The following excerpt is from an article that originally appeared on Zero Hedge
In a trend observed every day this week, S&P futures are slightly in the red ahead of a post-open ramp with the VIX rising to 9.91, as Asian shares climb, European stocks are little changed. WTI crude pares recent gains, slipping below $51 after API showed an unexpected crude build. Earnings season launches with bank earnings reports from JPMorgan and Citigroup, while Economic data include PPI figures, jobless claims.
As Reuters notes, broader investor risk sentiment has improved this week after Catalonia dialed back plans to break away from Spain, with MSCI’s 47-country world stocks index reaching a record high. Global equities now appear to be taking geopolitical developments such as the secessionist push in Spain and tensions on the Korean peninsula in their stride, to reach those record tops.
Analysts will be keeping a close eye on banks Q3 reports: Trading probably dropped from the same period a year earlier. Executives from JPMorgan, Citigroup and Bank of America Corp. told investors last month to expect declines ranging from 15 percent to 20 percent. Goldman Sachs Group Inc., coming off its worst first half for the trading business in more than a decade, said the third quarter remained challenging. Subdued volatility, especially compared with the turmoil from Brexit and the U.S. election a year earlier — made the period particularly tough.
The Bloomberg Dollar Spot Index held a four-day decline as buying interest remained low after some Federal Reserve policy makers expressed concern in the account of the latest FOMC meeting that weak inflationary pressures are more than just transitory. The minutes of the FOMC’s Sept. 19-20 meeting were interpreted as dovish, posing risks to the path of interest rate rises investors price in for 2018 onward should inflation be weaker than targeted. The importance of U.S. CPI growth data due Friday is highlighted by overnight volatility in euro-dollar, which hit a more than two-week high, surpassing the levels seen ahead of U.S. payrolls last week, although it was unable to hold on to gains and fizzled to session lows after the European open.
Asian stocks advanced for a 5th day, sending the regional benchmark to a fresh 10-year high on Thursday, after minutes of the latest U.S. Federal Reserve meeting boosted optimism that rate increases in the world’s biggest economy will remain gradual, while the dollar sagged after the Federal Reserve showed a more guarded view towards inflation. The MSCI Asia Pacific Index rose 0.5 percent to 165.80 as of 4:40 p.m. in Hong Kong, heading for the highest close since November 2007. As Bloomberg reports, SoftBank was the second-biggest contributor to the regional gauge’s advance as Japan’s Topix also added to decade-long highs.
The Fed minutes released Wednesday showed officials debated hard last month over whether forces holding inflation down were persistent or temporary, with several policy makers looking for stronger evidence of price gains before supporting a third interest-rate increase this year.
“We expect that only a further unanticipated decline in inflationary pressures would prevent the Fed from moving in December,” said David Sloan, senior economist at Roubini Global Economics. “Looking further ahead, however, inflation is likely to need to show some improvement if three more rate hikes are to be delivered in 2018.”
“The Fed minutes signify the U.S. economy is on a recovery path and that succeeding rate increases will not be sharp,” easing concerns of market shocks, said Lexter Azurin, analyst at Manila-based AB Capital Securities. “An improving U.S. economy is taken positively by market for its big role in the global economy.”
European equities kicked off the session on a relatively tame footing with very little seen in the way of direction. In terms of sector specific performance, things are also relatively contained with some very modest underperformance seen in financial names in the wake of yesterday’s slightly more dovish than anticipated FOMC minutes release. Individual movers include Deutsche Lufthansa (+2.6%) amid expectations the Co. will purchase 81 planes from Air Berlin and retain 3k of their staff, with easyJet (+2.2%) supported by a pre-market broker move. ECB’s Praet said deflation risks have disappeared, but that Euro area inflation remains subdued and that sustained inflation adjustment will guide QE exit. Praet added that a substantial amount of stimulus is still required and that ECB should communicate more on reinvestment policy
In the U.K., sterling rose for a fourth day even as the fifth round of Brexit negotiations draws to a close with seemingly little progress. The U.K.’s chief negotiator David Davis and his EU counterpart Michel Barnier are due to brief reporters before noon in Brussels. Brexit negotiations are at a virtual political standstill, with no notable advances made in the fifth round of negotiations, according to several diplomats briefed on the discussions, the FT reported.
