Tag: Equity Markets (page 1 of 12)

Hunting Angels: What The World’s Most Bearish Hedge Fund Will Short Next

It's not easy being "the world's most bearish hedge fund", a description we first conceived nearly three years ago, and one look at Horseman Capital's returns over the past three years confirms it: after generating market-beating returns for much of its existence, things went bad in 2015, and much worse in 2016…

… when the Fund had a record net short equity position of over -100%, just as the market ripped higher after the Trump election.

That said, 2017 has been much better for Horseman and its CIO Russell Clark, who correctly timed the year's two big short trades so far: the mall REIT and the shale shorts.

Unfortunately, his other positions stood in the way, and as of the end of October (a good month with 2.04% in P&L), the fund is just 0.25% up on the year. Worse, after a period of calm, steady, upward grinding monthly performance for much of the previous several years, Horseman's sharpe ratio has cratered, as the monthly return variance surged, with a -6% month following two +7% months as a result of gross leverage that has never been higher, even if the net equity position – while still largely short – is far more manageable than it was in 2016.

Still, having been well ahead of the pack on the two big shorts of 2017, most money managers are always curious what if anything Clark – and Horseman – are shorting next. Well, they are in luck, because in his latest letter, he unveils the answer: according to Clark, the next major source of alpha will be shorting fallen angel bonds.

In his November letter to clients, Clark explains why he is hunting for soon to be "fallen angels", and where he got the idea from. And after more fund managers read the following excerpt, we have a feeling that the next big leg lower in not only junk, but also crossover credit, is imminent:

Mifid II will come into force soon, and a lot of research that used to be free, will need to be paid for. This has been a reason to ask ourselves some serious questions, namely what research do I read, and what has made me the most money. Strangely the research that has been most profitable for me, will remain free even post Mifid II as it is publicly available. The International Monetary Fund produces Global Financial Stability Reports. The stand out report for me was the April 2008 report that highlighted Eastern European banks vulnerability to wholesale funding. I shorted many of the banks named in the report. Most fell 70% to 90% subsequently.

 

What does the most recent issue of the Global Financial Stability Report have to say? It notes that BBB bonds now make up nearly 50% of the index of investment grade bonds, an all time high. BBB bonds are only one notch above high yield, and are at the greatest risk of becoming fallen angels, that is bonds that were investment grade when issued, but subsequently get downgraded to below investment grade, or what is known these days as high yield. It then points out that investors have never been more at risk of capital loss if yields were to rise. In addition, it notes volatility targeting investors will mechanically increase leverage as volatility drops, with variable annuities investors having little flexibility to deviate from target volatility. Another interesting point was that mutual fund share of the high yield market in the US have risen from 17% in 2008 to 30% today, and notes that investors outflows have become much more sensitive to losses than they used to be.

 

So my favourite research (love the price!) is telling me that US investment grade debt is very low quality, and could produce some large fallen angels. It then goes on to tell me that mutual funds are much larger in the high yield market than they used to be. It also tells me low rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me – but with growth so good and the market so strong, how on earth would we get a fallen angel?

 

To find a potential fallen angel, I looked through the holdings of investment grade bond ETFs to find large BBB bond issuers. The biggest of the BBB issuers happened to be the large telecommunication companies. The sector has over USD300bn of BBB rated debt compared to a high-yield market of USD 1tn. I am not a debt specialist, but I have noticed that falling share prices tend to be good lead indicators on debt downgrades, and the US telecommunication sector has not been participating in the market rally this year. The story looks good to me, and it comes via my favourite research source. US debt markets look in trouble to me, whether that has any effect on broader equity markets remains to be seen.

Aside from this rather original idea, some other notable changes in Horseman's industry exposure are noted: while both the retail and E&P shorts are still there, they have been notably tamed, and of note are two other major shorts (both in the US): one in real estate (we assume this is a play on the adverse impact of rising rates on real estate valuations), and the healthcare sector, a short whose thesis is quite interesting and we will reveal tomorrow.

For those wondering, the top 10 positions by % of NAV are the following:

Needless to say, we wish Horseman much success with a prompt realization of his BBB-short, especially since it appears that his LPs are starting to get cold feet, and the fund's AUM has shrunk by half from $2.8 BN  one year ago…

… to less than half, or $1.2BN currently.

http://WarMachines.com

Moody’s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country's growth potential. The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody's believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India's 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government's debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody's for an upgrade, but failed. The agency raised doubts about the country's debt levels and fragile banks, and declined to budge despite the government's criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody's noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government's objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," said Moody's.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

  • “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”
  • “India is on the right long-term path with capital markets — in both debt and equity — pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

  • “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise — we do believe all the rating agencies have been behind the curve somewhat”
  • Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

  • This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.
  • Investors like us who have long positions on India always expected an upgrade.
  • The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

  • Equity markets have already given a thumbs up to the news”.
  • It will lead to a reduction in borrowing costs, which is a major improvement.
  • “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

  • Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.
  • “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.
  • “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

  • The upgrade confirms Invesco’s positive view on India’s structural economic reforms.
  • “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

  • The upgrade is “very positive for banks, infrastructure and cyclical sectors”.
  • “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

  • The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.
  • “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

  • “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.
  • “It makes a big difference to investors and we will see more dollar bond supply from India”.

http://WarMachines.com

Keep Calm & Carry On

Authored by 720Global's Michael Liebowitz via RealInvestmentAdvice.com,

“Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” – Mark Carney, Bank of England Governor

In 1939, the British Government, through the Ministry of Information, produced a series of morale-boosting posters which were hung in public places throughout the British Isles. Faced with German air raids and the imminent threat of invasion, the slogans were aimed at helping the British public brave the testing times that lay ahead. The most enduring of these slogans simply read:

 “Keep Calm and Carry On.”

Ironically, it was the only one of the series that was never actually displayed in public as it was reserved for a German invasion that never transpired. Today, the British Government may wish to summon a fresh propaganda strategy to address a new threat on the horizon, that of the eventuality of Brexit.

The Kingdom Divided

The United Kingdom (UK) is in the process of negotiating out of all policies that, since 1972, formally tied it to the economic dynamics of the broader western European community. Since the unthinkable Brexit vote passage in June 2016, the unthinkable has now become the undoable. The negotiations, policy discussions, logistical considerations and legal wrangling are becoming increasingly problematic as they affect every industry in the UK from trade and finance to hazardous materials, produce, air travel and even Formula 1 racing.

The worst case scenario of a disorderly or “hard” Brexit, whereby no deal is reached by the March 2019 deadline, is the most extreme for investors along the spectrum of potential outcomes. A deadlock, which is unfortunately the most likely scenario, would result in tariffs on trade between the UK and the European Union (EU). Such an outcome would result in a rapid deterioration of British economic prospects, job losses and the migration of talent and businesses out of the country. Even before the path of Brexit is known, a number of large companies with UK operations, including Barclays Bank, Diageo, Goldman Sachs, and Microsoft, are discussing plans to move or are already actively moving personnel out of Britain. Although less pronounced, the impact of a “hard” Brexit on the EU would not be positive either.

The least damaging Brexit outcome minimizes costs and disruption to business and takes the form of agreement around many of the key issues, most notably the principle of the freedom of movement of labor. The current progression of events and negotiations suggests such an agreement is unlikely. The outcome of negotiations between the UK and the EU will be determined by politics, with the UK seeking to protect its interests while the EU and its 27 member states negotiate to protect their own.

To highlight the complexities involved, the challenges associated with reaching agreements, and why a hard Brexit seems most likely, consider the following:

  • Offering an early indication of the challenges ahead, German Prime Minister Angela Merkel stated that she wants the “divorce arrangement” to be agreed on before terms of the future relationship are negotiated. The UK has expressed a desire for these negotiations to run concurrently
  • A withdrawal agreement (once achieved) would need to be ratified by the UK
  • A withdrawal agreement would have to be approved by the European Parliament
  • A withdrawal agreement would have to be approved by 20 of the 27 member states
  • The 20 approving states must make up at least 65% of the population of the EU or an ex-UK population of 290 million people
  • If the deal on the future relationship impacts policy areas for which specific EU member states are primarily responsible, then the agreement would have to be approved by all the national parliaments of the 27 member states

The summary above shows that the unprecedented amount of coordination and negotiation required within the 27 member states and between the EU Commission, the EU Council and the EU Parliament, to say nothing of the UK.

The “do nothing and see what happens” stance taken by the British and the EU would likely deliver a unique brand of instability but one for which there is a precedent.

The last time we observed an economic event unfold in this way, investment firm Lehman Brothers disappeared along with several trillion dollars of global net worth. Although the Lehman bankruptcy was much more abrupt and less predictable, a hard Brexit seems likely to similarly roil global markets. The “no deal” exit option, which is the path currently being followed, threatens to upend the intricate and endlessly interconnected system of global financial arbitrage. Markets are complacent and seem to have resigned themselves to the conclusion that since no consequences have yet emerged, then they are not likely.

Lehman Goes Down

In late 2007 and early 2008, as U.S. national housing prices were falling, it was becoming evident that the financial sector was in serious trouble. By March of 2008, Bear Stearns was sold to JP Morgan for $2 per share in a Fed-arranged transaction to stave off bankruptcy. Bear Stearns stock traded at $28/share two days before the transaction and as high as $172 per share in January 2007. Even as evidence of problems grew throughout the summer of 2008, investors remained complacent. After the Bear Stearns failure, the S&P 500 rallied by over 14% through mid-May and was still up over 3% by the end of August following the government seizure of Fannie Mae and Freddie Mac. While investors were paying little attention, the solvency of many large financial entities was becoming more questionable. Having been denied a Federal Reserve backstop, Lehman failed on September 15, 2008 and an important link in the global financial system suddenly disappeared. The consequences would ultimately prove to be severe.

On September 16, 2008, the first trading day after Lehman Brothers filed for bankruptcy, the S&P 500 index closed at 1192. On September 25, just 10-days later, it closed 1.43% higher at 1209. The market, in short time, would eventually collapse and bottom at 666 in six short months. Investors’ inability to see the bankruptcy coming followed by an inability to recognize the consequences of Lehman’s failure seems eerily familiar as it relates to the current status of Brexit negotiations.

If all efforts to navigate through Brexit requirements are as complicated and difficult as currently portrayed, then what are we to expect regarding adverse consequences when the day of reckoning arrives? Is it unfair to suspect that the disruptions are likely to be severe or potentially even historic? After all, we are not talking about the proper dissolution of an imprudently leveraged financial institution; this is a G10 country! The parallel we are trying to draw here is not one of bankruptcy, it is one of disruptions.

As it relates to Brexit, Dr. Andreas Dombret, member of the executive board of the Deutsche Bundesbank, said this in a February 2017 speech to the Bank of International Settlements –

“So while economic policy will of course be an important topic during negotiations, we should not count on economic sanity being the main guiding principle. And that means we also have to factor in the possibility that the UK will leave the bloc in 2019 without an exit package, let alone the sweeping trade accord it is seeking. The fact that this scenario would most probably hurt economic activity considerably on both sides of the Channel will not necessarily prevent it from happening.”

Rhyming

On June 23, 2016, the day before the Brexit vote, the FTSE 100 closed at 6338. After a few hours of turbulence following the surprising results, the FTSE recovered and by the end of that month was up 2.6%. Today, the index is up 17.5% from the pre-Brexit close. The escalating risks of a hard exit from the EU clearly are not priced into the risky equity markets of Great Britain.

