Silver as an investment

US Futures Rebound After Disappointing Chinese, European Data

Yesterday’s sharp Chinese selloff is now a distant memory after the BTFDers emerged, and this morning U.S. equity futures are once again levitating as the FOMC begins its two-day policy meeting, following an uneventful BOJ announcement on Tuesday morning which left all QE parameters unchanged. Asian stocks traded mixed steady while European shares climb.

The key event overnight was the BOJ meeting, in which the central bank maintained QQE with Yield Curve Control and kept NIRP unchanged at -0.1% as expected. The decision to keep QQE with YCC was made by 8-1 vote, with Kataoka the sole dissenter again who suggested the BoJ needs to buy JGBs so that 15yr yield stays below 0.2%, while Kataoka also commented that the BoJ should ease if domestic factors lead to delays in reaching the inflation target. In terms of changes to its outlook forecasts, the BoJ raised FY 17/18 Real GDP growth forecast to 1.9% from 1.8%, while it cut Core CPI forecasts to 0.8% from 1.1% for FY 17/18 and to 1.4% from 1.5% for FY 18/19

Asian shares rose in afternoon trading, with the MSCI Asia Pacific Index gaining 0.1 percent to 168.29 and ignoring the overnight miss across the board in Chinese PMIs


… Confirming China’s economy is rolling over…



… supported by tech stocks as companies including Sony and Nintendo boosted their forecasts. Samsung gave the biggest boost to the regional gauge and South Korea’s benchmark after announcing a revamp of its executives. Japan’s Nikkei closed just barely lower, technically only its second down day in October, with SoftBank weighing on the index after talks to merge its Sprint unit with T-Mobile US were said to be in peril. Samsung Electronics closed at a record after nominating its Chief Executive Officer Lee Sang-hoon as its next board chairman, along with other management changes, hours after detailing a boost in shareholder payouts. The company’s plans, along with a pledge by South Korea and China to move beyond a year-long dispute over Seoul’s decision to deploy a U.S. missile shield, helped lift the Kospi Index to a new all-time high (remember the North Korea nuclear armageddon threat? Neither does the market).

“South Korean equities gained led by the Korea-China agreement on the Thaad issue and also because of Samsung Electronics’ announcement,” said Min Byungkyu, a global market analyst at Yuanta Securities Korea. Technology stocks rose the most among sub-indexes on the regional gauge, with Nintendo soaring after nearly doubling its annual profit forecast and Sony and Denso Corp. climbing after both companies boosted earnings outlooks. In India, Axis Bank surged after a report that Bain Capital plans to invest in the lender.

Speaking of China, the slump in Chinese government bonds is close to an end, with sentiment set to stabilize as the central bank boosts cash injections, analysts said The yield on the benchmark 10-year government bond fell 3 basis points to 3.90% on Tuesday, halting a four-day increase of 20 basis points that took it to the highest level in three years. The People’s Bank of China injected funds for a fourth day on Tuesday, adding a net 230 billion yuan ($35 billion) in the period.As a result, the SHCOMP halted the recent slump, rising just under 0.1% to 3,393.

In Europe, traders ignored the miss in euro-area inflation data in stride as closed German markets due to a local public holiday has led to a muted European session. The euro-area’s unemployment rate inched lower in September as the economy expanded for an 18th consecutive quarter, but consumer inflation unexpectedly slowed in October, complicating the European Central Bank’s task as it considers tightening policy.

Oil and gas stocks led gains in the Stoxx Europe 600 Index as crude hovered near a six-month high. Most European stocks climb, led by oil and gas sector; FTSE 100 rebounds after BP (+2.6%) earnings and buyback announcement. European energy names lead the way higher in the wake of BP’s earnings (+3.3%) which have subsequently supported the index. Financial names have seen slight underperformance after BNP’s (-3.2%) weak earnings which has also subsequently seen the CAC modestly underperform its  peers. Elsewhere, UK gambling names have been granted some reprieve after the UK government’s crackdown on fixed-odd betting terminals does not appear to be as bad as some had initially feared.

Treasuries and core European bonds were mostly steady. Earlier a note of caution had crept into markets in Asian hours following a drop in China’s factory gauge, and equity benchmarks in that region were mixed. Japanese stocks ended the day slightly lower after the Bank of Japan maintained its key policy rate and target for the yield on 10-year government bonds, while showing concerns remain on the inflation outlook.

The yield on 10Y TSY rose less than one basis point to 2.37%. Germany’s 10Y yield decreased less than one basis point to 0.37%, the lowest in two weeks. Britain’s 10Y yield dipped one basis point to 1.335%, the lowest in more than a week.