Overnight, President Trump stated we cannot allow North Korea situation go on. The President also commented on his tax plan, saying that he is looking at around 10% repatriation tax rate and vowing to lower corporate taxes to a maximum 20% from 35% and above, also pledges to cut small business tax marginal rate by 40%.
Treasury yields dropped as the market looks to inflation data out of the U.S. due Friday.
Gold continued its rally to climb above its 21-DMA, rising 0.2% to $1,294.66 an ounce, the highest in more than two weeks. West Texas Intermediate crude declined 0.7 percent to $50.93 a barrel.
Bulletin Headline summary from RanSquawk
- Greenback sees a marginal recovery as DXY finds support at 92.80
- European equities trade subdued, failing to follow Asia and the US, likely hampered by the bullish EUR and lack of newsflow
- Looking ahead, highlights include weekly jobs data, US PPI, DoEs and a slew of central bank speakers
- S&P 500 futures down 0.2% to 2,548.80
- VIX Index up 0.6%, at 9.91
- STOXX Europe 600 up 0.06% to 390.40
- MSCI Asia up 0.5% to 165.79
- MSCI Asia ex Japan up 0.6% to 548.24
- Nikkei up 0.4% to 20,954.72
- Topix up 0.2% to 1,700.13
- Hang Seng Index up 0.2% to 28,459.03
- Shanghai Composite down 0.06% to 3,386.10
- Sensex up 0.5% to 31,991.46
- Australia S&P/ASX 200 up 0.4% to 5,794.47
- Kospi up 0.7% to 2,474.76
- German 10Y yield fell 1.4 bps to 0.449%
- Euro up 0.03% to $1.1862
- Italian 10Y yield rose 5.9 bps to 1.892%
- Spanish 10Y yield rose 0.7 bps to 1.645%
- Brent Futures down 0.5% to $56.65/bbl
- Gold spot up 0.4% to $1,296.56
- U.S. Dollar Index down 0.09% to 92.93
Top Overnight News from Bloomberg
- Republican lawmakers from high-tax states are set to meet with House Majority Leader Kevin McCarthy and Ways and Means Chairman Kevin Brady Thursday to discuss GOP proposals to end the state and local tax deduction
- U.S. and Turkish officials will meet in the coming days to try to defuse a diplomatic crisis over Turkey’s arrest of some U.S. citizens and local consular workers, Turkey’s Deputy Prime Minister Bekir Bozdag said
- Fed’s Bostic said that with a relatively strong and improving labor market and stable inflation expectations, “I am looking for inflation to drift up to 2 percent over the next year or so”
- Kevin Warsh has emerged as the leading candidate to run the Federal Reserve next year, jumping ahead of current Chair Janet Yellen, according to a Bloomberg survey of economists Oct. 6–11; Jerome Powell, until now seen as a long-shot, vaulted into a tie for second with Yellen in the poll
- Germany wants the European Union to be prepared to grant U.K. financial companies transitional access to the EU if the Brexit process drags on, according to a government strategy document
- Global oil supply and demand estimates for 2018 indicate that inventories may not fall further, potentially capping prices, following a projected drop in stocks this year, the International Energy Agency said in its monthly report
- Trading Revenue in Focus at JPMorgan, Citi; Warsh Favored as Next Fed Chair; Trump on Iran, Tax and Health Care
- President Donald Trump said his tax plan would simplify the tax code and save money for millions of U.S. businesses and families as he campaigns against criticism the proposal is a giveaway to the rich
- U.S. central bankers are looking for clues that underlying strength in the economy will underwrite their plans to raise interest rates for a third time this year, a record of their meeting last month showed, as officials wrestled with why inflation remains so low