Data Courtesy: Bloomberg

Conversely, what has not recovered is the currency of the United Kingdom (chart below). The British Pound Sterling (GBP) closed at 1.4877 per U.S. dollar on June 23, 2016, and dropped by 15 points (-10%) to 1.33 by the end of the month following the Brexit vote. Over the past several months the pound has fallen to as low as 1.20 but more recently it has recovered to 1.33 on higher inflation readings and hawkish monetary policy language from Bank of England (BoE) governor Mark Carney. Despite following through on his recent threats to hike interest rates, the pound has begun to again trend lower.

Data Courtesy: Bloomberg

Carney has voiced concern over Brexit-induced inflation by saying that if global integration in recent decades suppressed price growth then the reduced openness to foreign markets and workers due to Brexit should result in higher inflation. This creates a potential problem for the BoE as a disorderly exit from the EU hurts the economy while at the same time inducing inflation. Such a stagflation dynamic would impair the BoE’s ability to engage in meaningful monetary stimulus of the sort global financial markets have become accustomed since the financial crisis. If the central bankers lose control of inflation, QE becomes worthless.

Some astute observers of the currency markets and BoE pronouncements argue that Carney’s threat of rate hikes are aimed at halting the deterioration of value in the pound and preventing a total collapse of the currency. That theory is speculative but plausible when analyzing the chart. Either way, whether the pound’s general weakness is driven by inflation concerns or the rising risks associated with a hard Brexit, the implications are stark.

What is equally evident, as shown below, is the laissez-faire attitude of the FTSE as opposed to the caution and reality being priced in by the currency markets. In Lehman’s case, the stock market was similarly complacent while the ten year Treasury yield dropped by nearly 2.00% from June 2007 to March 2008 (from a yield of 5.25% to 3.25%) on growing economic concerns and a flight-to-quality bid.

Data Courtesy: Bloomberg

A Familiar Problem

As discussed above, the Bank of England may find itself in a predicament where it is constrained from undertaking extreme measures due to inflation concerns or even being forced to tighten monetary policy despite an economic slowdown. Those actions would normally serve to support the pound. Further, if the prospect of a hard Brexit continues to take shape, capital flight out of the UK may overwhelm traditional factors. In efforts to prevent the disorderly movement of capital out of the country, the BoE may be required to hike interest rates substantially. Unlike the resistance of equity markets to bad news, the currency markets are more inclined, due to their size and much higher trading volume, to fairly reflect the dynamics of the economy and the central bank in a reasonable time frame.

Our perspective is not to presume a worst case scenario but to at least entertain and strategize for the range of possibilities. Equity markets, both in the UK and throughout the world, transfixed by the shell game of global central bankers’ interventionism, are clearly not properly assessing the probabilities and implications of a hard Brexit.

All things considered, the pound has rallied back to the high end of its post-Brexit range which seems to suggest the best outcome has been incorporated. If forced to act against inflation, the Bank of England will be hiking rates against a stagnant economy and a poor economic outlook.  This may provide support for the pound in the short term but it will certainly hurt an already anemic economy in the midst of Brexit uncertainty.

Summary

Timing markets is a fool’s errand. Technical and fundamental analysis allows for an assessment of the asymmetry of risks and potential rewards, but the degree of central bank interventionism is not quantifiable. With that premise in mind, we can evaluate different asset classes and their adherence to fundamentals while allowing a margin of error for the possibility of monetary intervention. After all, if central banks print money to inflate asset prices to create a wealth effect, some other asset should reveal the negative effects of conjuring currency in a fiat regime – namely the currency itself. In the short term, it may appear as though rising asset prices create new wealth, but over time, the reality is that the currency adjustments off-set some or all of the asset inflation.

Investors should take the time, while it is available, to consider the gravity of the disruptions a hard Brexit portends and look beyond high flying UK stocks to the more telling movement of the British pound. Like with Lehman and the global financial system in 2008, stocks may initially be blind to the obvious. Although decidedly not under the threats present during World War II, the British Government and the EU lack the leadership of that day and will likely need more than central banker propaganda to weather the economic storm ahead.

Keep calm and carry on, indeed.

http://WarMachines.com

Nasdaq, Bitcoin Surge To Record Highs As China Saves The World

IP surges (thanks to hurricanes), Congress passes a tax bill that has no hope of passing the senate, but a huge Chinese liquidity injection sends stocks soaring and proves…

 

Seemingly thanks to a Risk Parity rebound…

And a huge China liquidity injection…

“The increase in cash additions will help soothe market sentiment,” said Qin Han, chief fixed-income analyst at Guotai Junan Securities Co.

And indeed it did: US equity markets soared today… (Small Caps and Trannies best, Dow and S&P lagged but up big)

 

Which sent Nasdaq back to record highs..

 

VIX was pushed back under 12 but that is well above the 10 handle when stocks last hit these highs… NOTE the weak close in S&P futs (after running stops)…

 

Stocks decoupled from bonds…

 

And Stocks decoupled from FX…

 

And Stocks even decoupled from VIX…

 

HYG (High yield bond ETF) also surged most in 8 months… NOTE it filled the last two days gaps lower…

 

Having ripped off its most oversold since March (note the perfect cymmetry with today's move.. and what happens next)

 

Treasury yields were higher on the day… (with a notable selkloff late in the day)

 

But until the last 30 mins, the curve had drifted very modestly lower…

 

The Dollar Index drifted lower on the day – despite the yield, stock gains…

 

Gold managed very small gains on the day but WTI Crude fell lower (testing $54 handle twice)

NOTE – WTI futs are rolling to Jan 18.

 

Gold remains the best performer since Saudi unleahsed its chaos…

 

Finally, we noted that Bitcoin has ripped over 40% higher off the weekend's lows – back to previous record highs…

http://WarMachines.com

Goldman Reveals Its Top Trade Recommendations For 2018

It’s that time of the year again when with just a few weeks left in the year, Goldman unveils its top trade recommendations for the year ahead. And while Goldman’s Top trades for 2016 was an abysmal disaster, with the bank getting stopped out with a loss on virtually all trade recos within weeks after the infamous China crash in early 2016, its 2017 “top trade” recos did far better. Which brings us to Thursday morning, when Goldman just unveiled the first seven of its recommended Top Trades for 2018 which “represent some of the highest conviction market expressions of our economic outlook.”

Without further ado, here are the initial 7 trades (on which Goldman :

  • Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.
  • Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.
  • Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.
  • Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.
  • Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.
  • Top Trade #6: Own diversifed Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).
  • Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.

As Goldman’s Francesco Garzarelli writes, “these trades represent some of the highest conviction market expressions of the economic outlook we laid out in the latest Global Economics Analyst, as well as in our Top 10 Market Themes for 2018. Some of the key market themes reflected in our trade recommendations include:

  • Strong and synchronous global expansion. We forecast global n GDP growth of around 4% in both 2017 and 2018, suggesting that next year’s global economy will likely surprise on the upside of consensus expectations.
  • Relatively low recession risk. Given the low inflation and well-anchored inflation expectations across DM economies, we think central banks have little reason to risk ‘murdering’ this expansion with the kind of aggressive rate hikes that would have historically been warranted to fight the risk of inflation becoming entrenched.
  • But relatively high drawdown risk. Even if growth remains strong in the coming year, markets are still susceptible to temporary drawdowns, especially given the high level of valuations. We think the two most prominent risks to markets in 2018 are (1) pressures on US corporate margins from rising wages and 2) a swing in market psychology around the withdrawal of QE, which could lead to a faster re-pricing of interest rate markets than we assume.
  • More room to grow in EM.While most developed economies are currently growing well above potential, most emerging market economies still have room for growth to accelerate in 2018.

More from Goldman:

Our Top Trade recommendations reflect our Top Ten Market Themes for the year ahead. To capture the gradual normalization of the bond term premium and position for a more hawkish path of the Fed funds rate than the market currently expects, we recommend going short 10-year US Treasuries. Given our expectations of a ‘soggy Dollar’ in 2018, we think investors should position for a rotation into Euro area assets and continued Yield Curve Control from the BoJ by going long EUR/JPY. We expect EM growth to accelerate further in the coming year and suggest going long the EM growth cycle via the MSCI EM stock market index. At the same time, the EM credit cycle appears ‘younger and friendlier’ than the ageing US credit cycle, so we recommend going long the EMBI Global against US High-Yield credit. The combination of solid global growth and supportive domestic factors should help the Indonesian Rupiah, the Indian Rupee and Korean Won rally in 2018, while we expect the low-yielding Singaporean Dollar and Japanese Yen to underperform. Since the strong global demand environment should also help the commodity complex perform well but commodities as an investment carry poorly, we recommend going long BRL, CLP and PEN to gain diversified exposure to the commodities story.

And some more details on the individual trades:

Top Trade #1: Position for more Fed hikes and a rebuild of ‘term premium’ by shorting 10-year US Treasuries

Go short 10-year US Treasuries with a target of 3.0% and a stop at 2.0%.

We forecast that the yield on 10-year US Treasury Notes will head towards 3% next year, levels last seen before the decline in oil prices in 2014. By contrast, the market discounts that 10-year yields will be at 2.5% at the end of 2018, a meagre 20bp above spot levels. Our view builds on two main assumptions. First, QE and negative rate policies conducted by central banks in Europe and Japan have amplified the fall in  the term premium on bonds globally and have contributed to flatten the US yield curve this year – a central ingredient in our macro rates strategy for 2017. As a result of this, we think that US monetary conditions are too accommodative for the Fed’s comfort in light of the little spare capacity left in the jobs market. This will likely lead the FOMC to deliver policy rate hikes in excess of those discounted by the market (Exhibit 1). On our US Economists’ baseline projections, Dec 2018 Eurodollar futures, trading at an implied yield of 2.0%, will settle at 2.5%.

Second, we expect a normalization in the US bond term premium from the current exceptionally low levels over the coming quarters (Exhibit 2). This will reflect the compounding of two forces. One is an increase  in inflation uncertainty as the economic cycle continues to mature. The other reflects the interplay of the lower amount of Treasury bonds that the Fed will roll over (quantitative tightening, QT) and higher Treasury issuance. We expect these dynamics to come to the fore particularly in the second half of the year.

* * *

Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar

Go long EUR/JPY with a target of 140 and a stop at 130.

Although most economies are sharing in the upturn in global activity, there remains scope for divergence in capital flows and therefore FX performance. Among the major developed markets, we think this is particularly true for the Euro and Yen. We expect both currencies to head back to one twenty—1.20 for EUR and 120 for JPY—over the coming months. We therefore recommend that investors go long the cross, with a target of 140 and stop of 130 (Exhibit 3).

We interpreted the run-up in the Euro in 2017 as a kind of ‘short-covering’ rally. Euro area growth picked up, national politics trended in a favourable direction, and the ECB began to turn its attention away from monetary easing and towards the eventual normalisation in policy by tapering bond purchases. Against this backdrop, many investors seem to have decided that Euro shorts were no longer appropriate—especially given estimates of long-run ‘fair value’ for EUR/USD of around 1.30. Direct measures of investor positioning bear this out. For instance, net speculative Euro length in futures swung from a short of $9bn at the start of the year to a long of $12bn as of last week. These portfolio shifts seem to have more room to run: bond funds remain long USD in aggregate, and FX reserve managers have not started to  cover their substantial EUR underweight. Continued inflows into Euro area assets should support the EUR currency, even as interest rates remain low.

The opposite holds true for the Japanese Yen. Because of the Bank of Japan’s Yield Curve Control (YCC) policy, USD/JPY has remained highly correlated with yields on long-maturity US Treasuries (Exhibit 4). As a result of the recent general election—in which the LDP won another supermajority—a continuation of YCC appears very likely for the time being. Although the policy is beginning to bear fruit—in terms of improving price and wage trends—we suspect that Governor Kuroda (or his possible replacement) will judge these favourable signs as well short of what is needed to consider reversing course. Therefore, with global yields pushing higher on the back of solid growth, we think USD/JPY can again approach its cyclical highs.

