fed has completely misjudged the situation and now it’s just a matter of just trying to find an exit while you can,” said Kyle Rodda, a market analyst at IG Group in Melbourne. “We’re probably entering a stage now where markets have got it their head that we’re preparing for quite sustained downside going into 2019.”

The sell-off that began Wednesday after Powell disappointed markets with a rate hike and a promise to keep reversing quantitative easing after downplaying the implications of market volatility, gathered pace in Asia and Europe. Markets were mostly spooked by Powell's comment that the process of unwinding QE is on "autopilot."

The Fed’s been a huge friend of the stock market and they are now a little bit of an enemy” and will probably become a worse enemy before this is all over, Bob Doll, Nuveen chief equity strategist and senior portfolio manager, said on Bloomberg Television.

The enemy was revealed in European trading, where more than three-quarters of Stoxx Europe 600 members declined, with the index sliding to the lowest level since December 2016. Major European Indices are in the red, continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging.

Earlier in the Asian session, Japanese stocks entered a bear market as the last policy statement of the year from the BOJ added to mounting investor concerns, sending the yen to its strongest since mid-September. The Topix index fell 2.5%, extending its decline after the BOJ kept its policy unchanged. Electronics makers and telecommunications stocks were the biggest drags on the benchmark gauge, which closed almost 21 percent below its January high.

Some investors thought the drop in Japanese stocks went too far. “This is an adjustment on the market from a strongly crowded position, especially on U.S. equities, to a more normal level,” said Frank Benzimra, head of Asia equity strategy at Societe Generale. “I’m surprised at the reaction of the Japanese market, which I find a bit excessive.”

USD/JPY fell below 112 for the first time since Oct.; the yen was supported amid concerns about slowing global growth after the Fed said it still intends to raise interest rates two more times next year; yields on super-long JGBs dropped to five-month lows after the Bank of Japan kept policy unchanged.

Elsewhere in currencies, the dollar fell broadly, with the BBDXY sliding back under 1,200 while treasuries held most of their steep gain from Wednesday.

Sweden’s krona rose against all Group-of-10 peers after a surprise interest rate hike by the Riksbank which raised its policy rate by 25 bps, as expected by 10 of 24 economists in a Bloomberg survey; the krona rose as much as 1% against the euro to a three-day high, before paring gains as traders digested a lowered rate projection.

In other central bank news overnight, the BoJ left monetary policy steady with short-term rate target at -0.1% and JGB yield target at around 0.0%; unchanged as expected. The Central Bank maintained pledge to buy JGBs in a flexible manner with holdings to increase at a pace of JPY 80tln per annum. Forward guidance was unchanged with BoJ stating it "will keep current extremely low rates for an extended period of time". Board members Kataoka and Harada dissented on YCC as expected.

Also in Asia, the Hong Kong Monetary Authority raised rates by 25bps to 2.75% in lockstep with the Fed, as expected. HKMA stated that rising interest rates reflect normalization from a low-rate environment and more data in needed to determine if the local property market is in a downturn. Meanwhile, somewhat surprisingly the PBoC left interest and reverse repo rates unchanged, once again refusing to hike rates in lockstep with the Fed.

In another surprise move, the Swedish Riksbank raised rates for the first time in 7 years, to -0.25% vs. Exp. -0.5%. The bank's forecast for the Repo rate indicates the next hike will likely occur in the second half of 2019. Deputy Governor Jansson dissented the rate hike, and did not support the repo-rate path in the monetary policy report. The Riksbank also sees the repo rate averaging 0.48% in Q4 2020, vs. Prev. 0.66% forecast and, 0.98% in Q4 2021, vs. Prev. 1.23% forecast. The bank noted that even though inflation has been lower than expected, conditions remain good for inflation to stay close to the inflation target going forward. The hike sent the SEK sharply higher against all of its peers.

After posting a modest rebound on Wednesday, oil once again tumbled, sliding more than 3 percent in New York. Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to
weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does
not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In
addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers
are awaiting orders from state oil Co NOC.

Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London
dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were
imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.

Expected data include jobless claims and November’s Leading Index. Accenture, Blackberry, Carnival, Walgreens Boots, and Nike are among companies reporting earnings

Market Snapshot

  • S&P 500 futures little changed at 2,505.25
  • STOXX Europe 600 down 1.2% to 337.29
  • MXAP down 1.3% to 146.16
  • MXAPJ down 0.9% to 474.60
  • Nikkei down 2.8% to 20,392.58
  • Topix down 2.5% to 1,517.16
  • Hang Seng Index down 0.9% to 25,623.53
  • Shanghai Composite down 0.5% to 2,536.27
  • Sensex down 0.3% to 36,368.40
  • Australia S&P/ASX 200 down 1.3% to 5,505.82
  • Kospi down 0.9% to 2,060.12
  • German 10Y yield fell 1.7 bps to 0.222%
  • Euro up 0.8% to $1.1467
  • Italian 10Y yield fell 16.3 bps to 2.413%
  • Spanish 10Y yield rose 0.2 bps to 1.38%
  • Brent futures down 2.8% to $55.64/bbl
  • Gold spot up 1% to $1,255.60
  • U.S. Dollar Index down 0.7% to 96.37

Top Overnight News from Bloomberg

  • Fed Chairman Jerome Powell suggested he will be more cautious about raising rates next year after boosting them for the fourth time in 2018. “There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he told a press conference
  • The Bank of Japan left its stimulus settings unchanged at its final policy meeting of the year, with Governor Haruhiko Kuroda acknowledging that risks are tilted to the downside; Japanese stocks entered a bear market
  • People’s Bank of China said it would supply lower-cost liquidity for as long as three years to banks willing to lend more to smaller companies, as policy makers roll out targeted measures aimed at shoring up the flagging economy
  • New Zealand’s economy grew at half the pace economists predicted in the third quarter, suggesting inflation will remain subdued and raising the possibility the central bank may cut interest rates.
  • Australia’s labor market softened a little in November in a setback for the Reserve Bank’s drive for higher wages and faster inflation
  • Special Counsel Robert Mueller will be cautious about implicating President Donald Trump -- or even a thinly disguised “Individual-1” -- directly in criminal activity in legal filings he’s expected to issue in the next few months, according to people familiar with his investigation
  • Soros Fund Management has reduced most of its macro wagers, moving away from the strategy that made George Soros a billionaire, according to people familiar with the changes

Asian equities drowned in a sea of red following the decline seen on Wall Street post-FOMC where the Dow, S&P 500 and Nasdaq all dived to fresh YTD lows and tech-giant Apple sunk over 3%. ASX 200 (-1.3%) was mostly pressured by the material sector as metals fell with the Fed-induced USD strength, similarly Nikkei 225 (-2.8%) retreated further below the 21,000 handle to levels last seen in September 2017 as its heavy mining sector slumped, while a firmer JPY further distressed the benchmark. Elsewhere, Shanghai Comp. (-0.5%) was weighed on by financial names (China Banks sector -2.3%) after the PBoC refrained from raising reverse repo rates following the FOMC and HKMA 25bps hikes. Meanwhile, Hang Seng (-1.0%) was pressured by the regional risk sentiment alongside weakness in the property and financial sectors, on the flip side, shares in Rusal provided the industrial sector with modest support after spiking higher in excess of 20% after the reports that US will terminated sanctions against the company.

