Another day, another record high in markets around the globe as stocks – contrary to what Jeremy Grantham expects – have already entered the blow-off top mania phase. U.S. equity index futures rise, following a jump in European and Asian shares, while the Nikkei exploded higher after being held back for the past two days by holidays. Base metals and the euro gain.
European stocks rose the most in over two weeks on an acceleration in risk euphoria and signs the global economic expansion of 2017 remains intact. European bourses (Eurostoxx 50 +0.8%) trade higher across the board with all ten sectors in the green, as builders and automakers lead the advance. Gains are relatively broad-based with the exception of consumer staples which trades relatively flat, financials supported post-FOMC minutes. Today has seen a turn in sentiment for UK retail names with Debenhams (tumbling -17.7%) taking the shine off the sector after a disappointing sales update which saw the Co. cut their guidance.
Confirming Europe’s upward economic momentum, Markit reported the best EU Composite PMI since February 2011, printing at 58.1, above last month’s 58.0 and the expected 58.0. The breakdown as follows:
- EU Markit Comp Final PMI (Dec) 58.1 vs. Exp. 58.0 (Prev. 58.0), EU Markit Services Final PMI (Dec) 56.6 vs. Exp. 56.5 (Prev. 56.5)
- German Markit Comp Final PMI (Dec) 58.9 vs. Exp. 58.7 (Prev. 58.7), German Markit Services PMI (Dec) 55.8 vs. Exp. 55.8 (Prev. 55.8)
- French Markit Comp PMI (Dec) 59.6 vs. Exp. 60.0 (Prev. 60.0), French Markit Services PMI (Dec) 59.1 vs. Exp. 59.4 (Prev. 59.4)
- Italian Markit/ADACI Services PMI (Dec) 55.4 vs. Exp. 54.7 (Prev. 54.7)
- Spanish Services PMI (Dec) 54.6 vs. Exp. 54.7 (Prev. 54.4)
Earlier, the MSCI Asia Pacific Index headed for another record close after benchmarks in Tokyo closed at their highest in more than a quarter century, and posting their biggest one-day gains since November 2016. Japanese investors returned to the market after two extra days of holidays for the first time this year, catching up to the rest of the global euphoria with the Nikkei 225 closing up 3.3%, boosted by tech firms and banks, the best annual opening day since 1996 while the Topix index (+2.6%) closed at its best level since 1991 as brokers and oil & coal lead gains in all 33 industry groups.
In macro, the dollar slipped and U.S. Treasuries declined as minutes of last month’s Federal Reserve meeting showed policy makers continue to back a “gradual approach” to raising interest rates.
The USD unwound post FOMC minutes gains and reversed course, with the DXY trading below the 92.00 level with EUR/USD moving higher in the wake of another set of relatively strong PMI figures. The composite PMI rose to its highest level since February 2011 as Germany rose to its highest level in 80 months. AUD/NZD/CAD are all back in the ascendency vs the Greenback, with AUD/USD absorbing at least some 0.7850 offers overnight on the back of China’s services PMI beat and another rise in iron ore prices. The Kiwi has reclaimed the 0.7100 handle having tested, but not clearly breaching key tech DMAs around 0.7105-0.7100 yesterday despite a short dip below the big figure. USD/CAD still drawn to 1.2500 amidst a range up to circa 1.2550, with the Loonie supported by firm crude prices.
Core European bonds pared Wednesday’s gains and the euro advanced toward a three-year high as data showed economic activity in the euro-area accelerated to the fastest pace in almost seven years. US Treasury yields were supported as traders lifted the odds of a Fed move by end-March, gains were limited as the minutes from the Dec. 12-13 policy meeting still lacked any explicit signal of a move in the first quarter, with some officials reiterating their concern about low inflation. “There was no suggestion that the Fed is beginning to feel concerned over the possibility of falling behind the curve,” said Lee Hardman, a currency analyst at MUFG, in a client note. “There appears to be a high hurdle for the Fed to deliver a faster pace of rate hikes beyond their current plans for three hikes in 2018. As a result, we continue to believe that the U.S. dollar will struggle to reverse last year’s weakening trend.”
