Futures Jump Despite Threat Of Imminent Government Shutdown; Dollar Slide Accelerates

    If US and global stocks sold off yesterday on fears of a government shutdown, coupled with a spike in US Treasury yields to the highest level since March and approaching Gundlach’s “equity selloff redline“…

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    then it is unclear what has precipitated their rebound this morning when the threat of a US government shutdown is even more pressing – with not enough votes in the Senate as of this moment (despite it having passed the House late on Thursday) to keep government running reflected in the latest plunge in the dollar which dropped to a fresh 3 year low – while the 10Y jumped even more overnight, breaking above the crucial 2.63% level and rising as high as 2.6407, the highest since September 2016.

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    While not a rout just yet, the Treasury selloff – arguably on concerns of rising inflation although we have seen many false starts in the past – spilled over across the globe, although Spanish bonds outperform in expectation of sovereign rating upgrade. Bunds underperformed despite a decent bounce off the 160.31 low to 160.56 (-2 ticks vs -27 ticks at worst), with chart support respected again.

    Meanwhile, equities again ignore all risks, and overnight Japan’s Topix rose first time in three days, while Europe’s Stoxx 600 rose 0.5%, and was poised to close at the highest level since August 2015, and S&P futures have rebounded, wiping out all of yesterday’s losses.

    Predictably, Chinese stocks extended the 2018 rally, while the Nikkei 225 (+0.2%) saw initial upside pared as participants awaited developments in Washington where the stop gap bill to fund government through to February 16th was passed by the House, but faces less certainty at the Senate. Elsewhere, Hang Seng (+0.2%) somewhat took a breather from its recent ascent to all-time highs and Shanghai Comp. (+0.4%) was positive after yesterday’s GDP numbers and firm liquidity efforts by the PBoC. In Europe, the Dax is outperforming, led by ThyssenKrupp after they confirmed their targets and BASF who continue to rally after their positive trading update late yesterday.

    Meanwhile, in macro, the dollar selloff accelerated, with the Bloomberg Dollar Spot Index hitting a fresh three-year low and headed for its sixth week of losses – its longest weekly losing streak in almost a year – amid concerns over a potential U.S. government shutdown that outweighed any benefit the greenback normally gets from higher yields. Some thoughts from Bloomberg:

    • BBDXY declines 0.3% Friday and is down 0.9% this week; it reached 1,130.91, lowest since January 2015
    • Temporary funding for the U.S. government is due to run out midnight Friday
    • 10-year U.S. Treasury yield was little changed at 2.63%; reached 2.6407%, highest since September 2014

    The pound was among the beneficiaries of greenback weakness and extended its recent run to hit a fresh high since the June 2016 Brexit. According to Bloomberg, given it’s unlikely to get dovish headlines on the Brexit front, at least until the EU March summit gets into play, sterling finds a bid from short-term and momentum accounts.

    The moves in American assets however dominated global markets, with the euro, yen, gold and base metals among the beneficiaries of the weaker dollar. The risk-on mood that helped drive up Treasury yields was still in evidence, with European stocks following Asian peers higher, U.S. futures pointing to gains and emerging-market equities climbing for a sixth day. Over in Asia, the Yuan briefly gained beyond 6.40 per dollar for first time since 2015 as the PBOC again strengthened the daily fixing and injected a net 80BN of liquidity.

    In commodities, WTI and Brent and crude futures trade lower with markets keeping a close eye on US production after the DoE inventory data on Thursday and following monthly oil market reports from OPEC and the IEA. The DoE data showed US production rebounded over 2% in the latest week to 9.75mln bpd, while the IEA today said that US production could soon top 10mln bpd, and overtake Saudi Arabia and Russia. Precious metals are benefitting from the weak USD and as markets fear a potential US federal government shut down. IEA says global oil supply in December fell by 405k bpd to 97.7mln bpd due to lower North Sea and Venezuelan output. The IEA also saw US crude supply is set to push past 10mln bpd, overtaking Saudi Arabia and rivalling Russia

    Bulletin headline Summary from RanSquawk

    • Stop gap bill to fund government through to mid-Feb was passed by the House, however faces dim chances of passing a Senate vote.
    • GBP back towards 1.39 following soft retail sales which had been distort by Black Friday sales in Novembers reading.
    • Looking ahead, highlights include US U. of Michigan Sentiment data and comments from Fed’s Quarles, Bostic and Williams.

