Silver as an investment

Global Stocks Slide, Futures Pressured As Bond Yields Jump To Highest Since June

World stocks started the week in the red Monday as the dollar touched a 7-month high and U.S. and European government bond yields climbed to their highest since June following the Friday speeches by Eric Rosengren and Janet Yellen which hinted the Fed’s next step could be to pursue a steepening of the TSY yield curve the same as the BOJ.

Echoing what we said previously, Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote that “markets are reacting to the possibility that the Fed might join the Bank of Japan in conducting policy to steepen the yield curve. In the Fed’s case, this might amount to running the gauntlet of higher inflation with a very slow pace of monetary tightening.”

According to Reuters, despite the specifics, all the overnight moves came amid signs that inflation is finally starting to wake from its slumber and that top central banks may let inflation “run hot” as Janet Yellen suggested on Friday.

Among the hardest hit treasuries were U.K. gilts, with losses accentuated by the turmoil arising from ongoing concerns about a “Hard Brexit.” As a result, 10-year yields rose to the highest since the Brexit vote, amid speculation the weaker pound is already pushing up prices for consumers. Sterling continued to fall, dropping another 0.2%.

Turkey’s lira and South Korea’s won led emerging-market currencies lower. The Stoxx Europe 600 Index fell for the fourth time in five days and equity gauges declined across most of Asia as oil traded around $50 a barrel.

“We have the two month window where there will be a lot of uncertainty about what the European Central Bank will do, and we had a poor gilt opening this morning and that has spooked the market,” said Mizuho interest rate strategist Antoine Bouvet. “We expected another 20 basis point rise in Bund yields by mid-November.”

Even as the outlook for inflation picks up, central bank policy makers have reiterated commitments to keep stoking prices to spur economic growth. As Bloomberg notes, BOE Governor Mark Carney said last week that he’ll tolerate an inflation-target overshoot, with Yellen echoing that sentiment, saying there are “plausible ways” that running the economy hot for a while could repair some damage caused to growth during the recession. Fed Vice Chair Stanley Fischer is due to speak Monday, while American companies’ earnings are also being watched closely for signs of sustainable growth. 

“The Fed, in allowing inflation to run above target, may be changing the game in rates,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “We finally have a fundamental reason for long-term yields to push higher and for inflation premia to re-rate.”

In addition to the broad global selling in rates instruments, attention turned to China’s ongoing and unexpected devaluation of the Yuan, where the USDCNH rose above the psychological level of 6.75 before dipping back to 6.7486 as the PBOC appears to no longer care about setting a ceiling. As we showed previously, concerns about the currency and a pick up in capital outflows may have been responsible for the dramatic plunge in China B-Shares, which crashed by nearly 7% in the last 90 minutes of trading.


But the underlying catalyst was a return to concerns about global VaR shocks rising from the sharp move in the long end of the curve as we warned last night. The yield on 30-year Treasuries rose to 2.57% in early trading, set for the highest close since June 2, and following an eight basis-point jump on Friday. The two-year note yield was little changed for a second day after futures prices indicated the chance of a Fed rate hike in 2016 held steady at 66% in the last session.  Gilt yields have been climbing for the past three weeks as sterling’s 18 percent slide since the vote to leave the EU drove a market gauge of inflation expectations to the highest in 2 1/2 years. Faster inflation erodes the fixed payments on bonds, while also making it less likely the BOE will be able to cut interest rates and extend its asset purchases. The yield on the benchmark 10-year security jumped eight basis points to 1.17 percent, after touching 1.22 percent, the highest since the June 23 referendum. The yield on Germany’s 10-year bonds increased by three basis points to 0.09 percent, while that on similar-maturity notes in Australia rose by four basis points to 2.31 percent.