* * *

Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index

Go long EM equities through the MSCI EM Index with a target at 1300 (+15%) and a stop at 1040 (-8%).

As we outline in our Top Themes for 2018, we expect strong and synchronous global growth to continue into 2018. We prefer to own growth exposure in emerging economies, which we think have more room to grow. When EM growth is above-trend and rising, equities typically outperform on a volatility-adjusted basis.

From an earnings perspective, we see much more scope for EM corporates to surprise to the upside, driving equity performance in 2018 (Exhibit 6). MSCI EM EPS have rebounded quite quickly from a six-year stagnation and, in local currency terms, EM earnings per share (EPS) has repaired the ‘damage’ of the 2010-2016 period. We expect MSCI EM EPS to rise another 10% in 2018, which should drive the bulk of the upside in this trade.

From a valuation perspective, EM equities are not cheap relative to their own history (they are currently trading in the 86th percentile of the historical P/E range), but they are cheap relative to US equities (38th percentile of historical relative P/E range), which should hopefully offer some cushion in a global risk-off event. We find that the relative valuation of EM to DM equity is largely influenced by the growth  differential between the two regions; and we forecast this differential to widen another 60bp next year, which in turn should drive EM valuations to expand relative to DM by around 3%. To be sure, a long-only EM equity trade carries significant ‘pullback risk’, especially given the current entry point. Accordingly, we have set a stop on the recommended trade at -8%, which provides enough buffer to accommodate for a shock similar to the EM equity sell-off around the US election. Although EM equities have had a good run in 2017, we do not view the asset class as over-owned. Indeed, the cumulative foreign flow into major EM equity markets is still tracking below historical averages.

* * *

Top Trade #4: Go long the inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation swaps

Go long EUR 5-year 5-year forward inflation with a target of 2.0% and a stop at 1.5%.

We recommend going long Euro area 5-year inflation 5-years forward (henceforth 5y-5y) through EUR inflation swaps, for an target of 2.0% – levels last seen in mid-2014 ahead of the fall in crude oil prices. The rationale for the trade is the following.

First, the risk premium on Euro area forward inflation is currently depressed, offering an attractive entry point. A low inflation risk premium can be inferred from the flat term structure of inflation swap yields. The difference between 5-year inflation, which is priced roughly in line with the expectations of our European Economists (Exhibit 7), and 5y-5y forward is near the lowest levels observed since the 2011 crisis.

Second, the inflation options market assigns high odds to Euro area headline inflation staying at or below 1% over the next 5 years. Against this backdrop, the ECB has reiterated its determination to keep monetary policy accommodative in order to encourage a rebuild of inflationary pressures. With the expansion in activity and job creation likely to continue, we expect the inflation risk premium to increase.

* * *

Top Trade #5: Position for ‘early vs. late’ cycle in EM vs. the US by going long the EMBI Global Index against short the US High Yield iBoxx Index

Go long EM USD credit through the EMBI Global against US High-Yield credit through the iBoxx USD Liquid High Yield Index, with a 1.5×1 notional ratio, indexed at inception to 100, with a total return target at 106 and a stop at 96.

The EM credit cycle is ‘younger and friendlier’ relative to an ageing US corporate credit cycle. With the improvement in macro fundamentals across EM, namely better current account balances, dis-inflation and FX reserve accumulation, we do not see a near-term risk of Dollar funding concerns. While EM credit spreads are not cheap per se, we see relative value against the US High-Yield market. In addition to the growing exposure of the latter to secularly challenged sectors, with the US cycle maturing and profit margins potentially eroding, we see more fundamental concerns in US High-Yield than in the EMBI (of which 70% of the constituents are sovereign bonds and the remainder in ‘quasi-sovereigns’).

Unlike most EM trades, long EM credit vs. US High-Yield has yet to fully recover from the sell-off following the US election. Since the ‘taper tantrum’, EM has generally outperformed with the exception of a few sharp risk-off events that had specific negative-EM implications (such as the sharp decline in oil prices and Russian recession in late 2014/early 2015, and the 2016 US presidential election). However, other risk- off periods, such as the Euro crisis in early 2011, saw EM credit outperform US high-yield.

The relative performance of EM vs. US High-Yield consistently tracks the EM-DM growth differential (Exhibit 10). We expect the general trend of EM outperformance to continue in a pro-risk environment and see the entry point as attractive, albeit admittedly slightly less so following the recent High-Yield sell-off. Finally, this trade is positive carry and should perform well if global spreads move sideways to tighter. We have set the stop at -4%, which coincides roughly with the bottom reached after the US election.

* * *

Top Trade #6: Own diversifed Asian growth, and the hedge the interest rate risk via FX relative value (long INR, IDR, KRW vs. short SGD and JPY)

Go long an equal-weighted basket of INR, IDR, KRW against an equal-weighted  basket of SGD and JPY, indexed at inception to 100, with a total-return target at 110 and stop at 95.

INR, IDR and KRW provide diversified exposure to the strong global growth we forecast in 2018 and specific idiosyncratic factors that should support their currencies in the year ahead. The combination of commodity exporting (IDR) and commodity importing (INR and KRW) currencies on the long leg of the recommended trade offers some protection against swings in commodity prices. By funding out of SGD and JPY, not only do we take advantage of their low yields, but JPY underperformance should also provide a hedge should the move higher in US yields lead to wobbles in the currencies where we recommend being long. The overall trade carries positively to the tune of about 4% over the year.

Country-specific factors in India, Indonesia and South Korea should boost their currencies, on top of the strong global growth environment we expect next year. Specifically:

India’s bank re-capitalization plan should impart a powerful positive impulse to investment in the coming year and should break the vicious cycle of higher non-performing loans, weaker bank balance sheets and slower credit growth. As the drags from GST implementation and de-monetization also fade, we expect growth to move from 6.2% in 2017 to 7.6% in calendar 2018. In addition to the three hikes we expect the Reserve Bank of India to deliver by Q2-2019, the high carry, FDI and equity inflows should also be supportive for the INR. We have moved our 12-month forecast for $/INR stronger to 62.

We continue to see Indonesia as a good carry market. As the drag on domestic consumption from the tax amnesty fades in 2018, we expect economic growth to move up to 5.8% in 2018 (from 5.2% in 2017), while the current account, inflation, and fiscal deficit should remain stable. We think Bank Indonesia is done easing and should move to hike rates by 50bp in H2-2018. We also expect Indonesia to be included in the Global Aggregate bond index, which could prompt one-off inflows worth US$5bn in Q1-2018 (vs. US$10bn bond inflows YTD in 2017). We have moved our 12-month forecast for $/IDR stronger to 13000. Finally, Indonesia, like India, has accumulated reserves over the past year that now stand at record high levels and should help mitigate volatility.

We expect the KRW to outperform other low-yielding Asian peers in 2018. The strong memory chip cycle should extend at least through H1-2018, while the government’s income-led growth policy provides a fiscal boost. Together with the boost from improving exports, this should allow the Bank of Korea to withdraw monetary accommodation in the face of rising financial stability concerns, with three policy rate hikes to 2.0% penciled in by the end of 2018. The thawing of China/South Korea relations and rebound in Chinese tourists should also help the travel balance. Overall, we expect the current account to remain stable at around 5% of GDP in 2018. Further deregulation in outbound capital flows could temper KRW strength over the medium term, but might not pass the National Assembly in the near future given  fragmentation in the legislative body. Our 12-month forecast for $/KRW is now stronger at 1060.

On the funding side, not only do SGD and JPY offer a low yield, we expect them to underperform in the year ahead. While we expect the Monetary Authority of Singapore to steepen its appreciation bias in October, we do not expect any significant SGD appreciation versus Asian peers given that the SGD is already trading on the strong side of the policy band. Meanwhile, we forecast USD/JPY at 120 in 12 months. With the BoJ controlling the yield curve as US rates move higher, JPY should continue to weaken, especially if US rates move higher than the forwards discount, as we expect.

* * *

Top Trade #7: Go long the global growth and non-oil commodity ‘beta’ through BRL, CLP, PEN vs. short USD

Go long a volatility-weighted basket of BRL, CLP and PEN (weights of 0.25, 0.25 and 0.5) against USD, indexed at inception to 100, with a total return target of 108 and a stop at 96.

The ongoing strength of global growth should continue to support a rally in most industrial metal prices. Our seventh Top Trade recommendation aims to capture this dynamic by going long the ‘growth and metals beta’. All three currencies on the long side have reliably responded to upswings in global trade and external demand over the past two decades. Moreover, each has performed particularly well in the pre-crisis decade, a period that also featured strong global growth and buoyant industrial metals prices. CLP offers direct exposure to a particularly encouraging story in copper, while BRL and PEN provide more varied metals exposures. The recommended trade has a positive carry of roughly 2.5% a year, and our 12-month forecasts are stronger than the forwards in all cases: we forecast USD/BRL at 3.10 in 12 months, USD/CLP at 605 in 12 months and USD/PEN at 3.15 in 12 months.

Beyond these global factors, our recommended Top Trade allows for diversified exposure to an encouraging Latin American growth recovery. Not only should growth in Brazil pick up as it recovers from a deep recession (and a recent BRL sell-off, creating an attractive entry-point), but BRL screens as strongly undervalued on our GSFEER currency model due to a combination of contained inflation and current account rebalancing, making BRL an attractive high carry currency. Meanwhile, PEN – the low-vol ‘tortoise’ of Andean FX – offers exposure to one of the most attractive valuation stories in the EM low- to mid-yielder space. Last but not least, CLP – the ‘hare’ of Andean FX – has moved quickly in 2017, so sends a somewhat less attractive valuation signal, but provides direct exposure to our most encouraging metals view, copper, and what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean election.

Finally, although it is designed for our global base case of strong growth, our Top Trade #7 can perform well in other external environments, potentially including a global growth disappointment. In particular, while BRL is a high-yielding and ‘equity-like’ currency, CLP and PEN are each lower-yielding and more ‘debt-like’: they have historically shown relatively resilient performance vs. the USD during periods of both declining growth and falling core rates.

http://WarMachines.com

Futures Jump, Global Stocks Rebound From Longest Losing Streak Of The Year

After five consecutive daily losses on the MSCI world stock index and seven straight falls in Europe, there was finally a bounce, as investors returned to global equity markets in an optimistic mood on Thursday, sending US futures higher after several days of losses as global stocks rebounded following a Chinese commodity-driven rout. 

The House is poised to vote, and pass, on tax legislation although what happens in the Senate remains unclear. European shares rebounded for the first time in eight sessions, following Asian stocks higher as the global risk-off mood eased. The euro, Swiss franc and yen all weakened as the dollar edged higher. “After five or six days of steady selling you have got people coming back in looking for bargains,” said CMC Markets' Michael Hewson. “I think it’s temporary though. We haven’t had a significant sell off this year and the fact of the matter is that equity markets have done so much better than anyone dared to envisage.”

As Bloomberg echoes, "investors seem to be regaining their appetite for risk after several days of global declines in stocks and high-yield credit that had many questioning whether the selloff could become a rout."

Still, investor concern over the progress of a massive U.S. tax reform plan showed no sign of abating as two Republican lawmakers on Wednesday criticized the Senate’s latest proposal. U.S. President Donald Trump hit back, tweeting that “Tax cuts are getting close!”

“If we look at what the markets are focusing on, it’s still very much the tax cut debates in the U.S., and how much progress there’s going to be on this front,” Barclays' Mitul Kotecha told Reuters.

