While it is still unclear just why the FOMC Minutes which are said to have made a December liftoff “more likely” unleashed a dramatic market rally, one which sent both stocks and TSYs higher (suggesting of a rate cut not a hike, and certainly not more tightening), the sentiment continued overnight, with both Asian stocks surging on the US momentum, as well as Europe, where the DAX gapped solidly above the 200 DMA as most European shares advanced, led by resources, travel stocks. U.S. futures continue their ramp higher, and at last check were another 8 points, or 0.4%, in the green.
DB may have summarized yesterday’s action best: “This positive market response will likely please the Fed and give them more confidence.” Poor Fed, locked in a reflexive nightmare of its own making.
But if the Fed Minutes were enough to unleash the latest leg in this rally, than the ECB’s own minutes due also today, should send futures back over 2100 without much difficult, regardless of their actual content.
Here is where the markets stand at this moment:
- S&P 500 futures up 0.4% to 2089
- Stoxx 600 up 1.1% to 384
- MSCI Asia Pacific up 1.6% to 134
- US 10-yr yield down 2bps to 2.26%
- Dollar Index down 0.35% to 99.3
- WTI Crude futures up less than 0.1% to $40.78
- Brent Futures up 0.8% to $44.48
- Gold spot up 0.3% to $1,074
- Silver spot up 0.2% to $14.20
Here are some of the main overnight news: shortly after the close we learned that Pfizer is near an agreement to buy Allergan for $380/share in biggest deal, one which however may be scuttled in the last minute by Treasury’s latest anti-inversion crackdown; Square raised less than sought in IPO, Testing Valuations: Raised $243m selling 27 million shares for $9 each, ~1/3 less than sought; Diller’s Match Group Raises $400 Million in Online-Dating IPO, also at the low end of range; Telegram App Blocks Islamic State Channels Over ‘Propaganda’: ISIS used the service for propaganda; Staples’ Customers Said to be Dissatisfied With Asset Sales: NYP: FTC may move within weeks to block the merger; Blackstone, Carlyle, KKR Said Possible Armacell Bidders: Reuters: Charterhouse set Fri. deadline for bids for Armacell; Wal-Mart to Take Minority Stakes in China Ventures: China Daily: Agreed to buy minority stakes in 21 JVs; M&A Leaks Fall to Lowest in Six Years in Regulatory Crackdown: Stronger regulation discouraged gossip, according to a report
Back to markets, overnight Asian equities took an impetus from a Fed inspired rally in US stocks. ASX 200 (+2.1%) led the region after a rebound in the commodities complex saw material names bolster the index. Nikkei 225 (+1.1%) was supported by the outperformance in tech names, however pulled off best levels as the BoJ stood pat on monetary policy, as expected with the central bank also signalling a cautionary note in regards to inflation. The market as usual ignore weaked than expected Japanese trade data, with exports posting their first drop, declining 2.1%, more than the -2.0% expected, and dropping for the first time in over a year. Shanghai Comp. (+1.4%) dipped in and out of gains and losses, amid reports that leveraged bets for Chinese stocks fell from a 2-month high. JGBs yet again traded in tepid fashion.
Top Asian news:
- BOJ Keeps Policy Unchanged After Recession, Weak Inflation: Almost half of analysts surveyed don’t see bank easing again
- China Should End Yuan-Rate Distortion, Ex-PBOC Adviser Says: Central bank is obsessed with currency stability, Yu Yongding says
- Asia Riches Chase Aussie as Local Currencies Wilt, UBS Says: View that RBA won’t cut interest rate supports currency
- SoftBank’s $100 Billion Debt Spurs Call for Son to Curb Ambition: BNP says SoftBank should set targets to improve finances
- Billionaire Agarwal’s Vedanta to Cut Costs 25% Amid Slump: Commodity prices could drop 5% to 7% further, he says
In Europe, much of the price action across asset classes so far in European trade has stemmed from last night’s release of the FOMC minutes. As such, European equities have followed the precedent set by their US and Asian counterparts (Euro Stoxx: +1.2%), trading in positive territory with 91% of Stoxx 600 members gaining after market participants inferred that the Fed believe the US economy is strong enough to withstand a rate hike. As was the case in the US, Financials are among the best performers on the back of the minutes, while equity specific news has remained in focus in Europe towards the back end of earning season with Royal Mail (+5.6%) and Johnson Matthey (+8.3%) both among the best performers after earning updates.
