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Trading  | October 19, 2017

Has the market’s “melt-up” levitation finally ended? Of course, it could be much worse: as Bloomberg’s Paul Jarvis recalls, thirty years ago on this day traders around the globe were staring at their screens in disbelief as stock markets turned to a sea of red: the Dow, S&P 500, FTSE, DAX and CAC fell -23%, -20%, -10%, -9% and -10% respectively.

Fast forward to 2017 and the day known as Black Monday appears as little more than a blip in U.S. and European stock markets’ relentless progress. Having closed above the 23,000 mark for the first time on Wednesday, the Dow Jones Industrial Average has led markets back from the abyss, rising more than 13-fold since falling 23% in a single trading session on Oct. 19, 1987.

Then again, “all” it took was central banks collectively buying a little over 30% of global GDP in debt over the past 3 decades, and especially in the past 8 years, to create the world’s most artificial “bull market” and “recovery” in history, and one day there will be hell to pay, but not just yet. Instead, on “Not Green Thursday”, traders wake up today to a modern day version of mini Black Monday, in which a sudden “risk-off” equity selloff has swept across global markets during early European trading, before gradually running out of steam, following a day in which the Dow Jones closed at one of its most overbought levels in the past 100 years.


US equity futures lead the move, with the VIX surging more than 1 vol to 11.550 (up 14%) the highest in five weeks, with Nasdaq futures heavily underperforming on reports of orders being cut for Apple iPhone 8. Losses compounded by poor earnings from major European names including SAP (-2.2%), Unilever (-4.8%) and Nestle (-0.6%); additionally, Hang Seng sold off into the close to end the day down 1.9%. As stocks sell off, USTs rally sharply in response, with the short end of the curve flattening again as the USD/JPY spikes lower, as do crude futures.

Here are the key overnight events that are having the biggest impact on this morning’s trading:

  • Apple: supplier orders for iPhone 8 and Plus are reduced by ~50% for Nov. and Dec. with shipments seen at 5-6m units per month: EDN
  • Catalonia: Spain to invoke Art. 155 and suspend Catalan autonomy after regional president refused to drop independence claims
  • ECB’s Nowotny: ECB cannot stop QE purchases abruptly; policy can be normalized before inflation reaches 1.9%, would be a mistake to wait too long on changing QE
  • China 3Q GDP 6.8% down from 6.9%; Retail Sales 10.3% vs 10.2% est; Industrial Output 6.6% vs 6.5% est; Fixed Assets 7.5% vs 7.7% est.
  • New Zealand: new coalition govt formed between Labour and First parties; National Party ousted
  • U.K. Sept. Retail Sales m/m: -0.8% vs -0.1% est.

As Nanex’ Eric Hunsader shows, today’s trading session is shaping up – at least for now – as the biggest post-midnight selloff in the S&P in 2017.

Meanwhile, as noted earlier, Spanish bonds marginally underperform due to auction concession and confirmation that govt will suspend Catalan autonomy. NZD weakest in G-10 after new coalition govt is formed, with the potential for RBNZ mandate to therefore be expanded beyond inflation. Gold and VIX rally given the risk-off sentiment

The Stoxx Europe 600 Index headed for the biggest drop in almost two months, with all industry sectors in the red, after Spain said it would move ahead with suspending Catalonia’s autonomy. Spanish shares lagged the benchmark and bond yields for peripheral Europe fluctuated.  Underwhelming earnings from companies including Unilever and SAP SE further frayed investors’ nerves, already on edge amid concerns about the escalating Catalan stand-off, the lack of progress in Brexit negotiations and the search for a new Federal Reserve chief.

“European markets have started the day firmly on the back foot as a raft of company report earnings missed expectations, while investors await the next steps with respect to the constitutional crisis in Spain and today’s EU summit in Brussels,” said Michael Hewson, chief market analyst at CMC Markets U.K. “We look set for a lower U.S. open today. All eyes are likely to be on today’s meeting with current Fed chief Janet Yellen and U.S. President Trump with some Republicans calling for her to be allowed to leave.”

