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Trading  | October 11, 2017

S&P500 futures point to a slightly lower open, as Asian stocks rise to trade near decade highs, with Japan’s Nikkei 225 closing at highest since 1996. European stocks are little changed, with Spanish shares gaining after Catalan President rows back from an immediate declaration of independence. MSCI’s all-world stocks index briefly hit a fresh record high in opening European trading as a 1.5% jump in Spain’s IBEX added to a 10-year high set by Asian shares overnight.

In early trading, the euro extended gains spurred by Catalonia’s pullback from an immediate declaration of independence from Spain, while the dollar drifted as investors awaited minutes from the last Federal Reserve meeting. Spanish stocks ralied sharply, with the IBEX 35 index rising as much as 2%, helped by a rise in banking shares which rallied as much as 4%, after Catalan President Carles Puigdemont said he’ll seek talks with Madrid over the future of his region in Spain delaying any independence announcement for “weeks”, rowing back from an immediate declaration of independence.

“There was a chance Puigdemont would have made a decisive declaration, so now yields are dropping because there is room for negotiation left,” said DZ Bank strategist Christian Lenk.

At the same time, the Spanish 10y bond yield dropped 5bps to 1.65%. However, shortly before 5am ET, the EURUSD slumped without a specific catalyst, while the European rally fizzled modestly as renewed fears over the fate of the Catalan region re-emerged.  Puigdemont’s backtrack averted an immediate confrontation over independence for Catalonia, though Spanish leaders are maintaining a hard line. Deputy Prime Minister Soraya Saenz de Santamaria accused Puigdemont of irresponsible leadership even as he sought to reassure companies fleeing the region. Prime Minister Rajoy convened an extraordinary meeting of his cabinet in Madrid on Wednesday to discuss his next move.

Elsewhere in Europe, the FTSE 100 climbed to as high as 7,550.17, surpassing its record closing level of 7547.63, after rising steadily the past 3 weeks. However, the index was down fractionally at last check. The pound has been under pressure in the past month as Brexit negotiations remain stuck on questions over the divorce terms, such as the size of the U.K.’s exit payments and the future of EU citizens’ rights. Stocks elsewhere on the continent, however, struggled for traction, with the Stoxx Europe 600 gauge flat as a drop in industrial metals led miners lower.

Asian equity markets were mostly positive as the region got a tailwind from Wall Street where all 3 major indices posted fresh all-time highs. This supported sentiment with ASX 200 (+0.6%) also lifted by energy names after WTI reclaimed the USD 51/bbl level to the upside. Shanghai Comp. (+0.2%) and Hang Seng (-0.4%) were choppy after a feeble liquidity effort by the PBoC and with Hong Kong benchmark just about kept afloat amid Chief Executive Lam’s policy address and profit tax cut announcement.

The most notable overnight move was the jump in Japanese shares, with the Nikkei 225 closing at its highest since December 1996, propped by companies in industries ranging from technology to retail. Machinery maker Fanuc Corp., Recruit Holdings Co., FamilyMart UNY Holdings Co., SoftBank Group Corp. and Terumo Corp. were the biggest contributors to the Nikkei 225’s gain, while scandal-whipped Kobe Steel Ltd. was the worst performer, falling a record 36 percent over two sessions. Railway companies and insurers propelled the benchmark Topix index to a decade-high for a second straight day.

“Expectations for upward revisions in local companies’ annual profit targets are pretty high ahead of the earnings season kicking off later this month,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. in Tokyo. “It also reflects anticipation of a victory for the Abe administration in the upcoming election.”

Japan’s stock market has been buoyed by a series of upbeat economic data. A Cabinet Office report released before the market opened Wednesday showed Japan’s core machinery orders for August climbed more than analysts expected. The yen’s weakness against the dollar has further fanned speculation for robust growth in quarterly earnings. Japanese voters will head to the polls on Oct. 22 for a general election in which Prime Minister Shinzo Abe’s Liberal Democratic Party will be challenged by Tokyo Governor Yuriko Koike’s new Party of Hope. Support for the LDP was up marginally to 31.2 percent in an opinion survey conducted Oct. 7-9, compared with a poll from last week, according to public broadcaster NHK.

In the US, President Donald Trump’s public feud with Tennessee Senator Bob Corker, an influential fellow Republican, has raised concern that his push for a tax-code overhaul could be harmed. At the same time, the Federal Reserve will publish the minutes from its last minute later with a third U.S. rate hike of the year now looking nailed on for December.

“Squabbles surrounding Trump’s efforts come as no surprise, but it is still not helping the dollar,” said Yukio Izhizuki, senior currency strategist at Daiwa Securities in Tokyo.