Top Asian News

  • China, Canada Said to Discuss Third Detainee’s Return, Post Says
  • Asia Stock Carnage Deepens as Hopes Fizzle With Policy Updates
  • Developer Jiayuan International Jumps By Record 25% in Hong Kong
  • Bank Indonesia Pauses Rate Hikes as Fed Turns Cautious
  • Emerging Markets Seen Coming Back From Dour 2018 Led by Brazil

Major European Indices are in the red [Euro Stoxx 50 -1.5%] continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors with index heavyweights Anglo American (-3.1%), Rangold Resources (-2.6%) and Rio Tinto (-2.6%) in the red. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging. Other notable movers include Wirecard (-3.7%) who are at the bottom of the DAX (-0.9%) following a article stating the Co only has a 5-10% share in German online transactions

Top European News

  • U.K. Retailers Get Black Friday Boost as Sales Surge
  • Bang & Olufsen Loses Quarter of Its Value on Lower Forecast
  • Societe Generale to Take $123 Million Charge on Serbia Sale
  • London Gatwick Airport Shut by Drone Scare Amid Holiday Rush
  • After Brexit and Italy, Poland Shows Cost of Clashing With EU

In FX, the Dollar has recoiled sharply from initial recovery highs seen after the Fed delivered its latest 25 bp hike, but not quite the dovish future guidance that most seemed to be anticipating. However, 2019 dot plots were trimmed to 2 from 3, the neutral rate was shaved to 2.8% from 3% and the accompanying statement was tweaked to a degree in terms of the amount of further policy normalisation in the current cycle. Hence, on reflection the FOMC has shifted towards a more cautious stance, and this was
highlighted by Chair Powell in the post-meeting press conference, particularly with regard to subdued if not expressly declining  inflation pressure. The upshot, an unwind and part-reversal in the Usd and index through pre-FOMC lows around 96.200.

  • SEK - In stark contrast to the Greenback’s relatively abrupt U turn, the Swedish Crown received a semi-surprise boost from the Riksbank that raised the repo rate by ¼ point against majority, albeit not unanimous by any means market expectations. Indeed, Eur/Sek has tested 10.2500 vs almost 10.3700 at one stage ahead of the contentious final policy meeting of the year, even  though the decision to hike was contested by one Board member and came with a shallower projected tightening path out to 2021.
  • EUR - The single currency is heading gains vs the back-pedalling Usd and finally cleared recent highs just ahead of 1.1450 on its way to circa 1.1485 and mega option expiries/barriers at 1.1500 (5.6 bn) that also coincide with early November peaks
  • CHF/GBP/JPY - All benefiting from the aforementioned Dollar demise, with the Franc breaching 0.9900 resistance and perhaps also aided by a widening Swiss trade surplus. Similarly, Cable has overcome a sticky level around 1.2650 to briefly peer above 1.2700 despite ongoing Brexit uncertainty and helped in part by a strong pre-Xmas UK retail sales update, but highly unlikely to derive any further purchase from the BoE that is unanimously seen standing pat. Meanwhile, broad risk-off sentiment/positioning and even flatter yield curves have sparked strong demand for the Jpy that has now rallied through 112.00 to just over 111.70,  even though Japanese monetary authorities are monitoring the situation and BoJ Governor Kuroda maintains the option of further easing if needed following an unchanged final policy meeting of the year.
  • AUD/NZD/CAD - The Aud is markedly outperforming vs its fellow non-US Dollars, albeit within a significantly lower range vs its US counterpart around 0.7100, as the Kiwi is undermined by much weaker than forecast Q3 GDP overnight and ANZ’s dovish call for a 25 bp RBNZ rate cut. Nzd/Usd is languishing below 0.6800 and the Aud/Nzd cross is back over 1.0500 accordingly. Elsewhere, sliding crude prices and the Canadian-Chinese diplomatic situation continues to weigh heavily on the Loonie, but the Cad has rebounded from 1.3500+ lows to circa 1.3450.
  • EM - Regional currencies now all in the ascendency vs the Usd and regaining lost ground after the initial Fed fall-out and rout in risk assets.

In commodities, Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers are awaiting orders from state oil Co NOC. Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.

Looking at the day ahead, we’ll get the December Philly Fed PMI for December and latest weekly initial jobless. It’ll be worth seeing if the latter affirms last week’s lower reading. Later on the November leading index will also be out.