    Market Snapshot

    • S&P 500 futures up 0.3% to 2,805.25
    • STOXX Europe 600 up 0.4% to 400.34
    • MSCi Asia Pacific up 0.7% to 183.69
    • MSCI Asia Pacific ex Japan up 0.6% to 599.11
    • Nikkei up 0.2% to 23,808.06
    • Topix up 0.7% to 1,889.74
    • Hang Seng Index up 0.4% to 32,254.89
    • Shanghai Composite up 0.4% to 3,487.86
    • Sensex up 0.6% to 35,468.93
    • Australia S&P/ASX 200 down 0.2% to 6,005.81
    • Kospi up 0.2% to 2,520.26
    • German 10Y yield rose 0.8 bps to 0.581%
    • Euro up 0.3% to $ 1.2277
    • Italian 10Y yield fell 1.1 bps to 1.721%
    • Spanish 10Y yield fell 3.5 bps to 1.458%
    • Brent Futures down 0.9% to $ 68.68/bbl
    • Gold spot up 0.7% to $ 1,335.99
    • U.S. Dollar Index down 0.3% to 90.27

    Overnight Top Headlines from Bloomebrg

    • The Federal Reserve is working to relax a key part of post- crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street’s giants
    • U.S. House passes stopgap govt funding bill, Senate reconvenes at 11 a.m. Eastern today; click here for the latest on the shutdown saga
    • White House is said to consider John Williams as Fed vice chair: WSJ
    • Fed’s Mester backs three to four rate hikes this year and next; Dudley repeats concern fiscal stimulus may cause overheating
    • NAFTA: U.S. is losing patience with slow pace of talks, wants concrete progress next week; threat to withdraw is serious, according to people familiar
    • Germany’s Social Democratic Party is looking for ways to sweeten another stint in government with Angela Merkel as the political impasse in Europe’s biggest economy comes to a head
    • The Bank of Japan is optimistic about hitting its 2% inflation target within two years and is considering how best to communicate any possible policy changes, WSJ reports, citing unidentified people familiar with its thinking
    • Global equity funds see “massive” weekly inflows of $ 24b, with the four-week inflow to stocks the biggest ever at $ 58b, signaling investors’ “fear of missing out”, BofAML strategists write in note, citing EPFR Global data

    Asia equity markets mostly traded in the green after a subdued performance on Wall St and with focus on whether Congress can avert a government shutdown. ASX 200 (-0.2%) was weighed by continued weakness in commodity-related stocks as well as a lacklustre financial sector, while Nikkei 225 (+0.2%) saw initial upside pared as participants awaited developments in Washington where the stop gap bill to fund government through to February 16th was passed by the House, but faces less certainty at the Senate. Elsewhere, Hang Seng (+0.2%) somewhat took a breather from its recent ascent to all-time highs and Shanghai Comp. (+0.4%) was positive after yesterday’s GDP numbers and firm liquidity efforts by the PBoC. Finally, 10yr JGBs were marginally lower as Japanese yields increased in tandem with global peers including the US 10yr yield which rose above 2.63% and its highest since 2016.
    PBoC injected CNY 130bln via 7-day reverse repos, CNY 90bln via 14-day reverse repos and CNY 10bln via 63-day reverse repos for a weekly net injection of CNY 590bln vs. last week’s CNY 40bln net injection. BoJ is said to be optimistic in achieving their 2% inflation target withing two years but are cautious on the next move. People close to the BoJ say the market overreacted to the change in Rinban operations, which they say wasn’t meant to signal any  roader policy shift. As a guide, this is relatively the same as recent source reports from the BoJ.

    Top Asian News

    • China’s State-Backed Firms Are World Beaters Early in 2018
    • This Is How China’s Regions Fare in the Fake GDP Data Stakes
    • Japan Governor Witholding Reactor Decision During 3-Year Study
    • Bunds On Back-Foot Again as Treasuries Slide Continues to Weigh
    • Demand for Euro Calls Outweighs Puts This Week Ahead of ECB Meet
    • BOJ Is Said Optimistic to Hit 2% Inflation Target in 2 Yrs: WSJ

     

    Equity markets are higher across the board, appearing to shrug off concerns over the potential government shutdown. The Dax is outperforming, led by ThyssenKrupp after they confirmed their targets and BASF who continue to rally after their positive trading update late yesterday. The FTSE underperforms slightly with a number of smaller companies issuing profit warnings, including: Carpetright, Dignity and Bonmarche whose shares all plummeted between 20% and 50%. Although none of these companies are in the FTSE 100, the knock on effect is clear to see with Kingfisher, a competitor to Carpetright, propping up the index. US equity futures pushed higher after reports that the Fed is said to be working on plans to relax bank leverage ratio which could free up billions in bank capital.

