Silver as an investment

Global Stocks Roar To Record Highs As Tax Reform Is “Priced In” All Over Again

Global stocks and US equity futures roared upward to new record highs to start the second-to-last week of the year, boosted by optimism over a Republican agreement on the shape of U.S. tax cuts aimed at lifting growth; incidentally this is the 6th consecutive day that the “tax bill” has been priced in by the market, and according to cynics, 6th consecutive week and/or 6th month. Meanwhile, the dollar dropped and Treasuries headed lower.

World stock markets have surged this year, for the most part on constant expectations of tax reform passing, which is expected to boost corporate profits but mostly trigger share buybacks and higher dividend payouts, to the tune of over $1 trillion. The benchmark MSCI World index rose 0.41% on Monday to hit a fresh record high, putting it on course for its best year since 2009.

In overnight cross-asset developments, it was a low-volume session as traders close out the year, which saw the dollar fall against most G10peers Monday alongside Treasuries as focus remained on Trump’s tax measures. The pound climbed ahead of a speech by PM May.  While core euro- area bonds were little changed, peripheral debt from Italy and Spain climbed. Portugal’s bonds rallied, with 10-year yields sliding to the lowest since April 2015 after Fitch Ratings raised the country’s credit ranking two notches to investment grade late on Friday. Portugal’s 10Y bond traded decisively below its Italian equivalent on Monday. The last time it did so for a sustained period was in early 2010. “There is very much a shift in the architecture in the European government bond market,” said DZ Bank rates strategist Daniel Lenz.

Europe’s Stoxx 600 Index rose for the first time in three sessions as real estate, automakers and technology stocks led gains. Germany’s DAX index rose 1.2 percent, with the U.K.’s FTSE 100 up 0.5 percent. Most European bonds rose with Portuguese debt outperforming after Friday’s upgrade from Fitch Ratings. Sentiment was buoyed by ongoing tax reform optimism with the latest reports suggesting that Republican Senators Rubio and Corker are to support the tax bill. In terms of what lies ahead, the House is due to vote on the bill tomorrow, while US Senator Cornyn has stated that Senate will most likely pass the bill tomorrow. In terms of sector specifics, gains are relatively broad-based with individual movers including Gemalto (+6%) and Thales (+4.3%) in the wake of their tie-up at the expense of Atos (-1.3%).

With little in the way of major economic data this week, the GOP tax bill was likely to remain in focus for stock market investors, according to Mike van Dulken, head of research at Accendo Markets. “Ahead of bill being signed into law, any more updated guidance from U.S. corporates, showing potential earnings improvement from the reform, will be closely watched.”

“The odds of the tax cut legislation getting passed within this year have grown,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute Co. This “will benefit not only the U.S., but also economies around the globe including Japan, allowing investors to anticipate an increase in corporate earnings.”

Earlier, equity benchmarks in Tokyo, Hong Kong and Sydney climbed after the S&P 500 Index and other American gauges closed at records on Friday. Australia’s ASX 200 (+0.7%) was higher as miners gained after an early 6% surge in Dalian iron ore prices, while Nikkei 225 (+1.6%) outperformed on JPY weakness and after encouraging Japanese Trade Data in which exports rose a 12th consecutive month. Elsewhere, Hang Seng (+0.7%) was positive and Shanghai Comp. (-0.1%) traded indecisive after a significant CNY 300BN injection by the PBoC (CNY 260BN net), and as some property names lagged after the latest China House Price data continued to show the effectiveness of government measures to cool the property sector.

Meanwhile, Indian shares rebounded as Prime Minister Narendra Modi’s party is set to return to power in his home state, an election that’s considered a bellwether before the national vote in early 2019. The NIFTY rose 0.7% after being down 2% at the start of trade as early results suggested a closer race in Gujarat between the ruling BJP and the opposition Congress Party than what was seen in Friday’s exit polls. However, stocks later pared losses and then some, after the BJP pulled ahead and trends pointed to a comfortable majority win

The dollar pared its Friday gains even as Treasuries dropped, with investors’ greater focus still on tax reform. Volumes were relatively low as traders noted holiday liquidity slowly emerging in the major currencies. EMFX edged higher with politics driving price action, while global equities surged amid improved risk appetite. The euro gained and sterling advanced before U.K. Prime Minister Theresa May sets out her plan for a proposed Brexit transition period. The euro strengthened after two days of declines. South Africa’s rand rose on optimism Cyril Ramaphosa will become the next leader of the ruling African National Congress party.