In terms of fixed income, Bunds initially saw a bid throughout the European morning in line with USTs in the immediate wake of the release after the FOMC minutes release suggested a more gradual rate path and as such the German curve is notably flatter this morning. Elsewhere, Europe has seen supply relatively well received from Spain and France with European paper now coming off its best levels ahead of the US open.
European top news:
- U.K. Retail Sales Fall More Than Forecast as Consumers Pause: Sales volume dropped 0.6% from Sept.
- German Cooperative Banks Said in Biggest Merger Since 2010: DZ Bank, WGZ Bank said to agree to merge
- France Endures State of Emergency as Forensics Scour Wreckage
- VW to Delay China Venture Stake Increase for Financial Reasons
In FX, there was a change in the recent surge in the USD, with some aggressive overnight selling in the USDJPY ever since the BOJ disappointed some after it did not boost QE, while markets have seen weakness go through EUR in early trade as participants focus on Fed/ECB policy divergence following yesterday’s FOMC minutes release which has left a Dec hike on the table while looking ahead to the ECB minutes scheduled for later today.
Separately a miss on expectations from UK retail sales (Ex Auto Fuel (Oct) M/M -0.90% vs. Exp. -0.60%) has seen GBP gains against the USD capped , with GBP weakening against the EUR. The USD remains in negative territory (-0.3%) despite the aforementioned GBP and EUR softness and as such has benefitted the commodity complex, with the likes of WTI, Brent both benefiting, as such we have seen strength in CAD.
In commodities, WTI and Brent have traded relatively range bound, remaining at levels reached after yesterday’s DoE inventories showed a less than expected build. NatsGas outperforms in anticipation of low stockpiles in today’s EIA storage report (Exp. build of 19, prey. build of 49). Gold has come off highs reached during the Asia session, having moved off 5 year lows as the greenback was pressured with yields lower as participants focus on the potentially shallower rate path ahead. Silver prices also benefitted from the aforementioned FOMC minutes, breaking a 15 day losing streak. Elsewhere, London copper sank to fresh 6 year lows, and Nickel near 12 year lows with fears over Chinese demand persisting.
Goldman Sachs expects that copper prices will decline to USD 4,800/ton by the end of 2015 and to USD 4,500/ton by the end of next year, while gold forecasts remain at USD 1,100/oz in 3-months, USD 1,050/oz in 6-months and USD 1,000/oz in 12-months . Furthermore, the bank expects iron ore prices to fall over its forecast period down to USD 44/ton in 2016 and USD 40/ton in 2017. (RTRS)
Of interest today will be the latest set of ECB minutes for the October 22nd meeting while in the US we’ll get last week’s initial jobless claims data, At the same time as the latest Philly Fed.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Stocks in Europe trade higher, following on from their US counterparts, which were bolstered on the back of yesterday’s FOMC release
- FX markets have seen weakness go through EUR in early trade as participants focus on Fed/ECB policy divergence following yesterday’s FOMC minutes, while GBP has weakened after weak retail sales data
- Looking ahead, today sees the release of ECB minutes, US Weekly Jobs, Philadelphia Fed
Business Outlook, EIA Natural Gas Storage, ECB’s Coeure, Fed’s Lockhart and Fischer
- Treasuries steady, 30Y yield falls by ~2bp even as global stocks rise after Fed minutes yesterday showed FOMC “intended to convey’’ a rate increase in Dec. may be appropriate, although no decision had been made.