Indices in Tokyo, Shanghai and Hong Kong and Seoul all rallied overnight, while London, Frankfurt and Paris started 0.3-0.4% higher as cyclical stocks which had driven the sell-off made a comeback. In Japan the Topix index ended its longest losing streak in a year, rising 1% with technology stocks providing the biggest boost, and the Nikkei 225 advances 1.5%. The ASX (+0.2%) also managed to shake off its early losses, closing higher with the energy sector outperforming as consumer staples and utilities weighed. Chinese stocks edged lower despite a massive cash injection by the PBOC, while the Hang Seng moved higher. Hong Kong stocks rebounded from their worst day in four weeks, as insurers led by Ping An Insurance Group Co. jumped on optimism that rising bond yields will boost investment income. Tencent Holdings climbed after posting its fastest revenue growth in seven years.

China’s sovereign bonds finally rebounded, advancing after the central bank boosted cash injections by the most in 10 months, fueling speculation that the authorities are looking to stabilize sentiment after a debt selloff. Having flirted with 4% in recent days, the yield on 10-year government notes dropped 3 basis points to 3.95%; the 5-year yield fell 1 basis point to 3.95%. The 10-year yield surpassed 4% this week for the first time since 2014. The People’s Bank of China added a net 310 billion yuan ($47 billion) through reverse-repurchase agreements on Thursday, bringing this week’s open-market operation additions to 820 billion yuan, also the most since January.

European stocks bounce back from a seven-day rout – the longest losing streak of the year – that had erased almost 400 billion euros ($471 billion) from the value of the region’s benchmark. The Stoxx Europe 600 Index adds 0.7%, following gains in Asia and climbing from a two-month low. All national benchmarks in the region are in the green, except those in Italy and Greece. Most industry groups also rise, with automakers rebounding from an eight-day slump on data showing European car sales grew in October. Financial services firms and builders were among the biggest gainers in the broad advance of the Stoxx Europe 600 Index.

There was some relief too that oil prices had pulled out of what had been a near 5 percent drop and that upbeat U.S. data on Wednesday had helped the dollar halt the euro's sharp recent rise.

In currencies, the pound fluctuated as Brexit rhetoric rumbled on, and data showed U.K. retail sales barely rose in October. Concerns about Brexit continue to mount: an article in 'The Sun' newspaper, stated that UK PM May, could increase her divorce bill offer to the EU in December; deal would add GBP 20bln to the GBP 18bln said to already be on offer. Source reports indicate that EU is said to reject UK bid for `bespoke' trade deal, according to Politico. BoE's Carney states that the Bank will do whatever they can to support the UK economy during the Brexit transition period. Chancellor Hammond said to stick to fiscal rules and resist demands for spending surge in upcoming UK budget. Michael Gove is reportedly facing a Conservative party backlash as he is accused of using the cabinet to audition for UK Chancellor

The dollar index was slightly higher on the day at 93.828 having hit four- and five-week lows against the yen and euro. The euro was down around 14 ticks at $1.1760 retreating from a one-month top of $1.1860 on Wednesday. Havens underperformed on Thursday, with gold trading little changed, and the yen and Swiss franc among the worst-performing major currencies. The Swiss franc decreased 0.3 percent to $0.9918, the largest dip in more than two weeks.

Commodities largely stabilized as China’s central bank boosted the supply of cash in the system by the most since January, though oil eventually reversed a gain. Gold edged 0.1% lower to $1,277.29 an ounce. It reached $1,289.09 overnight, its highest since Oct. 20. Oil prices gained despite pressure after the U.S. government reported an unexpected increase in crude and gasoline stockpiles. They had lost ground to this week’s International Energy Agency (IEA) outlook for slower growth in global crude demand.

European government bonds took their cue from the U.S. benchmark, turning lower as the yield on 10-year Treasuries increased. Bond markets saw a broad rise in yields after mostly upbeat U.S. economic news on Wednesday had added to expectations the Federal Reserve will hike interest rates again next month as well as multiple times next year. Two-year Treasury yields US2YT=RR crept to fresh nine-year peaks in European trading, though significantly the U.S. yield curve remained at its flattest in a decade. European yields nudged higher too but the standout there was a fall in the premium investors demand to hold French debt over German peers to its lowest in over two years, almost to record lows.

Wal-Mart, Viacom, Best Buy and Applied Materials are among companies due to release results. Economic data include initial jobless claims, Philadelphia Fed Business Outlook.

Market Snapshot

  • S&P 500 futures up 0.4% to 2,574
  • STOXX Europe 600 up 0.7% to 384.61
  • MSCI Asia up 0.8% to 169.14
  • MSCI Asia ex Japan up 0.7% to 555.93
  • Nikkei up 1.5% to 22,351.12
  • Topix up 1% to 1,761.71
  • Hang Seng Index up 0.6% to 29,018.76
  • Shanghai Composite down 0.1% to 3,399.25
  • Sensex up 1% to 33,095.23
  • Australia S&P/ASX 200 up 0.2% to 5,943.51
  • Kospi up 0.7% to 2,534.79
  • German 10Y yield rose 1.3 bps to 0.389%
  • Euro down 0.1% to $1.1779
  • Brent Futures down 0.03% to $61.85/bbl
  • Italian 10Y yield rose 0.7 bps to 1.57%
  • Spanish 10Y yield rose 1.1 bps to 1.561%
  • Brent Futures down 0.03% to $61.85/bbl
  • Gold spot down 0.02% to $1,277.91
  • U.S. Dollar Index up 0.1% to 93.91

Top Overnight News

  • After a month of discussions, German Chancellor Angela Merkel faces a self-imposed end-of-week deadline to unlock coalition negotiations
  • British PM Theresa May saw some support from officials of her German counterpart Merkel
  • Manfred Weber, who leads Merkel’s Christian Democrats in the European Parliament and is a self-proclaimed skeptic on Brexit, changed his tone dramatically after meeting May saying the U.K. had a “credible” position and there was a “willingness to contribute to a positive outcome”
  • Sterling came under pressure after a Politico report said the EU’s Chief Brexit Negotiator Michel Barnier’s team flatly reject May’s bid for a “bespoke” trade deal
  • Fed officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy. With inflation and interest rates still low, the central bank has little room to ease policy in a downturn
  • U.S. Treasury Secretary Steven Mnuchin is trying to persuade businesses and the Republican faithful to get behind a proposed tax overhaul from the Trump administration that so far lacks broad public support
  • The tax plan has provisions that may affect coverage and increase medical expenses for millions of families
  • President Robert Mugabe’s refusal to publicly resign is stalling plans by Zimbabwe’s military to swiftly install a transitional government after seizing power on Wednesday
  • Tax overhaul update: President Donald Trump is scheduled to head to the House, rallying Republican members before vote on tax bill
  • German Chancellor Angela Merkel meets heads of her Christian Democratic-led bloc, Free Democrats and Green party to kick coalition talks into gear
  • Cisco Sees First Revenue Growth in Eight Quarters; Shares Up
  • Koch Brothers Are Said to Back Meredith Bid to Buy Time Inc.
  • Health Care for Millions at Risk as Tax Writers Look for Revenue
  • Cerberus’s Feinberg Switches Strategy to Shake Up German Banking
  • Mattel Drops on Report That It Rebuffed Approach From Hasbro
  • New SUVs at Peugeot, Ford Offset U.K. Drag on Europe Car Sales
  • Google Sued for Using ‘Bait and Switch’ to Hook Minority Hires
  • Santos Seen Luring More Bids After Rejecting $7.2 Billion Offer
  • AT&T’s Clash With America Movil Slows Nafta Telecom Talks
  • Mobileye’s $15 Billion Deal Masks Drop in Israel Tech M&A
  • Mugabe’s Refusal to Resign Is Said to Stall Zimbabwe Transition

In Asian markets, a modest uptick in US stock index futures helped the Nikkei 225 stem some of its recent losses, with financials and retailers leading the way; as a result, he Japanese blue-chip index closed up 1.5%. The ASX (+0.2%) also managed to shake off its early losses, last closing up, with the energy sector outperforming (although this was on the back of confirmation of a rebuffed Santos takeover offer) as consumer staples and utilities weighed. Chinese stocks edged lower, while the Hang Seng moved higher Treasuries operated in a narrow range throughout the APac session, while JGBs were relatively listless, with a solid 20-year auction the highlight of the session. Aussie bond yields moved to session highs in the wake of the aforementioned labour market release, where they consolidated.

In European markets, equities kicked off the session on the front-foot in a continuation of some of the sentiment seen overnight during Asia-Pac trade (Nikkei 225 +1.5%). Some slight underperformance has been observed in the FTSE 100 with gains capped by a slew of ex-dividends which have trimmed 14.56 points off the index. Notable ex-dividends include both of Royal Dutch Shell’s listings, with the oil-heavyweight subsequently hampering the energy sector as WTI and Brent crude have failed to make any meaningful recovery from Thursday’s losses. Elsewhere, the likes of Fiat Chrysler (+2.5%) and Volkswagen (+2.4%) have been giving a help hand by the latest EU new car registration data. In fixed income, a limited reaction to better than forecast UK consumption data, and clear reservations about retail activity over the key Xmas and New Year period based on bleaker signals from anecdotal surveys and non-ONS data. Hence, Gilts dipped to 124.72 (-15 ticks vs +8 ticks at best), while the Short Sterling strip reversed pre-data gains to stand flat to only 1 ticks adrift before stabilising again. In truth, core bonds were already on the retreat from early highs (ie Bunds down to 162.43 vs 162.71 at best) in what appears to be a broad  retracement within recent ranges rather than anything more meaningful.

 

In FX, GBP has once again been a key source of focus with GBP/USD hit early doors amid reports in Politico that the EU are leaning towards rejecting the UK’s request for a bespoke trade deal. However, sentiment saw a mild recovery after reports in the Sun suggested that PM May could be on the cusp of upping her Brexit settlement offer in an attempt to kick-start trade talks. The main data release of the session thus far came in the form of UK retail sales which painted a less dreary picture of the UK economy than some had feared, although gains were short-lived as Brexit remains the focus. Marginal sterling buying was seen in EUR/GBP, trading around session lows, helped by a stop hunt through yesterday’s lows. Cable too saw a bid later in the session, benefiting from the weaker USD. Elsewhere, EUR/USD is back below 1.1800 vs the USD after topping out just ahead of October’s 1.1880 high, and now in a fresh albeit higher range flanked by big option expiries between 1.1795-1.1800 (913mln) and 1.1815-25 (4.8bln). Another roller-coaster ride for the Antipodeans, with AUD choppy on mixed labour data (headline count miss, but jobless rate and full employment upbeat) and pivoting the 0.7600 handle vs the USD.

In the commodities complex, as mentioned above, WTI and Brent crude futures have failed to make any noteworthy recovery from the sell-off seen on Tuesday with energy newsflow particularly light during today’s session thus far with markets looking ahead to the November 30th OPEC meeting which is set to give nations the instruction to extend oil production cuts. In metals markets, gold prices have traded in a relatively similar manner with prices unable to be granted any reprieve from their latest tumble. Elsewhere, Nickel and Copper have been weighed on, sending prices to multi-week lows as concerns around Chinese growth prospects continue to linger.

Looking at the day ahead, weekly initial jobless claims, Philly Fed PMI for November, import price index for October, industrial production for October and NAHB housing market index for November will be released. The BoE Carney’s, Broadbent and Haldane will all participate at a public plenary session while the ECB’s Villeroy de Galhau and Constancio are due to speak, along with the Fed’s Williams, Mester and Kaplan.

