Silver as an investment

Traders Paralyzed, Markets Flat Ahead Of Today’s Main Event: The ECB’s Taper Announcement

US equity futures and Asian shares are flat this morning with European shares treading water ahead of the ECB’s policy meeting in which it’s expected to announce a tapering to its €60bn in monthly QE. On this busiest day of Q3 earnings season, companies set to report earnings include Alphabet, Microsoft, Amazon and Intel, while we also get data on jobless claims and wholesale inventories.

In a pre-ECB appetizer, Sweden and Norway’s central banks both kept their interest rates on hold as they too look forward to see what the ECB does first. Their currencies barely budged though as attention remained firmly on a euro rose to a 1-week high of $1.1820, up 12.5% for the year, before hitting an air pocket ahead of the European open.

Ahead of today’s main event, traders waited for formal confirmation from the ECB that will take its biggest step yet in unwinding years of loose monetary policy before committing capital and volumes were abysmal and price action has been tentative. In terms of sector specific moves, performance is relatively mixed with a bulk of the outliers coming in the form of individual companies given we are in the thick of earnings season.

The Stoxx Europe 600 Index was little changed with bank shares underperforming after earnings reports from Deutsche Bank AG and Barclays Plc. Spanish shares rebounded sharply following a Bloomberg report that instead of Independence, Catalonia may seek election instead. In any case, Catalonia’s President Carles Puigdemont will address the regional parliament on Thursday afternoon.

Notable movers include Barclays (-5.9%), Bayer (-3.4%), AB Inbev (-2.6%), Deutsche Bank (-2.03%, STMicroelectronics (+6.4%). Typically tight and light trade in Bunds ahead of an ECB meeting, and especially one that is widely expected to herald a change in policy. The 10 year German bond briefly attempted to trade higher off the Eurex open, but swiftly reversed course and revisited sub-161.00 territory (ie yield staying close, albeit just below 0.5%). Volume so far only a little more than 100k lots, with many market participants sitting tight until the ECB reveals its QE hand amidst a range of potential tapering options and opinions. Gilts largely side-lined, but firmer for choice having underperformed yesterday on UK data that supports near term tightening (November BoE hike prospects up to between 80-90% as a result). Some respite for US Treasuries also, after recent bear steepening, on a Wall Street downturn and reports that dove Yellen may yet be reappointed by President Trump for a further term.

Eurozone bonds trade in tight ranges: the German curve has flattened as the long-end outperforms. In the US, Treasuries rebound, with 10Y yields pulling back from yesterday’s seven-month high, declining to 2.42%, the level that sparked yesterday’s stop loss driven selloff. SEK and NOK were slightly weaker versus EUR after both Riksbank and Norges Bank left policy unchanged as expected while the Turkish Lira is among the biggest losers in EM ahead of Turkey’s central bank decision. European stocks slightly stronger, with Italian equities leading regional gains. WTI extends gain above $52/bbl as Saudi Arabia’s crown prince backs extending OPEC production cuts beyond March 2018. The pound fell and South Africa’s rand extended its decline amid worries
of a rating downgrade after the country’s finance minister on Wednesday
signaled more borrowing. West Texas crude slipped a second day.

As a reminder, the ECB is expected to announce a reduction in the size of its monthly bond buying at its policy meeting. Any deviation from the expected nine-month extension of quantitative easing at around 30 billion euros a month, could impact markets, in particular the euro and German bunds.

 

In Asia, despite an overall muted tone to trading, the Nikkei 225 resumed its winning ways (+0.2%) after ending the longest stretch of gains on record, dismissing a strong yen, and traded positive with Daiwa Securities and Fanuc among the biggest gainers after encouraging earnings. Hang Seng (-0.2%) and Shanghai Comp. (+0.5%) were mixed ahead of updates from the blue-chip financials with the mainland lifted after another respectable liquidity operation by the PBoC. The Kospi underperformed even as data showed South Korea’s economic growth picked up more than expected in the third quarter. China began marketing its first sovereign dollar bonds since 2004 on the heels of the twice-a-decade Communist Party congress. 10yr JGBs were relatively flat with early mild upside seen alongside a rebound in USTs, while today’s 2yr JGB auction failed to inspire demand despite stronger than prior results as price action conformed to the mundane tone seen across overnight asset classes.