American tax reform also remains a key theme, with lawmakers said to be considering a phase-in plan. The indictment of former Trump campaign aides in Robert Mueller’s investigation of Russian meddling in the U.S. election, however, may pose a danger to the White House as it tries to push tax cuts though Congress. Fed and BOE rate decisions this week remain in focus for FX, with major currency pairs trading in tight ranges; GBP/USD continues to trade with an upside bias due to positioning into BOE announcement.

West Texas Intermediate crude fell less than 0.05 percent to $54.14 a barrel. Gold decreased 0.1 percent to $1,275.55 an ounce.  Oil is poised for its second monthly gain for the first time this year.

Economic data include employment-cost index, Chicago PMI and consumer confidence. Mastercard and Pfizer are among companies reporting earnings today

Bulletin Headline Summary from RanSquawk

  • European bourses trade higher with energy names topping the leaderboard after earnings from BP
  • EU inflation fell short of expectations but little reaction for EUR with markets already braced for a softer print given German readings yesterday
  • Looking ahead, highlights include US APIs

Market Snapshot

  • S&P 500 futures up 0.2% to 2,573.25
  • MSCI Asia up 0.1% to 168.30
  • MSCI Asia ex Japan up 0.3% to 550.81
  • Nikkei unchanged at 22,011.61
  • Topix down 0.3% to 1,765.96
  • Hang Seng Index down 0.3% to 28,245.54
  • Shanghai Composite up 0.09% to 3,393.34
  • Sensex down 0.06% to 33,245.25
  • Australia S&P/ASX 200 down 0.2% to 5,909.02
  • Kospi up 0.9% to 2,523.43
  • STOXX Europe 600 up 0.08% to 394.22
  • German 10Y yield fell 0.8 bps to 0.359%
  • Euro down 0.06% to $1.1644
  • Brent Futures down 0.4% to $60.67/bbl
  • Italian 10Y yield fell 10.0 bps to 1.582%
  • Spanish 10Y yield fell 1.8 bps to 1.477%
  • Brent Futures down 0.3% to $60.70/bbl
  • Gold spot up 0.05% to $1,276.96
  • U.S. Dollar Index down 0.04% to 94.52

Top Overnight News

  • The Bank of Japan left its massive monetary-stimulus program unchanged even as it trimmed its inflation forecasts, signaling further divergence ahead from its global peers
  • France’s economy extended its run of growth into a fifth quarter, marking its best streak in more than six years; the 0.5% expansion in the three months through September, compared with an upwardly revised 0.6% the previous three quarters, was supported by corporate and household investment while trade weighed on growth
  • Catalan leader Carles Puigdemont kept his followers guessing as to the next step in his pursuit of an independent republic, after fleeing to Belgium where he’s expected to emerge on Tuesday
  • China’s official factory gauge fell to 51.6 in Oct., vs. 52 forecast in Bloomberg survey, and five-year high of 52.4 in Sept., with new orders and prices leading the decline, as officials increasingly prioritize a campaign to clamp down on polluting industries and rein in debt
  •  White House Downplays Mueller Indictments; Apple Escalates Qualcomm Dispute; Ex-Third Point Partner Drawing SEC Probe
  • Congress will put Facebook, Twitter and Google under a public microscope Tuesday about Russia’s use of their networks to meddle in the 2016 election, a day after Special Counsel Robert Mueller’s criminal investigation disclosed its first indictments and guilty plea
  • Apple Inc. is designing iPhones and iPads for 2018 that don’t use components from Qualcomm Inc. amid an escalating dispute between the companies
  • House tax writers have completed about 90 percent of the tax bill they plan to release this week, Ways and Means Chairman Kevin Brady said Monday — but the last part may be the hardest
  • SoftBank Group Corp.’s talks to merge U.S. unit Sprint Corp. with T-Mobile US Inc. have hit a serious snag throwing the deal into jeopardy after months of talks
  • The Bank of Japan left its massive monetary stimulus program unchanged even as it trimmed its inflation forecasts, signaling further divergence ahead from its global peers
  • Treasury Secretary Steven Mnuchin put to rest for now the idea bubbling in the $14.2 trillion Treasuries market that the government might introduce ultra-long term debt sales
  • The old recipe of using bonds to hedge against risks from equity holdings may not be a winner anymore, and investors would be better off with a more complex approach that relies on multiple tactics, according to Pacific Investment Management Co. analysis

