If yesterday one could “explain” the overnight stock levitation due to the move higher in crude oil, today there is no such catalyst with WTI down modestly, and yet the broader push higher across European stocks and US equities has reappeared following yesterday’s muted close on Wall Street ahead of key central bank data on deck. Some have attributed the 0.4% rise in futures to the latest dip in the dollar, while a modest bond rally as the countdown to crucial policy decisions by the Bank of Japan and the Federal Reserve entered its final stretch, put taper tantrum concerns on hold if only for the time being.

Indeed, it is all about the two key central bank meetings over the next 24 hours, with both the BOJ and Fed set to make highly anticipated policy decisions. As DB’s Jim Reid puts it, “tomorrow is going to be a bit of a Hollywood day in markets with the FOMC conclusion and the BoJ meeting. In 24 hours we’ll know the Japanese decision and we’ll be awaiting the press conference from Kuroda at 7.30am BST.” DB thinks the BOJ they’ll refrain from adding more stimulus this month. While the bank’s Japan economists acknowledge all the noise from the various media outlets reporting that the BoJ is considering a change in its JGB purchasing scheme to spur a steepening in the curve, a deepening of NIRP and a new forward guidance strategy, they think that the BoJ will do little more than indicate its intent to base its policy implementation on the yield curve, especially since the Fed announcement shortly after can undo anything the BOJ may “surprise” with. Still, the wider market forecasts suggest a reasonable split between economists however so it should be an interesting meeting and reaction.

To be sure, traders are skeptical to put on big trades with not one but two key risk events ahead: “no one is prepared to take on too much risk ahead of the Bank of Japan and the Fed Open Market Committee meetings,” Chris Weston, chief market analyst at IG told Bloomberg. “The key this week for me is how the Japanese and U.S. fixed-income markets react to either central bank decision. If real bond yields start moving up it will cause a tightening of financial conditions that will not be taken well by the credit or equity markets.”

He wasn’t the only one: “the market in general is in a wait and see mode ahead of the Fed meeting tomorrow,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen.  “There’s some anxiety still over the risk of a Fed hike. The euro strengthening a bit might affect European stocks negatively and a small decline in oil as well is weighing on oil companies.”

There was some movement in the USD, which declined versus most of its major counterparts, while the yen advanced, with a large majority of economists surveyed by Bloomberg predicting the Fed will keep policy unchanged. European bonds gained with their U.S. counterparts, pushing Spain’s 10-year yield below 1%, as fixed-income traders assessed the potential results of a BOJ policy review.

Oil declined amid projections of rising supply from Nigeria and expanding crude stockpiles in the U.S. New Zealand’s dollar climbed with milk prices. European stocks were little changed at a one-week high.

Shifting expectations regarding the outcomes of the BOJ and Fed meetings spurred volatility in financial markets over the past two weeks. A slew of weak American economic data has pushed the probability of a U.S. rate hike to 20 percent in the futures market, down from more than 40 percent in late August. The BOJ has been studying the effectiveness of its stimulus programs and economists are split over the likelihood of further easing on Wednesday. To be sure, if the last BOJ announcement is any indication, when the central bank broadly disappointed and only boosted its ETF purchases…

… tomorrow may see another general aversion from risk assets, especially if the JGB curve resumes its steepening.

Stock trading has been generally muted, with Asian stocks declining broadly across the board – the Nikkei 225 (-0.2%) traded choppy on return from its long weekend with sentiment driven by an indecisive JPY. ASX 200 (+0.2%) was initially pressured by losses in telecoms and energy, while Shanghai Comp (-0.1%) and Hang Seng (-0.1%)  both declined. The Stoxx Europe 600 Index rose 0.1%. Italian banks dragged a gauge of lenders to the worst performance of the 19 industry groups on the equity benchmark. Total SA and BP Plc weighed on oil-related companies as crude gave up Monday’s gains on speculation a global glut will persist amid rising Nigerian output. Bayer AG climbed 1 percent after raising the peak sales forecast for its new-drug portfolio. GVC Holdings Plc added 2.6 percent after saying that its 2016 results will be at the upper end of market expectations.  

S&P 500 Index futures advanced 0.4%, after U.S. equities ended Monday little changed.