Looking at the latest weekend developments involving UK’s messy divorce, EU Brexit Chief Michel Barnier said the EU is not prepared to come up with a makeshift trade deal for the UK that knits together all the best bits of existing models. Following this, the Telegraph have reported that this will lead to a cabinet row in the UK. The Telegraph have also reported that leading Remain campaigners plan to utilize the ‘meaningful vote’ on final Brexit deal with the aim of keeping UK in the EU. On the subject of trade, Guardian reported that Britain’s banks have written to Theresa May and Philip Hammond warning that a Canada-style free trade agreement with the EU post-Brexit is not ambitious enough and that alignment with EU rules on finance is crucial.

In the energy complex, WTI and Brent crude futures trade with modest gains alongside the broadly softer USD with energy news flow otherwise relatively light after the Baker Hughes oil rig count posted a decline to 747 from 751 on Friday. Among news driving oil price is Nigeria’s oil union starting a national strike Monday, while last week’s Forties pipeline crack which sent Brent prices higher, hasn’t spread, but the pipe remains closed. In metals markets, gold has seen little in the way of notable price action alongside the broad positive risk tone, with price action in the metals complex mainly centred around China in which Dalian iron futures surged around 6% on the back of recent gains in global prices.

Bitcoin traded at around $19,000 as futures trading debuted on the CME Group Inc.’s venue, the world’s biggest exchange, giving the cryptocurrency further cachet and access to mainstream investors

Marfket Snapshot

  • S&P 500 futures up 0.3% to 2,689.75
  • STOXX Europe 600 up 0.8% to 391.29
  • MSCI Asia Pacific up 0.8% to 171.40
  • MSCI Asia Pacific ex Japan up 0.4% to 556.13
  • Nikkei up 1.6% to 22,901.77
  • Topix up 1.4% to 1,817.90
  • Hang Seng Index up 0.7% to 29,050.41
  • Shanghai Composite up 0.05% to 3,267.92
  • Sensex up 0.5% to 33,642.23
  • Australia S&P/ASX 200 up 0.7% to 6,038.93
  • Kospi down 0.01% to 2,481.88
  • German 10Y yield rose 0.4 bps to 0.305%
  • Euro up 0.4% to $1.1791
  • Brent Futures up 1% to $63.84/bbl
  • Italian 10Y yield rose 1.7 bps to 1.546%
  • Spanish 10Y yield fell 2.2 bps to 1.437%
  • Brent Futures up 1% to $63.84/bbl
  • Gold spot up 0.07% to $1,257.32
  • U.S. Dollar Index down 0.2% to 93.71

Bulletin Headline Summary from RanSquawk

  • Optimism over tax reform buoys sentiment in Europe.
  • PGBs outperform following Fitch’s two notch upgrade.
  • Looking ahead, highlights include US NAHB Housing Market Index