- Comcast Corp., 3M Co. and Wal- Mart Stores Inc. are among the companies buying back bonds now in transactions that could save them millions of dollars if the latest proposed tax changes from the Trump administration and Congress end up becoming law
- Prime Minister Mariano Rajoy gave his Catalan antagonist Carles Puigdemont five days to clarify whether he has declared independence from Spain or not as the country prepared for its national holiday on Thursday
- Passive investments, already eating away at active managers’ assets, are getting another boost from MiFID and two other new rules
Trump Is Said to Demand Tax-Break Change to Protect Middle Class
- Brexit Talks Edge Backward as U.K. Prepares for the Worst
- Proxy War Over Iran Nuclear Agreement Divides U.S., Europe at UN
- BMW Said to Make Mini Brand Outside Europe in New China Tie-Up
- China Sept. Auto Sales Rise 3.3% Y/y: CAAM
- Bitcoin Strengthens Above $5,000 for the First Time
Asian equity markets traded mostly positive after another set of fresh record levels for all major indices in US, where focus was on the FOMC minutes which suggested concerns over weak inflation. The positive momentum helped Nikkei 225 (+0.35%) extend on its highest levels in over 2 decades and test the 21,000 level, while ASX 200 (+0.40%) was somewhat muted as weakness in miners capped upside. Elsewhere, Hang Seng (+0.24%) and Shanghai Comp. (-0.06%) were mixed with underperformance in the mainland after another lacklustre PBoC liquidity operation which led to a net daily drain of CNY 40bln. 10yr JGBs were relatively flat as demand lacked amid a mostly positive risk tone and reserved BoJ Rinban announcement for JPY 710bln of JGBs in the belly to the super-long end. PBoC injected CNY 20bln via 7-day reverse repos for a net daily drain of CNY 40bln.
Top Asian News
- Hong Kong Slaps Banker With Ban for Mobile Phone, WeChat Use
- Sri Lanka Makes Arrests in $60 Million Taiwanese Bank Cyberheist
- Japan Stocks Set Fresh Highs Amid Optimism of Abe Election Win
European equities have kicked off the session on a relatively tame footing with very little seen in the way of direction. In terms of sector specific performance, things are also relatively contained with some very modest underperformance seen in financial names in the wake of yesterday’s slightly more dovish than anticipated FOMC minutes release. Individual movers include Deutsche Lufthansa (+2.6%) amid expectations the Co. will purchase 81 planes from Air Berlin and retain 3k of their staff, with easyJet (+2.2%) supported by a pre-market broker move. A firmer tone overall, with Bunds leading the way after an initial blip to set a fresh high for the week so far, but then running into selling above 161.50 (albeit with relatively tight stops). Some caution evident ahead of 30 year US long bond issuance, while BTPs also pared best gains ahead of Italy’s multi-tranche offering. However, EZ peripheral debt still marginally outperforming on dovish ECB comments (Praet) and a brief period of calm on the Catalonia-Spain front. Contrasting fortunes for Italy’s BTP issuance, with the top end of the range raised, but yields mixed and covers not that liberal overall – hence, the 10 year benchmark yield showing little net change since the results, but still a tad softer on the day around 2.144%. If anything, the cost of borrowing reflects modest curve flattening, and note that this is the first tap of the long dated 30 year maturity that was launched via syndication.