Japan’s Topix climbed 0.4 percent as trading resumed following a holiday on Monday, while the Nikkei 225 fell 0.2 percent. Nicholas Smith of CLSA Ltd. said he’s “absolutely certain” the BOJ will stop buying exchange-traded funds tracking the Nikkei 225 amid criticism its use of the measure is distorting the market, and buy more Topix and JPX-Nikkei Index 400 ETFs instead.

The yield on 10Y Treasuries declining 2bps to 1.70%, and offsetting Monday’s 2bps increase.  Two of the Fed’s 23 primary dealers — Barclays Plc and BNP Paribas SA — are going against the grain and betting on a surprise rate hike from the Fed on Wednesday. It’s the first time more than one dealer has gone against the consensus during the week of a policy meeting since last September, data compiled by Bloomberg show. Germany’s benchmark 10-year bond yields slipped two basis points to minus 0.002 percent. In Europe, Spanish 10-year bond yields fell to less than 1 percent for the first time since Sept. 9. Italy led advances among the region’s longer-maturity bonds, with the nation’s 30-year yield sliding seven basis points to 2.36 percent. Japan’s 10-year bond yield slipped 1-1/2 basis points to minus 0.06 percent.

Market Wrap:

  • S&P 500 futures up 0.4% to 2142
  • Stoxx 600 up 0.1% to 342
  • FTSE 100 up 0.4% to 6837
  • DAX up 0.5% to 10422
  • German 10Yr yield down 1bp to 0.01%
  • Italian 10Yr yield down 2bps to 1.29%
  • Spanish 10Yr yield down 1bp to 1.02%
  • S&P GSCI Index down 0.1% to 348.5
  • MSCI Asia Pacific up 0.2% to 139
  • Nikkei 225 down 0.2% to 16492
  • Hang Seng down less than 0.1% to 23531
  • Shanghai Composite down 0.1% to 3023
  • S&P/ASX 200 up 0.2% to 5304
  • US 10-yr yield down 2bps to 1.69%
  • Dollar Index down 0.04% to 95.8
  • WTI Crude futures down 0.3% to $43.16
  • Brent Futures down 0.3% to $45.83
  • Gold spot up 0.2% to $1,315
  • Silver spot down 0.2% to $19.21

Global Headline News:

  • Two of Fed’s Own Primary Dealers Warn Shock Hike Awaits Markets: Barclays, BNP see September hike even as futures show 20% odds
  • Dollar Weakens Before BOJ, Fed as Energy Stocks Decline With Oil: Crude slips toward $43 a barrel before U.S. stockpiles data
  • Online Grocer Backed by Facebook Billionaire Said to Seek Buyer: Singapore-based RedMart working with bank to explore options
  • Grab’s Record $750m Funding Turns Up the Heat on Uber: SoftBank led round that’s said to hand Grab a $3b value

Looking at regional markets, we start in Asia where stocks traded subdued following a similar lead from the US close, with participants tentative ahead of this week’s BoJ and FOMC meetings. Nikkei 225 (-0.2%) traded choppy on return from its long weekend with sentiment driven by an indecisive JPY. ASX 200 (+0.2%) was initially pressured by losses in telecoms and energy, while Shanghai Comp (-0.1%) and Hang Seng (-0.1%) were also negative on cautiousness ahead of the key risk events, with the latter also dampened following recent increases in money market rates. 10yr JGBs were marginally lower amid increased risk appetite in Japan, while today’s BoJ bond buying operations were for a relatively reserved amount. BoJ will likely adjust the policy framework this week and could be forced to abandon 2-year inflation target for a longer outlook, according to Nikkei.