A cautious tone persisted in Asia as the region digested softer than expected Chinese PMI data and a dampened lead from the US where reports suggested corporate tax cuts could be gradual. ASX 200 (-0.2%) was indecisive and failed to maintain early energy-led gains, while Nikkei 225 (unch) was kept grounded by a firmer JPY and with SoftBank among the worst performers on reports it plans to abandon merger talks between its unit Sprint and T-Mobile US. KOSPI (+0.9%) gained after reports China and South Korea agree to resolve THAAD-related dispute and with Samsung shares buoyed by record quarterly profits, while Shanghai Comp (+0.1%) and Hang Seng (-0.3%) initially weakened following the miss on Chinese Manufacturing PMI and with some of the big 4 banks pressured post-earnings; the mainland pared losses heading into the clsoe. Finally, 10yr JGBs were relatively flat with only minimal gains seen amid a risk averse tone in Japan and after an unsurprising BoJ policy announcement where dovish dissenter Kataoka suggested more easing.

Top Asian News

  • China Factory PMI Falls From Five-Year High on Pollution Cleanup
  • BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook
  • China, South Korea Agree to Shelve Thaad Missile Shield Dispute
  • Macau Casinos Emerge From Rut as October Revenue Hopes Brighten
  • Indian Billionaire Fund Says Bank Boost to Help Clear Loans

With Germany on vacation today, European bourses have started the session on the front-foot (Eurostoxx 50 +0.2%), albeit modestly so. In terms of sector performance, energy names notably lead the way higher in the wake of FTSE-heavyweight BP’s earnings (+3.3%) which have subsequently supported the index. Financial names have seen slight underperformance after BNP’s (-3.2%) lacklustre earnings which has also subsequently seen the CAC modestly underperform its peers. Elsewhere, UK gambling names have been granted some reprieve after the UK government’s crackdown on fixed-odd betting terminals does not appear to be as bad as some had initially feared. A really low key final business day of October in the sovereign bond markets, thus far. Turnover has been extremely light, even allowing for Germany’s Reformation holiday with Bund volume on Eurex around 100k lots (at writing). The German benchmark has also been very rangebound, albeit mainly on the plus side of a 162.64-162.83 trading band, and it appears that many are sitting tight ahead of the key risk events later this week. Indeed, UK Gilts are even more contained within 124.37-54 parameters, awaiting BoE ‘super Thursday’ when a widely anticipated first rate hike in a decade comes with an uncertain vote split, policy meeting minutes, forward guidance and the latest QIR. US Treasuries largely consolidating on Monday’s decent gains made on risk aversion and month end positioning, which saw the 10 year yield retreat clearly below 2.40%, ahead of the FOMC, new Fed chair announcement and monthly jobs report.

Top European News

  • Standard Chartered Retail Banking Chief Karen Fawcett to Retire
  • Ryanair Chief Seeks Solution to Pilot Crisis as Earnings Slide
  • Davis to Brief Cabinet on Brexit Amid Plans to Ramp Up Talks
  • MiFID Investment Research May Face VAT Hit From U.K. Taxman
  • BNP Slides as 3Q Earnings Miss Estimates on Weaker CIB Revenue
  • WPP Lowers Revenue Forecast as Ad Industry’s Woes Deepen

In FX, trade has been particularly tentative thus far with the BoJ only causing a modest uptick in USD/JPY towards 113.00 after the Bank stood pat on rates as expected with 1 dissenter suggesting the need to buy 15yr JGBs to keep yields below 0.2%. EUR saw little in the way of a reaction to the latest miss on expectations for Eurozone inflation (Y/Y 1.4% vs. Exp. 1.5% and core 0.9% vs. Exp. 1.1%) with markets potentially already braced for a lacklustre figure  given yesterday’s German prints.

Commodities continue to trade in a particularly tight range with WTI crude futures consolidating around USD 54/bbl. Elsewhere, the metals complex has been relatively non-committal ahead of this week’s FOMC and NFP, while copper lacked impetus overnight amid a cautious risk tone and after weaker than expected PMI data from its largest consumer China.

Looking at today’s key data, notable data includes the flash October CPI print for the Euro area and France, the advanced Q3 GDP report for the Euro area and consumer confidence for the UK for October. In the US the Q3 employment cost index, October Chicago PMI, October consumer confidence and the August S&P/ Case-Shiller house price index is amongst the data due. Onto other events, the ECB’s Visco and Padoan are also due to speak while UK Brexit Secretary David Davis is questioned by the House of Lords EU Committee about the state of Brexit talks. BP and BNP Paribas are amongst the companies reporting results.