Top Overnight News from BBG

  • President Donald Trump is set to deliver a national-security speech, in which he will declare China a “strategic competitor” to the U.S., senior administration officials say
  • U.K.’s May will address Parliament Monday, outlining her plan for the transition period, which might stoke a potential new row with the EU as she tries to keep different factions inside the Conservative Party on her side
  • Lawmakers scrambling to lock up Republican support for the tax reform bill added a complicated provision late in the process — one that would provide a multimillion-dollar windfall to real-estate investors such as President Donald Trump
  • French aerospace specialist Thales SA knocked out Atos SE’s unsolicited attempt to buy Dutch cybersecurity provider Gemalto SA, outbidding the rival with a cash offer valued at 4.76 billion euros ($5.6 billion) that won backing from the target company
  • The surprising closeness of early results from elections in Indian Prime Minister Narendra Modi’s home state of Gujarat sent the benchmark S&P BSE Sensex tumbling as much as 2.6 percent, while bonds and the rupee also sank. But as his party gained ground — the Sensex reversed, rebounding more than 1,206 points from the day’s low
  • A narrower victory may prompt Modi to resort to populist spending to boost support before he faces re-election in early 2019
  • Steadier short-term money-market rates are no reason to relax for China’s fixed- income traders still reeling from a tumultuous 2017. While the central bank’s timely measures have maintained money-market calm and helped bonds recover, rising longer-term borrowing costs signal traders expect funding costs to become more volatile
  • Blackstone Takes 80% Stake in Australia’s La Trobe Financial
  • Facing Impeachment, Kuczynski Finds Peruvians Quickly Left Him
  • San Miguel Boosts Power Play With $1.9 Billion Coal Plant Deal
  • Bitcoin Takes Bigger Wall Street Stage With Smooth CME Debut
  • French Finance Ministry Seeks Fine v. Amazon: Le Parisien
  • Apple’s Homepod 2018 Shipment Goal Raised to 15M Units: EDN

Asia equity markets began the week broadly in the green following Friday’s gains on Wall St. where tax reform optimism buoyed all major indices to record levels after reports Republican Senators Rubio and Corker were to support the tax bill. ASX 200 (+0.7%) was higher as miners gained after an early 6% surge in Dalian iron ore prices, while Nikkei 225 (+1.6%) outperformed on JPY weakness and after encouraging Japanese Trade Data in which Exports rose a 12th consecutive month. Elsewhere, Hang Seng (+0.7%) was positive and Shanghai Comp. (-0.1%) traded indecisive after a significant CNY 300bln injection by the PBoC, and as some property names lagged after the latest China House Price data continued to show the effectiveness of government measures to cool the property sector. India markets were volatile on election risk during vote counting day with the NIFTY (+0.7%) down 2% at the start of trade as early results suggested a closer race in Gujarat between the ruling BJP and the opposition Congress Party than what was seen in Friday’s exit polls. However, stocks later pared losses and then some, after the BJP pulled ahead and trends pointed to a comfortable majority win. Finally, 10yr JGBs were uneventful with prices flat as pressure from the heightened risk appetite in Japan was counterbalanced by a respectable Rinban announcement by the BoJ for nearly JPY 1tln of JGBs in 1yr-10yr maturities.

Top Asian News

  • HNA Debt Load in Focus as Citic Bank Cites Repayment Issues
  • China Is Said to Plan Killing Local Subsidies for Electric Cars
  • Tencent, JD Back Chinese Online Retailer in Battle With Alibaba
  • China’s $189 Billion Giant of Finance Reveals a Huge Bet on Tech
  • Saudi Aramco, Khazanah Eye Stake in Indonesian Road Builder
  • ThaiBev Bets Big in Vietnam With $4.8 Billion Brewery Stake
  • The Stocks Vying to Join the China-Hong Kong Trading Link
  • Indian Contracts Advance Amid Tight Election Race: Asian NDFs

European equities (Eurostoxx 50 +1.0%) trade higher across the board in the wake of further record highs on Wall St. last week and a broadly positive Asia-Pac session. Sentiment has largely been buoyed by ongoing tax reform optimism with the latest reports suggesting that Republican Senators Rubio and Corker are to support the tax bill. In terms of what lies ahead, the House is due to vote on the bill tomorrow, whilst US Senator Cornyn has stated that Senate will most likely pass the bill tomorrow. In terms of sector specifics, gains are relatively broad-based with individual movers including Gemalto (+6%) and Thales (+4.3%) in the wake of their tie-up at the expense of Atos (-1.3%). Bunds have succumbed to more downside, and inter-market spread activity coupled with some asset-switching seems the obvious catalysts as Portuguese bonds in particular continue to bask in the glory of becoming investment grade at Fitch, while EU equities have latched on to latest Wall Street records and mostly firmer leads from Asia-Pac bourses overnight. The 10 year Eurex bond has been 20 ticks off-side at 163.27, but now back near the upper end of the range as the focus turns to Eurozone data in the form of final CPI. In contrast, UK Gilts have recovered well from their early Liffe base to trade up at 125.65 (+18 ticks vs -7 ticks at one stage) and ongoing Brexit uncertainty with inferences for BoE policy seems to be the prop. Elsewhere, US Treasuries remain a few ticks underwater on heightened tax reform bill passage prospects, and with the curve re-steepening a little after spreads contracted to fresh multi-year levels late on Friday.

