In another mostly quiet overnight session where the RBA kept rates unchanged at 1.50% as expected, followed however by an unexpected 25 bps rate cut by the RBI, the main event has once again been sterling, which continued its slump after recent comments by Theresa May that Article 50 would be triggered by March, with cable falling to a 31 year low as Brexit worries were compounded by a stronger dollar, and boosted by resurgent U.S. interest rate hike expectations. The JPY continues to weaken (down ~70bp) after Reuters said the BOJ is watching the level of the yen closely (the BOJ will ease further in response to JPY spikes according to Reuters).
Sterling dropped to its weakest since 1985, hit by a growing sense that the UK may be heading for a ‘hard’ Brexit in which it cuts links to the EU’s single market in favor of total control over immigration.
Cited by Reuters, UniCredit’s Global Head of FX Strategy, Vasileios Gkionakis said that “it is now abundantly clear that access to the single market is not on (UK Prime Minister) Theresa May’s list of top priorities and the market is realizing that… there is more pressure for the pound in the weeks and months ahead.”
“We have the market facing the reality that Brexit is about to begin and we could be faced with hard Brexit,” Jane Foley, a senior currency strategist at Rabobank International in London, told Bloomberg. The reports about the financial sector are “just lacing the concerns the market already has about the outlook for growth, investment and jobs in the U.K. economy.”
Bad news for sterling meant good news for the FTSE100, as London’s cheered the idea of a weaker pound boosting firms’ exports though. The weaker pound led to a second day of gains in the FTSE 100 pushed it above 7,000 for the first time in 16 months and just 0.1 percent away from a record reached in April 2015.
However, when denominated in USD-terms, the FTSE is still below its pre-Brexit level.
Europe’s bourses all rose, advancing across industry groups and regional markets, heading for a sixth straight day without losses. The Stoxx Europe 600 Index added 0.8% in early trading and poised for its biggest advance in almost two weeks.
The Stoxx Europe 600 Index added 0.6 percent at 8:21 a.m. in London. The benchmark traded in a range of about 6 points in the past five sessions, after concerns about the health of Deutsche Bank AG sent shares tumbling on Sept. 26. German markets reopened after a holiday, with the DAX Index rising 0.5 percent on Tuesday. The Stoxx 600 is entering the final three months of the year after its first quarterly advance of the year. After jumping as much as 14 percent from a June low through the beginning of September, the Stoxx 600’s rebound lost steam last month as worries about the health of Europe’s banking sector took hold.
The gains in the past week reflect positive expectations for company profits through the rest of the year, according to Michael Kapler, a fund manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. A sustained uptick in earnings over the next few quarters could send equities significantly higher, strategists at UBS Group AG have said.
“We are at a very important potential turning point for European equities,” Kapler said. “Market expectations for the earnings recession to end are quite high. This is very important and we will hopefully see some earnings growth. But then there is potential for disappointment if this doesn’t come through.”
Those following Deutsche Bank stock were happy to see an early jump of 3.2% after the open, however since then the gain has fizzled to just a few cents in the green.
S&P500 index futures rose amid growing investor speculation that the Federal Reserve will judge the world’s biggest economy strong enough to withstand an interest rate hike this year. S&P 500 contracts expiring in December climbed 0.1% to 2,155.5 at 6 a.m. in New York. Technology and consumer-staples shares dragged the equity benchmark down 0.3 percent on Monday amid lower-than-average trading volume. Dow Jones Industrial Average futures added 34 points, or 0.2 percent, to 18,190 today.
As Bloomberg notes, investors now see a 61% chance of the Fed raising rates in December, up 10 percentage points from a week earlier, following hawkish comments from Fed Bank of Cleveland President Loretta Mester. One of three policy makers to dissent in favor of an increase at the September meeting, she said yesterday that she expects the case for a rate hike to remain “compelling” at the central bank’s November review.