    Top European News

    • U.K. Retailers See Black Friday Hangover as Sales Plunge 1.5%
    • BASF Aims to Muscle Itself Onto Battery Materials’ Top Table
    • Britain’s Black Belt in EU Law Says She Can’t Fight Brexit
    • GOP Conservatives Brought Russia Probe Demand to Shutdown Talks
    • Ceconomy Shares Plummet as Black Friday Discounts Erode Profit

     

    In commodities, WTI and Brent and crude futures trade lower with markets keeping a close eye on US production after the DoE inventory data on Thursday and following monthly oil market reports from OPEC and the IEA. The DoE data showed US production rebounded over 2% in the latest week to 9.75mln bpd, while the IEA today said that US production could soon top 10mln bpd, and overtake Saudi Arabia and Russia. Precious metals are benefitting from the weak USD and as markets fear a potential US federal government shut down. IEA says global oil supply in December fell by 405k bpd to 97.7mln bpd due to lower North Sea and Venezuelan output. It maintained its 2018 global oil demand forecast at 1.3mln bpd, down from 2017 growth of 1.6mln bpd. US crude supply is set to push past 10mln bpd, overtaking Saudi Arabia and rivalling Russia.

    In FX, the USD remained on the back foot in European trade as the threat of a government shutdown in the US becomes a reality ahead of the Senate vote. 60 votes in the Senate are needed to fund the government but it appears that the Republicans don’t even have the full support of everyone in their own party so getting an additional 10-15 from the Democrats seems unlikely. The JPY remained strong as sources in the WSJ said that the BoJ is optimistic of reaching its 2% inflation target within two years. UK retail sales disappointed, falling 1.5% M/M vs. expectations of a smaller 0.6% decline. Nevertheless, despite a brief dip in GBP on the back of the figures, GBP/USD reversed course as the ONS stated that shoppers are just moving their shopping earlier (NB: November data was much better than expected).

    Looking at the day ahead, the December retail sales in the UK and the preliminary University of Michigan consumer sentiment print in the US are the only data of note due. Friday also marks the deadline for the US government  shutdown. Oil giant Schlumberger is due to report earnings

    US Event Calendar

    • 10am: U. of Mich. Sentiment, est. 97, prior 95.9; Current Conditions, est. 114.4, prior 113.8; Expectations, est. 85.3, prior 84.3
    • 8:45am: Fed’s Bostic Speaks on U.S. Economy in Nashville
    • 8:45am: Fed’s Bostic Speaks on the Economy
    • 1pm: Fed’s Quarles Speaks on Bank Regulation

    DB’s Jim Reid concludes the overnight wrap

    It’s still unclear whether we’ll get some political turbulence in the US as the shutdown vote gets passed to the Senate this morning. Overnight the House has voted 230-197 to pass a spending bill to avoid the US government shutdown and extend funding till 16 February. This was the easy part given the Republican’s majority in the lower House. Looking ahead, the Senate has taken an initial vote, but needs an additional procedural step that requires 60 votes, which means the Republicans need the help of at least nine Democrat votes to pass the bill. Bloomberg noted Senate Democrats say they have the votes to block the bill, in part to force Republicans to discuss other matters such as the protection for young immigrants. So an evolving situation until Friday morning when the Senate reconvenes (US time).

    Staying in the US, the Fed’s Dudley has warned that the longer term risks from US tax cuts may be “that the economy could actually overheat, that inflation might not stop at 2%….or 2.2%…and then the Fed would have to step on the brakes a bit harder”. As a reminder, our US team noted that if fiscal changes only provide demand-side stimulus, they could quicken the arrival of the next recession by pulling forward demand and causing the Fed to move more aggressively on rate hikes. Refer to their note for details. Elsewhere, the WSJ reported that the White House is considering the Fed’s John Williams for the role of Fed Vice Chairman

    This morning in Asia, markets are trading modestly higher. The Hang Seng (+0.24%), Kospi (+0.09%), China’s CSI300 (+0.75%) and Nikkei (+0.1%) are all modestly up. After the bell in the US, AMEX’s 4Q result was above market but guidance for next year was lower than consensus expectations (adj. EPS of $ 6.90ps-$ 7.30ps vs. $ 7.38ps) – its shares are trading c2.7% lower.