Top European News
- Italy Bank Bulls Say Bad Loan Panic Overdone as Stocks Slide
- European Refiners Hardest Hit If Kurdish Oil Disrupted, IEA Says
- Serco Is Said to Be Among Bidders for Carillion Health Unit
- Event-Driven Hedge Fund Melqart Plans to Stop Taking New Money
- Tallinna Sadam Eyes Passenger Growth, Nordic Cargo Ahead of IPO
In FX markets, the USD has regained some ground against its major counterparts that was seen in the wake of the aforementioned FOMC minutes with ranges overall relatively tight. This is likely as a by-product of a quiet European calendar and macro newsflow with a bulk of today’s releases and speakers not due until the latter half of the session. SEK has seen some weakness early doors with Swedish inflation metrics all falling short of expectations and subsequently providing the Riksbank with further ammo to stand pat on existing policy despite recent calls from the market to reconsider their approach. In option activity, 2bln worth of expiries loom in EUR/USD between 1.1790 – 1.1805 with another 7.5bln worth of expiries between 112.00 and 113.05 in USD/JPY. AUD benefited from stronger than expected Home Loans data, printing 1.0% vs. Exp. 0.5%. EUR/AUD ran into key levels ahead of the data, rejecting June’s high around the 1.5224 area.
In commodities, WTI and Brent crude futures continue to remain in close proximity to their post-API lows with the latest report revealing a surprise 3.1mln bbl build and subsequently pushing WTI back below USD 51/bbl. This morning’s IEA release has done little to instigate price action with key findings including expectations that OPEC will maintain output steady around current levels and their measure of compliance standing at 88%. Gold prices have remained supported by the broadly softer USD while copper was flat overnight and held onto recent advances amid a mostly positive global risk tone during Asia-Pac trade.
US Event Calendar
- 8:30am: PPI Final Demand MoM, est. 0.4%, prior 0.2%; Ex Food and Energy MoM, est. 0.2%, prior 0.1%; Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2%
- 8:30am: PPI Final Demand YoY, est. 2.6%, prior 2.4%; Ex Food and Energy YoY, est. 2.0%, prior 2.0%; Ex Food, Energy, Trade YoY, prior 1.9%
- 8:30am: Initial Jobless Claims, est. 250,000, prior 260,000; Continuing Claims, est. 1.93m, prior 1.94m
- 9:45am: Bloomberg Consumer Comfort, prior 49.9
DB’s Jim Reid concludes the overnight wrap
Markets should be wide awake over the next 30 hours or so as we have US bank earnings kicking off Q3 reporting (JPM and Citi today), PPI today, US retail sales tomorrow and then possibly the data highlight of the month at the moment, namely US CPI. Before all that, the Fed kickstarted the second half of the week with their minutes last night where there was a clear debate on inflation but the tone – coupled with the two Fed speakers – was perhaps a bit more dovish than market expectations with UST 10y down 1.3bp. The odds of a December rate hike is c77% (per Bloomberg) though and not much changed.
In the details, the minutes noted “many participants expressed concerns that the low inflation this year might reflect not only transitory factors…” and that several policy makers said their decision on whether to raise rates this year “would depend on whether the economic data in the coming months increased their confidence” that inflation is on track to reach the Fed’s target. Further, “it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted”. Elsewhere, some participants were more worried about upside risks to inflation arising from “a labour market that had already reached full employment and was projected to tighten further”. Notably, many participants continued to believe that labour market pressure would show through to higher inflation eventually.
Onto the Fedspeak. The more dovish Fed Evans said “it’s too early” to make a call on a December rate hike and that “I really don’t see any harm in waiting longer just to take more stock of the inflation situation”. Further, he added that while price pressure should emerge from a stronger labour market, “it might take something like 3.5% unemployment rate before you really see inflation pick up”. Elsewhere, the Fed’s Williams said that with the unemployment rate now down to 4.2% in September, the Fed had “not only reached the full employment mark, we’ve exceeded it”. He expects the unemployment rate to fall below 4% and remains optimistic that core PCE inflation should rise to 2% “over the next couple of years”.