US Event Calendar

  • 8:30am: Employment Cost Index, est. 0.7%, prior 0.5%
  • 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.4%, prior 0.35%; YoY NSA, est. 5.93%, prior 5.81%; US HPI YoY NSA, prior 5.94%;
  • 9:45am: Chicago Purchasing Manager, est. 60, prior 65.2
  • 10am: Conf. Board Consumer Confidence, est. 121.3, prior 119.8; Present Situation, prior 146.1; Expectations, prior 102.2

DB’s Jim Reid concludes the overnight wrap

The bond bullish/bearish switch that has alternated at regular intervals over the last few weeks has firmly switched to bull mode since the ECB meeting less than 72 business hours ago. Yesterday this got an additional boost by good news from the Peripherals, weaker German inflation, a former Trump campaign manager charged in connection with the Russia probe and reports that the US corporate tax rate may only be lowered in increments over 5 years.

In the US, House tax writers are discussing a phase-in approach for corporate tax cuts, allowing the tax rate to gradually fall from 35% in 2018 to 20% by 2022 (ie: -3ppt per year), as per Bloomberg. The plans are not yet final and when asked, House Ways and Means Chairman Brady only said “we want to get the growth up front”. Treasury secretary Mnuchin noted “the objective is not to have that phase in, but we will see how that goes”. Looking ahead, the Ways and Means panel is expected to release the draft bill this Wednesday for further debate.

Staying in the US, Bloomberg reported that three people have been indicted by Robert Mueller’s Special Counsel in relation to potential Russian influence on the 2016 US presidential election, including: 1) President Trump’s former campaign chairman (Paul Manafort) for conspiracy and money laundering (receiving payments from Ukrainian political parties and then laundered some of the payments back into US, 2) Ex-foreign policy adviser to Trump (George Papadopoulos), who reportedly lied about the timing of his contacts with foreign nationals, where he communicated with an overseas professor during the campaign (March 2016), who told him about Russians possessing “dirt” on Hillary Clinton in the form of “thousands of emails” and 3) a business partner of Mr Manafort. Elsewhere, President Trump tweeted “sorry, but this is years ago, before Paul Manafort was part of the Trump campaign”. However, the indictment noted Manafort’s illegal acts lasted into early 2017.

It’s too early to know if there’s are any ramifications for politics or even the tax reforms but the guilty plea by George Papadopoulos, who served as a foreign-policy adviser to President Trump during the campaign suggests the Investigators may have someone who appears to be fully cooperating. This could potentially have a material impact.

Turning to Catalonia where tensions have cooled. The Spanish government retook control of the Catalan region yesterday with little resistance and the ousted Catalan President Puigdemont has reportedly fled to Brussels, potentially seeking asylum while other party members will continue with the  new election scheduled for 21 December. Puigdemont is expected to make an address later today. Elsewhere, El Mundo reports that opinion polls conducted early last week (before independence was declared) show that support for Catalan independence fell to 33.5% in the region. As a reminder, El Mundo also reported yesterday that opinion polls suggest Catalan secessionists could win 65 seats in a new election, but fall short of the 68 seats needed for new majority. The Spanish markets responded favourably, with the IBEX up 2.44% and 10y yields down 9.3bp. To put the mini bond rally in context, Spanish 10y yields are now the lowest since early September and 20bp lower than the day after referendum took place (1 October) and 15bp lower than the day before last week’s ECB meeting.

Staying in government bonds, core European bond yields fell c2bp yesterday (Bunds -1.6bp; Gilts -1.4bp; OATs -2.9bp) while UST 10 fell 3.8bp driven by the aforementioned factors. Peripherals outperformed with 10y yields down 9-12bp  (Spain -9.3bp; Italy -10.4bp; Portugal -11.9bp), with Italian bonds likely supported by S&P’s credit rating upgrade late last Friday, where it lifted the country’s rating 1 notch higher to BBB, citing strengthening economic outlook, an  uptick in employment and a stronger banking sector.

This morning, the BOJ voted 8-1 to retain its monetary stimulus policy, with the new board member dissenting. As our Japanese economist expected, the BOJ has trimmed its near term core inflation outlook to 0.8% for 2017  (-0.3ppt) and 1.4% for 2018 (-0.1ppt). However, the outlook for 2019 remains unchanged at 1.8%. In China, the October manufacturing PMI was softer than expectations at 51.6 (vs. 52), but remember that last month’s reading of  52.4 was the highest since 2012. This morning, Asian markets have followed the negative lead from the US and are trading slightly lower. The Nikkei (-0.24%), Hang Seng (-0.08%) and Shanghai Comp. (-0.25%) are down slightly, but the Kospi is up 0.66%, after China and South Korea agreed to restore bilateral relations and put aside a yearlong disagreement over the deployment of a US missile shield.