Meanwhile in safe havens, bunds gained as European stocks slumped from the open. Spanish bonds softened as Spain moves ahead with suspending Catalonia’s autonomy, though bounced after solid auctions.

The late day selloff in stocks in Hong Kong stood out in a mixed Asian session, as the Hang Seng crashed as much as 600 points, or 2.4%, in the last minutes of trading, coming even as China reported its economy expanded 6.8 percent last quarter, as traders focused on comments about household debt and asset bubble risk by PBOC governor Zhou.

The dollar rebounded after losses earlier in the week while the pound weakened as data showed U.K. retail sales dropped more than forecast in September, making third-quarter growth in the sector the weakest in four years. The euro briefly dropped before recovering. Haven currencies led G-10 gains amid risk-off mood as weak earnings dragged stocks lower.  Elsewhere, the kiwi dollar plummeted 1.3% after New Zealand’s Labour Party got the backing of the nationalist New Zealand First Party to form a government, as reported earlier. China’s currency retreated even after data from the central bank suggested that the country is now seeing capital inflows. Iron ore fell the most since September.

Treasuries pared weekly losses and the greenback snapped a three-day winning streak. The euro felt the heat from latest Catalonia headlines, yet was supported by demand for upside ECB exposure, while sterling dropped the most in two weeks as soft U.K. data coincided with start of EU summit.

In commodities, West Texas Intermediate crude fell 1.3 percent to $51.34 a barrel, the lowest in a week. Gold increased 0.3 percent to $1,284.68 an ounce. Copper declined 0.8 percent to $3.15 a pound.

In rates, the yield on 10-year Treasuries decreased two basis points to 2.32 percent. Germany’s 10-year yield dipped less than one basis point to 0.39 percent. Britain’s 10-year yield decreased three basis points to 1.288 percent. Japan’s 10-year yield declined one basis point to 0.067 percent.

Data include jobless claims and Philadelphia Fed Business Outlook. Philip Morris, Paypal, BNY Mellon, Danaher and Blackstone are among companies reporting earnings

Market Snapshot

  • S&P 500 futures down 0.4% to 2,550
  • STOXX Europe 600 down 0.6% to 389.27
  • MSCI Asia down 0.2% to 167.03
  • MSCI Asia ex Japan down 0.7% to 549.02
  • Nikkei up 0.4% to 21,448.52
  • Topix up 0.3% to 1,730.04
  • Hang Seng Index down 1.9% to 28,159.09
  • Shanghai Composite down 0.3% to 3,370.17
  • Sensex down 0.08% to 32,584.35
  • Australia S&P/ASX 200 up 0.1% to 5,896.13
  • Kospi down 0.4% to 2,473.06
  • German 10Y yield fell 1.4 bps to 0.382%
  • Euro down 0.02% to $1.1785
  • Italian 10Y yield rose 4.1 bps to 1.773%
  • Spanish 10Y yield rose 3.7 bps to 1.656%
  • Brent futures down 1% to $57.56/bbl
  • Gold spot up 0.2% to $1,283.83
  • U.S. Dollar Index up 0.1% to 93.49