Looking at stocks, Europe’s Stoxx 600 slid 0.7% in early trading with energy producers falling the most as oil slipped. The equity benchmark ended last week little changed as investors weighed central bank policy and the health of the global economy following mixed data from China. Pearson Plc tumbled 9.6% as the world’s largest education company reported a sales decline. S&P 500 Index futures retreated 0.3 percent, after U.S. equities ended Friday little changed following a late-afternoon selloff. The MSCI Asia Pacific excluding Japan Index slipped 0.6 percent and the MSCI Emerging Markets Index also fell 0.6 percent.   The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong declined 0.6 percent. A report due Wednesday may show China’s economy grew 6.7 percent in China the third quarter, the same as in the previous two periods, according to a Bloomberg survey of economists. Crown Resorts tumbled 14% in Sydney after Chinese authorities detained 18 of its employees, including the head of its international high-roller operations. Gaming stocks elsewhere were also hurt, with Sands China Ltd. and Galaxy Entertainment Group Ltd. both dropping at least 3 percent in Hong Kong.

Investors will look to data Monday for further indications of the health of the world’s biggest economy in light of Yellen’s comments on inflation. Among reports scheduled for release, industrial production is forecast to have increased in September after August’s contraction.

The earnings season is also in focus, with Charles Schwab Corp., International Business Machines Corp. and Bank of America Corp. among the main companies posting quarterly results on Monday. Analysts forecast a 1.4 percent contraction in third-quarter profits for S&P 500 members.

Bulletin Headline Summary from RanSquawk

  • Heavy selling pressure in fixed income markets this with Bunds breaking below 163.00 while Gilts continue to underperform as participants become less bullish on expectations for further BoE easing
  • A quiet morning in the FX markets, but there are plenty of data/event risks through the week to keep players on the side lines until we get some clearer signals to trade off.
  • Looking ahead, highlights include US Empire State Manufacturing Index, US Industrial and Manufacturing Production

Market Snapshot

  • S&P 500 futures down 0.3% to 2121
  • Stoxx 600 down 0.7% to 338
  • FTSE 100 down 0.8% to 6959
  • DAX down 0.7% to 10506
  • German 10Yr yield up 3bps to 0.09%
  • Italian 10Yr yield up 6bps to 1.44%
  • Spanish 10Yr yield up 3bps to 1.15%
  • S&P GSCI Index down less than 0.1% to 375.4
  • MSCI Asia Pacific down 0.1% to 138
  • Nikkei 225 up 0.3% to 16900
  • Hang Seng down 0.8% to 23038
  • Shanghai Composite down 0.7% to 3041
  • S&P/ASX 200 down 0.8% to 5389
  • US 10-yr yield up less than 1bp to 1.8%
  • Dollar Index down 0.08% to 97.94
  • WTI Crude futures down 0.3% to $50.20
  • Brent Futures down 0.1% to $51.89
  • Gold spot up 0.1% to $1,253
  • Silver spot down 0.2% to $17.39