The greenback extended its winning run versus the yen to a sixth day as a Bank of Japan survey showed companies trimmed their inflation forecasts. Sterling tumbled on mounting investor concern that the U.K. is heading for a so-called hard Brexit. European stocks headed for their longest run without losses in a year, fueled by a recovery in banks. Italy’s longer-dated bonds underperformed before the country sells 50-year securities for the first time. The Bloomberg Commodity Index fell as crude oil retreated from a three-month high.
The yield on Treasury two-year notes reached the highest in almost two weeks, while those 10-year securities were little changed at 1.62 percent, after climbing six basis points over the previous two trading days. A market gauge of inflation expectations advanced to a four-month high on Monday.
Italy’s longer-dated bonds underperformed after the country said late Monday it would issue a 50-year security. The extra yield, or spread, that investors get for holding 30-year bonds instead of those maturing in a decade reached the most since Sept. 22.
Japan’s 10-year bonds reversed earlier losses after demand strengthened at a sale of the tenor, with the bid-to-cover ratio increasing to the highest since June. The securities yielded minus 0.075 percent, compared with minus 0.055 percent ahead of the auction.
A speech today from Fed Bank of Richmond President Jeffrey Lacker, who recently called for higher borrowing costs, will also be in focus. With the next earnings season unofficially kicking when Alcoa Inc. reports results next week, analysts forecast a drop of 1.5 percent in third-quarter S&P 500 company profits, which would mark a sixth consecutive three-month decline.
Market Snapshot
- S&P 500 futures up 0.1% to 2155
- Stoxx 600 up 0.7% to 346
- FTSE 100 up 1.3% to 7078
- DAX up 0.7% to 10583
- German 10Yr yield down less than 1bp to -0.1%
- Italian 10Yr yield down 2bps to 1.25%
- Spanish 10Yr yield down 1bp to 0.92%
- S&P GSCI Index down 0.4% to 365.4
- MSCI Asia Pacific up 0.2% to 141
- Nikkei 225 up 0.8% to 16736
- Hang Seng up 0.4% to 23689
- S&P/ASX 200 up 0.1% to 5484
- US 10-yr yield down less than 1bp to 1.62%
- Dollar Index up 0.48% to 96.15
- WTI Crude futures down 0.7% to $48.46
- Brent Futures down 0.6% to $50.57
- Gold spot down 0.2% to $1,310
- Silver spot down less than 0.1% to $18.81
Global Headline News
- Salesforce to Buy Marketing Startup Krux for About $700m: Deal comprises $340m cash, CRM shares for purveyor of cloud- based software with data tools.
- Henderson-Janus Tie Up Signals Fee Pressures Spurring M&A: Deal may be precursor to wave of consolidation in industry grappling with more regulation, competition.
- Dimon Says ‘No Reason’ Deutsche Bank Can’t Overcome Issues: JPMorgan CEO also defended Wells Fargo CEO John Stumpf, calling Stumpf “a quality human being.”
- Credit Card Networks Must Face Merchants’ Chip-Reader Suit: V, MC, AXP lost early round of lawsuit alleging they colluded to blame merchants for fraudulent transactions stemming from absent chip-reading technology.
- Amazon Cracks Down on ‘Incentivized Reviews’ on Marketplace: AMZN will allow such reviews only through Amazon Vine program it introduced in 2007.
- SunEdison Confirms Selttlement Talks With Yieldcos Have Started: SUNEQ actively pursue dismissal or settlement of proofs of claims in bankruptcy cases.
- GoPro CEO: ‘Misconception’ That Demand for Products Waning: Nick Woodman says in Bloomberg TV interview that Karma drone to be a “phenomenal” contributor.
- Sempra’s Ienova Seeks to Raise $1.27b in New Share Offer: Mexico’s only publicly traded energy co. will offer 323m shares as soon as Oct. 13 after 10-city roadshow.
- Southwest Pilot Accord in Jeopardy After New Delta Agreement: Pilots’s union seeks to reopen some sections of Aug. 29 accord, also requested meeting with CEO Gary Kelly.