Top Overnight News

  • Spain will move forward with the process of suspending the powers of the Catalan government after Regional President Carles Puigdemont refused to drop his claim to independence. “The government will continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia,” the government said in a statement on Thursday morning
  • Robust factory output and consumer spending kept China’s economy humming in the third quarter, giving President Xi Jinping a firm footing to rein in excess capacity and shift to a more sustainable growth path
  • Yuan trading band expansion is a signal for opening up, but not a current focus, PBOC Governor Zhou Xiaochuan says at group discussion at the 19th Party Congress
  • Japan August all activity index rose 0.1% m/m, vs est. +0.2%
  • U.K. PM May wants negotiations to move on to the future relationship and hopes to discuss how to make quicker progress during the meal at a Brussels summit on Thursday, according to a senior U.K. government official
  • Euro briefly dipped and Spanish bonds fell on Madrid’s move to proceed with suspension of Catalan autonomy; Bloomberg dollar index steady
  • Soft earnings weighed on European stocks and S&P futures, supporting Treasuries and core European bonds
  • Cable dropped to one-week low after U.K. retail sales fell more than expected, while yen recovered from a two-week low on risk-off demand
  • Kiwi hit four-month low vs USD and the lowest in more than a year vs AUD as New Zealand First Party’s to back opposition Labour Party to form government; Aussie rose on jobs data beating estimates before paring gain after China’s 6.8% 3Q growth met estimates, while remarks by PBOC’s Zhou earlier had raised some expectations for a possible positive surprise

Asia equity markets traded mixed despite a mostly positive close on Wall Street. where all 3 majors posted fresh intraday records and the DJIA extended above 23K powered by IBM’s best performance in 8 years, as the region also digested a slew of tier 1 Chinese data including Q3 GDP which slightly slowed. ASX 200 (+0.1%) and Nikkei 225 (+0.7%) were positive in which the latter outperformed as it coat-tailed on USD/JPY’s brief reclaim of the 113.00 handle. Conversely, Hang Seng (-0.2%) and Shanghai Comp. (-0.4%) were less enthusiastic as participants mulled over the latest Chinese data in which GDP met expectations but still slowed from prior and although Industrial Production and Retails Sales mildly topped estimates, Fixed Asset Investments grew at its slowest pace in nearly 18yrs. Finally, 10yr JGBs were flat for most the session with demand subdued amid the positive risk tone in Japan, although mild support was seen following a 5yr JGB auction in which the b/c rose from prior. Bank of Korea kept the 7-day Repo Rate unchanged at 1.25% as expected. BoK Governor Lee said that there was one board member who dissented at today’s rate decision, while the Governor added that monetary policy is to remain accommodative and that conditions are getting ripe to adjust monetary easing

Overnight key Chinese data came in generally in line to stronger than expected:

  • Chinese GDP (Q3) Q/Q 1.7% vs. Exp. 1.7% (Prev. 1.7%, Rev. 1.8%). (Newswires)
  • Chinese GDP (Q3) Y/Y 6.8% vs. Exp. 6.8% (Prev. 6.9%)
  • Chinese Industrial Production (Sep) Y/Y 6.6% vs. Exp. 6.5% (Prev. 6.0%)
  • Chinese Retail Sales (Sep) Y/Y 10.3% vs. Exp. 10.2% (Prev. 10.1%)
  • Chinese Fixed Assets Investment Ex-Rural YTD (Sep) Y/Y 7.5% vs. Exp. 7.7% (Prev. 7.8%); lowest since December 1999.

PBoC Governor Zhou stated the trading band is not too important and that expanding the band is not currently in focus, while PBoC’s Yi stated that China will continue to expand macroprudential measures for the property sector.

Top Asian News

  • Taiwan Apple Suppliers Fall After Report of IPhone 8 Order Cuts
  • Toto Indonesia Distributor Is Said to Plan $150 Million IPO
  • How One Hedge Fund Ignored the China Bears and Made a 65% Gain
  • China’s Growth Momentum Gives Xi Platform to Deliver on Pledges
  • China’s Big Ball of Money May Be Headed Back to Stock Market
  • Billionaire Lau’s Chinese Estates Can’t Get Enough of Evergrande