US Event Calendar

  • 8:30am: U.S. Initial Jobless Claims, Nov. 11, est. 235k (prior 239k); Continuing Claims, Nov. 4, est. 1900k (prior 1901k)
  • 8:30am: U.S. Philadelphia Fed Business Outl, Nov., est. 24.6 (prior 27.9)
  • 8:30am: U.S. Import Price Index MoM, Oct., est. 0.4% (prior 0.7%); U.S. Export Price Index MoM, Oct., est. 0.4% (prior 0.8%);
  • 9:15am: U.S. Industrial Production MoM, Oct., est. 0.5% (prior 0.3%); Capacity Utilization, Oct., est. 76.3% (prior 76.0%)
  • 9:15am: U.S. Bloomberg Consumer Comfort, Nov. 12, no est. (prior 51.5); Economic Expectations, Nov., no est. (prior 47.5)

Central Bank speakers:

  • 9:10am: Fed’s Mester delivers keynote address at Cato Conference
  • 1:10pm: Fed’s Kaplan speaks to CFA society in Houston
  • 3:00pm: ECB’s Constancio speaks in Ottawa
  • 3:45pm: Fed’s Brainard delivers keynote at OFR FinTech Conference
  • 4:45pm: Fed’s Williams speaks at Asia Economic Policy Conference

DB's Jim Reid concludes the overnight wrap

There has been a lot of noise around the HY market in the past week or so as a combination of macro factors along with some notable earnings misses have weighed on the market. iTraxx Crossover and CDX HY have widened by around 25bps and 30bps respectively from their most recent tights, while the price level of the largest USD HY ETF (HYG US) is basically back to the same level as where it started the year, however this overstates the move in the US cash market and even more so in Europe. Looking in more detail at the cash market US HY has widened by around 60bps and EUR HY is 46bps wider from the  recent cycle tights only a few weeks back but both are still around 25bps and 100bps tighter on the year respectively.

In a broad historic context the recent moves hardly register but in the context of a year that has been headlined by extremely low levels of volatility they are certainly significant. For EUR HY there were two other periods where we saw some sort of correction this year. In March/April (ahead of the French elections) the index widened 27bps in 42 days and then in August/September (after the North Korean escalation) we saw a 29bps widening over 30 days. So the current 46bps of widening in just 12 days has been somewhat more aggressive than anything else we’ve seen this year.

Looking at similar data for the US we have also seen two previous corrections. In March spreads widened 61bps in 20 days and then in July/August we saw 45bps of widening in 15 days. So the current c.60bps widening over 22 days is actually of a similar magnitude to this year’s previous corrections. The moves look even more stark when we focus on single-Bs though. EUR single-Bs have widened by more than 100bps from the most recent tights, more than halving the YTD tightening we had seen. For USD single-Bs the recent widening (65bps) has actually reversed more than 80% of the YTD spread tightening we had seen to the recent tights.

The question from here is whether this recent back-up in spreads is simply going to lead to a fresh buying opportunity or whether it will lead to something more significant. Despite some of the recent profit warnings we think that it is more likely to be the former at the moment. But at the very least the pace of this turn around highlights how quickly market sentiment can change, especially when spreads are so tight. HY was looking very very stretched relative to IG in Europe and this corrects some of that. Overall it certainly provides us with some food for thought as we look to publish our 2018 outlook in the next 10 days.

Even though US HY has been one of the weaker markets of late there’s no doubt that the recent global equity sell off has struggled to gather momentum as the US session has progressed over the last week. Following through on this, Asia has been weak since the Nikkei sudden sell-off last week and Europe has followed with yesterday seeing the 7th successive daily fall in the Stoxx 600 (-0.49%) – the longest losing streak since October/November 2016. Meanwhile yesterday the US (S&P 500 -0.55%) again closed off the early session lows showing that this equity sell-off isn't really being US led. For the record since last Wednesday's close the S&P 500, Stoxx 600 and Nikkei are down -1.15%, -3.17% and -3.86% respectively which helps illustrate this.

Volatility has been on the way up though even in the US over this period. The VIX spiked to 14.51 intraday which was the highest since August 18th. It closed at 13.13 (+13%) which is still the highest since the same period. Meanwhile the VSTOXX index was up +2.25% and is now at the highest level since early September.

This morning in Asia, markets have stemmed losses and are trading higher. The Nikkei (+1.24%), Kospi (+0.52%), Hang Seng (+0.53%) and ASX 200 (+0.30%) are all up as we type. WTI oil is trading marginally higher and after the bell in the US, Cisco was up c6% after guiding to its first revenue gain in eight quarters.

On now to the big data of the yesterday and possibly the month. US Core CPI inflation surprised modestly to the upside in October, rising 0.225% in month-on-month terms (a firmer 0.2% print than DB expected). This raised the year-overyear rate to 1.8% (1.7% expected). The data provide additional evidence that the core inflation trend is firming after a string of very weak prints earlier this year. According to our economists, the three-month annualised change in core CPI inflation is now at 2.4%, the strongest since February 2017. We think inflation is turning a corner and regular consistent misses vs expectations will not be a feature of markets in 2018.

Staying in the US, the House’s version of the tax plan is reportedly on track for a vote on Thursday (local time). In terms of the Senate’s version, rhetoric appears to be heating up as the mark up process continues. The Democrats were reportedly not impressed with the last minute change to add in the repeal of the Obamacare individual mandate, to which Republican Senator Collins partly agrees on, noting that it “gravely complicated our efforts to combine tax reform and changes”, although she has not decided whether to vote against the bill or not. Elsewhere, Republican Senator Johnson has publicly confirmed that he is opposed to the revised GOP plan as it stands, in part as it does not do enough to help partnerships relative to the larger tax cuts for corporates.

Quickly recapping other markets performance from yesterday. Bond markets were firmer with core bond yields down 2-5bp (UST 10y -5bp; Bunds -2.1bp; Gilts -3.5bp) while peripherals underperformed with Portugal bonds leading the softness (+2.5bp). Key currencies were little changed, with US dollar index marginally higher, while Euro dipped -0.06% but Sterling rose 0.05%. In commodities, WTI oil fell another -0.70% (-3.2% for the week), in part following reports that Russia believes it’s too early to announce a potential extension of production cuts at OPEC’s meeting at end of the month. Notably, WTI is still up c18% from late August. Elsewhere, precious metals softened a little (Gold -0.16%; Silver -0.14%) and other base industrial metals were little changed (Copper -0.45%; Zinc -0.54%; Aluminium +0.36%).

Away from the markets, there were a deluge of Fed and ECB central bankers commentaries yesterday but overall contained minimal market moving information. In the details, the Fed’s Evans noted he was open-minded regarding policy action at the December FOMC ahead of discussions with fellow colleagues and sounded dovish on inflation, noting “I feel we are facing below target inflations” while reiterating the US labour market is “vibrant” and unemployment rate “could go below 4%”.

In Europe, the ECB’s Hansson was upbeat on the demand side of the economy and “feel more confident that inflation will eventually reach the levels consistent with our aim”. Elsewhere, the ECB’s Praet pointed to the importance of interest rates post QE, noting that “policy rates will eventually regain their status as the main instrument of policy, and our forward guidance will revert to a singular approach”. Finally, the ECB’s Coeure noted that it’s important for the ECB “to ensure that our own measures do not adversely affect the intermediation capacity of repo markets”.

Over in China yesterday, there were more signs that the government may tolerate slower economic growth in 2018. The Economic Daily reported that the deputy head of the Research Office of the State Council Ms Han has flagged that GDP growth at 6.3% in 2018-2020 would be sufficient to achieve the Party's 2020 growth target. As a reminder, our Chinese economists expect GDP growth to slow to 6.3% yoy by 1Q.

Finally, over in Zimbabwe, President Mugabe’s c40 years of power may be coming to an end with Bloomberg reporting the 93 year old was confined to his home, with military forces taking control of state owned  media outlets and sealing offthe parliament and central bank’s offices.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the core retail sales for October (ex-auto & gas) was in line at 0.3% mom, but with the prior reading upwardly revised by 0.1ppt. Elsewhere, the September business inventories was flat and in line for the month. Finally, the November empire manufacturing index fell from a c3 year high of 30.2 to a still solid reading of 19.4. After the recent economic data, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth has edged 0.1pp lower to 3.2% saar.

In the UK, the September unemployment rate was in line and steady at 4.3% – still at a 42 year low, while the average weekly earnings remains low but was slightly above expectations at 2.2% yoy (vs. 2.1% expected). Elsewhere, jobless claims (1.1k vs. 1.7k previous) and claimant count rate (2.3% vs. same as previous) were broadly similar to prior readings. The Eurozone’s September trade surplus widened to EUR$25bln (vs. EUR$21bln expected), while the final reading for France’s October CPI was unrevised at 0.1% mom and 1.2% yoy.

Looking at the day ahead, the final October CPI report for the Euro area will be out. UK retail sales data for October and Q3 employment data for France will also be released. In the US weekly initial jobless claims, Philly Fed PMI for November, import price index for October, industrial production for October and NAHB housing market index for November will be released. The BoE Carney’s, Broadbent and Haldane will all participate at a public plenary session while the ECB’s Villeroy de Galhau and Constancio are due to speak, along with the Fed’s Williams, Mester and Kaplan.

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Spot The Difference

US equity markets have rebounded aggressively off their opening plunge on the heels of a sudden magical bid…

Can you guess where from…

Now that Europe is closed – what happens next?

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Credit Crashes, VIX Tops 14 As Stocks Open Lower For 7th Straight Day

Something changed…

Futures were weaker overnight but dumped at the cash open…

 

As the collapse in HY credit accelerated… worst day for HYG in 3 months

 

HYG is now negative year-to-date…

 

With spreads crashing back abopve 400bps…

 

USDJPY was unable to save stocks and VIX is now topping 14…

 

VIX is starting to catch up to credit…

 

Equity markets are down at the open for the 7th straight day… Trannies (blue) and Small Caps (dark red) are the worst performers but Nasdaq (green) is plunging today…

 

It seems like the Saudi debacle broke something…

 

Or is this why?

Did the buyer of first and last resort just disappear?

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Gartman: “The Bear Market Is Upon Us We Fear “

With the BTFD algos showing some uncharacteristic hesitancy this morning, Dennis Gartman’s overnight commentary may provide just the catalyst they need to do their sworn duty and ramp stocks into the green within minutes of the cash open for one simple reason: Gartman fears a bear market of “some serious vintage” is now be upon us.

As excerpted from his latest overnight letter to clients:

STOCK PRICES ARE UNIVERSALLY WEAKER THIS MORNING as all ten of the markets comprising our International Index have fallen and as two of the ten… the markets in Japan and in Brazil… have fallen by more than 1% with the former down 1.5% as we write and as we finish TGL and with the latter down a truly material 2.3%. In the end, our Index has fallen 86 “points” or 0.7% and is down 175 “points” from its all-time high of 12,012 on Thursday of last  week, or 1.4% below that high. 

 

We note the “universal” nature of the weakness for having all ten markets moving in the same direction is indeed quite rare and historically this occurs at major turning points; that is, the lows were made back in the spring of ’09 amidst panic, final liquidation of stocks when we had one or two days of universal weakness followed by a day or two of universal strength. That was a major turning point, obviously. Further, the interim lows made in January of this past year were accompanied by one day of “universal” movement, and there are other examples that we can recall when prices moved in “universal” terms and which marked major turning points. Today’s “universal” weakness…only a week from the global market’s all-time high… is a harbinger of further material weakness we fear and sets the stage for the start of what we fear might well be a bear market of some serious vintage.

 

There is concern… very real concern… on our part that one market after another has broken its upward sloping trend line that has heretofore been very well defined. A trend line drawn across the recent lows of the Dow has been broken; a trend line drawn across the recent lows of the S&P has also; trend lines of the Russel… of the Nikkei… of the DAX… of the EUR STOXX 50… of the Tadawul in Saudi Arabia… have all been broken, and we can go of if need be but our point here is made. Something material has happened to the global equity market and only the most fervent of stock market bulls shall not recognize that fact.

