S&P futures slumped into the red, following a drop in European stocks while Asian shares traded mixed in a subdued day of trading thanks to Thanksgiving holiday; the big moves were in FX where the pound jumped, the euro strengthened and the dollar slumped after a draft deal on post-Brexit ties was tentatively agreed.
US cash markets may be closed, but futures are open, and overnight the Emini slumped to Wednesday’s session lows before rebounding modestly.
Europe’s bourses dropped back into the red on Thursday as investor worries mounted about slowing global growth in the face of rising U.S. interest rates and trade tensions. The Stoxx Europe 600 Index dropped as much as 0.9%, giving up much of Wednesday’s gains as almost every sector fell, led by basic resources and banking shares. The biggest decliners include BAT -1.9%, Total -1.1%, HSBC -1%, AstraZeneca -1.1%, although trading volumes were lethargic. Italy was under pressure in both stock and bond markets as sparring resumed over its budget plans. Some disappointing big-name earnings added to the gloom.
Europe’s tech sector lost another 1.2 percent, but it wasn’t the worst performer. Banks were 1.6 percent weaker and mining companies and other resources firms were down nearly 2 percent and approaching a one-month low, reflecting the bitter Sino-U.S. trade war, encouraging investors to take money off the table before U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, meet in Argentina next week.
The pound soared, rising sharply above 1.29 and gilts fell as a draft Brexit deal pointing to deep ties between the U.K. and European Union as well as a solution to the Irish border question was agreed at a “political level,” according to the EU. Enthusiasm was dented however after Reutrers reproted that Spain will vote against the current Brexit draft proposal because of a lack of clarity on Gibraltar.
Earlier, Asian indexes swung between gains and losses before turning higher, with Japanese stocks getting an end-of-session boost on a report about a possible government rebate. MSCI’s broadest index of Asia-Pacific shares outside Japan had ended little changed after recovering from an initial wobble. The index has managed to hold up so far in November after three straight monthly declines, but is on track for its worst annual performance since 2011. Japan’s Nikkei had finished almost 0.7 percent higher but Chinese shares closed 0.4 percent in the red.
“Investors are still wary about whether they’ll see further lows, given none of the issues that drove the recent correction have dissipated,” said Shane Oliver, Sydney-based head of investment strategy at AMP.
Trading volumes in the region were also depressed. Singapore became the latest to warn about the potential impact on Thursday. The city state is considered as a bellwether for international trade.
“Risks in the global economy are tilted to the downside,” said Loh Khum Yean, Singapore’s permanent secretary for trade and industry.
Elsewhere, Bitcoin steadied, emerging-market assets were broadly stable and gold nudged upward. Treasuries didn’t trade because of the U.S. holiday. In commodities, China-sensitive metals like copper fell and oil prices reversed early gains, although they were still above one-year lows touched earlier this week. U.S. crude futures were last down 8 cents at $54.55 a barrel after hitting a one-year low of $52.77 on Tuesday. Brent eased 15 cents to $63.33, off Tuesday’s low of $61.71.
The US is closed today for Thanksgiving holiday.