Top European News

  • Thales Makes Cash Bid That Values Gemalto at $5.42 Billion
  • ECB’s Liikanen Says Strong Recovery Supports Euro-Area Inflation
  • The European Wind Sector Gains New Power After U.S. Tax News
  • Statoil Spends Up to $2.9 Billion on More Brazil Oil Assets
  • Nabiullina Downplays Sanctions Threat Hanging Over Russian Bonds
  • IG Group, CMC Markets, Plus500 Plummet After ESMA Review
  • Vonovia Offers to Buy Real Estate Rival Buwog for $3.9 Billion

In FX, the Greenback is off late Friday and overnight peaks, but underpinned on latest tax reform bill developments. GBP is holding up relatively well despite latest tests for PM May as she consults with the Cabinet on the Brexit ‘end game’, while the EU top brass stresses that the UK won’t be given any preferential treatment when it comes to trade deals. Cable is keeping tabs on the 1.3350 level, above the recent range base, albeit moderately softer vs the Eur with the cross back over 0.8800. The antipodeans continue to outperform on supportive Central Bank, macro and fiscal impulses, with the Kiwi reclaiming 0.7000 status vs the US Dollar after an improvement in the Performance of NZ Services. JPY is still trapped in a range vs the USD, albeit trending more recently towards the upper end of the 112.00-113.00 band.

In commodities, WTI and Brent crude futures trade with modest gains alongside the broadly softer USD with energy news flow otherwise relatively light after the Baker Hughes oil rig count posted a decline to 747 from 751 on Friday. In metals markets, gold has seen little in the way of notable price action alongside the broad positive risk tone, with price action in the metals complex mainly centred around China in which Dalian iron futures surged around 6% on the back of recent gains in global prices.

Much of the focus on Monday will be on China where the annual Central Economic Work Conference is due to kick off and continue into Wednesday. Datawise the final Euro area CPI report for November is due, along with UK CBI trends orders data for December and the December NAHB housing market index in the US. November property prices data in China will be out in the early morning.

US Event Calendar

  • 10am: NAHB Housing Market Index, est. 70, prior 70

DB’s Jim Reid concludes the overnight wrap

We have a week of ‘great expectations’ ahead as the tax bill finally looks set to be delivered to Mr Trump before Christmas. The mood changed pretty quickly on Friday as Senators Rubio and Corker changed their minds and backed the plan with the latter being the only Republican Senator not voting for the original one. Then late on Friday details of the planned bill was announced. In terms of ratifying, it seems that the House will vote first, expected to be tomorrow, and then the Senate will vote later in the week. Now the holdouts have turned in favour, it does seem like a routine voting  process now even though the GOP may be one vote down in the Senate as CBS has reported that Senator McCain may not be available for the final vote due to his recent illness.

Given improved prospects of passing the US tax bill, the S&P rallied 0.90% to fresh highs and the USD dollar index firmed 0.47% last Friday. Within the S&P, gains were broad based with only the energy sector marginally down, while gains were led by tech and health care stocks. As a reminder, the key proposals in the final tax bill were broadly similar to prior press reports, including: i) cutting the corporate tax rate to 21%, effective from 2018, ii) offshore companies’ income held as cash subject to a 15.5% tax rate, iii) mortgage interest deduction capped at loans of $750k, iv) cutting top individuals tax rates to 37%, but benefits expire after 2025 and v) repeal the alternative minimum tax.

Also important this week will be China’s three-day Central Economic Work Conference which kicks off today. This event will see Party leaders discuss economic policies for the next year and the market will probably be most interested in the GDP growth target. Our China economists previously noted that it will be important to see if the government will change the tone on its growth target by lowering it explicitly from 6.5% to 6% or fine-tuning the wording to reflect more tolerance for slower growth.

