October 2, 2017
While S&P futures were modestly higher, rising 0.1% in a quiet session in which China, South Korea, India and Hong Kong were closed for holidays, the Euro, Spanish stocks and bonds were broadly lower as Spain faces its worst constitutional crisis in years following a dramatic, violent crackdown on Sunday’s Catalan independence referendum in which 89% of the voters wanted to secede from Spain.
Spain’s IBEX benchmark index IBEX fell as much as 1.3% (down -1.0% latest), vs a 0.3% gain for Stoxx 600, after Catalan separatist leaders signaled they may be moving toward a unilateral declaration of independence as early as this week. Spanish banks were among the biggest fallers, especially the regionally focused Banco de Sabadell, CaixaBank, and Bankinter.
The Euro was one of the worst performers among major currency peers after a the violence-marred vote in Catalonia spurred the regional government to press toward a unilateral declaration of independence.
The tensions also had a clear impact in the bond market, with Spanish premiums climbing over comparable German debt. In addition to hitting Spain’s IBEX index, Catalonia’s independence vote over the weekend amid scenes of unrest and violence has pressured the bonds of Spain and its restive province. Catalonia’s 4.95% of 11/2020 dropped 0.35% Monday morning to 104.747 bid according to Bloomberg, its lowest since Aug. 2016. Spanish government bonds also selling off; 10Y yield has spiked 7bps to 1.68%, off initial high of 1.697%, the highest since July 14. The Bund/bono spread was wider by as much as 8bps.
The tension in Spain “is not a game-changer for the euro, but it is likely to weigh – shifting the narrative away from the political optimism that followed Macron’s victory,” wrote RBC Capital Markets strategists led by Sue Trinh in Hong Kong, referring to President Emmanuel Macron’s victory in the French election earlier this year.
Elsewhere, European equities opened modestly higher after a mixed session for holiday-hit Asian markets, supported by mining sector following a stronger than expected official Chinese PMI and healthcare stocks; the DAX outperforms. Core fixed-income markets rally from lows with large block trade noted in 10y USTs. The pound dropped against the dollar for the sixth time in seven days amid concerns about the stability of U.K. Prime Minister Theresa May’s government.
Asian stocks were mixed as China, Hong Kong, India and South Korean markets closed for public holidays. The MSCI Asia Pacific Index rose less than 0.1% to 161.20. BHP Billiton Ltd. and miners gained after China reported better-than-expected manufacturing activity. Nissan Motor Co. slumped after suspending car registrations in Japan. Australia’s equity benchmark headed for its biggest daily gain since July after China, its top trading partner, reported an unexpectedly strong mfg PMI print, which rose to a 5 year high, and announced plans to cut the amount of required reserves banks must hold as reserves for certain loans. Nissan dropped as much as 5.4 percent, leading the decline in Japanese carmakers.
“A stronger dollar may spur some fund outflows from the region, dampening any further rally in their equities,” Komsorn Prakobphol, an investment strategist at Tisco Financial Group Pcl, said by phone. “Market activities in the region will be very slow this week with the closure of some major markets, especially in China.”
Elsewhere, the Eurodollar curve steepened and the dollar held an overnight bid as market continues to react to possibility of hawkish Fed appointment of Kevin Warsh. As Bloomberg notes, the Bloomberg Dollar Spot Index started off the last quarter of the year on a strong footing as the market focused on tax reforms in the U.S. and the possibility that the next Federal Reserve Chair comes from the hawkish camp. As bets rise on Kevin Warsh becoming the next Chair, traders discussed a July article in which he praised President Donald Trump’s policies in being able to “significantly improve the economy’s growth prospects”. In January, Warsh, a former Federal Reserve governor, argued that policy makers were too short-term focused and missed opportunities to raise rates by pursuing what he called a “ride-the-wind” policy.” Even if a hawkish Fed would come as a burden to Trump’s efforts to significantly boost economic growth, optimism among dollar bulls that his administration will finally deliver upon electoral pledges on tax reforms supported the greenback. The dollar gained versus all of its Group-of-10 peers while the index headed for a move above September highs (see chart). The euro was among the main underperformers, though traders discounted unrest in Catalonia as the key factor.
Gold fell and West Texas oil halted gains above $51 a barrel after Baker Hughes data showed the U.S. rig count climbing to 750 last week. The pound dropped against the dollar for the sixth time in seven days amid concerns about the stability of U.K. Prime Minister Theresa May’s government.
In rates, the yield on 10-year Treasuries climbed two basis points to 2.36 percent, the highest in almost 12 weeks. Germany’s 10-year yield advanced one basis point to 0.47 percent. Britain’s 10-year yield gained one basis point to 1.371 percent.