Overnight, Trump tweeted dismisses rumours that Chief of Staff Kelly will be fired soon, in which he blames dishonest media and says the chief is doing a fantastic job. Elswhere, Fed’s Kaplan (voter, soft hawk) said will be assessing progress of US economy towards full employment and looking for more signs of upward inflation. Kaplan added that he is mindful waiting too long to raise rates could leave the Fed behind the curve and increases chances of a recession, but also commented that the Fed can afford to be patient on rate hikes because economic growth is not running away. US may seek stricter NAFTA rules of origin and may require 85% of content to come from 3 NAFTA countries, may also seek 50% US content requirement, according to reports.

In FX, most Asian emerging currencies were higher after China fixed the yuan stronger and as news on Catalonia encouraged risk-taking, while concerns over U.S. tax reform and geopolitical risks lingered. Taiwan’s dollar was the biggest gainer, followed by Thailand’s baht while the offshore yuan fell. The euro rose to the highest level in two weeks after Catalan President Carles Puigdemont said that while an Oct. 1 referendum had given him the mandate to pursue independence, he would “suspend” the result for some weeks for dialogue with Spanish Prime Minister Mariano Rajoy’s administration. Catalan concerns have been rolled over to a future date and the yuan has been stronger, which are among the positive factors for Asia’s emerging currencies, said Stephen Innes, Singapore-based head of trading for Asia Pacific at Oanda Corp.

“Not too surprisingly, Asia’s EM FX is looking a lot brighter.” The Bloomberg Dollar Spot Index declines and the 10-year U.S. Treasury yields stayed below their recent highs of 2.4 percent, amid a feud between U.S. President Donald Trump and high-ranking Republican Senator Bob Corker that’s put the tax-reform agenda in question. The yen strengthened against the U.S. currency amid persistent concerns about North Korea. The Australian dollar rose, while the kiwi was steady

The dollar was little changed against its peers before FOMC minutes; stock futures held to tight ranges after Tuesday’s record high, while Treasury yields slipped. The euro held above 1.18 as options suggested further upside, while Spanish bonds outperformed on lower Catalan risks and the Turkish lira climbed for the first time in nine days. The Bloomberg Dollar Spot Index edged lower as London came into the market, reversing gains in the Asia session; the euro edged higher for a fourth day of gains against the dollar; Aussie dollar caught a bid from offshore funds following strong response to record bond auction; dollar-yen edges lower but trades above 112.00; cable steady around 1.3200 but neared 0.9000 against the euro as evidence emerged of further splits within the U.K. government over Brexit; Spanish bonds rallied as Catalans put off an immediate declaration of independence and sought dialogue.

Treasuries stuck in tight ranges through Asian hours and edge higher early in Europe as stocks unwind opening gains. Treasuries continue to outperform bunds, with spread 3bps tighter, though no evidence of large cross-market block trades that helped drive the tightening on Tuesday

In geopolitics, North Korea is reportedly looking as if it could be ready to launch multiple scud missile. US President Trump was briefed by Defence Secretary Mattis and a top military leader, in which they discussed a range of options to respond to any North Korea aggression. There were reports that 6 planes including 2 US B1-B bombers flew over the Korean peninsula as a show of force.

In the U.S., investors will parse Wednesday’s FOMC minutes for further confirmation a December rate increase is on track. Ten-year U.S. Treasury yields nudged lower after President Donald Trump said Tuesday he plans to make changes to his tax plan within the next few weeks, while dismissing concerns that his public spat with Senator Bob Corker would scuttle an overhaul. BlackRock, Delta among companies set to report earnings.

Bulletin headline summary from RanSquawk:

  • European bourses trade in the green with Spain leading the charge following yesterday’s announcement by Puidgemont
  • FX trade has been limited early in the European session, as markets digest the Catalonian announcement, and wait in anticipation for the latest FOMC minutes
  • Looking ahead, highlights include US JOLTS, FOMC minutes, Fed’s Evans, Williams and ECB’s Praet

Market Snapshot

  • S&P 500 futures down 0.09% to 2,546.25
  • STOXX Europe 600 down 0.01% to 390.12
  • MSCI Asia up 0.1% to 165.00
  • MSCI Asia ex Japan up 0.3% to 544.82
  • Nikkei up 0.3% to 20,881.27
  • Topix up 0.1% to 1,696.81
  • Hang Seng Index down 0.4% to 28,389.57
  • Shanghai Composite up 0.2% to 3,388.28
  • Sensex down 0.06% to 31,905.31
  • Australia S&P/ASX 200 up 0.6% to 5,772.15
  • Kospi up 1% to 2,458.16
  • German 10Y yield rose 1.7 bps to 0.459%
  • Euro up 0.2% to $1.1833
  • Italian 10Y yield rose 1.3 bps to 1.833%
  • Spanish 10Y yield fell 2.8 bps to 1.667%
  • Brent Futures up 0.2% to $56.74/bbl
  • Gold spot up 0.05% to $1,288.69
  • U.S. Dollar Index down 0.2% to 93.14