US Event Calendar

  • 8:30am: Philadelphia Fed Business Outlook, est. 15, prior 12.9
  • 8:30am: Initial Jobless Claims, est. 215,000, prior 206,000; Continuing Claims, est. 1.66m, prior 1.66m
  • 9:45am: Bloomberg Consumer Comfort, prior 59.4; Bloomberg Economic Expectations, prior 56
  • 10am: Leading Index, est. 0.0%, prior 0.1%

DB's Jim Reid concludes the overnight wrap

While the Fed were last night destroying the final hopes of a Santa rally I was temporarily diverted by the DVD of the nativity play I missed last week while travelling. Given it was the first I’ve seen a few things stunned me. Firstly one of the fathers filmed it and was quite clearly trying to impress other Dads as he used three cameras, spliced the footage together seamlessly and used optical zoom where appropriate. Secondly the parents made all the costumes and my wife having gone to fashion college in her early 20s was quite clearly determined to steal the show. It was like Georgio Armani has branched out into Jingle Bell outfits for 3-year olds. Finally there was one short bit ruined by crying babies. I asked my wife who was being inconsiderate and she replied sheepishly that it was our twins!!

The audience to the Fed last night also must have felt like screaming as the “Powell put” became the “Powell push”. The S&P closed down -1.54% and -3.03% off its intraday high. That’s the sixth worst intraday drop of the year and the ninth worst since 2011. The S&P 500 is now down -6.33% on the year and sits at a 15-month low. December now stands at -7.76% and has further extended the worst Xmas month since 1931 and the second worst on record. Given that December 1931 saw a price fall of -18.74% the record should at least hold!! Two-year Treasury yields rose less than a basis point, but 10-year yields fell -5.7bps. The 2s10s curve accordingly flattened -6.3bps, its sharpest move since March, to a new cyclical low of 10.8bps (9.5bps in Asia). This move indicates that the market is more concerned than before about the Fed instigating a policy error. As a reminder 2s10s has inverted ahead of the last 9 recessions, taking just under 18 months on average to transition from inversion to recession. See our note last week ( link ) for much more on all things yield curve related.

Overall, the key takeaway from the policy statement, the new economic projections, and Chair Powell’s press conference is that the Fed are becoming slightly more dovish but not at the pace the market is or wants. The Fed are not likely to change their planned policy path dramatically to rescue equity markets unless and until the selloff begins to affect the real economy. The statement did add a reference to “global economic and financial developments” and the new median projections include only two rate hikes in 2019 (from three). But the estimate of the long-run neutral interest rate also fell, to 2.8% from 3.0%, which means that current interest rates are even closer to neutral. That statement also maintained its reference to “further gradual increases,” which kept March alive for a potential hike. It did add the qualifier “some” to perhaps reflect the fewer expected hikes next year. Powell repeated these themes in his press conference: he acknowledged that they had taken “on board the outcome of financial conditions” but he denied that they “have fundamentally altered the outlook.” He said that the Fed “follows markets carefully but no one market is the single dominant indicator.”

Other US equity markets also dropped off their intraday peaks yesterday. The DOW and NASDAQ closed down -1.49% and -2.17%, which was -3.05% and -3.38% off highest levels of the session. Optimism had been building that Chair Powell would deliver a “dovish hike,” which made the moves ultimately more severe. Bank stocks had rallied as much as +1.99% but closed down -1.69%. The dollar closed near flat, despite dropping as much as -0.57% earlier in the session. In Europe, markets closed before the euphoria evaporated, with the Stoxx 600 up +0.31% and the FTSE 100 +0.96% higher. Emerging markets currencies and equities fell -0.24% and -1.66%, respectively.

Overnight we’ve had the second of three central bank meetings this week with the BoJ meeting. As expected there was no change in policy. Governor Kuroda's presser (6:30am BST) will have started by the time this reaches your inbox. 10y JGBs are largely unchanged trading at 0.018% while equity markets in Asia are following Wall Street's lead with the Nikkei (-3.02%), Hang Seng (-1.42%), Shanghai Comp (-0.82%) and Kospi (-1.38%) all down alongside most markets. The Nikkei is currently trading in bear market territory and down -20% from the January highs. Elsewhere this morning, futures on the S&P 500 are down another -0.82% with the mood deepening further.