- Google May Sell Virtual Reality Headset From $79: Variety: Daydream virtual reality headset may be unveiled on Oct. 4 event; Google Hires Amazon’s Kindle Hardware Chief: Information
- Cheaper EpiPen May Not Come Until End of Year: Mylan: Generic version planned to quell growing furor over EpiPen’s six-fold price increase to >$600 for package of 2.
- Bass Pro Group May Be Cut by S&P on Cabela’s Deal: Acquisition much larger than any others that co. has executed; BB- rating may be cut.
- Manhattan Apartment Sales Plunge 20% as Homebuyers Get Pickier: Pre-owned condo, co-op sales in 3Q fell 20% y/y, according to appraiser Miller Samuel, brokerage Douglas Elliman.
- Iran, OPEC’s Big Winner, Will Sign Landmark Oil Contract: National Iranian Oil Co. to complete $2.5b in deals with local cos., according to an oil ministry official.
Looking at regional markets, we start in Asia, where stocks shrugged off the negative US lead to trade mostly higher, with Nikkei 225 (+0.8%) outperforming on JPY weakness. ASX 200 (+0.1%) was initially pressured following the weak US lead where firm ISM data increased bets for a December Fed rate hike, while participants were also tentative as they awaited the RBA rate decision which provided no surprises as the central bank kept rates on hold as was unanimously expected. Nikkei 225 (+0.9%) benefited from a weaker JPY with USD/JPY reclaiming 102.00, while the KOSPI (+0.6%) played catch-up to Monday’s gains on return from its extended weekend. Hang Seng (+0.5%) was indecisive and traded choppy throughout the session while mainland China remained shut for Golden Week. 10 year JGBs are lower with demand for paper dampened by gains in riskier assets, although prices saw brief support following the 10yr JGB auction in which the b/c and average price improved from the prior month.
While the RBI announced an unexpected rate cute earlier in the session, RBA kept the Cash Rate Target unchanged at 1.50% as expected. RBA stated that the current rate is consistent with sustainable growth in the economy and that it sees inflation to remain low for some time. RBA also suggested complications arising from a stronger currency, which could affect the economic adjustment.
Top Asian News
- TPG to Revive Australia Market With Year’s Biggest Listings: Two key Asia-based dealmakers due to leave TPG in 2017.
- Amazon Faces Publishing Dispute in Japan Over Book Subscriptions: 1,700-plus titles removed from Kindle Unlimited amid talks.
- Evergrande Jumps Most in 15 Months After Reorganization Plan: Shares soar as much as 12%, most since July 2015.
- Samsung Biologics IPO to Raise as Much as 2.25t Won in Korea: Total ~16.5m shares will be offered at price range of 113,000-136,000 won apiece.
- U.S. Warships Make First Visit to Vietnam Base in Decades: Cam Ranh Bay was hub of U.S. military activity in Vietnam War
In Europe, the main story of the day was again the ongoing plunge in the GBP which has subsequently benefitted UK exporting names yet again to push the FTSE 100 above 7,000 for the first time in 16-months. Elsewhere, German participants returned from their elongated break with the DAX beginning the new quarter on the front foot amid the reprieve observed in Deutsche Bank (+2.2%) shares as discussions between Germany and the US DoJ continue with a deal yet to be presented by either side. In terms of fixed income, Bunds have seen somewhat of a rather subdued session thus far, while German yields have been a touch softer with the curve notably flatter. While focus will be on peripheral debt amid the announcement of Italy’s 50-yr bond yesterday which has seen Italian yields rise and could potentially be sold as early as today.
Top European News
- May Said to Dash City Hopes in Brexit Shock for Banking: According to 3 senior figures in May’s administration, govt will refuse to prioritize the protection of sector.