Meanwhile, commodities extended a record run of gains as oil climbed from the highest close in three years. As shown in the chart below, commodities are enjoying a record run of gains that straddles the end of 2017 and the start of the new year as crude oil notches multiyear highs and investors bet that booming global manufacturing output will help to sustain rising demand for raw materials.
The Bloomberg Commodity Index, which tracks returns on 22 raw materials, posted an unprecedented 14 days of gains to Wednesday, closing at the highest since February. Bloomberg notes that the index is poised for further gains as metals and oil climb higher, supported by supply disruptions, a weaker dollar and improving demand. Palladium, a metal used in car exhaust systems, is approaching an all-time high.
The Bloomberg Commodity Index has rebounded 12 percent since mid-June. In recent days, the cold snap in the U.S., which helped to boost wheat as well as natural gas, also helping to lift the index. Still, prices remain well below the highs from 2008.
Oil climbed from the highest in three years as optimism on the global economy, cold weather and political unrest bolstered a market that’s finally shaking off a prolonged surplus. Crude is having its best start to a year since 2012, after hitting $62 a barrel in New York. Swollen inventories in the U.S. are declining and could shrink further as winter storms boost demand for heating fuel, while a strong economy underpins consumption. OPEC is continuing its fight against a global glut, while street protests are stoking concern over the stability of the group’s third-biggest producer, Iran.
“The rise in oil prices has mainly been caused by the freezing polar vortex hitting the U.S., firing up heating demand, and spurring concern about a potential impact on oil production and trade,” said Jens Naervig Pedersen, an analyst at Danske Bank A/S in Copenhagen.
Copper, a bellwether for global manufacturing, climbed 1 percent after U.S. factory output data on Wednesday beat expectations. China also imposed heavy curbs on scrap imports, leaving buyers there more reliant on mined output, which analysts see tightening in the months ahead.
The commodity rally has ignited shares of producers. BHP Billiton Ltd., the world’s largest mining company, has risen in London to the highest since 2014. BP Plc, the British oil major, posted the first back-to-back annual gain last year since 2005.
In the weeks ahead, Chinese credit data and central bank policy will be key to determining whether the gains continue, Citigroup’s Layton said. “The only reluctance that people have in terms of getting more bullish on metals and bulks is that China has clearly shifted the tone from growth targets to quality over quantity, and people don’t know what that means yet. Chinese credit numbers are going to be critical to setting the tone for the first half, and I think they’re going to be fine.”
Expected data include jobless claims. Walgreens Boots, Monsanto and Lamb Weston are among companies reporting earnings.
Bulletin headline summary from RanSquawk
- Eurozone composite PMI hits highest level since February 2011
- Crude trades in close proximity to multi-year highs amid a draw in API inventories and ongoing Iranian tensions
- Highlights today include US jobless claims, services PMI and DoE oil inventories
Market Snapshot
- S&P 500 futures up 0.1% to 2,714.50
- STOXX Europe 600 up 0.5% to 392.30
- MSCI Asia Pacific up 1.2% to 178.01
- MSCI Asia Pacific ex Japan up 0.4% to 582.18
- Nikkei up 3.3% to 23,506.33
- Topix up 2.6% to 1,863.82
- Hang Seng Index up 0.6% to 30,736.48
- Shanghai Composite up 0.5% to 3,385.71
- Sensex up 0.5% to 33,975.81
- Australia S&P/ASX 200 up 0.1% to 6,077.08
- Kospi down 0.8% to 2,466.46
- German 10Y yield rose 1.2 bps to 0.454%
- Euro up 0.2% to $1.2033
- Italian 10Y yield fell 2.7 bps to 1.798%
- Spanish 10Y yield fell 3.1 bps to 1.567%
- Brent futures little changed at $67.84/bbl
- Gold spot down 0.01% to $1,313.05
- U.S. Dollar Index down 0.1% to 92.07
Top Overnight News via BBG
- Economic output in the euro-area accelerated to the fastest pace in almost seven years as services surged while factories benefited from booming domestic demand and near-record growth in export orders
- London was the worst-performing home market in the U.K. last year for the first time in more than a decade and may be stuck there
- Donald Trump’s desire to squeeze Kim Jong Un’s regime risks being undermined by the furtive maneuvers of oil tankers at sea
- Russia Deputy Foreign Minister: warns U.S. against any intervention in Iran
- European Dec. Service PMIs: Spain 54.6 vs 54.6 est; Italy 55.4 vs 54.7 est; France 59.1 vs 59.4 est; Germany 55.8 vs 55.8 est; U.K. 54.2 vs 54.0 est.