    Now recapping performance from yesterday. After the record close on Wednesday, US equities bounced around for most of the day to close modestly lower, with the S&P (-0.16%), Dow (-0.37%) and Nasdaq (-0.03%) all down. Within the S&P, most sectors weakened with losses led by the real estate and energy sectors, while telco and tech stocks were slightly up. European equities were firmer, in part driven by the beat on Chinese GDP. Across the region, the Stoxx 600 nudged 0.19% higher, with the DAX leading the gains (+0.74%) following its underperformance back on Wednesday, while Spain’s IBEX 35 fell 0.40%. The VIX was up for the fifth consecutive day to 12.22 (+2.6%) and to  the highest since mid-November.

    Over in government bonds, UST 10y bond yields rose 3.5bp to 2.627%, marking a fresh ten month high, and approaching 3 and a half year highs, in part weighed down by concerns of a potential government shutdown. Notably, yesterday’s auction of $ 13bn 10y TIPS went smoothly and attracted a bid-to-cover ratio of 2.69 – the highest since May 2014. Elsewhere, core European 10y bond yields were up 1-2bp (Bunds +1bp; Gilts +2.2bp) while peripherals outperformed with yields down c1bp.

    Turning to currencies, the US dollar index was marginally lower (-0.05%), while the Euro and Sterling both gained c0.4%, with the latter rising to another post Brexit high. In commodities, both WTI oil and Gold were broadly flat, while other base metals were mixed but little changed (Zinc -0.12%; Copper +0.09%; Aluminium +0.72%).

    Away from the markets and onto ECB central bankers speak. The ECB’s Coeure seemed relatively upbeat on the Euro economy, he noted “we ourselves at the ECB have stopped saying we want to strengthen the recovery, it’s not a  recovery anymore, it’s an expansion”.

    Elsewhere, the Bundesbank’s Weidmann noted Germany needs better fiscal spending, but not necessarily more. He said “raising public spending…to reduce Germany’s current account surplus would likely be a futile undertaking”, while this does not mean no action on fiscal policy, particularly to counteract the demographic drag on growth, but “action (is) not with regard to the overall stance, but with regards to how the money is spent”. On the issue of low wage growth despite tight labour market conditions, he noted Germany is not unique here, which suggests “that the factors responsible for holding back wage growth are not only idiosyncratic, but at least partly international as well”.

    Staying in Germany, the former head of the SPD Kurt Beck predicts the c600 party delegates will vote “about 60-40” in favour of coalition talks with Ms Merkel’s bloc at this Sunday’s party convention. Elsewhere, Ms Merkel’s caucus chief noted that post a potential yes vote from the SPD, there is unlikely to be major changes to the preliminary accord already agreed upon. He said “what has been negotiated in the exploratory negotiations has been negotiated  and can’t be revisited”.

    Back onto Brexit, there seems to be a softening in the EU’s stance on whether to include UK based financial services firms in a trade deal post Brexit, provided the UK pays for it. The French President Macron noted “you want to  accept a single market with finance being part of it? Be my guest, but that means financial contributions and accepting European jurisdiction”. Elsewhere, he said his overriding goal is to ensure the “single market is preserved”, but it’s “very much” up to the UK to decide what it wants.

    Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January Philly Fed index fell 7.7pt to a still solid level of 22.2 (vs. 25 expected). In the details, the new orders index  dropped 18.1pts to 10.1 (a 16-month low) but the shipments index rose 6.4pts to 30.3 and the prices paid index rose 5.1pts to 32.9. Elsewhere, December housing starts were lower than expected (-8.2% mom vs. -1.7%), largely due to a decline in starts from elevated November levels in the South, while building permits fell less than expected (-0.1% mom vs. -0.6%). Finally, the weekly initial jobless claims fell to the lowest since 1973 (220k vs. 250k expected), while continuing claims was slightly higher than expectations (1,952k vs. 1,900k). This week corresponds to survey week for payrolls so we could get a bump to estimates.

    In China, 4Q GDP was above market expectations at 6.8% yoy (vs. 6.7%) which has led to the first annual growth since 2010 (2017: 6.9%; 2016: 6.7%). Factoring in the latest readings, our economists have upgraded their Q1 and Q2 growth forecast to 6.5% and 6.3% (from 6.3% and 6.1%), but have kept their full year forecast for 2018 unchanged at 6.3%. Overall, they expect a tightening of fiscal policy and financial regulation to gradually slow the economy. Indeed, they argue that the resilient economic data will likely encourage the policy makers to maintain a tightening policy stance in the next few months.

    Looking at the day ahead, the December retail sales in the UK and the preliminary University of Michigan consumer sentiment print in the US are the only data of note due. Friday also marks the deadline for the US government  shutdown. Oil giant Schlumberger is due to report earnings and I’m on a train back home so hopefully I’ll avoid a repeat of the outbound journey.

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