While the bond rout eased in Europe and the US, China’s 10Y sov bond briefly rose to the highest in three years amid concerns over the nation’s deleveraging campaign, although it pared the advance to stay little changed at 3.79% as of close in Shanghai after surging 6bps on Wednesday in the biggest jump since May. Bond strategists point to 4% as next level to watch for 10-year yield, as sentiment is fragile and market tends to be moved by negative news.

In rates, the yield on 10Y Treasuries fell 1bp to 2.42%; Germany’s 10Y yield decreased 2 bps to 0.47%.

In commodities, West Texas Intermediate crude dipped less than 0.05 percent to $52.17 a barrel. Gold advanced less than 0.05 percent to $1,277.56 an ounce. Copper fell 0.4 percent to $6,984.50 per metric ton, the biggest fall in more than a week.

Bulletin Headline Summaary from RanSquawk

  • European equity markets subdued, as eyes on Draghi
  • The range bound theme has been evident across markets, with FX also seeing light trade
  • Looking ahead, the highlight will be the ECB and Draghi press conference, followed by US trade data and weekly jobs

Market Snapshot

  • S&P 500 futures down 0.03% to 2,557.75
  • STOXX Europe 600 up 0.04% to 387.27
  • MSCI Asia down 0.1% to 166.77
  • MSCI Asia ex Japan down 0.2% to 546.50
  • Nikkei up 0.2% to 21,739.78
  • Topix up 0.1% to 1,753.90
  • Hang Seng Index down 0.4% to 28,202.38
  • Shanghai Composite up 0.3% to 3,407.57
  • Sensex up 0.3% to 33,132.34
  • Australia S&P/ASX 200 up 0.2% to 5,916.30
  • Kospi down 0.5% to 2,480.63
  • German 10Y yield fell 0.6 bps to 0.476%
  • Euro up 0.03% to $1.1817
  • Brent Futures down 0.2% to $58.33/bbl
  • Italian 10Y yield fell 2.2 bps to 1.77%
  • Spanish 10Y yield unchanged at 1.647%
  • Brent Futures down 0.2% to $58.33/bbl
  • Gold spot up 0.03% to $1,277.96
  • U.S. Dollar Index down 0.04% to 93.67

Top Overnight News

  • President Donald Trump said he’s thinking about giving Janet Yellen another term as U.S. Federal Reserve chair as he balances the desire to put his stamp on the central bank with the risk of changing leadership amid a stock market rally.
  • A federal judge rejected a bid by Democratic state officials to temporarily block the White House from ending so-called cost-sharing reduction payments to health insurers under the Affordable Care Act.
  • To make a fair deal with Nafta you have to ’terminate’ it, Trump says
  • Sweden’s Riksbank keeps key rate at -0.50%, says still sees first rate hike in mid-2018
  • Norges Bank keeps deposit rate at 0.50%, says balance of economic risks unchanged since September
  • Catalonia may call regional elections this week, rather than declaring independence from Spain
  • Italy passes new law that sets stage for general elections in 1H 2018
  • Saudi’s crown prince says “of course” he wanted to extend the cuts into 2018; there’s a need to “continue stabilizing the market,” he adds
  • RBA’s Debelle says Australia inflation could be weaker than recent data showed

Asia stocks were indecisive for most of the session following the worst performance in their US counterparts since early September, where losses were led by telecoms and industrials amid a slump in AT&T and Boeing shares post-earnings. Corporate updates were in focus in Asia with ASX 200 (+0.1%) initially pressured by weakness in its largest weighted financials sector after ‘Big 4’ ANZ Bank missed on FY results. However, a late rebound in other banking names in Australia lifted the index into the green heading into the close. Nikkei 225 (+0.2%) dismissed a firmer JPY and traded positive with Daiwa Securities and Fanuc among the biggest gainers after encouraging earnings. Hang Seng (-0.2%) and Shanghai Comp. (+0.5%) were mixed ahead of updates from the blue-chip financials with the mainland lifted after another respectable liquidity operation by the PBoC. Finally, 10yr JGBs were relatively flat with early mild upside seen alongside a rebound in USTs, while today’s 2yr JGB auction failed to inspire demand despite stronger than prior results as price action conformed to the mundane tone seen across overnight asset classes. PBoC injected CNY 80bln via 7-day reverse repos and CNY 40bln via 14-day reverse repos. PBoC set CNY mid-point at 6.6288 (Prev. 6.6322)