Recapping other market performance from yesterday now. US bourses softened from their record highs with the S&P and Dow both down slightly (-c0.3%), while the Nasdaq was broadly flat (-0.03%), partly aided by Apple where its shares rose 2.25% following reports of strong demand for its new iPhone X. Indeed my devise won’t be shipped for 4-5 weeks!!! Within the S&P, modest gains in the real estate and tech sectors were more than offset by losses from health care and t elco stocks (-1.41%), with the latter partly impacted by reports suggesting the merger between Sprint and T-Mobile may not occur. Core European markets were little changed, with the Stoxx 600 and DAX  up 0.1% while the FTSE dipped 0.23%. Elsewhere, Spain’s IBEX led the gains (+2.44%) as tensions cooled in the region, while Italy’s MIB also rose 0.39%.

Turning to currencies, the US dollar index fell 0.38%, while the Euro gained 0.37% and Sterling rose 0.61% ahead of the BOE rate meeting this Thursday where the majority expect a rate hike (85.9% odds per Bloomberg). In commodities, WTI rose slightly (+0.46%) while Iron ore fell (-2.21%) for the fourth consecutive day. Elsewhere, both precious metals (Gold +0.23%; Silver -0.07%) and other base metals were mixed but little changed (Copper +0.28%; Zinc +0.57%; Aluminium -0.22%).

Away from the markets, Treasury secretary Mnuchin has backed away from the notion of issuing US treasuries with ultra-long maturities. He noted “we’ve done a bunch of research…at least for now, we don’t see a lot of demand for it” and that “if we could issue ultra-long bonds at the same yield as 30-year bonds, it makes a lot of sense”, but “if it turns out there’s a big premium….there’s no reason for us to do that”.

Turning to Brexit, perhaps in a bid to fast track progress before the big EU summit on 14 December where EU leaders may give the green light to start talks on trade and transition deals, the UK PM May and Brexit Secretary Davis are seeking to change the timing and structure of the negotiations with the EU, from four day sessions held once a month to more regular and ongoing talks as it may help both sides to make the necessary compromises. We shall find out more today as Mr Davis is scheduled to speak to the cabinet.

The latest ECB holdings were released yesterday. Net CSPP averaged €352mn/ per day last week (€367mn before April 2017 and €321mn since then, i.e. -12.3% since QE trimming). Net PSPP averaged €2,286mn/per day last week (€3,178mn before April 2017 and €2,440mn since then, i.e. -23.2% since QE trimming). This left the CSPP/PSPP ratio at 15.4% last week (13.5% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). We still think the ECB will likely keep CSPP relatively unscathed when they halve their APP in January.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was a bit mixed. The September PCE Core was in line at 0.1% mom and 1.3% yoy. On a six-month annualized basis, core inflation is running slightly higher at 1.5%, but still remains below the Fed’s target of 2%. Elsewhere, personal spending grew at the fastest pace since 2009 up 1% mom (vs. 0.9%) and outpacing an in line personal income growth of 0.4% mom. Finally, the October Dallas Fed manufacturing activity index was above expectations at 27.6 (vs. 21 expected) – marking the highest reading since March 2006.

In Germany, October CPI was lower than expected, at -0.1% mom (vs. 0.1% expected) and 1.5% yoy (vs. 1.7% expected) – the lowest annual rate since November 2016. The September retail sales was in line at 0.5% mom, but datarevisions to prior readings meant annual growth was higher at 4.1% yoy (vs. 3% expected). In Europe, the final reading of consumer confidence was in line at -1, while the business climate confidence (1.44 vs 1.4 expected) and economic confidence (114 vs 113.3 expected) both beat expectations, the latter is now at the highest level since January 2001. In the UK, the September mortgage approvals was broadly in line at 66.2 (vs. 66k expected). Over in Spain, 3Q GDP was in line at 0.8% qoq, leaving a solid through year growth of 3.1%. Elsewhere, October Spanish inflation rose 0.6% mom, leading to an annual reading of 1.7% yoy (vs. 1.7% expected).

Looking at the day ahead, notable data includes the flash October CPI print for the Euro area and France, the advanced Q3 GDP report for the Euro area and consumer confidence for the UK for October. In the US the Q3 employment cost index, October Chicago PMI, October consumer confidence and the August S&P/ Case-Shiller house price index is amongst the data due. Onto other events, the ECB’s Visco and Padoan are also due to speak while UK Brexit Secretary David Davis is questioned by the House of Lords EU Committee about the state of Brexit talks. BP and BNP Paribas are amongst the companies reporting results