- China Dec. Caixin Services PMI: 53.9 vs 51.8 est.
- South Africa: ANC party to consider removing Zuma as nation’s president m at Jan. 10 meeting of National Executive Committee
- API inventories according to people familiar w/data: Crude -5.0m; Cushing -2.1m; Gasoline +1.8m; Distillates +4.3m
- U.S. Data: lockup for today’s weekly unemployment claims data canceled due to weather, will be released via website
- Massive Winter Storm Threatens New York With Snow and Floods
- Calpers Seeks Manager for $40 Billion Private Equity Portfolio
- Intel, Microsoft Deal With Widespread Computer-Chip Weakness
- Debenhams Profit Warning Clouds U.K. Retailers’ Christmas
- London House Market Worst in U.K. With Price Decline Last Year
- Euro-Area Activity Accelerates to Fastest Pace Since Early 2011
- China Property Bonds Seen Facing Highest Default Risk in ’18
Asian bourses continued their rising streak, with the region trading at around 10yr highs. Japanese investors returned to the market for the first time this year, catch up play has been observed with the Nikkei 225 up 3.3%, while the Topix index (+2.6%) closed at its best level since 1991. ASX 200 (+0.1%) was buoyed by energy names yet again amid the persistent rise in crude. Elsewhere, Chinese markets made marginal gains, Shanghai Comp up a modest 0.33% and Hang Seng 0.57% with sentiment supported by Caixin Services PMI which saw its fastest growth since Aug’14. Bank of Japan Governor Kuroda says will continue patiently with easy monetary policy, adding that the economy is showing steady growth. Chinese released its latest Caixin Services PMI for December, which smashed expectations at 53.9 (vs. Exp. 51.8, Prev. 51.9), its fastest rise since Aug 2014.
Top Asian News
- Japan’s Nikkei 225 Stock Gauge Has Best Start to Year Since 1996
- Saudi Aramco Is Said to Seek Adviser for Global Gas Deals
- Reliance Communications Lenders Seen Facing Earnings Hit
- Axiata Is Said to Consider $500 Million Tower Unit IPO This Year
- Australian Pot Stocks Soar After Government Relaxes Rules
- Turkey’s Halkbank Could Suffer From Ex-Banker’s U.S. Conviction
European markets trade higher across the board (Eurostoxx 50 +0.8%) with all ten sectors in the green in the wake of a relatively upbeat Asia-Pac session after Japanese markets returned from their market holiday. Gains are relatively broad-based with the exception of consumer staples which trades relatively flat, financials supported post-FOMC minutes. Today has seen a turn in sentiment for UK retail names with Debenhams (-17.7%) taking the shine off the sector after a disappointing sales update which saw the Co. cut their guidance.
Top European News
- U.K. Said to Think Barnier Bluffing on No Brexit Deal for Banks
- Ocado Gains on Renewed M&A Speculation, Rumors of Contract Win
- Brexit, Prices Cast Shadow Over Buoyant U.K. Services Industry
In FX, the USD has reversed course and the DXY trades below the 92.00 level with EUR/USD moving higher in the wake of another set of relatively strong PMI figures. The composite PMI rose to its highest level since February 2011 as Germany rose to its highest level in 80 months. AUD/NZD/CAD are all back in the ascendency vs the Greenback, with AUD/USD absorbing at least some 0.7850 offers overnight on the back of China’s services PMI beat and another rise in iron ore prices. The Kiwi has reclaimed the 0.7100 handle having tested, but not clearly breaching key tech DMAs around 0.7105-0.7100 yesterday despite a short dip below the big figure. USD/CAD still drawn to 1.2500 amidst a range up to circa 1.2550, with the Loonie supported by firm crude prices GBP is another gainer vs the USD, as Cable rebounds from sub-1.3500 lows with a modest beat on UK services PMI (54.2 vs. Exp.
54.1) unable to offer much traction in the currency.