  • Top Asian News
  • Japan Post Insurance Preparing to Invest in Foreign Real Estate
  • Vietnam’s Biggest-Ever Initial Public Offering Prices at Top End
  • No Good News for India’s Bonds Means Yields Set to Grind Higher
  • Sri Lanka Large Lenders Rise as Rule Changed for Minimum Capital
  • Kobe Steel Finds Four Additional Cases of Suspected Fake Data
  • RBA’s Debelle Says Inflation May Be Even Weaker Than Data Show

In Europe, price action has also been tentative with traders looking to take the lead from events in Frankfurt today. In terms of sector specific moves, performance is relatively mixed with a bulk of the outliers coming in the form of individual companies given we are in the thick of earnings season. Notable movers include Barclays (-5.9%), Bayer (-3.4%), AB Inbev (-2.6%), Deutsche Bank (-2.03%, STMicroelectronics (+6.4%). Typically tight and light trade in Bunds ahead of an ECB meeting, and especially one that is widely expected to herald a change in policy. The 10 year German bond briefly attempted to trade higher off the Eurex open, but swiftly reversed course and revisited sub-161.00 territory (ie yield staying close, albeit just below 0.5%). Volume so far only a little more than 100k lots, with many market participants sitting tight until the ECB reveals its QE hand amidst a range of potential tapering options and opinions. Gilts largely side-lined, but firmer for choice having underperformed yesterday on UK data that supports near term tightening (November BoE hike prospects up to between 80-90% as a result). Some respite for US Treasuries also, after recent bear steepening, on a Wall Street downturn and reports that dove Yellen may yet be reappointed by President Trump for a further term.

Top European News

  • Santander Underlying Profit Gains as Charges Hurt Net Income
  • Liberty Global-Ziggo Deal Approval Annulled by EU Court
  • Hungarian Central Bankers Reiterate Extra Euro Entry Conditions
  • IMF Tells Central Banks to Keep Policy Accomodative If Possible
  • Norway Keeps Rates at Record Low to Back Recovery From Oil Slump

In FX, RBA Deputy Governor Debelle says they are alert to risk that wages will remain subdued even as spare capacity is reduced. US President Trump says his people negotiating NAFTA will have to get tougher and that to make a fair deal with NAFTA, it has to be terminated n a session set to be dominated by central bank action, notable announcements thus far have included rate decisions from the Riksbank and Norges bank. Kicking off with the Swedes, as expected the governing council stood pat on rates at -0.5% whilst maintaining their current size of asset purchases and repo rate path. The bulk of the reaction emanated from the Bank not paying too much credence to recent disappointing inflation data which led to appreciation of the SEK. However, this move was short-lived after the Bank extended their mandate for FX interventions. Elsewhere in the Scandi’s NOK saw little in the way of a reaction after the Norges bank kept rates on hold as expected and maintained existing rhetoric. AUD slipped below 0.7700 after RBA Debelle highlighted risks that wages could remain subdued. Finally, most other majors have traded in a relatively tight-range ahead of the ECB.

In commodities, in the commodity complex, price action has also been particularly tight with WTI reclaiming USD 52/bbl with little in the way of newsflow other than comments from the Saudi Crown Prince backing extending OPEC output cuts into 2018. In metals markets, copper has traded relatively flat while Gold has largely been tracking movements in the USD which has been kept in a range ahead of key risk events.

Looking at the day ahead, the ECB meeting at 12.45pm BST and Draghi press conference shortly after are likely to be front and center today. Data wise this morning we’ll receive German consumer confidence for November, Euro area M3 money supply for September and UK CBI retailing reporting sales for October. In the afternoon across the pond wholesale inventories for September, initial jobless claims, September advance goods trade balance, September pending home sales and October Kansas City Fed manufacturing activity data are all due. Barclays, Twitter, Amazon and Alphabet are amongst those due to report results.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 235,000, prior 222,000; Continuing Claims, est. 1.89m, prior 1.89m
  • 8:30am: Advance Goods Trade Balance, est. $64.0b deficit, prior $62.9b deficit, revised $63.3b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.9%; Retail Inventories MoM, prior 0.7%, revised 0.7%
  • 9:45am: Bloomberg Consumer Comfort, prior 51.1
  • 10am: Pending Home Sales MoM, est. 0.4%, prior -2.6%
  • 10am: Pending Home Sales NSA YoY, est. -4.2%, prior -3.1%
  • 11am: Kansas City Fed Manf. Activity, est. 17, prior 17