Top Overnight News

  • Dallas Fed President Robert Kaplan says he’s undecided on a rate move, with U.S. economy solid and inflation pressures probably building
  • European Central Bank policy makers are poised to preserve their commitment to ultra-low interest rates as they wrangle over how long to keep their bond-buying program going, according to central bank officials, who declined to be named because such matters are confidential
  • Bets on EUR/USD through options suggest that traders are the most bullish on the euro since 2009 on prospects for ECB tapering
  • China is moving forward with plans to issue its first dollar-denominated bonds since 2004, with the Ministry of Finance scheduled to meet with bankers in Beijing Wednesday to discuss the sale, according to people familiar with the plans
  • Bob Corker Is Just the Beginning of Trump’s Tax-Cut Problems
  • House Lawmakers Question IRS Over $7.25m Equifax Contract
  • Orange-Juice Market Awaits First U.S. Crop Report Since Irma
  • Wildfires Wreak Havoc on California’s $58 Billion Wine Industry
  • High Court Dismisses One Trump Travel Ban Case, May Drop Second
  • House Panel Is Said to Subpoena Firm That Produced Trump Dossier
  • FAA’s Panel Fails to Agree on Need for Drone Security Measures
  • Wind and Solar’s Future Depends on Taxes, Not Clean Power Plan
  • Kobe Steel Scandal Cascades as Two More Products Under Suspicion
  • Madrid Keeps Pressure on as Catalans Blink on Independence Bid
  • UBS’s Ermotti Talks Bigger Returns as Capital Issues Fade
  • Molina Healthcare Names Joseph M. Zubretsky President & CEO
  • Amazon Executive Drops Hints of Preferences for Second HQ Site
  • China Urges U.S. to Respect Its Sovereignty, Interests: CCTV
  • Google to Add 300 Jobs in France Over the Next Year, Echos Says

Asian equity markets were mostly positive as the region got a tailwind from Wall St where all 3 major indices posted fresh all-time highs. This broadly supported sentiment with ASX 200 (+0.6%) also lifted by energy names after WTI reclaimed the USD 51/bbl level to the upside. Nikkei 225 (+0.3%) pared opening weakness as USD/JPY nursed losses, although Kobe Steel woes persisted after further confirmation of product data falsification. Shanghai Comp. (+0.2%) and Hang Seng (-0.4%) were choppy after a feeble liquidity effort by the PBoC and with Hong Kong benchmark just about kept afloat amid Chief Executive Lam’s policy address and profit tax cut announcement. Finally, 10yr JGBs were subdued amid a positive risk tone in Japan and after a mixed 30yr auction where the b/c increased but accepted prices declined from last month. PBoC injected CNY 20bln via 7-day reverse repos. PBoC set CNY mid-point at 6.5841 (Prev. 6.6273)/

Top Asian News

  • Noble Group Said in Advanced Talks to Sell Oil Unit to Vitol
  • Hong Kong Developers Won’t Get Lower Land Premiums, Lam Says
  • India Oil, Gas Service Providers Surge After Sales Tax Clarity
  • Japan Shares Rise With Nikkei 225 Closing at Highest Since 1996
  • Deutsche Bank’s Japan Investment Bank Chairman Said to Leave

Most EU bourses are trading marginally in the green, while outperformance has been seen in Spanish assets with the IBEX surging higher, led by banking names. This comes after yesterday’s press conference from the Catalan leader, whereby Puigdemont announced that he had requested the mandate to pursue independence from Spain but said it would not be implemented for a few weeks. A strong German 5 year auction could induce a bid and re-test of the intraday highs, but debt futures are still lacking any real conviction ahead of the after-hours Fed minutes and latest from Spain on Catalonia (PM Rajoy holding a news conference at 11.00BST). However, Spanish Bonos and EZ peripheral paper overall continue to outperform, with Portuguese bonds deriving additional support from well received 5 and 10 year supply, even though this was destined to draw decent investor interest as the first bond offerings since S&P upgraded the sovereign in September. Conversely, UK Gilts remain the laggards after  Tuesday’s lacklustre DMO 20 year tap, with Brexit and BoE tightening expectations all weighing on sentiment/direction