 

Interestingly, this incipient stock market weakness is happening just as the world’s economies are in the best synchronous strength we’ve seen or noted in many, many years. “How,” some might ask, “can stocks fall as economic activity is strong and appears likely to continue for some while?” The answer is that all bear markets begin when economic activity is indeed at its peak just as all great bull markets begin at the depths of economic activity because as economic growth is peaking the demand on the part of plant, equipment and labor for capital draws that capital from the equity market where it has been residing for the previous several years. Equity market lows are marked precisely when economic activity is at its worst for the demand for capital on the part of plant, equipment and labor is at its worst and capital moves to the equity market instead, aided of course by the usual imposition of new capital created by the central banks.

 

We are at that former turning point; economic activity is strong and shall likely grow stronger for several months into the future. Employment rates are rising in North America, in Europe and in Asia, demanding capital while new capital projects are being planned and spending plans are being made strong. The “capital” for that labor, for those plans and for that additional labor shall migrate from the equity markets, even now at a time when the monetary authorities are either already erring toward monetary tightness or are seriously considering doing so.

 

It has always been thus and it shall always be thus. The equity market, by its very definition, anticipates the change in the economy, rising before the economy rises and falling before the economy falls. We are at the latter tipping point. It has been months in the coming, but it is here and adjustments in one’s investment policies must be made accordingly. The bear is upon is, we fear.

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“We Have Reached A Turning Point”: Trader Explains Why Today’s CPI Could Send Equities Reeling

From the latest Macro View by Bloomberg commentator and former Lehman trader, Mark Cudmore

Equities Must Fear CPI Now the Fed Put Era Is Over

A surprise in either direction from today’s U.S. consumer price index print is likely to hurt global stocks.

For many years, in the wake of QE, we became used to markets where “good data is good for equities and bad data is good for equities.” The logic was that bad data implied a greater likelihood more liquidity would be pumped into the system, whereas good data inspired confidence that the economic recovery was on track.

Today might mark a turning point where we more frequently trade the opposite dynamic. The Fed has fought so hard to convince investors that the economy can cope with hikes and balance-sheet reduction that it may have boxed itself into a corner. It can’t retreat from its policy path without seriously undermining its credibility.

If CPI misses to the downside, then investors will fear the Fed is making a terrible policy mistake with its determination to raise rates again in December. On the flip-side, if CPI beats, then traders will have to price in a much greater possibility that the Fed follows through on its forecast of three more hikes in 2018.

That level of tightening is still absolutely not priced into asset markets. The acceptance that policy normalization is a sustainable theme would alter the whole trading framework, because forecasts for funding and discount rates would have to be entirely revised.

That’ll be negative for global equities, emerging markets and commodities, but the most acute pain is likely to be in U.S. stocks, where a generation of investors have been programmed to believe the Fed will always have their back.

If inflation slows again and the Fed doesn’t backtrack on its policy tightening, then this trading dynamic might become increasingly similar for all major U.S. data releases. It’ll be an era of “bad data is bad for equities and good data is bad for equities.”

Disappointing data will be portrayed as a sign that the financial-market guardians are sleepwalking toward disaster. Positive data will cause global equity markets to sell-off as they register that rate hikes are coming much quicker than priced.

The new dynamic won’t necessarily sustain for months, let alone years, but we may have reached the crucial point where asset markets will throw a tantrum until we get clarity on whether it’s the Fed or rates markets that need to give ground.

Expect equity pain to continue in the short term while this plays out.

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China Commodities, Stocks Are Tumbling

As we just detailed in great depth, China's credit growth is slowing at just the wrong time – as exemplified by last night's economic malaise and bond market weakness – and tonight we are starting to see it ripple through commodity and stock markets…

As we noted earlier, Chinese bonds are breaking key levels as China's credit impulse begins to weigh…

 

And tonight we are seeing that deleveraging pressure filter through to equity markets…

 

And even more so in the industrial commodities…

SO WHAT?

As we concluded earlier, in our discussions with investors over the past several weeks, the response we get to slowing Chinese data is simply… “so what, stocks don’t fall, and China growth will be strong next year”. While, in general, we acknowledge this sentiment is widespread, we notice a number of troubling trends that bear watching (as noted above). In short, to the question posed in the title of this note: “Should Commodity Bulls be Worried”, we believe the answer is yes.  

Why should the bulls worry? Well, with economic growth slowing in China, the question is will it continue into 2018, and will it lead to bulk commodity prices deflating? In short, due mainly, we believe, to slower overall credit growth vs. prior bubbles (i.e., 2009, 2013, and 2016), a material slowdown in economic growth or asset values in China’s market is inevitable – barring another massive ramp-up in credit issuance (which doesn’t appear to be “in the cards” near-term) – it’s simply math.

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One Chart Proves Auto SAAR Numbers Are Nothing More Than A Rigged, Debt-Fueled Farce

Earlier this morning the New York Federal Reserve released their quarterly consumer credit report which detailed, among other things, delinquencies rates on every type of consumer debt from mortgages to student loans.  

Now, given the 4.3% unemployment rate in the U.S. (forget the ~95 million people out of the labor force for a moment) and equity markets which reassure us that “everything is awesome” by surging to new highs each and every day, one would assume that delinquency rates on consumer credit would be somewhat subdued relative to recent history and certainly when compared to the ‘great recession’.

And, for the most part, that assumption would be right but for auto loans which stands out as the only class of consumer credit that has consistently suffered from rising delinquencies going all the way back to 2014. Of course, this prompts the obvious question of why auto loans seem to be the outlier.

Luckily, the NY Fed breaks down auto loans into two categories to provide a little more granularity on what’s happening here. 

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

But, a drastically different picture emerges when looking at just the auto loans originated by America’s auto finance captives.  To our great ‘shock’, auto OEMs in the U.S. seem to have been much more “flexible” on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

Of course, we’re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios…certainly they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can’t possibly afford, right?

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“There Are Too Many Warning Signs”: Why One Trader Thinks Stocks Are Set To Slide In The Coming Days

From the latest Macro View edition by Bloomberg macro commentator and former Lehman trader, Mark Cudmore

Stock markets look set to continue to slide in the days ahead.

There are too many small warning signs building up at a vulnerable time for markets. Just because a 3% correction hasn’t happened for a long time doesn’t mean that one isn’t possible. Quite to the contrary, it suggests there are a lot of complacent longs that may over-react to a pullback.

It’s also important to emphasize the proviso that the three pillars of the secular bull market remain solid: growth, earnings and liquidity. There’s no obvious reason to turn structurally bearish, but that’s not the same as thinking that every dip needs to be bought instantly.

After a tremendous year of gains, the S&P 500 is particularly vulnerable to profit-taking as Thanksgiving Day and the looming debt-ceiling issue provide further complications to the implementation of a potential tax reform package.

China has been the engine of global growth, but Monday’s disappointing credit data will make investors nervous that the much greater policy focus will now be on deleveraging – and that will weigh on Asia broadly.

Japan has been a bellwether for the most recent equity gains, but last week’s volatile hiccup and subsequent price action look very bearish technically. After a parabolic gain the past two months, a pullback here would only be a healthy consolidation in the grand scheme of things.

European equities are leading the correction already, while U.K. stocks will remain under pressure from domestic politics and Brexit talks.

At this time of year, there are plenty of traders who’ll only need a nudge to take 2017’s profit and move to the sidelines. In contrast, there’s a dearth of reasons for fresh bulls to join in now.

Sometimes in markets you don’t need one headline catalyst to shift sentiment. Equity markets fall just because there are more marginal sellers than buyers.

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Philly Fed President Unconvincing As He “Lightly” Pencils In December Hike

Speaking in at a conference in Tokyo, the head of the Philly Fed, Patrick Harker said that he has penciled in a further rate hike by the Fed at its December meeting on 12-13 December 2017. However, his use of the word “lightly” suggested that there may be a degree of wavering on his part. According to Reuters.

A Federal Reserve official said on Monday he expects to back an interest rate hike next month despite caution over low-inflation, as U.S. central bank policy needs to be positioned to deal with future economic shocks.

 

Philadelphia Fed President Patrick Harker said he has “lightly penciled in” a December rate hike. However, he flagged he had slightly less conviction about the policy decision than he had last month as he “continues to elicit caution” about weak inflation and also about the way in which it is measured. Harker said he expects the Fed to raise rates three times next year as long as inflation remains on track, and the projected tightening could take policy to what he would describe as a neutral stance. Harker, a centrist voter on the Fed’s monetary policy committee this year under an internal rotation, said the Fed must continue normalizing policy as the economy is “more or less at full strength” and there remains “very little slack” in the labor market. “Removing accommodation is the right next step for a few reasons,” he said in prepared remarks to a Global Interdependence Center conference in Tokyo…

 

Price measures have drifted lower below the Fed’s 2-percent target this year even while unemployment has fallen. The central bank has raised rates a notch twice in 2017 and is widely expected to do so again next month from its current target range of 1.00 percent to 1.25 percent.

US inflation data is due on Wednesday this week, with the consensus expecting a modest 0.1% month-on-month rise in the headline CPI rate, with the year-on-year ticking back up to 2.0%. Core CPI is expected to be 0.2% month-on-month leaving the annual rate unchanged at 1.7%. Harker said that he doesn’t expect a large move and told Bloomberg TV that he will be focusing on wage inflation and employment data to support a rate hike before the December FOMC meeting. From Reuters.

Harker said the conditions in the U.S. economy are ripe for further gains in consumer prices, but he wants to make sure he can confirm this in the economic data.

 

“We will see unemployment drop below 4 percent probably late 2018 or early 2019, before it starts to come back up,” Harker said. “That should put pressure on wages and we should see inflation moving back to target. But again, I emphasize the word ‘should’ because we’ve been predicting this for a while and it hasn’t happened.”

Playing down any change in policy from the appointment of Jerome Powell as Fed Chairman, Harker noted that it was still undecided whether Janet Yellen would stay on as a Fed Governor when she steps down. Without saying it directly, it’s clear that Harker is concerned about a hiatus in US economic growth in the coming years, as he should be. While neglecting to mention debt, Harker highlighted the other “d” along with productivity.  

Harker said the United States faces a demographic challenge as baby boomers retire and are replaced by younger workers who get paid less.

 

He saw parallels with Japan’s rapidly ageing population and said raising productivity is the key to solving this problem.

 

“We create the conditions for growth, or lack thereof, but fundamental growth comes from the increase in labor force and the increase productivity,” he said. “By definition, those two define fundamental economic growth.”

Despite concerns about growth, Harker remains committed to reducing the Fed’s balance sheet. When pressed on the flattening yield curve and the risk it could invert, Harker cited the highly accomodative policies of other central banks, especially the Bank of Japan, as being a major factor. One justification for reducing the balance sheet cited by Harker is to provide the Fed with the ammunition to tackle the next crisis.

“In the event of another shock to the system, I want our tools to be at their most effective, and in my view, that means reducing our balance sheet.”

 

The Fed will also continue to trim its nearly $4.5-trillion bond portfolio, which Harker said should be clearly communicated in advance and happen in a predictable manner.

When pressed by a Bloomberg TV journalist about the risk to equity markets from the Fed reducing its balance sheet, Harker was at his least convincing. He noted that the Fed would try to do it in a way that is “as boring as watching paint dry” which, of course, is just sidestepping the critical question of what happens when the flow, which has driven equity markets to all-time highs, is reversed. No matter how convincing they try, and often fail to sound, it’s just a grand “experiment” after all.
 