- Oil traded near the lowest level in almost three months as U.S. government data showed crude stockpiles expanded for an eighth week in the world’s biggest consumer
- France prepared to extend a state of emergency and allow police to carry weapons even when off-duty in the wake of last week’s attacks, as forensics teams searched for clues in the wreckage of the terrorists’ suspected hideout
- President Xi Jinping condemned the Islamic State’s execution of a Chinese national, an act that raises pressure on China to take a greater role in resolving Syria’s civil war
- Obama moved to dent Russia’s optimism that a deal is near with the U.S. and France to coordinate the fight against Islamic State
- Sweden’s plan to absorb 350,000 asylum seekers by the end of this year by keeping all those people on state handouts rather than letting them do low-paid jobs looks untenable
- U.K. retail sales fell 0.6% in October, more than forecast, after 1.7% increase in September driven by Rugby World Cup and warm weather
- RBS plans to scrap all bonuses for 20,000 staff at its branches and increase fixed pay by 5% as it seeks to bolster its reputation in the wake of a series of scandals, including wrongly sold payment-protection insurance
- Credit Suisse’s withdrawal from making a market in government bonds in Europe has left everyone from traders to debt-agency chiefs concerned there may be a domino effect of departures that ultimately dries up liquidity for investors
- Home sales in Belgravia, the London district favored by Russian oligarchs for its large Regency-style houses, are slumping after the collapse of the ruble against the pound
- Republicans overwhelmingly pick Ben Carson over Donald Trump for having the better temperament to be president, but they have far more confidence in the billionaire than the retired surgeon to get things done, fix immigration and manage the economy
- Sovereign 10Y bond yields mostly lower. Asian and European stocks rise, U.S. equity-index futures higher. Crude oil and gold rise, copper little changed
US Event Calendar
- 8:30am: Initial Jobless Claims, Nov. 14, est. 270k (prior 276k); Continuing Claims, Nov. 7, est. 2.169m (prior 2.174m)
- 8:30am: Philadelphia Fed Business Outlook, Nov., est. -0.3 (prior -4.5)
- 9:45am: Bloomberg Consumer Comfort, Nov. 15 (prior 41.6); Bloomberg Economic Expectations, Nov. (prior 42)
- 10am: Leading Index, Oct., 0.5% (prior -0.2%)
- 12:30pm: Fed’s Lockhart speaks in Atlanta
4:45pm: Fed’s Fischer speaks in San Francisco
DB’s Jim Reid completes the overnight wrap
markets reacted with some calm to the October FOMC minutes which pointed to a Fed that were still on course to raise rates in December. Specifically, the minutes confirmed that ‘most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labour market, and inflation, these conditions could well be met by the time of the next meeting’. This led to the minutes explaining that ‘members emphasized that this change was intended to convey the sense that, while no decision has been made, it may well become appropriate to initiate the normalization process at the next meeting’. The prospect for gradual rate rises following the first hike was acknowledged also, with the text showing ‘that it would probably be appropriate to remove policy accommodation gradually’ and that ‘it was noted that the beginning of the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow’. Meanwhile, in a sign that views are still not necessarily fully aligned within the Fed camp, some members believed that economic conditions ‘had already been met’ for tightening but that ‘some others, however, judged it unlikely that the information available by the December meeting would warrant’ a hike, highlighting concerns over whether economic growth was robust enough to withstand potential adverse shocks.
The comments from Atlanta Fed President Lockhart prior to the minutes suggested that he would be happy to move in December ‘conditioned on no marked deterioration in economic conditions’. Lockhart said that ‘given my reading of current conditions and my outlook views, I believe it will soon be appropriate to begin a new policy phase’. The Richmond Fed’s Lacker also warned of getting behind the curve, while in his first policy speech as the Dallas Fed President, Kaplan aired a somewhat more centrist view, saying that the Fed has been ‘prudent is waiting for more data before taking policy action’ but that ‘accommodative policy does not necessarily mean a zero fed funds rate’.
Markets were already trading with a relatively positive tone leading into the minutes and that continued after the release, with the S&P 500 eventually closing up +1.62% for its biggest one-day gain in nearly a month. Credit indices finished tighter (CDX IG -1.5bps) and 2y Treasury yields closed up +2.5bps at 0.876% to nudge closer to the early month highs as the Treasury curve flattened. The US Dollar finished little changed, while despite briefly dipping below $40/bbl intraday, WTI (+0.20%) managed to rally back into positive territory by the close.