In commodities, WTI and Brent crude futures trade in close proximity to recent highs (albeit WTI back below USD 62.00) with oil prices supported by a multitude of factors including last night’s draw in the APIs and ongoing tensions in Iran which has led some to speculate whether the US could remove their waiver of sanctions on Iran (given recent rhetoric from the US). Additionally, Libyan Waha oil output has risen to 272K bpd after pipe repairs. In metals markets, gold has recouped some of yesterday’s post-FOMC minutes inspired losses with prices continuing to track fluctuations in the USD. Elsewhere, Chinese steel rebar futures were seen lower overnight as concerns over weather impacts on production continue to linger. Furthermore, China have vowed to meet targets to cut steel production capacity. Libya Waha oil output rises to 272K bpd after pipe repair. Iran’s elite Revolutionary Guards have deployed forces to three provinces to put down anti-government unrest after six days of protests.
Looking at the day ahead, we have the final readings for the December services and composite PMIs across Europe and the US. In the UK, the December Nationwide House price index, November mortgage approvals and net consumer credit data will be due. Over in the US, there is the December ADP employment change print (190k expected) along with the weekly initial jobless and continuing claims. Away from the data, the Fed’s Bullard will speak at an economic convention.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior 30.1%
- 8:15am: ADP Employment Change, est. 190,000, prior 190,000
- 8:30am: Initial Jobless Claims, est. 241,000, prior 245,000
- 8:30am: Continuing Claims, est. 1.93m, prior 1.94m
- 9:45am: Markit US Services PMI, est. 52.5, prior 52.4
- 9:45am: Markit US Composite PMI, prior 53
- 9:45am: Bloomberg Consumer Comfort, prior 52.4
DB’s Jim Reid concludes the overnight wrap
With 2018 four days old I hope you’ve managed to keep to your new year’s resolutions so far. Mine is to drink less caffeine. If truth be told I’ve always drunk too much tea and now the twins are causing me much stress and upheaval my habit has got out of hand. So here we go….. I’m Jim Reid and I’m a tea-oholic! You’ll find me shaking at my desk this morning whilst drinking a decaf tea.
US equities’ new year’s resolution is obviously to continue to go up in 2018 and yesterday saw more fresh records after a blockbuster ISM and Fed minutes that didn’t really rock the boat. Elsewhere a lot of other assets reversed their opening day 2018 move with the dollar climbing, bond yields rallying and European stocks recovering with the weak Euro. To recap, the S&P rose 0.64% to >2,700 with gains led by energy stocks, while the Stoxx also rose (+0.48%) for the first time in four days. Core 10y bond yields fell c2bp (UST -1.6bp; Bunds -2.6bp) and Gilts fell 7.3bp to largely reverse Tuesday’s move. In FX, the USD dollar index gained 0.34% while Euro fell (-0.36%) for the first time in six days. Finally, the VIX dropped 6.35% to 9.15, marginally above its all-time low of 9.14.
On the data front, the December ISM manufacturing PMI was above expectations at 59.7 (vs. 58.2) and the second highest reading in six years. On an annual basis, the strength was also evident with the 2017 average reading of 57.6 the best in 13 years. In the details, the ISM prices paid jumped to 69 and the gauge of new orders rose to 69.4 – the highest in c14 years.
Turning to the FOMC minutes now. They continue to favour gradual rate hikes but comments on inflation seemed a bit hawkish. On rates, most participants reiterated support for “continuing a gradual approach to raising the target range” (ie: three more hikes in 2018). On the inflation debate, participants noted that “recent readings on monthly inflation had edged up” with “many” participants expecting it to move towards target, although some thought it may stay below target longer than expected and several expressed concerns about inflation expectations. Further, participants discussed several risks that could result in a faster increase in inflation such as higher output, fiscal stimulus or accommodative financial conditions. On the flat yield curve, participants “generally agreed that the current degree of flatness….was not unusual by historical standards”, but several participants thought it required ongoing monitoring. Finally, on tax cuts, many participants expect the reforms to provide a lift to consumer spending and “a modest boost to capital spending”. The Bloomberg implied odds of a rate hike in March increased c12ppt to 81% yesterday.
This morning, Japan’s final reading of the Nikkei manufacturing PMI was 54 (vs. 53.6 prior month) and to the highest level since early 2014, while China’s December Caixin composite PMI also beat at 53.0 (vs. 51.6 previous). Asian markets are broadly higher as we type. The Nikkei is up 2.87% after trading resumed for 2018 while the Hang Seng (+0.55%) and China’s CSI 300 (+0.51%) are up modestly. The Kospi bucked the trend to be down 0.49%.