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From “BTFD” To “Sell The Rip”: Global Stocks Slide, Nikkei Tumbles, Pound Plunges

S&P futures gave up early gains and were trading down -0.2%, as Donald Trump completes his first Asian tour and as pressure mounts on U.K. Prime Minister Theresa May, sending the pound plunging. European stocks fell, tracking many Asian shares as the Nikkei plunge accelerated.

In Europe, the Stoxx 600 fell as much as 0.4%, resuming last week’s pull-back. 17 of 19 industry groups fall, with financial services, retail and banking shares leading the selloff; the broad European index is down 2.7% from the intraday high hit on Nov. 1. The Stoxx 600 drop also triggered a key technical level, with the Stoxx 600 sliding below the 50-DMA for first time since early September, while the Stoxx 600 Bank index dropped below the 200 DMA following a downgrade of European banks by Kepler Cheuvreux.

“Nothing has changed in the past few weeks in terms of fundamentals. Investors are just looking for excuses to book some profits after what has been a pretty strong year,” Fabrice Masson, head of equities at BFT Investment Managers, told Bloomberg: “Some of the stocks have risen 50% since the start of the year. If their earnings are good but don’t show a clear acceleration in the trend, it’s tempting to just sell.”

Well, something did change: earlier in the session, investment bank Kepler downgraded European stocks to underweight, saying last week’s pull-back marks the point at which equity markets shift from “buy-on-dip” to “sell-on-strength.”

In equities, the big mover overnight was Japan, where shares slumped and the Nikkei 225 tumbled by 1.3%, down to 22,380.99, its biggest drop since April 6, as investors found no new reasons to buy after driving benchmarks to their highest in a quarter century just one week ago. The Nikkei is now down 4.3% from the intraday high on Nov. 9. The Topix index slid for a third day and the Nikkei 225 retreated for a fourth session following gains last week that pushed them to levels unseen since 1991 and 1992 respectively. A combination of solid quarterly results, positive economic data and massive foreign buying had driven the rally. U.S. shares fell Friday after U.S. consumer sentiment data unexpectedly dropped by the most in a year amid expectations for faster inflation and higher interest rates.

“Investors who were hoping for the market to stage a rebound during the day may have sold in disappointment towards the end” exacerbating the decline, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “With corporate results behind us and no major economic data in sight, the market is in for a tussle between those waiting to buy and those trying to take profits.” The benchmark indexes finished at the day’s lows as declines accelerated in the last half hour of trading. “Stock futures, which started declining in late afternoon, dragged down stocks and the leveraged funds,” said Mitsuo Shimizu, deputy general manager at Japan Asia Securities. Next Funds Nikkei 225 Leveraged Index ETF, an exchange traded fund product managed by Nomura Holdings Inc., fell 2.7% , the most since April 6. As investors and market observers try to gauge the extent of a downward correction in domestic equities that begun late last week, optimism has yet to fade among some participants.

“I don’t want to use the word ‘correction’ — it’s too tough to predict these markets,” Chris Ailman, chief investment officer of the California State Teachers’ Retirement System, said in a Bloomberg Television interview. Markets have gotten ahead of themselves and “I’ll call it a pause to refresh.” The yen is a concern, but the fund is very optimistic about Abenomics and in favor of Japan’s corporate governance overhauls, he added.

Elsewhere in Asia, equities also retreated, with industrial and material shares leading declines, after tax-cut pessimism weighed on U.S. equities Friday. The MSCI Asia Pacific Index declined 0.6% to 170.25, falling for a second trading day. Industrial stocks led losses, dropping the most in almost a year. Hyundai Heavy Industries Co. fell the most among South Korean shipyards after losing an offshore order to a Singapore rival. Iida Group Holdings Co. plunged by record in Tokyo after first-half results missed the company’s targets. “Uncertainties over U.S. tax cuts are prompting investors to take profit after big rallies in the last few weeks,” said Linus Yip, Hong Kong-based strategist at First Shanghai Securities.South Korea’s Kospi lost 0.5%. Hong Kong’s Hang Seng Index climbed 0.3% to close at its highest in almost a decade after reversing an earlier loss.

Curiously, the Shanghai Composite ignored the noise from its neighbors, and staged an impressive comeback, closing up 0.4% at 3,447, the highest level in 22 months, led by banks, steelmakers and chipmakers.

More interesting, however, was the plunge in China’s government bonds: the 10Y yield rose to the highest level in 3 years, while 10-yr treasury futures plunged 0.67%, the biggest since the end of October, as bond yields kept climbing and the curve kept inverting with the 5-year yield breaking 4% at one point this morning, while the 10-yr yield approaches 4%.

In FX, the big mover was the pound, which came under heavy selling pressure as the U.K.’s political and Brexit troubles mount (see below); the dollar inched modestly higher, shrugging off stronger Treasuries; Gilts pushed higher from the open, providing support as European bonds gained across the board; the euro and the yen steadied on gamma trading.

The UK Brexit drama reached new heights over the weekend. As discussed earlier, 40 Conservative MP’s are reportedly calling for UK PM May to step down. This number is 8 short of the amount required to trigger a leadership challenge Other sources also suggest that UK PM May is facing a rebellion from pro-European Tory MPs who have vowed to vote against her “crass” plans to enshrine the date the Britain leaves the European Union in law. Sources suggest that a menacing secret memo from Boris Johnson & Michael Gove to UK PM May dictating terms for a hard Brexit has triggered a new Cabinet rift. Britain must not cave in to EU demands for a bigger Brexit divorce bill after Brussels set a two-week deadline for the UK to concede, allies of Boris Johnson have warned. Brexit Secretary Davis stated that he still believes that a trade deal with the EU can be negotiated within the given timeframe. However, separately, Chief EU Brexit Negotiator Barnier noted that the EU is preparing for possible collapse of Brexit talks. 

The U.K. data won’t be the only numbers on investors’ minds. U.S. inflation and growth numbers are also on the docket, and they could be key to the Federal Reserve’s determination to lift rates next month. Talks on tax legislation may also play into market thinking; pessimism over the likelihood of successful reforms helped drag global equities down from this month’s record high late last week. Measures of equity-market volatility have risen, albeit from low levels.

Over in Catalonia, Spain PM Rajoy visited the region for the first time since the government retook control. He called on “the silent or silenced majority” voters that oppose secessionism to “convert its voices into votes” in the upcoming 21 December regional election. Further, he noted “it’s urgent to return a sense of normality to Catalonia” and that he “ask all companies that have worked in Catalonia not to leave”.

In rates, the yield on 10Y TSY dropped two bps to 2.37%, the largest drop in more than a week. Germany’s 10Y yield fell two basis points to 0.39 percent, also the biggest fall in a week. Britain’s 10Y gilt fell three basis points to 1.309 percent.

In commodities, gold and most industrial metals rose, and West Texas oil dropped below $57 a barrel.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,578.20
  • MXAP down 0.6% to 170.26
  • MXAPJ down 0.3% to 558.68
  • Nikkei down 1.3% to 22,380.99
  • Topix down 0.9% to 1,783.49
  • Hang Seng Index up 0.2% to 29,182.18
  • Shanghai Composite up 0.4% to 3,447.84
  • Sensex down 0.8% to 33,061.20
  • Australia S&P/ASX 200 down 0.1% to 6,021.77
  • Kospi down 0.5% to 2,530.35
  • STOXX Europe 600 down 0.4% to 387.11
  • German 10Y yield fell 2.2 bps to 0.388%
  • Euro down 0.1% to $1.1649
  • Brent Futures down 0.1% to $63.43/bbl
  • Italian 10Y yield rose 3.0 bps to 1.58%
  • Spanish 10Y yield fell 2.4 bps to 1.552%
  • Gold spot up 0.3% to $1,278.27
  • U.S. Dollar Index up 0.2% to 94.58

Top Overnight News

  • Trump attends two days of meetings on regional security affairs hosted by the Association of Southeast Asian Nations before heading home
  • Sterling fell for the first time in three days; May has a bad start to the week following a Sunday Times report saying 40 of her own Conservative lawmakers have agreed to sign a letter of no confidence in her, nearly enough to trigger a leadership challenge, just days after the EU gave the U.K. two weeks to make “clarifications” so Brexit talks can advance
  • The U.K. Labour Party offered May a cross-party Brexit deal saying she’s lacking the support within her Conservative Party to deliver the Brexit she aims for
  • AT&T’s Merger Fight Is Said to Head Toward Thanksgiving Showdown
  • China Credit Growth Trails Estimates as Deleveraging Prioritized
  • Tesla Model 3 Depositors Staying Put as Wait in Line Lengthens
  • Noble Group Is Said to Lose Key Bank Prop as DBS Cuts Loans
  • Trump Hails ‘Great’ Ties With Duterte, Skirts Human Rights
  • Trump Is Shattering His Own Tweet Records With Non-Stop Barrage
  • Russian President Vladimir Putin meets Turkish counterpart Recep Tayyip Erdogan in Sochi, Russia
  • It prompted the opposition Labour Party to question her ability to deliver the Brexit transition period she’s proposed
  • Fed Bank of Philadelphia President Harker said he’s looking for another rate increase this year and the balance sheet unwind will be “boring”
  • “With a labor market this tight, inflation is likely to reassert itself at some point,” he says in text of speech in Tokyo
  • There’s been a marked turnaround in Europe’s economy. The 19-nation euro-zone bloc is already enjoying the strongest growth in a decade; economists at Credit Suisse Group AG and Oxford Economics are declaring that it’s heading toward a golden period of low- inflationary expansion
  • ECB Vice President Constancio said on Monday the recovery was broad-based, robust and resilient

Asian indices were mixed, with no fresh catalyst for a decisive move. Japan’s Nikkei 225 (-0.1%) continued to edge away from the multi decade highs set last week. Elsewhere Australia’s ASX (-0.1%) ebbed lower, while China’s Shanghai Comp. (+0.4%) and Hong Kong’s Hang Seng (+0.2%) tiptoed higher supported by a record breaking Singles’ Day event at the end of last week. Fixed income dealing was rangebound with Treasuries edging away from worst levels in a modest bull flattening move, despite FOMC voter Harker reiterating that he had pencilled in a December hike and three further hikes in 2018, inflation dependent. JGB’s moved lower as the BoJ refrained from engaging in Rinban operations today, with the long end experiencing a degree of mild underperformance. PBoC sets the CNY mid-point at 6.6347 vs. Prev. 6.6282. RBA Deputy Governor Debelle said that there is a risk that wages will stay lower for longer, although he did concede that some pockets of the economy are exhibiting wage pressure, and that he expects the recent uptick investment to last a while.

Top Asian News

  • Alibaba’s Rise Creates 10 Billionaires Not Named Jack Ma
  • Widening Citizenship Fiasco Threatens Aussie Confidence
  • Hong Kong Stocks Rise to 10-Year High as AAC Tech and AIA Jump
  • Noble Group Shares Extend Slump to 16% as DBS Said to Cut Loans

European bourses have kicked the week off modestly higher/flat (Eurostoxx 50 +0.1%) with outperformance in the FTSE 100 amid the softer GBP. In terms of sector specific moves, health care names have seen a modest bout of outperformance with Novartis at the top of the SMI following a positive drug update. Elsewhere, financial names underperform after Italian banks have seen little benefit from news on Friday that ECB can only impose capital requirements on banks to provide for bad loans on a case-by-case basis. Bunds and Gilts have slowly extended their respective recoveries from last Friday’s closes and intraday lows, the former finding traction when intraday tech support at 162.18 held, and gathering a bit of momentum when 162.34 (resistance and 50% retrace of the previous session sell-off) was surpassed. The next upside objective on some charts is the 162.50-56 area vs a  162.49 high so far, and if that is achieved then 162.73 will close a gap. Market contacts suggest that longs may not get twitchy unless Friday’s 162.13 low is breached. The 10 year UK debt future has traded up to 124.66 for a  35 tick gain on the day, and aside from short covering after the pre-weekend there has been plenty of incentive for bulls to step back in on the latest PM May/Government turmoil. US Treasuries also stabilising following recent bear-steepening that was deemed to be at least partly due to re-positioning (ie flatteners unwound).