Staying on the inflation debate, DB’s US economics yesterday published a note looking at demographics and inflation and find that aging has in fact been positive for US inflation in recent decades and that population aging should continue to act as a tailwind for inflation in the years ahead. Most people assume ageing is deflationary. I disagreed with that in last year’s long-term study and this report looks at the theme in much more detail. For more details, refer to Link. Also worth noting that Sweden’s September inflation reading (0.4% mom; 2.4% yoy expected) is due today and as George Saravelos reminded us yesterday it’s interesting as they the only G10 economy to see core inflation hit its target over the last few months. Although the Riksbank has previously said they are not fully convinced with the recent upside surprises and don’t see the price pressures as sufficiently broad based enough to be too concerned.
Over to Catalonia, Spain’s PM Rajoy has given the Catalan President Puigdemont until next Monday (10am local time) to formally clarify whether he has declared independence or not. The formal request for clarity is a necessary step if PM Rajoy decides to trigger legal procedures (Article 155 of the constitution) which could lead to the suspension of the Catalan Government. PM Rajoy noted “if Mr Puigdemont makes clear his wish to respect the law and return institutions to normality, he would end a period of uncertainty and rupture” and that he “just needs to say he didn’t declare independence”. Spanish markets responded positively, with IBEX up 1.34% and 10y yields down 5.8bp. The spread between Bunds and Spain has now narrowed to 116bp (-15bp than 7 days ago).
Staying with politics, the Italian government has won two of three confidence votes to pass a new electoral law, which could potentially penalise the 5-Star Movement party (5SM). A final confidence vote will be held today before the bill goes to the upper house senate later on where the government apparently has no clear majority. As a reminder, the new voting system allows 36% of lawmakers elected on a first-past-the-post basis and 64% via proportional representation. This development coupled with the latest over in Spain may have assisted the Italian markets too, with the FTSE MIB up 0.97% and 10y bond yields down 2.7bp yesterday.
Turning to the US 3Q reporting season which has kicked off this week. DB’s Chief asset allocation strategist Binky Chadha noted that the bottom up consensus expects 2.9% EPS growth yoy in 3Q, but adjusting for a typical beat (+3.4%) this suggests growth more like 6.3%, although still down from the 12.2% in 2Q, partly driven by the hurricanes. Across sectors, median growth is expected to be stronger for the cyclical sectors, led by Energy (67%), Tech (12%) and the Industrials (11%), with Financials (+8%) in the middle and then lowest for several defensives sectors like Telecoms (-1%), Utilities (+1%) and Staples (+4%). Link Elsewhere, JP Morgan (3Q adj. EPS $1.65ps consensus; +19% yoy, +4% qoq) and Citi’s (3Q adj. EP $1.32ps consensus; +14% yoy, +9% qoq) 3Q results will be out later today, with expected themes likely to be slowing loan growth, sound credit quality and weaker trading income. Notably, the latter has been well flagged by management, with Citigroup and JP Morgan previously suggesting trading income could decline c15% and c20% yoy respectively.
This morning in Asia, markets are building on the positive US lead and are trading higher as we type. The Nikkei is up 0.42% back around 21-year highs. The Kospi (+0.46%), Hang Seng (+0.26%) and ASX 200 (+0.29%) are all slightly up. Quickly recapping other markets performance from yesterday. US equities nudged higher to another fresh record high, with the S&P and Dow both up 0.18% while the Nasdaq rose 0.25%. Within the S&P, modest gains in the real estate (+0.54%) and utilities sectors were partly offset by losses by telco and financial names. In Europe, excluding the Spanish (+1.34%) and Italian (+0.97%) markets, other indices were little changed (Stoxx 600 flat; DAX +0.17%; FTSE -0.06%).
Over in government bonds, core European bond yields rose modestly while peripherals outperformed. Bunds (10y +2bp), Gilts (+1.7bp) and OATs (+1.4bp) rose modestly while peripherals such as Spain (-5.8bp), Portugal (-5.2bp) and Italy (-2.7bp) all outperformed. At the 2y part of the curve, core bond yields were little changed, with Bunds broadly flat but Gilts rose 2bp.