Global Top News

  • Deutsche Bank Said to Explore Shrinking U.S. Operations: Such an option being considered as part of bank’s broader strategy review, evaluating businesses in context of regulatory, capital requirements.
  • Ohio Joins California, Illinois in Suspending Wells Fargo: Gov. John Kasich barring WFC from state bond deals, contracts for a year; WFC’s New CEO Sloan Leaves Analysts Unsatisfied in Debut
  • Dynegy Unit Creditors Agree on $825m Debt Restructure: Bondholders to exchange 2018, 2020, 2032 notes for $139m in cash, $210m in new 7-year Dynegy notes.
  • Mortgage Insurers’ Pilot Program Draws Investor Scrutiny: Money managers raised concerns about Fannie Mae, Freddie Mac pilot programs to share more risk with the guarantors; are pressing trade groups to lobby against parts of plans.
  • Over 1 Million to Lose Obamacare Plans as Insurers Quit: At least 1.4m people in 32 states will lose Obamacare plan they have now: state officials.
  • ‘Accountant’ Topples ‘Girl on the Train’ at Box Office: Drama collected an estimated $24.7m at theaters in U.S., Canada: ComScore.
  • LendingClub Increases Interest Rates for Riskiest Borrowers: Co. lifted interest rates by weighted average 26 basis points, primarily for riskier transactions.
  • Apple Seeking Newer Screens to Make or Break Japan Suppliers: Co. plans to adopt OLED screen technology for next major upgrade to its flagship product.
  • Tesla Deepens Panasonic Ties With Solar Parts Deal: PV cell, module production for solar energy systems used by SolarCity will begin in 2017 at factory in Buffalo; Musk Moves Tesla Announcement to Weds.; Needs ‘Refinement’: Tesla CEO Elon Musk comments on Twitter.
  • Lululemon 3Q Comp. Sales View Cut at Goldman Amid Competition: Est. lowered to 3% from 4.5%; now below co. forecast of mid-single digits: Goldman.
  • Medtronic Recalls Some Lots of Embolization, Retrieval Devices: 84,278 units potentially affected by it had been distributed worldwide.
  • GameStop to Sell Out of PlayStation VR Goggles: COO: Co. has asked Sony to supply more of the headsets.
  • Nevada Approves Record $750m Subsidy for NFL Stadium: Lawmakers authorized a tax incentive to entice NFL’s Oakland Raiders to move to Las Vegas.
  • McDonald’s Executives King, Hess Said to Leave Co.: WSJ: Chief field officer, also senior VP for customer experience are planning to retire this year: WSJ.
  • Trump Says Polling-Place Cheating Leading to ‘Rigged’ Election: “They leave dead people on the rolls, and then they pay people to vote those dead people four, five, six, seven, eight, nine times:” Trump surrogate Rudolph Giuliani.
  • PayPal May Have Mulled Buying GoFundMe: TechCrunch: Price potentially above $1b.

Looking at regional markets, we start as usual in Asia, where stock markets began the week subdued following last Friday’s flat close on Wall St. and quiet news flow over the weekend. ASX 200 (-0.8%) was led lower by the consumer discretionary sector after 18 Crown Resorts employees were detained in China regarding the promotion of gambling on the mainland. Nikkei 225 (+0.3%) swung between gains and losses alongside choppy JPY movements in which USD/JPY fluctuated around 104.00. Chinese markets were mixed as the Hang Seng (-0.8%) conformed to the negative tone seen across Asia, while Shanghai Comp. (-0.7%) fluctuated between gains and losses with the PBoC upping its liquidity injections to the interbank market. 10yr JGBs saw muted trade with price action hampered by quiet news flow and with participants side-lined ahead of tomorrow’s enhanced liquidity auction for the long to super long end. China is to provide more policy support to boost the growth of the service sector, according to the cabinet.
PBOC injected CNY 50bIn in 7-day reverse repos and CNY 20bIn in 14-day reverse repos. The central banks set the Yuan mid-point at 6.7379 (Prey. 6.7157), the lowest in 6 years.

Top Asian News

  • China’s Currency Dilemma Deepens as Yuan Surges Versus Euro, Won: Allowing faster depreciation versus dollar could spur outflows.
  • Hedge Funds Cut Bullish Yen Bets Amid Currency’s Three-Week Drop: Dollar gains set to accelerate versus euro, yen year- end, RBS says.
  • Thai Bonds Suffer Record Outflows as King’s Death Sparks Concern: Selling is overdone, according to ING’s Tim Condon.
  • Crown Resorts Plunges After China Detains 18 Casino Employees: Detentions spark concern of clampdown on overseas marketing.
  • JR Kyushu Sets IPO Price at 2,600 Yen/Share, Top of Range: Co.’s share offering would be worth 416b yen, according to Bloomberg calculation.
  • KKR-Backed Cofco Meat Seeks Up to $333m in Hong Kong IPO: Chinese pork producer offers shares at HK$2 to HK$2.65 apiece.