Top Asian News

  • China Said to Plan $150b in New Public-Private Projects: Focus will be on fiscal policy and infrastructure investment
  • Yuan Funding Crunch Shows Risks in Reserve Currency Ranking: Yuan will join IMF’s Special Drawing Rights next month
  • Japan Funds Reluctant to Buy Local Debt After Selling Abroad: Japanese investors sold foreign bonds for two straight weeks
  • Brevan Howard, Caxton Expand in Asia Amid Hedge Fund Woes: Asia funds have beaten global rivals for past four years
  • With 18 Soldiers Dead, Modi Faces Pressure to Hit Pakistan: After Kashmir attack, analysts say Modi’s credibility at risk

In Europe, stocks are broadly in the green, despite a relatively flat open. Much of the focus has been on Financials given reports that Deutsche Bank (-1.8%) are planning to securitize USD 5.5bIn of loans in order to bolster capital. Further bad news came from Handelsblatt, claiming outflows from DB’s asset management unit hit EUR 20bIn in the first half of 2016. In spite of this the DAX (+0.4%) outperforms its major peers this morning, through a lack of energy names — which are amongst the worst performers – and the upside seen in Bayer’s (+1.3%) shares. The German pharmaceutical heavyweight, which is a large component of the DAX, increased its 2017 Y/Y pharma revenue forecast by 6%. Elsewhere, Monte Paschi (-5.3%) continues its roller coaster ride, having been halted from trading several times in today’s session and drags the FTSE MIB (-0.4%) lower. This morning has seen marginal upside in fixed income with Dec’16 Bund futures higher by 15 ticks. Of note Fl trade is relatively thin with some position squaring before the Fed.

Top European News

  • Glaxo Names Emma Walmsley as New CEO to Succeed Andrew Witty: Walmsley to join board on Jan. 1, take helm on March 31
  • Lufthansa, Air China Sign Pact to Operate China-Europe Routes: Carriers plan to start joint operations in 2017: statement
  • Bayer Mulls Dropping Monsanto Name as Brand Headache Cure: Executives aiming to build on consumer trust in Europe
  • UBS Raises $637 Million for European Infrastructure Debt Fund: money was raised from 17 investors, including pension funds and insurers in Europe and Japan
  • Swiss Watch Exports Fall for 14th Straight Month: Shipments dropped 8.8% in August, following 14% slide in July
  • Tesco Outpaces Rivals as Britons Splurge on Summer Booze Deals: Tesco had its smallest sales decline in 2.5 years
  • Sports Direct Seeks to Appease Investors With New Review Leader: Mike Ashley bows to shareholder pressure in latest concession
  • Arrow Global to Co-Invest in EU1.7b Real Estate Loan Portfolio: co. commented in statement
  • Banco Popular CEO Halts Private Bank Sale: Expansion: Larena wants to keep business to gain profitability, newspaper reports
  • Greencore Group Names Eoin Tonge CFO Effective Oct. 3: Eoin replaces Alan Williams, who is to become Travis Perkins CFO

In FX, the dollar fell against 13 of its 16 major peers, weakening 0.2 percent to 101.75 yen in early trading. It weakened 0.1 percent to $1.1187 per euro, having dropped 0.2 percent the previous day. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was little changed, after touching its strongest level since July 29 last week. The BOJ should continue with both asset purchases and its negative interest rates policy, partly to prevent currency appreciation, Koichi Hamada, adviser to Prime Minister Shinzo Abe, was cited as saying in a Tokyo Shimbun report over the weekend. Any debate to cut back on the central bank’s easing program now will bring back a pre-Abenomics, deflationary age, he said. South Africa’s rand gained 0.5 percent to a one-month high, bringing its advance in September to 5.5 percent, the biggest appreciation among 31 major currencies tracked by Bloomberg. The rand is rebounding from a 6.1 percent selloff in August sparked by concern that Finance Minister Pravin Gordhan’s job is on the line after reports that he faces arrest over allegations of irregularities at the tax authority, which he headed from 1999 to 2014.

In commodities, West Texas Intermediate fell 0.4 percent to $43.15 a barrel and Brent slipped 0.5 percent to $45.74.  Nigeria’s output reached 1.75 million barrels a day and will keep rising after government outreach and a cease-fire with militants allowed some production to restart, Minister of State for Petroleum Emmanuel Kachikwu said. U.S. crude stockpiles probably increased by 3.13 million barrels last week, according to a Bloomberg survey before government data Wednesday. Gold rose 0.2 percent to $1,315.28 an ounce, advancing for a second day. U.S. natural gas climbed for the third day out of four. Futures rose 0.7 percent to $2.955 per million British thermal units as above-normal temperatures were forecast for most of southern and eastern part of the country next week.