Top European News

  • Ultra Electronics Drags Defense Stocks on CEO Ouster, Forecast
  • Four in 10 London Homesellers Cutting Prices in Tough Market
  • U.K. Labour Says May Lacks Power to Deliver Brexit Transition
  • European Stocks Downgraded, Seen as Vulnerable Zone at Kepler

In FX markets, GBP has been the main mover overnight with pressure mounting on UK PM May amidst reports of a rising rebellion within the Conservative Party ranks. Cable has now retreated through 1.3100 and bears will be targeting the post-BoE rate hike low of 1.3040, if 1.3050 is breached on the downside (reportedly an objective for one major bank). Elsewhere, the EUR is firmer vs the Greenback as the pair consolidates recent gains above 1.1650, but a confirmed topside break of the 1.1550-1.1170 range only seen if 1.1690 (21 DMA) near term chart resistance is breached. Comments from ECB’s Constancio this morning have come in on the dovish side, stating that “Much-feared inflationary pressures have not materialised, nor can they be foreseen in the immediate future”. AUD is currently capped below 0.7700 after dovish or bearish on balance comments from RBA deputy Governor Debelle (wages to remain low for some time).

In energy markets, WTI and Brent crude futures trade modestly lower with reports of an earthquake in Iraq and tensions in the Gulf
region ultimately doing little for oil prices. Additionally, press reports from over the weekend suggested that the Saudi King has no
plans to step down while the Iraqi oil minister has ordered an acceleration of repair works at the Bai Hasan and Avana oilfields near
Kirkuk; exports remain at a halt. In metals, gold prices have ticked higher in recent trade in a mild retracement of Friday’s losses.
Elsewhere, Chinese steel rebar futures were supported overnight amid output reductions in some of the nation’s lager steelmaking
cities. Finally, Chinese iron ore demand is forecast to fall by 6mln tonnes in November as China plans to curb steel production
during the winter to meet air pollution targets, according to the CISA (China Steel & Iron Association)
Oman Oil Minister says does not believe there will be deeper production cuts. (Newswires)
The Iraqi oil minister has ordered an acceleration of repair works at the Bai Hasan and Avana oilfields near Kirkuk. However,
exports remain at a halt

US Event Calendar

  • Nov. 13-Nov. 17: MBA Mortgage Foreclosures, prior 1.29%
  • Nov. 13- Nov. 17: Mortgage Delinquencies, prior 4.24%
  • 2pm: Monthly Budget Statement, est. $58.0b deficit, prior $45.8b deficit

DB’s Jim Reid concludes the overnight wrap

It’s almost a pleasure to get back to work to see what happens next after a fascinating last couple of days for markets (ok it’s all relative). Although 2016 marked a turning point for our structural view on rates and inflation (higher) due to populism (more fiscal), peak QE, demographics (peak labour supply around middle of this decade), and perhaps peak regulation, we must admit that the dovish taper from the ECB over two weeks ago made us wonder whether the next leg to our trade might delayed for a few months. We still felt the unfunded US tax cut was under-priced by markets which was still the main avenue for higher yields. However up until Wednesday evening everything was becalmed – equities continued to hit new record or multi-year highs, bonds were moving towards multi-month lows in yields and volatility was low again with the VIX back below 10 and the MOVE index (Treasury vol) back down around all-time lows. Then Thursday started with a wild (in today’s terms) swing in the Nikkei and we then saw a rare simultaneous sell-off in equities, rates and spreads.

Just for ease, below we’ll detail the 2-day sell off in a number of assets with Friday’s move in brackets. All bond market moves are 10yr yields. USTs +6.4bp (+5.7bp), Bunds +8.4bp (+3.5bp), Gilts +11.7bp (+7.9bp) and BTPs +9.9bp (+3bp). In equities, DAX -1.91% (-0.42%), CAC -1.66% (-0.50%), FTSE -1.28% (-0.68%), FTSE-MIB -1.18% (-0.36%), and the Bovespa -2.96% (-1.05%). In credit, Crossover +10.6bp (+1.4bp) and CDX HY +8.2bp (+1.1bp).
Obviously these moves are still relatively small in the greater scheme of things and only bring us back to levels days before rather than months before in most indices (HY US ETFs an exception as back to March levels) but the suddenness of the move without warning or catalyst has provoked a lot of attention. The blame has been placed on the following factors, none of which fully explain the reversal but are worth highlighting. Weak EMFX and (US) HY over the last few weeks, continuous flattening of global yield curves since the ECB meeting, difficulties in the tax reform plan, and Saudi tensions from last weekend and the associated rise in Oil that this has encouraged.

Indeed Oil is up 9.3% over the last three weeks and up 30.4% since the lows in June. Maybe with this rise in Oil, 10 year Bunds shouldn’t be flirting with 30bps as they did on Wednesday regardless of the ECB. Given these moves, this week’s inflation numbers are the perfect opportunity for things to calm down or volatility to continue to pick up. The most significant is the October CPI report in the US on Wednesday. The consensus is for a small +0.1% mom lift in the headline and +0.2% mom lift in the core. Remember though that the latter has missed relative to market expectations in six out of the last seven months. We think we may see more positive surprises in 2018 but not necessarily yet. Also due this week will be final October CPI revisions for Germany and the UK tomorrow, France on Wednesday and the Euro area on Thursday. In the UK the older inflation measure RPI is expected to go above 4% for the first time since December 2011. Looking further back, since May 1992 we’ve only seen RPI above this level for 42 months (13.8% of the time) out of the last c25 years. Meanwhile even with the late week Gilt sell off, 10-year yields remain at a lowly 1.34%. Not a brilliant real return potential in our opinion!

So inflation is the big thing this week but we’ll also see Euroarea Q3 GDP tomorrow although no change from the +0.6% qoq flash print is expected. Also tomorrow China sees its monthly bulk activity numbers and US retail sales is out on Thursday. As you’ll see in the week ahead at the end its a packed week for central bank speakers with the highlight being tomorrow’s ECB policy panel discussion in Frankfurt which includes a star studded line up with the ECB’s Draghi, Fed’s Yellen, BoE’s Carney and BoJ’s Kuroda all participating. Elsewhere Mr Trump’s Asia tour comes to an end in the first half of the week where he will attend the East Asia Summit to discuss strategic political and security issues in the region and tomorrow Mrs May’s Brexit legislation is the subject of two days of examination in the House of Commons. The full day-by-day week ahead is available at the end and a reminder that our  new “Next Week… This Week” document from Friday includes all this and an easy to read cut-out and keep of all upcoming events.

Now on to the US tax plan, the House’s version of the tax bill is expected to go to a full House vote this week (either Thursday or Friday), while the Senate’s plans will begin its mark-up process today with an expectation for a full senate vote before 23 November. Over the weekend, there was more rhetoric across the spectrum. The House and Means Committee Chairman Brady noted he will not budge on certain things, noting that “I’m committed to” a compromise that would preserve the deduction for state and local proper taxes vs. the Senate’s plans which expect a full elimination. Elsewhere, President Trump’s top economic adviser Gary Cohn said he expects the tax bills go to a conference committee that reconciles differences between the House and Senate versions before returning a report to both chambers for final passage. He noted that the conferees “will decide what stays and what goes” and they’ll pick and choose the different parts that they think are important”. Indeed, it feels like both versions of the tax plans are opening gambits and the hard work begins when the bills are reconciled. Our US economist believes there is a decent chance that some version of tax reform can be achieved, but this is likely to be a Q1 event with potential stumbling blocks along the way.

In the UK, the Sunday Times reported that 40 Conservative MPs have agreed to sign a letter of no confidence in the UK PM, almost enough to trigger a leadership challenge (need eight more MPs). This morning, Sterling is down 0.56% against the USD and as mentioned earlier, PM May’s Brexit legislation will be debated in the House of Commons this week.

This morning in Asia, markets are mixed. The Nikkei (-0.68%), Kospi (-0.45%) and ASX 200 (-0.24%) are down modestly, while Hang Seng is up 0.17% as we type. Elsewhere, Bitcoin has dropped -10.21% this morning (c17% in two days), in part as Bloomberg reports that traders are buying its alternative instead (Bitcoin cash). Over in Japan, the October PPI was above expectations at 0.3% mom (vs. 0.1% expected) and 3.4% yoy (vs. 3.1% expected).

Now briefly recapping other markets performance on Friday. US bourses softened and posted its first down week since September (-0.21%) amid uncertainty over US tax reforms. The S&P (-0.09%) and Dow (-0.17%) fell slightlywhile Nasdaq was virtually flat. Within the S&P, modest gains in the consumer staples and telco sector were more than offset by losses from energy and healthcare names. The US dollar index dipped 0.06%, while Euro and Sterling gained 0.20% and 0.39% respectively. The VIX jumped 7.52% and was up 23.5% for the week at 11.29.

Despite the pull back in US equities last week, our global asset strategists remain bullish. They note the duration of the equity rally “without” a typical 3-5% pullback has been very unusual. Further the speed and the size of the current rally have not been unusual and that while multiples are high relative to their historical averages, they are in line with their historical drivers. Overall, they see S&P 500 EPS growth of 11% in 2018, supported by stable robust US growth, a pickup in global growth and assuming a range bound dollar. At 19.5x PE, they have an S&P target of 2850 for 2018 but expect more regular (3%-5%) pullbacks to resume next year. Refer to the link for more details.

Over in Catalonia, Spain PM Rajoy visited the region for the first time since the government retook control. He called on “the silent or silenced majority” voters that oppose secessionism to “convert its voices into votes” in the upcoming 21 December regional election. Further, he noted “it’s urgent to return a sense of normality to Catalonia” and that he “ask all companies that have worked in Catalonia not to leave”.

Back to China’s financial sector liberalisation measures announced back on Friday, including: i) foreign investors can own controlling stakes (51%) in local securities JVs, ii) removing restriction that foreign companies can only own less than 20% of a Chinese bank and iii) allowing foreign insurance companies to own up to 51% of local individual insurance company 3 years from now (100% in 5 yrs). Our China Chief economist notes that this is a big step toward opening up the service sector to the world and consistent with the message from the 19th Party Congress. They expect the reform will help to promote FDI inflows and offset some of the capital outflows. Refer to the link for more details.

Before we take a look at the calendar, we wrap up with other data releases from Friday. In the US, the November University of Michigan consumer confidence was lower than expectations at 97.8 (vs. 100.8). At the end of last week, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth was 3.3% saar while the NY Fed’s Nowcast estimate sits at 3.2% saar.

In the UK, the macro data was above expectations. The September IP was 0.7% mom (vs. 0.3% expected) – the 6th consecutive month gain, leading to annual growth of 2.5% yoy (vs. 1.9% expected). Elsewhere, manufacturing production also beat at 0.7% mom (vs. 0.3% expected) and 2.7% yoy (vs. 2.4% expected). In France, the September IP slightly beat at 0.6% mom (vs. 0.5% expected) and 3.2% yoy (vs. 3.1% expected), but manufacturing production was lower than expected at 0.4% mom (vs. 0.8%) and 3.1% yoy (vs. 3.4% expected). Italy’s September IP also disappointed, at -1.3% mom (vs. -0.3% expected) and 2.4% yoy (vs. 4.8% expected).

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