In Europe, heavy selling pressure in fixed income markets this with Bunds breaking below 163.00 while Gilts continue to underperform as participants become less bullish on expectations for further BoE easing. More specifically, participants have continued to scale back expectations of further easing by the BoE as the softer GBP has continued to heighten the possibility of a firmer uptick in inflation than initially thought when the BoE acted in August (Goldman Sachs pushed back BoE easing to Feb’17 from Nov’16). Alongside this, Bunds have seen a couple of key levels breached this morning with the yield breaking back above 0.10% reaching levels last seen since the UK referendum, while USTs also remain softer as participants further price in expectations of a 25bps cut by the Fed in their Dec meeting, albeit with a potentially shallower path ahead as shown by comments from Fed chair Yellen on Friday. Price action in equities have been somewhat contained this morning with the Eurostoxx 50% (-0.3%) modestly in
the red, however EU bourses have marginally pared their opening losses amid broad based gains across financial names with reports suggesting that Deutsche Bank (+0.3%) could be considering an exit from their US operations. Elsewhere, energy names underperform in the wake of the losses seen on Friday despite prices being relatively stable this AM.

Top European News

  • Draghi Seen Embracing More Before Less QE as Inflation Edges Up: With consumer prices barely rising, recovery still fragile, majority of Bloomberg survey respondents predict that ECB president will prolong bond-buying.
  • Coty Said to Be Near >GBP400m Purchase of U.K.’s GHD: Sky: Deal for hair-care products co. may be announced as soon as this month: Sky.
  • Sonnen Considering IPO in Bid to Rival Tesla Powerwall Storage: German solar-energy-storage maker may pursue IPO as early as 2017 to develop additional services.
  • U.K. Falls Out of Top 5 Investment Sites Post Brexit: EY: British businesses rank behind investments in U.S., China, Germany, Canada, France; London Becoming U.K.’s Housing Market Laggard: London asking prices +2.5% in past year, second-weakest performance out of 9 areas surveyed by Rightmove.
  • U.S. Banks Slashed Share of U.K. Property Loans Before Brexit: U.S., Canadian banks’ market share fell to 7% vs 14% in 1H 2016: survey of 78 lenders by De Montfort University

In FX, the MSCI Emerging Markets Currency Index fell 0.3 percent, headed for its lowest close since Sept. 16. The lira weakened for a second day, dropping 0.5 percent. The won weakened 0.4 percent, while Malaysia’s ringgit retreated 0.3 percent. The yen advanced 0.1 percent to 104.03 per dollar, following declines in each of the last three weeks. Hedge funds and other large speculators cut bullish bets on the currency by the most since May in the week ended Oct. 11. Australia’s dollar slipped 0.3 percent. The yuan fell to a six-year low in Shanghai, while Taiwan’s dollar dropped to levels last seen in August.

In commodities, oil extended declines after U.S. producers ramped up drilling even as crude inventories remained at the highest seasonal level in at least three decades. Futures fell 0.3 percent to $50.19 a barrel. Aluminum dropped 1.4 percent as an Indonesian producer group said it will ask the government to lift a bauxite export ban imposed in 2014, threatening to increase supply of the raw material. Nickel slipped as much as 0.7 percent. Copper rose as much as 0.6 percent after the biggest two-week decline in four months. Gold advanced after posting a three-week slide as investors weighed the outlook for U.S. interest rates against signs of robust demand. Bullion for immediate delivery climbed 0.2 percent to $1,253.62 an ounce.

On today’s calendar, we’ll get the September industrial and manufacturing reports along with capacity utilization data and the Empire manufacturing report for October.

* * *

US Event Calendar

•    8:30am: Empire State Mfg, Oct., est. 1.00 (prior -1.99)
•    9:15am: Industrial Production, Sept., est. 0.2% (prior -0.4%)
•    12:15pm: Fed’s Fischer speaks in New York
•    5:10pm: Reserve Bank of Australia’s Lowe speaks in Sydney
•    U.S. Rates Weekly Agenda
•    FX Weekly Agenda

DB’s Jim Reid concludes the overnight wrap

It’s a varied week of highlights ahead over the next 5 days to grab our attentions. The main events being UK and US inflation and ECB lending standards tomorrow, China’s monthly main data dump and the final US presidential TV debate on Wednesday, the ECB meeting on Thursday and earnings season getting into full swing (96 US and 40 European companies) through the week. A key macro theme at the moment is potential central bank tapering/tightening what with the Fed itching to hike, the BoJ potentially tapering until the government picks up the baton and vague speculation about the ECB wanting to rein in QE. DB’s Mark Wall still expects a 9-12 month extension in December but if the ECB is thinking differently we may get some hints on Thursday. If they do extend then they need to solve the eligibility conundrum soon so that’s another thing to look out for at the meeting.