Top Overnight News from Bloomberg
- E.U., U.K. see free-trade area and deep regulatory cooperation; state “determination” to replace backstop: Draft
- U.K. and European negotiators are working through the night to hammer out the final part of the Brexit deal as Theresa May fights to keep a crunch summit on Sunday on track. After meeting EU Commission President Jean-Claude Juncker Wednesday, PM Theresa May announced that she will return to Brussels for last minute talks on Saturday, just a day before EU leaders are due to sign off on the deal. That wasn’t expected: Brexit update
- Technology stocks rose Wednesday, posting a partial rebound from a bruising three-day decline, though analysts said further volatility and losses are likely
- Federal Reserve Chairman Jerome Powell and his colleagues are likely to turn more wary about marching interest rates higher after delivering a widely anticipated quarter percentage-point increase in December. Fed may pause cycle of rate hikes as early as spring: MNI
- The Republican chairman of the U.S. Senate committee overseeing trade rebuffed a call by a dozen GOP senators to vote on a revised a U.S.-Canada-Mexico trade agreement this year, a move that likely will doom their effort
- U.S. consumers will be hit hard if President Donald Trump goes ahead with tariffs on the remaining imports from China, worth about $260 billion in 2017. That’s because China has an “exceptionally large” market share in goods that have so far escaped the tariffs, according to Deutsche Bank AG. They note that 93 percent of U.S. laptop imports came from China in 2017 while 80 percent of mobile phone imports came from China
- Italy PM Conte confident spread will narrow; acting responsibly on budget; Italy’s Di Maio sees margins for dialogue with EU; infringement procedure would be unfair; Salvini/Di Maio say won’t change a comma on budget: Repubblica
- BTP Italia total placement closed at EU2.16b: Treasury
- WSJ: Apple to offer Japan carriers discount to up iPhone XR sales
DB’s Jim Reid concludes the overnight wrap
Happy Thanksgiving to all our US readers. Apparently Americans will consume up to 4,500 calories each over the course of today, although I read that us Brits consume around 7,000 on Xmas Day so our friends stateside are lightweights. For those working in financial markets both these numbers might be eclipsed this year after the stresses of the last couple of weeks. However, ahead of the holiday, there were some healthier markets yesterday to raise a glass to. In addition to that, we ran the numbers yesterday and the Friday after Thanksgiving has seen a ratio of positive to negative days for the S&P 500 of just under 2 to 1. This long-term daily average is 1.13 to 1.
Anyway, back to the present, where the rout which plagued just about every risk asset on Tuesday reversed to some degree yesterday with the NASDAQ (+0.92%), S&P 500 (+0.31%) and NYSE FANG (+0.51%) all closing higher. These indexes pared their peak intraday gains (S&P 500 up just over 1% at highs) though amid thin afternoon liquidity ahead of today’s US holiday. The DOW closed flat, while in Europe the STOXX 600 (+1.14%) and DAX (+1.61%) both rallied before the US dipped after Europe went home. HY spreads in the US and Europe were both around -7bps tighter, and WTI and Brent rallied +1.97% and +1.34% respectively. The climb for oil was fairly steady during the day helped partly by a drop in the latest API inventories data and also President Trump’s early morning tweet in which he thanked Saudi Arabia for lower oil prices. Inventories data out of the EIA later in the session didn’t really move the dial.
There were seemingly a few reasons for the turn in sentiment. One was the decent rally for BTPs, where two- and 10-year yields fell -23.3bps and -14.6bps respectively, for their best day in over a month. As expected, the European Commission rejected the latest Italian draft 2019 plan, with Commissioner Moscovici warning against Italy adopting free-rider behaviour in comments with the press. The EC confirmed that they are not yet opening the EDP but suggested that they see this as the path which is opening ahead. Moscovici confirmed yesterday that Italy will have two weeks to answer queries put forward by the EC. After that, the EC will have to make the decision whether or not to recommend opening an EDP to the Eurogroup. The hope for Italy might be that Moscovici sounded willing to keep a dialogue open, rather than shutting the door completely. Our economists rightly noted that the ball is now back with Italy. On that, Deputy PM Salvini initially said yesterday that the Government is open to a dialogue on spending revisions but wouldn’t stretch to discussing the budget deficit or pension reform. A potential sign of compromise appeared to be enough for the market though with the FTSE MIB also climbing +1.41% and an index of Italian banks up +2.35%, both snapping a five-day losing run.