This positive market response will likely please the Fed and give them more confidence. Regular readers will know that last year we felt pretty sure that the Fed would be unable to raise rates in 2015. Well it’s increasingly looking like we’ll be 15 days wrong!! We are now more sanguine on the short-term impact of a hike as positioning in hike-sensitive assets seems to be cleaner than it was in the summer. This doesn’t mean to say that a hike wouldn’t be a policy error and it’ll be too early to conclude on this for sometime. Monetary policy works with a lag that can be around 1-2 years and we worry that with global nominal growth still so low, the Fed has left it rather late in the cycle to be hiking. In our minds we still see 2017-2018 as potential recessionary years which fits with the above.
Overnight the main news out of Asia is that the BoJ, as expected, has stood put on its current monetary stimulus program, despite Japan recently falling back into recession. In the accompanying statement, the BoJ said that the Japanese economy ‘has continued to recover moderately, although exports and production have been affected by the slowdown in emerging markets’. BoJ Governor Kuroda is set to speak shortly after we go to print at 6.30am GMT this morning. Prior to this, Japan’s latest trade balance number showed that the economy had returned to a surplus in October for the first time since March, supported by a steep fall in imports (-13.4% yoy vs. -8.6% expected) which followed a -11% fall in September. Exports were soft, down -2.1% (vs. -2.0% expected). The Yen has gained nearly half a percent this morning, while the Nikkei (+0.84%) and Topix (+0.69%) have both firmed.
Elsewhere there’s been gains also for the Hang Seng (+1.15%), Kospi (+0.83%) and ASX (+1.52%), while bourses in China have rebounded off a weaker open (Shanghai Comp +0.70%) following a soft November MNI business indicator reading which was down -5.7pts this month to 49.9, the first sub-50 print since July.
Closer to home yesterday, European equity markets posted modest declines as events in France continue to dominate headlines. The Stoxx 600 finished -0.14% lower, while the Dax (-0.10%) was down a similar amount but continues to hover near its three-month high. French equities (CAC -0.62%) were the notable underperformers along with the peripheral bourses. The ECB’s Mersch highlighted that markets should be not draw any premature conclusions about the economic impact of the terror attacks in France, saying that ‘we have no indication of any economic pessimism as a result of the Paris attacks, let alone weaker hard data’ and that ‘doom-and-gloom talk is not warranted at this stage’.
European sovereign bond yields continue to nudge lower. 10y Bund yields finished down just shy of 2bps at 0.504% and are now 19bps down from the high earlier this month. Yesterday also saw Germany issue record low 2y Bunds at auction yesterday, fetching a yield of -0.38%. In fact this wasn’t the only case of a sovereign issuing negative yielding bonds yesterday. Portugal issued 12-month bills at an average yield of -0.006%, while outside the eurozone Sweden sold 89-day bills at -0.416% and Denmark sold 3y bonds at -0.31%.
Before we look at the day ahead, yesterday’s data in the US yesterday played second fiddle to the FOMC minutes, but it’s worth highlighting the steep decline in housing starts (-11.0% mom vs. -3.8% expected) last month, driven by multi-family properties. Offsetting this somewhat however was a better than expected building permits reading (+4.1% mom vs. +3.8% expected).
Turning over to today’s calendar now, it’s another relatively quiet day for data in Europe this morning with the only release of note out of the UK where the October retail sales numbers are due, along with the CBI trends survey. Also of interest will be the latest set of ECB minutes for the October 22nd meeting, due out around lunchtime. Over in the US this afternoon we’ll get last week’s initial jobless claims data, followed by the Conference Board’s October leading indicator. In terms of central bank speakers, this morning we’ll hear from the ECB’s Coeure, Weidmann and Praet while this afternoon Lockhart (due 5.30pm GMT) is set to speak again on the US economy and Fischer (due 9.45pm GMT) is scheduled to speak on emerging markets.