Investors await U.S. manufacturing data for clues on the speed of economic recovery. “September manufacturing PMI data will draw the market’s attention today,” Rabobank strategist Jane Foley said in a note. “scheduled remarks from the Fed’s Kaplan could provide further clues as to the central bank’s thinking. At the end of the week attention will be drawn to the release of the September U.S. labor report.”
Bulletin Headline Summary from RanSquawk
Top Headline News:
Asia-Pac equity markets were mostly higher on what was a holiday quietened day with China, Hong Kong South Korea and India all shut for holiday. Nonetheless, the positive momentum from last Friday’s US session where the S&P 500 and Nasdaq Composite ended Q3 at fresh record levels rolled over to the region with ASX 200 (+0.8%) outperforming on broad based gains, while a PBoC announcement of targeted RRR cuts from 2018 and Chinese Official Manufacturing PMI at its highest since 2012 added to the optimism due to Australia’s heavy exposure. Nikkei 225 (+0.2%) was also positive, albeit to a lesser extent as participants digested the latest Tankan survey in which most components beat estimates including a decade-high headline Large Manufacturing Index, although Large All Industry Capex disappointed. 10yr JGBs were lower as they tracked the declines in USTs, while prices were also pressured alongside a positive risk tone and the absence of the BoJ in the market today. Chinese Official Manufacturing PMI (Sep) 52.4 vs. Exp. 51.5 (Prev. 51.7) Highest since 2012. Chinese Non-Manufacturing PMI (Sep) 55.4 (Prev. 53.4) Chinese Caixin Manufacturing PMI (Sep) 51.0 vs. Exp. 51.5 (Prev. 51.6)
PBoC announced it would cut RRR for some banks that meet certain requirements for lending to small business and the agricultural sector beginning in 2018. The PBoC said that a wide majority of China’s banks would be eligible for at least a 50bps cut but reiterated that it will implement a prudent and neutral monetary policy while keeping liquidity basically stable and that the announcement was a structural adjustment and not a shift in monetary policy. The Japanese Tankan Large Manufacturing Index (Q3) printed at 22 vs. Exp. 18 (Prev. 17). Highest since 2007.
Top Asia News
European equities initially traded marginally higher across the boar . The main outlier has been the Spanish IBEX (-1.0%) amid the growing concerns across Spain and the Catalonia region.
Housing names outperform in the FTSE, as PM May has stated that the government will find an extra GBP 10bln for the help to buy
scheme. Barratt Homes trades up around 4% and leads the UK index, closely followed by easyJet and Ryanair, both benefiting
amid the pending administration from competitor, Monarch Airlines. Spanish bonds underperform amid the aforementioned political unrest across Spain. The Spanish 10y yield gapped up to trade through September’s highs, with 1.75% the next touted resistance, previously rejected in April and June. Bonds trade lower across the board, with the German 10y witnessing a similar upside gap, but finding continued resistance at 0.50%.
Top European News
In currencies, the EUR saw selling pressure amid the political unrest seen in Catalonia over the weekend. Further weight has been put on EUR, with US rates now gaining significantly vs. Germany. Despite the bearish concerns for EUR/USD, last week’s lows have not been tested, with Asian trade limited amid various holidays. EUR/USD longs continue to get squeezed, with the pair trading through the long-term trendline support. A break of the August 1.1660 low could further trigger stops, aiding the bearish pressure. The DXY has seen a bid through the session, reacting to the shortlist for the pending Fed Chair position being all but declared. Yellen, Powell, Cohn and Warsh have all been interviewed, with markets indicating that President Trump could sway toward a more hawkish head. A slowdown ahead of September’s highs has seen the current bullish momentum run out of steam, with a break through 93.66 set to be the next target for greenback bulls. Elsewhere, GBP has seen some selling pressure this morning amid an uncertain political backdrop and disappointing data. More specifically, UK manufacturing PMI printed at 55.9 below the expected 56.4 which added to the downbeat sentiment amid weekend reports suggesting a lack of unity in PM May’s Cabinet. This has subsequently lead to some supporters of May calling for her to dismiss Foreign Secretary Johnson. Furthermore, this also comes ahead of this week’s Conservative Party conference which could also help to highlight the divisions in the party.