DB’s Jim Reid concludes the overnight wrap

So today is the day we’ve all been waiting for. It’s not an exaggeration to say some people have waited all their life for this moment. What will the announcement bring? Will the conspiracy theorists be working overtime? And will we get closure on a number of issues? Yes today sees the release of the final classified files on the JFK assassination nearly 54 years after the event. As someone who knows most of what he knows about the event from the film JFK I’m looking forward to being educated.

Fortunately the minutes of today’s blockbuster ECB meeting will be available in only a few weeks so there’ll be no need for a film to be made speculating on how we got to the decision (who would play Mr Draghi?). Ahead of this, in a year of ultra-low volatility, yesterday threatened to leave you with a bit of motion sickness given the comparatively large swings seen and decent pick up in volumes. Given how well flagged today’s much anticipated ECB meeting is, it’s possible that yesterday was the storm before the calm. However there are still ways that Mr Draghi and co could surprise. Overall DB expect a cut in purchase at the start of 2018 from EU60bn per month to EU30bn and for this to be confirmed for 9 months. The consensus (guided by informed articles and commentary from the ECB) seems to have migrated lower towards EU25-30bn over the last month and from a 6 to a 9 month extension. However with reinvestments expected to be EU15bn per month on average next year, this could yet lead to a number at the lower end of expectations if the ECB focus on this. Our rates strategists think an explicit mention of gross purchases from the ECB could be quite hawkish as it would acknowledge the reinvestment issue that would naturally keep policy looser if they recycled all proceeds.

Another hawkish signal could be mention of an explicit end date for purchases but this is not expected at the moment. Nevertheless our strategists think the current market pricing of the first rate hike being pushed back to early 2020 is too far. They think it’s more likely to be between Q2 and Q3 2019. Elsewhere for credit investors it’s unlikely they’ll explicitly mention the specifics of the CSPP/ PSPP split but we think there’s a good chance that when the data comes through in early 2018 it will show no or limited CSPP tapering relatively to PSPP. See the note we did on this last week for more details.

We’ve mentioned a few times recently that bonds were looking like they were getting more volatile with the ranges picking up. Yesterday this trend increased as the intra-day range in 10yr USTs, Bunds and Gilts were 6.2bp, 3.7bp and 10.1bps respectively, before closing +1.3bp, 0.6bp and 4.8bp higher. USTs saw the biggest round trip closing at 2.433% having retraced nearly all of the sell-off up to 2.473% earlier on. Driving the swing seemed to be ECB hawkishness (growing chatter about a cut to EU20bn) and stronger IFO, UK GDP and US durables (more later) on one hand before a response to weaker earnings (again more later) and a delayed reaction to the prior day’s disagreement between Senator Flake and Corker and Mr Trump seemed to swing the pendulum the other way.

Over in the US, the House of Representatives votes today on whether to adopt the 2018 budget that has already passed in the Senate. The House Republicans holds 239 seats and need only 217 votes to pass the budget, but potential defections may rock the boat. If passed, this will clear another hurdle before the finer tax plans are released, (expected to be 1 November) which will then lead to further debates. Elsewhere and adding to the bumper Thursday, Italy’s Senate is expected to hold a final vote on its new electoral bill (11am local time).

Moving onto the search for the next Fed Chair, President Trump told Fox network he has narrowed his search to 2 or 3 people, and when asked if Ms Yellen “might be worth keeping”, he said “I would certainly think about that”.He added a decision will come in “the next very short period of time” and that “it won’t be a big shock”. Elsewhere, Bloomberg reports that Trump has privately told people that he would not appoint Gary Cohn to be the Fed Chair, in part to better allow him to focus on the tax reform efforts.