In Europe, a broad risk off tone being seen in EU equities, alongside US equity futures this morning, with the move attributed to US equity futures tripping tech stops. Elsewhere, the IBEX is taking a hit amid the standoff between Spain and Catalan, as reports note that Spain’s Cabinet are to proceed with Article 155 on Saturday. Gilts and Short Sterling futures were already on the rebound prior to the dire UK data (and back month downgrades), but have extended gains, understandably – 10 year debt future just shy of 125.00 (some 1400 lots said to have been blocked at 124.97, buyer touted), and 3 month strip 0.5-4 ticks above parity. Some might contend that a leak prompted the pre-release recovery, but in truth all core bonds and STIRs were on the advance as cash bourses and US stock futures collapsed. The catalysts and rationale range from a tech-led rout, Catalonia on the brink of Article 155, a mere correction and for those prone to superstition an ominous repeat of 1987. All things considered, Spanish supply was taken down comfortably, and we suspect similar appetite for French OATs. Bunds have continued their recovery to 162.56, and thus surpassing the nearest upside technical target of 162.45, with Wednesday’s highs next in sight. US Treasuries also regaining composure after another squeeze in yields yesterday.

Top European News

  • U.K. Retail-Sales Growth Slumps to Weakest in Four Years
  • European Stocks Slide With Spain as Catalan Deadline Passes
  • Abertis Finds Atlantia Bid Attractive, Wants Better Price
  • IWG Falls Most Ever; Says Profit to ‘Materially’ Miss Estimates

In FX, : New Zealand’s First Party announced their decision to form a government with the Labour party, meaning that the Labour party will govern the nation for the first time in 9-yrs. In turn, NZD fell on the news, reflecting increased uncertainty, with the currency moving towards the October low of 0.7060, printing a low of 0.7040 after tripping stops through 0.7050. This slip in NZD led to AUD/NZD reaching its highest level in 18-months after breaking through the 1.10 and 1.11 handles. AUD/NZD looks to have met resistance at the 78.6% Fib retracement (1.1176) of the 2015 high to the 2016 low. AUD had also been supported by solid Australian jobs data with the employment change printing ahead of analyst estimates, while the unemployment rate took a surprise fall. Throughout the Asian session the JPY continued to weaken past 113 against the greenback as persistent record milestones on Wall Street saw USD/JPY benefit from carry trade flows. However, during the European morning, broad based declines in global equities amid US equity futures tripping tech stops led to a leap in the JPY with USD/JPY moving back to the mid-112. GBP dipped back to the mid 1.31 from just below of 1.32 amid annual retail sales growth slowing to weakest level since 2013 in Q3 after Septembers retail sales figure printed a surprise fall. Consequently, indicating that consumer demand remains uncertain ahead the BoE rate decision next month. Since the comments from the BoE’s new recruits (Ramsden and Tenreyro) as well as uninspiring data has seen market pricing of a hike next month dip from over 80% to 69%.

In commodities, similarly with the global risk off sentiment, WTI and Brent crude futures are hovering around their lows of the day, while the FTQ flow supported the precious metals complex with Gold and Silver prices edging higher. OPEC sec gen Barkindo says we are satisfied that Nigeria and Libya are making a recovery on their output, further saying Sceptics of oil deal were totally mistaken.

Looking at the day ahead, the most notable release in Europe will be UK retail sales data while in the US the most significant releases include the latest weekly initial jobless claims numbers, October Philly Fed business outlook and September leading index. Verizon results headline the corporate earnings releases due out.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 240,000, prior 243,000; Continuing Claims, est. 1.89m, prior 1.89m
  • 8:30am: Philadelphia Fed Business Outlook, est. 22, prior 23.8
  • 9:30am: Fed’s George Speaks in Oklahoma
  • 9:45am: Bloomberg Consumer Comfort, prior 49.5; Economic Expectations, prior 51.5
  • 10am: Leading Index, est. 0.1%, prior 0.4%

DB’s Jim reid Concludes the overnight wrap

Today marks the 30th anniversary of Black Monday where the Dow, S&P 500, FTSE, DAX and CAC fell -23%, -20%, -10%, -9% and -10% respectively. The FTSE fell a further 12% the day after perhaps reflecting the difficulties in fully reopening the market after the great storm a few days before.