- Pound Tumbles to 3-Decade Low as Brexit Angst Persists
- LVMH to Buy 80% of German Suitcase Maker Rimowa for EU640m: Co. buying stake from Dieter Morszeck, grandson of founder.
- ABB Defies Cevian’s Call for Breakup by Keeping Power Grids: Co. also announced plan to buy back $3b worth of shares 2017-19.
- Credit Suisse in Talks to Secure Full Saudi Bank License: Bank in talks with central bank for an onshore license, head of international wealth-management business Iqbal Khan said in Dubai interview.
- Nets Post-IPO Stock Decline Triggered Stabilization Measures: Stabilizing manager Deutsche Bank took measures by intervening in market.
- CK Hutchison Looking to Grow U.K. Mobile Business: Sixt: Group is “lobbying very hard”; focused on acquiring airwaves in U.K., finance director Frank Sixt says in interview.
- Ericsson to Cut 3k Jobs in Sweden as Network Demand Wanes: Co. to reduce manufacturing in towns of Boraas, Kumla as it turns its focus to software development, according to statement.
In FX, the Bloomberg Dollar Spot Index rose 0.5 percent as of 10:38 a.m. London time, the biggest gain since Sept. 16. The U.S. currency jumped 0.7 percent to 102.32 yen and was 0.4 percent stronger at $1.1163 per euro. The pound fell as much as 0.8 percent to $1.2740. Sterling is down against 30 of its 31 major peers since Prime Minister Theresa May’s weekend announcement that Britain would trigger its exit from the European Union in the first quarter of 2017. Declines have extended since she was said to refuse to prioritize the protection of the financial-services industry in negotiations with the EU. The currency has been hurt by speculation that the government will prioritize immigration curbs over full access to the EU single market. “We have the market facing the reality that Brexit is about to begin and we could be faced with hard Brexit,” said Jane Foley, a senior currency strategist at Rabobank International in London. Australia’s dollar fell as much as 0.4 percent after the central bank kept its benchmark interest rate at a record-low 1.5 percent, a decision forecast by all 28 economists in a Bloomberg survey. India’s rupee gained as the central bank cut interest rates in its first policy meeting since a leadership change. The benchmark was lowered to 6.25 percent from 6.50 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday. The move was predicted by 16 of 39 economists in a Bloomberg survey, with one seeing a cut to 6 percent and the rest forecasting no change. The rupee gained 0.3 percent.
In commodities, the Bloomberg Commodity Index fell 0.4 percent. Crude oil declined 0.9 percent to $48.36 a barrel in New York, losing ground for the first time in a week before data that’s forecast to show U.S. stockpiles expanded. Production from Libya, among countries exempt from an OPEC output cut, rose to 500,000 barrels a day and will climb further this month, a state oil company official said.
Gold slid for a sixth day, its longest losing streak since August, as investors anticipate higher U.S. interest rates and UBS Group AG said it was negative on the metal.
Industrial metals broadly retreated as Deutsche Bank analysts cautioned that demand driven by China’s property sector may fade next year. Lead dropped 1 percent on the London Metal Exchange, while copper, nickel and zinc dropped. An LME index tracking the metals moved into a bull market last week as data pointed to a stronger economic outlook for China, the top commodities consumer.
Looking at today’s calendar, there’s not a lot of data with the ISM NY reading in the US on the cards. There is a bit of Fedspeak with the Richmond Fed’s Lacker due to speak at an event this afternoon (at 1.05pm BST). The ECB’s Praet is also due to speak this morning while BoE policy maker Saunders is scheduled to speak this afternoon, while the US Vice-President nominee debate is to take place overnight.
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Bulletin Headline Summary from Bloomberg and RanSquawk
- GBP has once again been hampered throughout the session with Brexit fears sending GBP/USD to 31 year lows
- The softer GBP has been of benefit to the FTSE 100 with the index breaking above 7,000 for the first time in 16-months
- Looking ahead, highlights include Fed’s Evans, Lacker and BoE’s Saunders
US Event Calendar
- 8:05am: Fed’s Lacker speaks in Charleston, W.Va.