In commodities, price action has been subdued, finding a slow start to the week as a result of the lack of Asian trade. Forecasts for US shale oil growth and uncertainty around China’s crude imports could possibly add to the recent bullish pressure that has been witnessed across oil markets. Precious Metals continue to be led by the unwind in Gold, as markets are seemingly unwinding geopolitical concerns. Gold trades back inside the March – August range, as silver looks to break through 16.50. Iraq says oil exports average for September was 3.24mln bpd. Libya’s Sharara Oil Field has been closed since late yesterday, according to engineers. Libya’s NOC say that they are making efforts to restore production at their Sharara Oil Field and that there are currently no plans to declare a force majeure at the site.
Looking at the day ahead, we’ve got the September ISM manufacturing print as well as the final September manufacturing PMI and August construction spending readings.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
Welcome to October and Q4. It’s another busy week ahead with Payrolls to look forward to on Friday, although the report is likely to be blown apart by the recent two hurricanes. Continuing to work backwards on the main highlights of the week, Thursday sees the latest ECB minutes and Wednesday the services PMIs/ISM. We also have the UK Conservative Party conference over the next few days which will likely have lots of conflicting headlines on Brexit. Don’t forget that the US budget discussion headlines will never be too far away from your screens. Today sees the crucial manufacturing PMIs/ISMs across the globe. Given how correlated they’ve been to equity performance they are a vital report for the immediate direction of markets. Over the weekend China has already seen a stronger than expected official manufacturing PMI (52.4 vs 51.6 expected and 51.7 last month). This is one of the lower readings in the world at the moment but is still at 5 and a half year highs. The private Caixin equivalent was lower though (51 vs 51.5 expected) with this report having a bias towards smaller companies and exporters. The official non-manufacturing PMI was higher though (55.4 vs 53.4 last month). Staying with China, the PBoC have also announced a targeted RRR cut for some banks in 2018. DB’s Zhiwei Zhang thinks this is as much to offset tightening from macro prudential regulation. China is on holidays this week alongside a few other Asian markets so there is no immediate local reaction, although the Aussie ASX is +0.91% higher seemingly on the China news. Elsewhere the Nikkei is +0.14%, the Euro is -0.34% (see below on Catalonia) and 10 year JGBs and USTs are up 1.5bp and 2bps respectively following on from the sell-off in the latter half of Friday on the Warsh news.
The big news over the weekend was probably the strange and disturbing images in Spain as the “illegal” independence referendum took place to chaotic and sometimes violent scenes. The wires are reporting yesterday’s events as a PR disaster for Spanish PM Rajoy so how he responds will be important. The Catalan government spokesman Jordon Turull has said that around 2 million out of 2.3 million voted for independence (around 5 million eligible to vote). It seems there is a good chance they will declare independence over the next few days which in turn could force Mr Rajoy to use constitutional laws and revoke Catalonia’s autonomy. As a minimum Mr Rajoy’s minority government is going to be severely tested by this constitutional nightmare. The realistic end game is talks, compromise and perhaps more money transferred between Madrid and the Catalonians. However such talks are bound to be more fraught now.
While its hard to see what the immediate macro spill overs could be, its another example that politics is getting more extreme across the world. Even in a year where the edge has been taken off populism by strong growth, we’ve still seen the establishment defeated in France, the AfD do better than expected in Germany, the meteoric rise of the hard left Jeremy Corbyn from the political ashes in the UK, the S5M still neck and neck in the Italian polls and now all the passions behind this vote in Spain. Extreme politics continues to bubble under the surface. Weaker economic times ahead might tip it back into the mainstream at some point.
Talking of politics, before this the big story on Friday was news that Mr Trump and Treasury Secretary Mnuchin had met with former Fed Governor Kevin Warsh (amongst others – see below) to discuss nominating him as the next Fed Chair. The President himself then suggesting late on Friday that a decision could be made in the next 2-3 weeks which is accelerated relative to previous expectations. Warsh is now seemingly one of four front-running candidates (including Yellen, Powell and Cohn) and he would likely be the most market moving as he has been subtly critical of the Fed in recent times. As DB’s Peter Hooper pointed out on Friday, one thread of his criticism has been over the size of the Fed’s balance sheet, suggesting that it poses risk of “fiscal dominance” – potential for fiscal policy to drive monetary policy decisions. Peter also reminds us that one of his clearest comments on monetary policy came in a January article in the WSJ , where he said: “..the Fed should establish an inflation objective of around 1% to 2%, with a band of acceptable outcomes. The current 2.0% inflation target offers false precision.” So with inflation currently in the middle of this range, there is more reason to continue raising rates on this line of thinking. Whether he would be more mainstream if brought into this role is open to conjecture but by him being in the race the prospect of more hawkish policy increases. He would also be expected to be more dovish on financial regulation and it was therefore understandable that higher yields and looser regulation led to Banks being one of the better performers in the US on Friday. Our take is that he is the favourite if Mr Trump sees deregulation as the most important criteria and maybe him being hawkish on rates might take the pressure of the credibility issue of Mr Trump appointing someone who will be seen as someone who would keep rates too low for too long on a political whim.