Overnight, China printed an in line 3Q GDP reading of 6.8% yoy, but both the September retail sales (10.3% yoy vs. 10.2% expected) and IP (6.6% yoy vs. 6.5% expected) slightly beat expectations. This morning in Asia, markets are trading a bit mixed. The Nikkei (+0.66%), ASX 200 (+0.15%) and Kospi (+0.06%) are slightly up, but the Hang Seng (-0.14%) and Chinese bourses (-c0.5%) are down as we type.

Now onto the US budget resolution bill, which is a crucial step before the Republicans formally work towards a tax reform package by the end the year. Currently, the GOP control 52 seats in the Chamber and with Mississippi’s
Cochran off due to sickness, there is a slimmer margin of error to pass this resolution which seeks to authorise a deficit increase of cUS$1.5trn over the next 10 years. That said, with the late backing of Senator Collins from Maine, the bill is expected to pass before the weekend and ahead of it going on to the next (tougher) phase, which includes drafting the tax bill and getting it through the committee and the full Senate.

Perhaps conveniently timed, Treasury Secretary Mnuchin has told the Politico that stock markets have tax reforms “baked into it, (with) reasonably high expectations” for a substantial corporate tax cut. Conversely, if tax reforms do not eventuate “there is no question in my mind that…you’re going to see a reversal of a significant amount of these gains”. Notably, US central bankers have a slightly different view, the Fed’s Dudley also spoke on taxes yesterday, but said “we are a long way from tax reforms at this point”, and he has not incorporated the impact of fiscal reform in his economic forecast. This echoed Ms Yellen’s comments on fiscal policy changes over the weekend where she said “it’s a source of uncertainty”, we have taken “a kind of wait and see attitude”. Elsewhere, Mnuchin has now conceded that it’s very hard not to give tax cuts to the wealthy with tax cuts also given to the middle class, in part as “the top 10% of the people pay 81% of the taxes”.

Moving onto bonds, after a relatively big rally after Friday’s soft US CPI print, yesterday saw 10 year USTs retrace all that rally with the closing level now back to 2.347%, broadly steady to last Wednesday’s close. We hit a post CPI low of 2.274% at Friday close. It seems the news that (the relatively hawkish) John Taylor interviewed well for the Fed Chair role from earlier in the week is still percolating through markets. There was also some mildly hawkish central bank speak and bullishness from the US administration over the tax reform bill.

Staying with bonds, core European 10y bonds yields rose c3bp yesterday (Bunds + 3.2bp; Gilts +4.1bp; OATs +3bp) while Spanish yields jumped 7.4bp ahead of today’s deadline (10am local time) for Catalan President Puigdemont to formally respond again on whether independence was declared or not. Note that the El Mundo also reported yesterday that Justice Minister Catala said the central government is ready to apply all legal instruments to restore order (at Catalonia).

Now turning to the mildly hawkish ECB central bankers commentaries where they confirmed the need for tapering. Firstly, ECB’s Lautenschlaeger said “I think it is time next year to gradually but completely roll back net purchases of bonds”. Then ECB’s Bank of France Governor Villeroy de Galhau also noted that “we have to achieve an adequate (QE) reduction because we have progressed towards our inflation target”, but did reiterate that ECB is following a path of “an adequate and very gradual (rate) normalisation”. Finally, ECB’s Hansson reminded that “the economy is in much better shape than some time ago” with people now more optimistic on the economy and that “I personally would like to see that we reduce the purchases, since we are on the right track”, but noted that “no decision has been made yet regarding timing and manner”. Elsewhere, Mr Draghi spoke on reforms, noting “with monetary policy being accommodative, we now have a window of opportunity to take these measures”.