- 8:55am: Redbook weekly sales
- 9:45am: ISM New York, Sept. (prior 47.5)
- 4:30pm: API weekly oil inventories
- 7:50pm: Fed’s Evans speaks in Auckland, New Zealand
DB’s Jim Reid concludes the overnight wrap
Market activity was a little tepid yesterday not helped by China being off all week and with Germany on a day’s holiday yesterday. So this week hasn’t really got going yet. However there was some interesting data to discuss and also the move closer towards ‘hard Brexit’ that we discussed yesterday continues to reverberate as the pound dropped -1.00% vs. the USD yesterday and back to levels last seen on July 6th Sterling also traded close to 5-year lows against the Euro after breaking down below 1.150. If my knee recovers in time this is going to be an expensive Xmas ski holiday at this rate.
Diving straight into that data, on the positive side there was a return to expansion in the manufacturing sector with the ISM manufacturing printing at 51.5 in September following that dip to 49.4 in August. The reading also came in above the market consensus of 50.4 while the details showed that new orders in particular (+6pts to 55.1) were up sharply along with production (+3.2pts to 52.8), while the employment component improved slightly to 49.7 from 48.3. Offsetting the data somewhat however was the August construction spending release which showed spending unexpectedly declined in August (-0.7% mom vs. +0.3% expected), while the July reading was also revised down to -0.3% mom from 0.0%.
Yesterday’s data fits in with DB’s Joe Lavorgna’s more sanguine H2 growth forecast relative to the central tendency forecast implied by that of the FOMC. Joe is forecasting for inflation-adjusted output growth of just 1.6% in the second half (1.3% in Q3 and 1.8% in Q4) compared to the roughly 2.4% implied by the FOMC. He notes that despite that bounce back in the manufacturing ISM, last quarter the manufacturing ISM averaged 51.2, a slight deterioration from its Q2 average of 51.8, which coincided with real GDP growth of just 1.4%. Joe notes that, historically, the manufacturing ISM has led the year-over-year growth rate of real GDP by a quarter. Joe also notes that in the breakdown of the construction spending report, public-sector spending was particularly weak and is down nearly -20% annualized from its Q2 average.
Both of these factors support Joe’s more sanguine H2 GDP forecast. That soft construction spending report was also the reason behind the two-tenths decline in the Atlanta Fed’s GDPNow forecast for Q3 to 2.2% (it had been as high as 3.3% a month ago). The NY Fed also has Q3 at 2.2% as of Friday, while Q4 is pegged at just 1.2%. Joe notes that he wouldn’t be surprised to see the Atlanta and NY Fed GDP trackers fall below 2% if employment figures disappoint on Friday.
Closer to home, the continued hard Brexit concerns reverberated from the off yesterday reflecting initially the weekend newsflow. There was also plenty of focus on the speech from Chancellor Hammond which did little to stem the sell-off in Sterling. According to the FT, Hammond said that the UK will face at least two years of economic ‘turbulence’ along with a period of ‘fiscal uncertainty’. He also added that business confidence would likely go on ‘a bit of a rollercoaster’ as the process gets underway. We’ll get a clearer picture of the fiscal stance on November 23rd with the Autumn Budget Statement and updated OBR forecasts. Despite the flurry of Brexit related headlines yesterday, there was better news on the data front where the September manufacturing PMI rose 2pts to a bumper 55.4 (vs. 52.1 expected) and the highest since June 2014. Clearly the weaker Pound has had a big impact boosting accommodative financial conditions for the sector and which has subsequently translated into increasing overseas demand.