Top European News

  • Europe’s Natural Gas Traders Have a Bone to Pick With Italy
  • Pound to Climb Toward $1.40 Amid Floundering Brexit: Saxo Bank
  • Italy New Electoral Law May Not Enhance Governability: Citi
  • Smith and Nephew Gains After Report of Elliott Stake Building
  • Mondi Falls as Rising Costs, Currency Moves Weigh on Earnings

In currencies, trade has been limited early in the European session, as markets digest the Catalonian announcement, and wait in anticipation for the latest FOMC minutes. The greenback has backed off this morning, with the DXY finding support around yesterday’s lows, just ahead of 93.10. As such, Dollar counterparts have ticked up, with EUR/USD edging higher following marginal bids amid the Catalonian leader avoiding making a formal declaration of independence from Spain, to test its August 29th high. In fact, the EUR has seen a slight bid against all its counterparts, as EUR/GBP grinds higher through the 0.8940 consolidation, while EUR/CAD attacks September’s high of 1.4812, where offers are likely placed. USD/JPY has edged away from 112.50, with option expiries the theme this week, (2bln worth of expiries between 112.80 and 113.00).

In commodities,trade has also been quiet throughout the session with WTI crude futures mildly extending on yesterday’s 3% increase to briefly break above the USD 51/bbl level. Of note, today will see the release of the API crude report after US close and the monthly OPEC report at 1200BST.  Gold climbed 0.1 percent to $1,288.98 an ounce, the highest in more than two weeks.

Looking at the day ahead, China’s Xi Jinping is due to deliver a communique following the meeting of the Chinese Communist Party. The UK’s Philip Hammond will face questions in the House of Commons, including on Brexit related issues. In the US, the big focus in the US will be the FOMC meeting minutes from the September meeting. Datawise we’ll receive August JOLTS data prior to this, while the Fed’s Evans and Williams are both due to speak later on. The ECB’s Praet is also due to deliver comments this evening.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -0.4%
  • 7:15am: Fed’s Evans Speaks on Economy and Monetary Policy
  • 10am: JOLTS Job Openings, est. 6,135, prior 6,170
  • 2pm: FOMC Meeting Minutes
  • 2:40pm: Fed’s Williams Gives Community Leaders Speech

DB’s Jim Reid concludes the overnight wrap

Markets spent yesterday mostly waiting for Catalan President Carles Puigdemont’s address last night to the regional parliament. It seemed he’d increasingly been boxed in by differences of opinion within his own coalition and also the fact that 6 of the 7 Catalonian based companies in the IBEX 35 have made strong overtures towards relocating their legal bases away from the region. Given that his options had seemingly been reduced over recent days he played his hand relatively well by saying the referendum had given the region a mandate for independence but that they would hold off for now to enter into dialogue with PM Rajoy and his administration. He said “we propose the suspension of the effects of the declaration of independence for a few weeks, to open a period of dialogue”.

Later in the evening, Bloomberg reported that Catalan lawmakers (including Puigdemont) are signing a document titled “Declaration of the representatives of Catalonia”, but are delaying its implementation. On the other side, the Spanish Deputy PM said “neither Mr Puigdemont nor anyone else can draw conclusions from a law that doesn’t exist, from a referendum that hasn’t taken place…” We shall find out more soon as the Spanish PM Rajoy will convene an extraordinary cabinet meeting in Madrid today (9am local time) and will address the Spanish Parliament later in the day.

Outside of this, the big focus today will be the FOMC meeting minutes from the September meeting (2pm local time). Our US team believes inflation will be a heavily debated topic, but given the recent Fed speak, it appears that most voting members are looking through some of the recent weakness and prefer to continue the “gradual” removal of monetary accommodation. For example, based on the forecasts submitted at the meeting, 12 of the 16 FOMC participants favoured at least one more rate hike this year. Elsewhere, the Fed’s Rosengren said over the weekend that inflation “is still not at the level that I would expect it to be, but we’re definitely seeing that tight labour markets are causing wages and salaries to gradually go up as well” and that inflation “will be much closer to 2%” a few months into 2018. As a reminder, the voting Chicago Fed Evans (today) and Fed Governors Brainard and Powell (tomorrow) will be speaking over the next day or so. Data wise, the September PPI is due tomorrow, followed by the big CPI release and retail sales on Friday. So plenty of opportunity for the rate debate to move on.

Turning to the proposed US tax reforms now. When asked if the latest public rhetoric with Senator Corker would undermine his tax efforts, President Trump said “I don’t think so. I think we’re well on the way”. Further, he noted “we’ll be adjusting (the plans) a little bit over the next few weeks to make it even stronger…”. Later on, the White House Press Secretary Sanders noted that “… the final piece of legislation has not been finalised….(but) the framework is still the same”. For now we wait and watch, perhaps not for too long, as according Kevin Brady (Chairman of the Ways and Means Committee), his committee will release the tax bill “very soon” after both Chambers of Congress adopt a budget resolution later this month.