Before Warsh turned the session round, bonds were enjoying some respite from the recent sell-off after the US PCE miss (0.1% vs 0.2% MoM expected). 10 year Treasuries were trading at around 2.30% after PCE, a bps or so lower on the day and 6bps off the post-tax reform euphoria highs. However we closed at 2.334% after the Warsh news and this morning in Asia we’re trading at 2.353% as we type. This followed a risk-on end to the quarter with the S&P 500 climbing +0.37% on Friday, the Dax +0.98%, and the FTSE and CAC both +0.68%. The peripherals mildly underperformed. 10 years Bunds were down -1.5bps mostly following the inflation miss rather than the Warsh news. All other European 10yrs Govvies were around 1-3bps lower.
Over the course of the week it did feel like some of the momentum was back for the bond bears with the Warsh news coming in the week of more information than perhaps expected on the Republican’s tax plans. The view of our rates strategists are that the chance of unfunded tax cuts has risen after last week and as such their should be some justifiable move to higher yields. On the tax plan, DB’s Luzzetti, Ryan & Weidner published a detailed piece late on Friday (Link) explaining their current thoughts and going into detail on the plans as we know them so far and the legislative challenges ahead. Despite the high level of uncertainly, they use the Fed’s model of the US economy to assess the macroeconomic implications of the Republican tax plan. Assuming tax cuts are enacted in Q1 2018, the full tax plan would lift growth by about 0.4pp by end-2018 and cause the Fed to undertake nearly two additional rate hikes by end-2019. A more modest tax plan in line with our expectations would lift 2018 growth by 0.2pp and cause the Fed to undertake almost one additional rate hike by end-2019. Note that the overall profile of hikes on this model are way above current market expectations.
Before the performance review we move on to this week’s full calendar now. In terms of data, the focus this morning in Europe will be on the final revisions to the September manufacturing PMIs which will also include a first look at the data for the periphery and UK. Also due out is the August unemployment rate for the Euro area. Over in the US this afternoon we’ve got the September ISM manufacturing print as well as the final September manufacturing PMI and August construction spending readings. Tuesday looks to be a fairly quiet day for data with Japan consumer confidence, Euro area PPI and US vehicle sales data the only releases of note. Wednesday kicks off in Japan with the September Nikkei services and composite PMIs. In Europe we’ll receive the remaining September PMIs (services and composite) along with the latest retail sales data for the Euro area. The focus in the US on Wednesday will likely be on the September ADP employment print and ISM non-manufacturing. The final services and composite PMIs are also due. Turning to Thursday, with no data of note in Europe the focus across the pond in the US will be on the latest weekly initial jobless claims print, August trade balance, August factory orders and the final durable and capital goods order revisions for August. We finish the week in Europe on Friday with factory orders data in Germany, trade data in France and house prices data in the UK. The big focus on Friday however will be in the US with the September employment report due out including nonfarm payrolls, average hourly earnings and the unemployment rate. Wholesale inventories and consumer credit data for August round out the releases.
Onto other events, Today sees the UK’s Chancellor of the Exchequer Hammond will address the Conservative Party Conference. In Japan, the BOJ’s quarterly Tankan survey of large manufacturers will be out. In the US, the Fed’s Kaplan will speak. Then onto Tuesday, there will be numerous speakers at the Conservative Party conference, including: UK home secretary Rudd, Trade secretary Fox, Brexit secretary Davis and Foreign secretary Johnson. Then the BOE will publish its record of the Financial policy committee. Over in the US, the Fed’s Powell will speak on regulatory reform. Turning to Wednesday, the EU parliament will vote on a non-binding Brexit resolution, while Mrs Yellen will give opening remarks at a Community banking conference in the US. Then onto Thursday, the ECB’s Praet and Coeure chairs a panel in Frankfurt and the ECB’s governing council members Liikanen and Jazbec will speak. Following on, the ECB will also publish accounts of its September meeting. In the UK, BOE’s Chief economist Haldane will speak on “Central banks engagement with society”. Over in the US, there are four Fed speakers, including: Williams, Harker, Powell and George. Finally, on Friday, BOE’s Chief economist Haldane speaks on “Trust in institutions”. In the US, we round out the week with three more Fed speakers, including: Bostic, Dudley and Kaplan.
This article was posted: Monday, October 2, 2017 at 6:23 am