As we noted earlier markets-wise there wasn’t a huge amount to write home about in terms of price action yesterday. US equities closed weaker with the S&P 500 kicking off Q4 with a -0.33% loss after rate-sensitive sectors like utilities and REITS in particular got knocked about. In Europe the Stoxx 600 (+0.09%) edged a tad higher on low volumes although the peripherals were down while the FTSE 100 (+1.22%) outperformed on that Sterling weakness. Sovereign bond markets were broadly weaker meanwhile. 10y Bund yields rose just under 3bps to -0.096% while 10y Treasury yields ended up a similar amount at 1.623%. In commodity markets WTI (+1.18%) rose for the fourth successive session and to the highest level since August 26th. In credit markets indices were little changed in the US and slightly wider in Europe (Main +2bps). On that note this morning we’ve put out a Credit Bites specifically looking at Euro and Sterling credit returns in September and YTD.
Refreshing our screens this morning it’s been a mixed start for bourses in Asia. Boosted by a -0.57% weakening for the Yen, the Nikkei (+0.88%) and Topix (+0.67%) have gained for the second day in succession, while the Kospi (+0.55%) has also edged higher. The Hang Seng (-0.11%) is lower although volumes are pretty low given the China holiday, while the ASX (-0.09%) is also in the red. There’s been some central banks focus this morning too with the RBA holding rates, as expected, at 1.5%. The Aussie Dollar is currently -0.10% following the announcement.
Moving on. We also got a little bit of Fedspeak yesterday but again nothing much that was particularly market moving. The Cleveland Fed’s Mester (more hawkish leaning) spoke late last night and said that should the data come in as expected then ‘I would expect that the case would remain compelling’ for a hike soon. She also highlighted that she views all FOMC meetings, including November, as being live for rate action. NY Fed President Dudley (dovish) was a bit more cautious. His key point was that ‘a risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these (unconventional) policies at the zero lower bound, the more cautious one would be in the process of removing accommodation’.
Wrapping up the rest of the data yesterday, in Europe there was no change to the final revision for the manufacturing PMI for the Euro area in September at 52.6. Germany’s print was also left unchanged at 54.3 while France was revised up 0.2pts to 49.7. In the periphery the standout was Spain (52.3 from 51.0) which rose to a 5-month high, while Italy (51.0 from 49.8) touched a 2-month high, offset by 2-month low for Ireland (51.3 from 51.7). In the US the PMI was revised up one-tenth to 51.5. The final data out of the US yesterday were the latest vehicle sales numbers for September. Annualised sales rose to 17.7m for all vehicles from 16.9m in August.
Staying with the US but moving onto the election, DB’s ‘House View’ team published a US election special overnight titled “Policy continuity or paradigm shift?” The team notes that the US election will see a polarised electorate choose between two sharply contrasting worldviews. Democratic candidate Hillary Clinton is likely to follow a similar policy agenda to that of the Obama administration, while Republican candidate Donald Trump has promised radical change. In the report, the team discuss in detail the key drivers of this polarisation, the possible government scenarios, the candidates’ key policy proposals, and the likely implications for macro and markets.
A quick mention before we look at the day ahead that yesterday morning DB’s Marco Stringa published a note on Spain noting that over the weekend Pedro Sanchez resigned as leader of the centre-left PSOE. The defeat of Sanchez was probably a necessary step to break the nine-month political impasse in Marco’s view, but it is not yet a sufficient one. The PSOE will be under a caretaker leader until the next party congress. In any case, before the next party congress the PSOE federal committee will have to make a decision on whether to abstain. He notes that on the one hand, the events of the weekend reinforce his view that a third election will be avoided. On the other hand the centre-right PP could now have less of an incentive to compromise.
Looking at today’s calendar, there’s not a huge amount of data to report with just Euro area PPI in August this morning (-0.1% mom expected) and the ISM NY reading this afternoon in the US on the cards. There is a bit of Fedspeak with the Richmond Fed’s Lacker due to speak at an event this afternoon (at 1.05pm BST). The ECB’s Praet is also due to speak this morning while BoE policy maker Saunders is scheduled to speak this afternoon, while the US Vice-President nominee debate is to take place overnight.
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