Given that the market is sensing a slight shift in emphasis from central banks, the focus on the bond market continues with UK Gilts leading the sell-off during the European session on Friday (more below) with US Treasuries adding to the losses after Yellen spoke on Friday night. The key theme seemed to be her wondering whether there was room to let the US economy ‘run hot’ and whether such a ‘high pressure’ economy could enhance things like labour force participation. While this could be potentially dovish for the front end, the perception was that it could allow inflation to be allowed to run higher which helped the long-end sell-off and steepened the curve. The Boston Fed’s Rosengren (a dissenter last month) also spoke and said that the market is pricing in an ‘appropriately’ high probability of a Fed rate hike in December however it was Yellen’s comments which got Treasuries moving. Indeed 2y yields finished the session flat at 0.835% however 5y, 10y and 30y yields were up 2.8bps, 5.7bps and 8.1bps respectively by the end of play. The 5.5bp move in the 5y 30y spread was in fact the most since March 30th and takes the spread to just below the highs of midway through last month.

In terms of Gilts there was a similar bear steepening effect across the curve on Friday. 2y yields edged less than 1bp higher however 10y and 30y yields were up 7.2bps and 6.0bps to 1.094% and 1.762% respectively. Comments from BoE Governor Carney seemed to be at the forefront of the selloff when he suggested that the Bank will ‘tolerate a bit of overshoot in inflation over the course of the next few years’ in order to cushion the blow of an anticipated increase in unemployment. Carney also added that ‘our job is not to target the exchange rate, our job is to target inflation’ but ‘that doesn’t mean we’re indifferent to the level of sterling’ however ‘it does matter ultimately to where inflation is and over the course of two or three years out, it matters to the conduct of monetary policy’. BoE MPC member Forbes added separately on Friday that the BoE might overshoot its inflation target ‘sharply’ over the next couple of years and that the days of ‘inflation bouncing around zero are gone’. Sterling fell -0.51% on Friday versus the Dollar and is down another -0.19% this morning at $1.2168. The five-day loss of -1.95% last week means Sterling has now weakened in five of the last six weeks.

Meanwhile, as we noted earlier, this week will see earnings season start to ramp up, particularly across the pond. The Banks sector will again be under the spotlight with BofA (today), Goldman Sachs (Tuesday) and Morgan Stanley (Wednesday) due. That comes after some better than expected earnings and revenue numbers from Citi, JP Morgan and Wells Fargo on Friday where decent beats in fixed income trading revenue appeared to be a big driver and consistent theme at both Citi and JPM in particular. DB’s US equity strategist David Bianco expects most companies to beat the last minute estimates this quarter but beats to be smaller than usual and Q4’16 and 2017 EPS outlooks to be tempered. He’s forecasting the S&P 500 EPS to be flat year-on-year and up 2% quarter-on-quarter (or 3% ex-energy).

Those banks earnings had initially seen US equity markets get off to a decent start on Friday with Europe (Stoxx 600 +1.29%) also finishing on a strong note for much the same reason. However as Europe closed markets in the US faded with the S&P 500 (+0.02%) eventually finishing little changed as rates spiked higher and the Dollar strengthened which weighed on utilities and REITS in particular.
As we look at our screens this morning it’s a bit of a mixed start to the week in Asia. The Nikkei (+0.29%) and Kospi (+0.47%) are currently posting modest gains however the Hang Seng (-0.42%) and ASX (-0.68%) have dipped lower. Bourses in China are generally flat although its been a fairly directionless start with indices trading between gains and losses. Sovereign bond markets are generally weaker in the region. Longer dated JGB yields are a couple of basis points higher while benchmark 10y yields in the likes of Australia, New Zealand and Korea are 5-7bps higher.