Looking at today’s calendar, it’s another quiet start in the European session this morning with the August PPI print in Germany the only data due to be released. In the US we get more housing market data, this time in the form of the August housing starts and building permits data. The market is expecting starts to fall -1.7% mom but permits to rise +1.8% mom. Today also marks the commencement of the United Nations General Debate and runs through until the 26th. Speakers include Theresa May, Francois Hollande and Alexis Tsipras, so it’ll be interesting to see if there is anything interesting to come from this.

* * *

US Event Calendar

  • 8:30am: Housing Starts, Aug., est. 1.190m (prior 1.211m)
    • Housing Starts, Aug., est. -1.7% (prior 2.1%)
    • Building Permits, Aug., est. 1.165m (prior 1.152m, revised 1.144m)
    • Building Permits, Aug., est. 1.8% (prior -0.10%, revised -0.8%)
  • 11:30am: U.S. to auction 4W bills

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade mostly higher with the exception of the FTSE MIB as the nation’s banking sector continues to concern investors
  • A busy morning in FX with markets back to full strength, but not for the specific currencies in the line of fire ahead of the BoJ and FOMC rate announcements
  • Looking ahead, highlights include the NZ GDT Auction and API crude oil inventories
  • Treasuries slightly higher in overnight trading as global equities mixed, oil lower and gold rallies; investors see just 20% chance of rate hike tomorrow by Fed; BOJ rate announcement overnight.
  • Two of the Fed’s 23 preferred bond-trading partners — Barclays Plc and BNP Paribas SA — are betting against their peers and the bond market by forecasting officials will raise rates Wednesday
  • China’s shadow banking could lead to losses of $375 billion, according to CLSA Ltd. estimates of likely levels of bad debt. The brokerage estimated the potential bad debt ratio for “bank-related shadow financing” at 16.4%, or 4.2 trillion yuan
  • China’s attempts to slow runaway home-price growth in major cities are showing little sign of success, stoking the threat of a housing bubble that could destabilize the economy
  • Deutsche Bank AG, which is trying to bolster its capital, is working to securitize billions of dollars of corporate loans to offload risk, according to a person with knowledge of the matter
  • Trade is likely to remain weak in the coming years, according to a report by the ECB. While global trade grew on average roughly twice as fast as global output prior to the financial crisis, the ratio of imports to world GDP has largely stagnated over the last five years and will probably remain at current levels
  • This year is poised to be one of the biggest on record for corporate bonds in Europe after getting off to a slow start. Companies have sold the equivalent of about 250 billion euros ($280 billion) of notes in the single currency and sterling
  • Wells Fargo’s John Stumpf, struggling to quell a scandal and demands for management accountability, plans to tell lawmakers Tuesday the bank failed customers and the public by reacting too slowly to signs employees were opening millions of unauthorized accounts
  • The mandate to negotiate Britain’s departure from the European Union must be unanimously approved by the bloc’s remaining 27 governments, leaving “zero chance” the U.K. can clinch a deal with both immigration curbs and free- market access, the Czech envoy said

* * *

DB’s Jim Reid concludes the overnight wrap

Tomorrow is going to be a bit of a Hollywood day in markets with the FOMC conclusion and the BoJ meeting. In 24 hours we’ll know the Japanese decision and we’ll be awaiting the press conference from Kuroda at 7.30am BST. As a reminder DB thinks that they’ll refrain from adding more stimulus this month. While our Japan economists acknowledge all the noise from the various media outlets reporting that the BoJ is considering a change in its JGB purchasing scheme to spur a steepening in the curve, a deepening of NIRP and a new forward guidance strategy, they think that the BoJ will do little more than indicate its intent to base its policy implementation on the yield curve. The wider market forecasts suggest a reasonable split between economists however so it should be an interesting meeting and reaction.

In terms of markets in the early going this week, following a decent rebound in Europe and then a positive start to trading in the US, equity markets were left treading water by the end of play yesterday as the rally faded into the evening. Indeed a boost from the commodity complex had initially helped the Stoxx 600 close up +1.02% for just the second daily gain in the last eight sessions, while the S&P 500 opened up as much as +0.67% but that marked the high point for the day with the index eventually fading into the close to end around flat. Gains for utility and real estate names – the latter following a bumper NAHB housing market index print (more on that below) – ended up being offset by losses for telecom names and also the tech sector with Apple (-1.17%) down for the second day in a row following four strong days to start last week.