Turning to currencies, the US dollar index weakened 0.29%, while Sterling and the Euro gained 0.15% and 0.43% respectively, with the latter partly assisted by the Spanish developments. In commodities, WTI oil rose 0.75% following OPEC raising its demand forecasts for next year, but some of those gains are being reversed this morning following a surprise increase in US crude inventories. Elsewhere, precious metals were marginally higher (Gold +0.29%; Silver +0.31%) while other base metals were mixed, but little changed (Copper +1.82%; Zinc -0.96%; Aluminium -0.37%).
Away from the markets, the ECB board member Peter Praet reiterated “a very substantial degree of monetary accommodation is still needed” and “in the next few weeks, the governing council will again assess….its package of measures…and will recalibrate its instruments accordingly”. On the calibration of QE, the ECB’s Smet sounded a bit dovish, noting “given that we still need more confidence on inflation….” and “when there is more uncertainty, you would probably see more merits from a higher (pace of purchases)”. Earlier in the day, Bloomberg noted that according to Euro-area central bank officials, policy makers are expected to preserve their pledge to not raise interest rates until “well past” the end of bond buying. We shall find out more in the next ECB meeting on 26th October.
Over in the US, President Trump spoke in Pennsylvania to rally support for his tax reform. He provided more details on how the plans could benefit middle class families, claiming it will eventually translate into a “$4,000 pay raise for an ordinary worker”, albeit over an eight year timeframe (as per Trump’s economic advisers). For Congress, Trump noted “all I can say is, you better get it (tax plans) passed”. Elsewhere, Trump will reportedly meet with one of the Fed Chair candidates (John Taylor – Stanford Uni. Economist) this week, while Politico reported that Treasury Secretary Mnuchin has privately recommended Fed Governor Powell to Trump. Either way, it sounds like we may have a winner pretty soon.
Turning to Japan, a series of larger opinion polls suggest PM Abe could secure a two third majority in the election on the 22nd October. Kyodo news polled 90k people on 10-11 October and estimated Abe’s LDP party and his coalition partner could win a total 319 seats (out of 465). Elsewhere, the Asahi and Nikkei newspaper predicted the coalition could win c300 seats (c65%). The Kyodo polls estimates Governor Koike’s new Party of Hope could win 60 seats (c13%).
Finally, turning back to Brexit. While the EU and UK are reportedly closer on issues such as citizens’ rights, the actual Brexit talks are still likely in stalemate with a key issue being the potential financial obligations UK owes to the EU bloc. Chancellor Hammond said “we have to be prepared for a no deal scenario unless or until we have clear evidence that is not where we will end up”. When pressed further, he indicated that he would start investing money (for plan B contingency plans) as soon as January if progress hasn’t been made in the talks.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the August JOLTS job openings was lower than consensus at 6.08m (vs. 6.13m expected) as well as last month’s record level of 6.14m. The quits rate edged down 0.1pts to 2.1%. Elsewhere, the weekly MBA mortgage applications fell 2.1% (vs. -0.4% previous), but the 4-week average still rose 4.4% yoy. Over in Spain, the final reading for September inflation was broadly unchanged at 0.6% mom and 1.8% yoy (vs. 1.9% expected).
Looking at the day ahead, in France we’ll receive the final September CPI revisions, while Eurozone’s August IP will be out (0.6% mom; 2.6% yoy expected). The BoE will also release the latest credit conditions and bank liabilities surveys mid-morning. In the US, the big focus will be on the September PPI report (0.2% mom; 2% yoy expected for core), while the latest weekly initial jobless claims will also be released. Onto other events, today is a busy day for speakers with the ECB’s Draghi and Fed’s Brainard due to take part in a monetary policy panel in the afternoon, while the Fed’s Powell will speak shortly after at a conference in Washington. President Trump is also tentatively scheduled to give a speech on US policy towards Iran. Earnings season also gains some early momentum with JP Morgan and Citi scheduled to report.post was originally published on this site