In other news, the PBoC said that it will supply lower-cost liquidity for as long as three years to banks willing to lend more to smaller companies, in a move to support the economy. The PBOC will create a “targeted” version of its Medium Term Lending Facility, and take applications from banks that meet regulatory requirements and have potential to increase credit supply to smaller companies with the funds to be made available at a rate of 3.15%, lower than current facilities which have shorter maturities. Meanwhile, the US senate passed a stopgap funding bill to avert a partial federal shutdown and keep the government funded until February 8.

On Brexit, Work and Pensions Secretary Amber Rudd became the first person in PM May's cabinet to openly discuss the idea of second referendum as she said, “I don’t want a people’s vote or a referendum in general, but if Parliament absolutely failed to reach a consensus, I can see that there would be a plausible argument for it.”

Back to yesterday and Italian assets led gains in European markets, after the European Commission endorsed Italy’s revised budget plan. The FTSEMIB gained +1.59% and 10-year BTP yields fell -16.6bps to their lowest level since end-July. Two-year BTP yields ralled -10.9bps to their lowest level since May. The agreement includes a lower deficit target, as expected, of 2.04% of GDP in 2019 compared to the original plan’s 2.4%. The savings will come from less ambitious social spending and a smaller reduction in the retirement age. The agreement should eliminate the risk that the Commission launches an Excessive Deficit Procedure in the near term, though EC Vice President Dombrovskis told reporters that the decision will depend on Italy’s full implementation of agreed measures over the next year.

The outperformance of BTPs continues a trend seen since mid-October. Interestingly if we mark the global risk-off period as starting on October 3rd, BTPs are the second best performing asset (+3.9%%) out of 38 in our usual performance review sample. Only Gold (+4.2%) is higher while the Brazilian Bovespa (+2.9%) is third. For context over the same period US and EU HY are down over -3%, the FTSE-MIB -8.5%, Stoxx 600 -10.5%, S&P500 -12.6%, NASDAQ -17.1% and WTI Oil -39.1%. If we actually do the same exercise from the peak in BTP yields on October 18th then they top the list. So this sell-off has not been about Italy as this has actually been a star performer. Interestingly over the same period Italian IG corporates have underperformed the IG corporate index so the higher beta nature of these names has offset the improved sentiment for the sovereign.

Moving on. The last main central bank meeting of the year today is the BoE with the policy meeting decision outcome due around lunchtime. No change in policy is expected and our economists expect the statement to remain fairly neutral given the rise in Brexit uncertainty. Softer survey data should confirm a downgrade to the BoE's Q4-2018 growth estimate (-10bps), which is currently at 0.4% qoq. We could also see a downward revision to growth in Q1-2019 given the likelihood of slower activity spilling over into next year. Importantly, however, the MPC will also look to account for the recent fiscal stimulus announced by the Chancellor in the October Autumn Statement.

On the data front, US mortgage applications fell -5.8% last week, the third steepest drop of the year. Existing home sales rose 1.9% mom in November. So still mixed data on the US housing front. The US current account widened to - $124 billion in the third quarter, which was the widest deficit in nominal dollars since the fourth quarter of 2008. In Europe, German PPI stayed steady at 3.3% yoy, which was nevertheless stronger than expected. In the UK, PPI fell 0.2pp to 3.1% but beat expectations, while CPI softened 0.1pp to 2.3% yoy. Core CPI fell 0.1pp to 1.8%. Euro area-wide construction output rose 1.8% yoy.

In terms of the day ahead, the BoE meeting is likely to be the highlight with data releases fairly thin on the ground. Prior to the BoE we’ll get November retail sales data in the UK followed by the December CBI survey data. Over in the US we’ll get the December Philly Fed PMI for December and latest weekly initial jobless. It’ll be worth seeing if the latter affirms last week’s lower reading. Later on the November leading index will also be out.