Circuling back to Brexit. The EU President Donald Tusk said the EU was not preparing for a full collapse of Brexit talks, but if talks “continue at a slow pace and that sufficient progress has not been reached, then we will have to think about where we’re heading”. Elsewhere, Chancellor Hammond has written for The Times overnight and noted that the UK government is “planning for every outcome and we will find any necessary funding and will only spend it when it’s responsible to do so”. We shall know more this Thursday post a wrap up news conference by EU negotiator Michel Barnier.

Staying with politics. Over in Italy, the Premier Gentiloni’s cabinet has called a confidence vote to pass a new electoral law which could potentially penalise the 5-Star Movement party (5SM). The new system (Rosatellum 2.0) would likely be used in next year’s election and could allow the formation of broad coalitions before the ballot. The new system allows 36% of lawmakers elected on a first-past-the-post basis and 64% via proportional representation. The 5SM candidate for PM (Luigi Di Maio) said “this is a mortal blow to democracy…the aim is to destroy us”. However, as per Reuters, the Rosatellum, even if passed, still looks unlikely to lead to a clear parliamentary majority, with opinion polls showing the centre-left, centre-right and 5SM splitting the vote three ways. For now, the voting process for the new law is expected to end this Thursday with the likely backing from the ruling PD party, Berlusconi’s opposition centre-right Forza Italia, the Northern League and the small centrist Popular Alternative (AP) group. Then the bill will go to the upper house senate where the government apparently has no clear majority.

This morning in Asia, markets are following the positive lead from the US. The Nikkei (+0.26%), Kospi (0.86%), ASX 200 (+0.61%) and Shanghai Comp. (+0.33%) are all modestly up, but the Hang Seng is broadly flat as we type.

Turning to market performance yesterday. US equities rebounded towards its record high, with the S&P 500 (+0.23%), Dow (+0.31% to a fresh all time high) and Nasdaq (+0.11%) all up slightly. Within the S&P, gains were led by the utilities and consumer staples sector with minor offset from the consumer discretionary sector. Wal-Mart jumped 4.47% after announcing a US$20bln share buyback (c8% of market cap) with positive guidance to its e-commerce sales. European equities broadly softened yesterday ahead of Catalan President’s address which took place after market hours. The Stoxx 600 (-0.01%), CAC (-0.04%) and DAX (-0.21%) dipped marginally, while the IBEX fell 0.92% but the FTSE 100 advanced 0.40%.

Bond markets were mixed but little changed. Core 10y bond yields were broadly flat (UST +0.2bp; Bunds -0.2bp; OATs unch), while Gilts (+0.6bp) and peripherals such as Italian BTPs (+1bp) and Spain (+1.5bp) were slightly higher. At the 2y part of the curve, Bunds and OATs were broadly flat, but Gilts and Spanish yields rose 1.7bp and 2.3bp respectively.

Turning to currencies, the US dollar index fell 0.41% while Euro and Sterling gained 0.58% and 0.46% respectively, partly aided by higher than expected macro data and the more conciliatory tone from the Catalan President’s address. WTI oil rose 2.70% to US$50.89/bbl ahead of EIA data, which are expected to show crude inventories declined for a third week. Precious metals were slightly higher (Gold +0.31%; Silver +0.90%) while other base metals were mixed but little changed (Copper +0.56%; Zinc +0.67%; Aluminium -0.93%).

Away from markets, the Netherlands has just formed a new coalition government 208 days after the actual election. Mark Rutte of the People’s Party for Freedom and Democracy will lead the coalition along with three other parties, although with only a 1 seat majority (76 out of 150) in the parliament. As per the FT, some of the government’s early focus include: i) support the unity of the remaining 27 EU members and protect the interests of the Dutch fishing sector and ii) any common Eurozone debt instruments are undesirable, in part as all member states cannot shift the negative impact of their policies onto other countries.

Looking at the day ahead, China’s Xi Jinping is due to deliver a communique following the meeting of the Chinese Communist Party. In Europe the final September CPI revisions for Spain are due. Onto other events, The UK’s Philip Hammond will face questions in the House of Commons, including on Brexit related issues. Across the pond, the big focus in the US will be the FOMC meeting minutes from the September meeting. Datawise we’ll receive August JOLTS data prior to this, while the Fed’s Evans and Williams are both due to speak later on. The ECB’s Praet is also due to deliver comments this evening.

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