In terms of the weekend newsflow there’s some focus on Italy with the news that Banco Popolare and Banca Popolare di Milano shareholders’ have approved Italy’s biggest bank merger in nearly a decade. The tie-up will create a €171bn asset lender according to the FT and should provide a boost for PM Renzi who made a push for the deal. Away from this, the latest Brexit news is that a group of legislators including former Lib Dem PM Nick Clegg and former Labour Leader Ed Miliband have demanded PM May’s government to publish a ‘substantive outline’ of its Brexit plans and submit to a vote in Parliament prior to triggering Article 50. This of course follows that Parliament session which had Labour calling for a ‘proper scrutiny’ of PM May’s strategy last week.

Before we look at the week ahead, just a quick recap on the rest of the newsflow on Friday. In terms of the US data, retail sales were a bit mixed with the headline (+0.6% mom) and core ex auto and gas (+0.3% mom) in line with the market consensus, but the GDP input control group component (+0.1% mom vs. +0.4% expected) missing which led to the Atlanta Fed cutting its Q3 GDP forecast to 1.9% from 2.1%. As a reminder this forecast was as high as 3.8% in early August. Meanwhile, headline PPI (+0.3% mom vs. +0.2% expected) was a little higher than expected, while the core ex food, energy and trade (+0.3% mom vs. +0.1% expected) also rose more than expected. A first look at the October University of Michigan consumer sentiment survey was mixed. The sentiment reading dipped 3.3pts to 87.9 (vs. 91.8 expected) and while the current conditions component rose 1.3pts to 105.5, the expectations component was down 6.1pts to 76.6 and the lowest since September 2014. We’d imagine that the upcoming President election is weighing on the latter in particular.

Elsewhere, business inventories (+0.2% mom vs. +0.1% expected) printed a little higher than expected and the September Monthly Budget statement revealed a $33.4bn surplus. There was nothing of particular note released in Europe.

Turning over to this week’s calendar now. This morning in Europe the only notable data due out is the final revision to September CPI in the Euro area. Over in the US this afternoon we’ll get the September industrial and manufacturing reports along with capacity utilization data and the Empire manufacturing report for October. Tuesday morning should be an interesting session in Europe with the ECB bank lending survey due out along with the UK CPI/RPI/PPI data in September. Over in the US we’ll also get the September CPI report too, along with the October NAHB housing market index print. Wednesday is all about China with the September data dump released in the morning which includes Q3 GDP, industrial production, retail sales and fixed asset investment. Away from that there’s more data due in the UK in the form of the August and September employment data, while in the US we’ll get the September housing starts and building permits numbers, along with the Fed’s Beige Book in the evening. In Europe on Thursday the data includes Germany PPI and UK retail sales. That’s before we get the ECB policy meeting outcome shortly after midday. Over in the US on Thursday the data releases include initial jobless claims, Philly Fed manufacturing survey, existing home sales and Conference Board’s leading index. We end the week in China on Friday with the latest property prices data and MNI business indicator reading. In the UK there’s more data, this time the latest public sector net borrowing reading, while the Euro area consumer confidence print is due in the afternoon. There’s no data due in the US on Friday.

Away from the data the Fedspeak this week includes Fischer this evening, Williams and Kaplan on Wednesday, Dudley on Thursday and finally Tarullo and Williams on Friday. Of course the third and final Presidential Debate on Wednesday evening in Las Vegas will be closely watched. In the UK Chancellor Hammond is due to testify before the Treasury Committee on Wednesday. The ECB’s Draghi holds his usual post-ECB meeting press conference on Thursday too. The other big focus for markets this week is of course earnings. 96 S&P 500 companies are set to report including BofA, Netflix and IBM today, Goldman Sachs, Johnson & Johnson and Intel on Tuesday, eBay and Morgan Stanley on Wednesday, American Airlines, Verizon, Microsoft, Walgreens Boots and Schlumberger on Thursday and McDonald’s and GE on Friday. We’ll also get earnings from 40 Stoxx 600 companies this week.