With the global PMIs/ISM now complete, we’ve updated our usual YoY equity market performance versus the new data based on a regression between the two series over the last 20 years. At face value Europe looks very cheap with the DAX and CAC 30% and 18% lower than where the manufacturing PMIs suggest they should be given the historic relationship between the two. However if we re-benchmark the relationship and dollar adjust the YoY equity market performance we find that these two markets are 14% cheap and only 1% cheap respectively. Other European markets go from being cheap to more in line or a touch expensive (peripherals). This is obviously due to the very strong YoY performance of the Euro over the last 12 months (+15.5% vs the Dollar) that’s preventing European equities from fully benefiting in local currency terms from the strength in the PMIs. For example the DAX should be up around 43% over the last 12 months given where the PMI is but is only up 12%. However on a dollar adjusted basis the DAX is up 29% over the period.
Given the big currency swings the US market is perhaps a better template for general valuations. The regression suggests the S&P 500 should be up 25% YoY whereas it is now up around 20%. So slightly cheap given the data. If we dollar adjust everything, current equity market performance generally implies European, US, UK and Japanese PMIs in the 57-59 region whereas Germany is currently 63.3 and the US at 59.7. We’ve included both local currency and dollar adjusted numbers. As we always say we use this as a rough guide to valuations and try to concentrate on the general cheapness/expensiveness of global markets rather than individual ones where distortions can occur.
Now briefly recapping other market performance from yesterday. US bourses strengthened to fresh highs, with S&P (+0.64%), Dow (+0.40%) and Nasdaq (+0.84%) all higher. Within the S&P, gains were led by energy and tech stocks, with partial offset from telco names. European markets were all higher, with the DAX up (+0.83%) for the first time in six days. Across the region, the CAC (+0.81%), Spain’s IBEX (+0.37%) and FTSE (+0.30%) also advanced.
Elsewhere, key currencies fell modestly against a stronger Greenback with the Euro and Sterling down 0.36% and 0.54% respectively. In commodities, WTI oil rose 2.09% to $61.63/bbl – the highest in 2.5 years, in part on expectations that the EIA report will continue to show a drop in US crude stockpiles. Precious metals softened c0.3% (Gold -0.33%; Silver -0.31%), while other base metals also weakened c0.5% (copper -0.44%; zinc -0.42%; aluminium -0.60%).
Away from markets and onto selected headlines across Europe now. Ireland has sold the first European sovereign bond issuance for the year, with its €4bn bond sale attracting strong investor demand with bids of around €14bn. Over in Germany, the SPD leader Mr Schultz has met with Ms Merkel yesterday to discuss procedural matters. Post the meeting, both parties noted “trust has grown and we’re starting negotiations optimistically”. Looking ahead, formal exploratory talks are scheduled to begin on 7 January.
Back onto Brexit, the UK’s Trade secretary Liam Fox has confirmed UK’s interest in potentially joining the Trans-Pacific Partnership trade group post Brexit, noting that “we want to explore all the opportunities” and “we would be foolish not to look at all the potential”. Elsewhere, two unnamed senior UK government officials noted to Bloomberg that UK based banks will continue to operate freely across the EU bloc post Brexit and that EU negotiator Barnier will soften his stance in not including financial services firms in trade deal discussions that are scheduled to start in March.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the November construction spending was also above market at 0.8% mom (vs. 0.5% expected). Factoring in the ISM and above, the Atlanta Fed now forecast 4Q GDP to expand at an annualised rate of 3.2% vs. 2.8% previously. Over in Germany, the December unemployment rate was in line at 5.5% and steady on last month’s revised reading. In the UK, the December construction PMI was slightly below at 52.2 (vs. 53 expected).
Looking at the day ahead, we have the final readings for the December services and composite PMIs across Europe and the US. In the UK, the December Nationwide House price index, November mortgage approvals and net consumer credit data will be due. Over in the US, there is the December ADP employment change print (190k expected) along with the weekly initial jobless and continuing claims. Away from the data, the Fed’s Bullard will speak at an economic convention.
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