Back in equities yesterday, both the S&P (-0.47%) and Dow (-0.48%) fell the most since early September, while the Nasdaq also retreated 0.52%. The weakness was impacted by softer corporate results from AMD (share price- 13.47%), Chipotle Mexican Grill (-14.58%) and even Boeing (-2.85%) after beating consensus forecasts. Within the S&P, all sectors were in the red, led by losses from the telco (-2.28%) and industrials sectors. The VIX rose to 11.23, back towards its recent highs in early September.

It’s not clear whether some of the risk off was a response to the recent surge in yields. So far markets have shrugged it off but as we approached 2.5% and 0.5% on Treasuries and Bunds perhaps there was an appreciation that most of the recent move has been an increase in real yields and not inflation expectations moving notably higher. So financial conditions have tightened slightly as a result. It’s not clear whether that was an issue but whatever the cause there’s no doubt activity and vol increased.

This morning in Asia, markets are mixed but little changed. The Hang Seng (-0.17%), Kospi (-0.12%) and ASX 200 (-0.10%) are down slightly, but the Nikkei (+0.16%) and the Shanghai Comp (+0.20%) are up as we type. Now quickly recapping other markets performance for yesterday. European bourses were all lower, with the Stoxx 600 (-0.57%), DAX (-0.46%) and CAC (-0.37%) down c0.5%, while the FTSE (-1.05%) underperformed, partly impacted by higher Sterling and  GlaxoSmithKline’s weaker results (shares -5.52%, biggest daily fall in 9 years). Turning to currencies, the US dollar index dipped marginally (-0.07%), while Euro republic, while the region’s foreign affairs chief suggested they would consider dropping their bid for independence if the central government offered them a way out. We should find out soon, with the Catalan President Puidgemont due to address Parliament this afternoon (from 5pm local time).

Over to the UK, Brexit secretary Davis had to back track earlier comments where he suggested the UK Parliament may not be able to vote on the final EU divorce term before Brexit happens, as “it (voting) can’t come before we have the deal”. Later on, his office emailed a statement and noted “we are working to reach an agreement on the final deal in good time before we leave the EU in March 19”. Elsewhere, EU Chief negotiator Barnier noted that talks should be wrapped up by October 2018.

In Canada, the cash rate was left unchanged at 1%, in line with consensus. Looking ahead, comments sounded a bit dovish, with the BOC noting “while less monetary policy stimulus will likely be required over time, the Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by (the) incoming data…” Further, Governor Poloz noted “given our recent history with inflation running below target, we continue to be more preoccupied with the downside risks to inflation”. The odds of a December rate hike fell c11ppt to 33%.

Turning to China, where the new Politburo Standing Committee (PSC) was unveiled yesterday. Our China Chief economist noted that President Xi has gained more political power in this reshuffle. Stronger political power is a necessary condition for faster structural reforms, but not a sufficient one. It remains to be seen how effective the reforms will be implemented, particularly regarding state owned enterprises, fiscal and property market issues. For more details, refer to link.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the September durable goods orders report beat expectations, even with 0.2ppt upward revisions to the prior month’s reading. Core durable goods orders was 0.7% mom (vs. 0.5% expected) while capital goods orders (core) rose 1.3% mom for a third consecutive month (vs. 0.3% expected) – now up 7.8% yoy. Elsewhere, housing market readings were also higher than expectations. New home sales for September rebounded after two months of decline to 667k (vs. 554k expected). The FHFA house price index for August was up 0.7% mom (vs. 0.4% expected) and the four-week average of the MBA’s new purchase mortgage applications index is now up 7.7% yoy, roughly double that reported a month earlier.

In Germany, the October IFO business climate rose to a new post-unification high at 116.7 (vs. 115.1 expected), while the expectations index also rose to 109.3 (vs. 107.3 expected) – the highest since December 2010. In the UK, 3Q GDP beat expectations at 0.4% qoq (vs. 0.3% expected), which is the highest growth this year, while annual growth was in line at 1.5% yoy.

Looking at the day ahead, the ECB meeting at 12.45pm BST and Draghi press conference shortly after are likely to be front and center today. Data wise this morning we’ll receive German consumer confidence for November, Euro area M3 money supply for September and UK CBI retailing reporting sales for October. In the afternoon across the pond wholesale inventories for September, initial jobless claims, September advance goods trade balance, September pending home sales and October Kansas City Fed manufacturing activity data are all due. Barclays, Twitter, Amazon and Alphabet are amongst those due to report results.