Also attracting some interest yesterday was an MNI article quoting ‘senior Fed sources’ as suggesting that the Fed is considering a pause in hiking rates and may also consider ending its tightening cycle as soon as spring next year. The article went on to say that Fed officials appear to be converging around 3% for the neutral rate and that policymakers see inflation as peaking around the current 2% level before falling lower. A couple of comments are worth making on this. The first is that MNI isn’t seen as the most reliable source for Fed news, and the second is that this story broadly repeats commentary we have already heard from Clarida and Powell in recent days. So not particularly groundbreaking in our view. Treasuries didn’t move much on the article and 10y yields ended flat, while two-year yields sold off +1.0bps by the close of play and the Dollar index edged down -0.11%.
Overnight Asian markets are mixed in thin trading due to today’s Thanksgiving holiday in the US and a holiday in Japan tomorrow. The Nikkei (+0.61%) and Hang Seng (+0.06%) are up while the Shanghai Comp (-0.55%) and Kospi (-0.39%) are down. Elsewhere, crude oil prices both WTI and Brent are down c. -0.35% this morning. On the data front, Japan’s October CPI printed in line with consensus at +1.4% yoy and core at +1.0% yoy while core-core CPI stood at +0.4% yoy.
Yesterday’s Brexit newsflow was fairly thin on the ground again, though Prime Minister May did meet with EU Commission President Juncker in Brussels. The two leaders made “good progress” according to a spokesman. More talks are planned for Saturday which is cutting it fine for Sunday’s summit, especially with some reports (BBC) suggesting that Friday is the key deadline to have things ready for the summit. Negotiators are working through the night to hammer out more on the agreement. Earlier in the session Gilt yields rose +1.3bps and the pound traded -0.09% weaker, as markets remain in a holding pattern ahead of the EU summit and the eventual UK Parliament vote, which is due sometime over next few weeks.
Meanwhile, the latest in the trade debate was the announcement by the WTO yesterday that they intend to launch a dispute investigation into the US allegations about China continuing a state-backed campaign of IP and technology theft. A decision is expected next year. In Germany Economy Minister Altmaier also announced that Germany planned to increase regulatory barriers to foreign investors by the end of this year, in effect making it harder for Chinese companies to launch takeovers of German companies. All this before the G20 meeting in just over a week now which will include a meeting between Trump and Xi Jinping on the sidelines. On that the FT reported yesterday that the draft communique made no explicit comment on fighting protectionism – language which has in essence been a mainstay of the statement since 2008.
The OECD released updated macroeconomic forecasts yesterday, and revised down its global growth projection for 2019 -0.4pp to 3.5% from the last May edition. The forecast for euro area growth was revised down -0.3pp to 1.8%, the US down -0.1pp to 2.7%, and China down -0.1pp to 6.3%. In their first projections for 2020, the OECD expects global growth to remain steady as faster growth in most EMs balances a further slowdown in developed markets and China.
It was a busy day for US economic data ahead of the Thanksgiving holiday, headlined by somewhat soft durable goods orders which fell -4.4% mom, the sharpest drop in over a year. Durables ex-transportation were soft as well, up +0.1% mom versus the expected +0.4%. Core capital goods orders were flat after a revised -0.5% mom drop in September. Our economists had highlighted their expectations for capex to slow over the medium term, so this data does not change their baseline forecasts. Separately, initial jobless claims ticked higher to 224,000 from 216,000 last week, which presents some downside risks to the November nonfarm payrolls report due two weeks from Friday. Finally, the University of Michigan consumer sentiment index moderated slightly to 97.5, though 5-10 year inflation expectations ticked up to 2.6% from 2.4%, matching their highest level since March 2016.
As far as the day ahead is concerned, with it being a holiday in the US and markets subsequently closed, we’re extremely sparse on data releases with November confidence indicators in France and the November consumer confidence print for the Euro Area the only readings of note. That being said it’s a packed day for the ECB with Angeloni, Weidmann, Knot, Visco and Mersch all due to speak. The ECB’s October meeting minutes are also out today with Italian Finance Minister Tria due to face questions in the Upper House this afternoon.The BoE’s Saunders then speaks tonight.
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