Over in the US, the Fed’s Dudley was also a bit hawkish, noting “we went into 2017 showing a median of three rate hikes, and so far, we’re on path….for that to actually bear out”, which echoed the Fed’s Harker’s earlier comments where he thinks one more rate hike is appropriate this year, but warned his view was dependent on the inflation readings. Elsewhere, the Fed’s Kaplan also spoke at the panel, noting that“whatever we say about the neutral rate, I personally do not intend to raise the fed funds rate so that it’s nudging up against the 10-year Treasury rate”.

Moving onto equity market performance for yesterday. US equities continue to power ahead, with the Dow up 0.70% to a new all-time high (23,158 – the 6th time the index passed a 1,000 increment in last 12 months), helped by stronger sales forecasts fromIBM where its shares rose 8.86%. Elsewhere, the Nasdaq (+0.01%) and S&P (+0.07%) was also up marginally, with modest gains in the financials (+0.56%) and IT sectors largely offset by losses from energy (-0.70%) and telco names. The VIX fell slightly (-0.2pts) to 10.07.

European markets were broadly higher, with the Stoxx 600 up 0.29%, driven by gains in real estate and financials, while energy and material stocks were the only two sectors mildly in the red. Across the region, the DAX (+0.37%), FTSE (+0.36%), CAC (+0.42%) and Spain’s IBEX (+0.55%) all rose modestly.

Key currencies were little changed yesterday, with the US dollar index down 0.07%, while Euro and Sterling edged 0.18% and 0.11% higher respectively. In commodities, WTI oil was up 0.31% following API reports of lower US crude inventories last week. Elsewhere, precious metals dipped slightly (Gold -0.31%; Silver -0.22%) while other base metals were mixed but little changed (Copper -0.51%; Aluminium -1.51%; Zinc +0.89%).

Away from the markets and onto Brexit, EU President Tusk said “I don’t expect a breakthrough tomorrow (at the EU summit)”, although added that “it is still possible” that talks move onto trade in December. Earlier, UK PM May’s office released a letter to EU citizens living in UK, noting “as I travel to Brussels today… many people will be looking at us (the leaders of the 28 nations in EU) – to demonstrate we are putting people first”. We wait and see whether the gesture of goodwill will translate into some tangible breakthrough in today and tomorrow’s EU Summit talks.

Over in Germany, the Federal Constitutional Court has rejected bids to limit the Bundesbank’s cooperation with the ECB on the QE program. The plaintiffs had argued that ECB’s Public Sector Purchase Program (PSPP) might violate the prohibition of monetary financing in EU law that the ECB might have exceeded its monetary policy mandate. For now, the Court noted the plaintiffs must wait till the end of proceedings when judges could still ban the Bundesbank’s participation, although a final verdict into 2018 is likely to coincide with the expected run down of QE already. Elsewhere, PM Merkel has started talks with potential coalition partners in order to form a new government.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the September housing data was slightly weaker than consensus, with housing starts at 1.13m (vs. 1.18m expected) and building permits at 1.22m (vs. 1.245m expected). This was likely partly impacted by the recent Hurricane activity. Elsewhere, MBA applications rebounded to 3.6% this week (vs. -2.1% previous).

The Fed’s latest beige book reported that “economic activity increased in September through early October, with the pace of growth split between modest and moderate”, despite major disruptions from Hurricane Harvey and Irma in some areas. On prices, “pressures remained modest since the previous report”, despite labour markets that were “widely described as tight”. Notably, “the majority of Districts reported only modest to moderate wage  pressures”.

In the UK, the August unemployment rate was in line and steady from July at 4.3% (42 year record low), while the average weekly earnings grew slightly higher than expected at 2.2% yoy (vs. 2.1%). Elsewhere, the September  claimant count rate was in line at 2.3%, while the jobless claims change was higher than last month at 1.7k (vs. -0.2k previous).

Looking at the day ahead, the most notable release in Europe will be UK retail sales data while in the US the most significant releases include the latest weekly initial jobless claims numbers, October Philly Fed business outlook and September leading index. Verizon results headline the corporate earnings releases due out.

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