While not quite making up for the steep decline on Friday, WTI did finish +0.63% yesterday as exports out of Libya continued to be halted, while OPEC’s secretary general suggested that there could be an extraordinary meeting between Oil ministers if a consensus is reached at the informal meeting next week. Precious metals were also stronger, with Gold (+0.22%) and especially Silver (+2.02%) rebounding. Base metals excluding Copper were also broadly higher (Nickel in particular rallying +4.37% on supply concerns).

There wasn’t a huge amount to report in the rates space with Treasury yields inching slightly higher (10y +1.9bps to close back above 1.700%), while the Greenback was weaker despite the latest NAHB housing market index reading The index rose a bumper 6pts to 65, well exceeding the consensus estimate of 60 and it means that the current reading is the joint highest (with October 2015) since 2005. The details pointed to widespread strength with both reported present sales (+6pts to 71) and future sales expectations (+5pts to 71) both rising.

Refreshing our screens and looking at the latest in Asia, there doesn’t appear to be much in the way of a direction in markets this morning with the bourses fairly mixed. Japan has reopened following the public holiday yesterday and the Topix and Nikkei have climbed +0.63% and +0.11% respectively. The Kospi (+0.03%) is little changed, while the Hang Seng (-0.30%), Shanghai Comp (-0.29%) and ASX (-0.21%) have dipped modestly lower. There’s little to report from currency markets while Oil (-0.40%) has faded. Meanwhile there continues to be some focus on the BIS report from the weekend which showed that the credit gap in China (also known as the credit-to-gross domestic product gap, or the difference between the credit-to-GDP ratio and its long term trend) has risen to 30.1% and well above the 10% level that signals financial stress. A year ago the ratio was 25.4% and the increase in the gap has raised fresh concerns about China’s banking sector.

Moving on. We discovered yesterday that the past week has seen the highest amount of the ECB CSPP to date. Net settled purchases were €2.657bn last week which equates to a daily average of €531mn. This compares to a daily average of €365mn since the program started and a monthly average of €7.666bn. The step-up in buying has coincided with healthy primary issuance and hints that the ECB are being very active in new issues. Remember that when they last disclosed buying composition (on September 5th) for data at the end of August, the split was around 93% secondary and only 7% primary. When they next detail the split in early October, which will factor in all the September purchases, we’d expect primary to have increased.

Flipping to equities, a quick mention this morning that our European equity strategists have published their latest report looking at the risks of a US recession. They note that four signals are in place that have been associated with US recessions in the past: corporate margins have been declining for the past two years, the Fed’s Labour Market Conditions Index has turned negative last month, capex growth is negative and the US speculative default rate is above 5%. There has only been one occasion over the past 30 years on which these factors have come together without this leading to a recession – namely, 1986. The reason the economy did not go into recession but back then was that the Fed cut rates by 550bps and the US dollar dropped by 40% after the Plaza Accord, boosting export growth. None of these support factors are unlikely to materialize this time round. As a consequence, the team agree with our economists that there is a 30% probability of a US recession over the coming 12 months. This is one reason for their cautious stance on European equities – and cyclical sectors in particular.

Before we look at the day ahead, another reminder that the latest Long-Term Study “An Ever Changing World” was out the week before last. We’re still getting a lot of interest and demand for the report so here is a link for those who haven’t seen it yet. http://pull.db-gmresearch.com/p/15348-C657/40032476/LT_Study.pdf

Looking at today’s calendar, it’s another quiet start in the European session this morning with the August PPI print in Germany the only data due to be released. In the US this afternoon we get more housing market data, this time in the form of the August housing starts and building permits data. The market is expecting starts to fall -1.7% mom but permits to rise +1.8% mom. Today also marks the commencement of the United Nations General Debate and runs through until the 26th. Speakers include Theresa May, Francois Hollande and Alexis Tsipras, so it’ll be interesting to see if there is anything interesting to come from this.

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