Also worth highlighting is Friday’s US personal income and spending reports and within it the Fed’s preferred inflation measure – the core PCE print. Current market expectations are for a modest +0.1% mom rise in the core PCE which translates into a one-tenth uptick in the YoY rate to +1.5%. Also worth flagging are the Catalonia regional elections due on Thursday. Our economists in Europe previously noted that according to polls, Podemos could emerge  as the potential king-maker with ~10 seats. This ambitious positioning couldallow them to support an ERC and Junts pel Cat minority government while keeping the unilateral agenda in check. Alternatively, if Citizens continues on its strong momentum and ends up being the first party accompanied by a strong performance of the Socialists, Podemos could decide to support a minority unionist government. The rest of the week ahead is at the end of the note today with a few interesting things ahead before we break for Christmas. However don’t expect activity to be particularly high this week.

This morning in Asia, markets are broadly trading higher. The Nikkei (+1.57%) and Hang Seng (+0.63%) are both up, but Kospi (-0.03%) and China’s CSI 300 (-0.25%) are slightly down as we type. Now briefly recapping other markets performance from Friday. European equities were mixed, the Stoxx 600 dipped 0.19% but the DAX (+0.27%) and FTSE (+0.57%) both rose modestly, with the latter benefiting from mining stocks and a lower Sterling. The VIX fell for the first time in four days and dropped 10.2% to 9.42. Core 10y bond yields were little changed with treasuries up 0.4bp and Bunds -1.1bp.

There was more action in the UK, with 10y Gilts yields down 2.3bp and Sterling dropping 0.83% on Friday after various EU diplomats signalled the next stage of Brexit talks may be more difficult. Firstly, German Chancellor Ms Merkel said the next stage will be “incomparably more difficult”. Then the EU Commission President Juncker said “the second phase is much more difficult than the  first…. (for now) we just finished the first mile”. Later on, the EU Chief negotiator Barnier noted the UK “have to realize there won’t be any cherry picking….we won’t mix up the various scenarios to create a specific one…and accommodate their wishes”. Over the weekend, the UK’s Foreign Minister Johnson said the UK must strike a trade deal that gives it power to discard EU laws and failure to  do so would render Britain a “vassal state” of the EU. Elsewhere, the latest BMG poll for the Independent showed 51% of respondents would prefer to remain in the EU compared to 41% who wants to leave, with the 10ppt margin the highest since the monthly poll’s inception last June. Most other recent polls have showed that voting intentions wouldn’t have changed much since the referendum.

Away from markets, US Congress has until this Friday (22 December) to extend government funding and avert a partial government shutdown. Notably, Treasury Secretary Mnuchin seems fairly relaxed, he noted “I can’t rule it out, but I can’t imagine it (government shutdown) occurring”.

Over in the Germany, talks to form the next government between Ms Merkel’s party and SPD may have hit an obstacle. The leader of the CSU party Mr Seehofer (main ally of Ms Merkel’s CDU party) told Party delegates that “we won’t negotiate anything that would hinder or hurt our state election campaign” and that Germany “needs limits on migration”.

Finally, the French Finance Minister Le Maire noted he will ask G-20 ministers to consider joint regulation of Bitcoin, he said “I don’t like it….there is an obvious speculative risk, we need to look at it and study it” and that “I think we need regulation of Bitcoin”. Elsewhere, futures trading of Bitcoin have started yesterday on the world’s largest futures exchange (CME).

We wrap up with other data releases from Friday. In the US, the November IP was slightly below expectations at 0.2% mom (vs. 0.3%). Growth in October was revised up 0.3ppt, but this was largely offset by downward revisions spread across earlier months. That said, the overall annual growth of IP was sound at 3.4% yoy – the highest for three years. The capacity Utilization was broadly in line at 77.1% (vs. 77.2% expected), which is the highest since November 2011. Elsewhere, the December Empire manufacturing survey was below market at 18 (vs. 18.7 expected). In Europe, the October trade surplus narrowed to €19bln (vs. €24.3bln expected). In France, the final reading of the 3Q wage growth was in line at 0.3% qoq.