After last week’s market woes, stocks have started the new week in a sea of green, with equity markets rising around the globe, buoyed by renewed optimism over trade and easier financial conditions ahead of this week’s Feed speeches and key G-20 summit between Trump and Xi, while European shares surged as Italian officials adopted a more conciliatory tone resulting in hopes Italy’s populist government is willing to concede in the long-running standoff with Brussels.
S&P futures rose 1.2%, erasing losses from the latter part of last week, after decent Black Friday retail sales data, boosted by strong Asian and European risk sentiment.
In Europe, banking and automaker shares led the Stoxx Europe 600 Index higher, with all sectors in the green, after stocks rose in most of Asia except for China and Australia. Italy’s sovereign bond yields tumbled after the Deputy Premier Matteo Salvini signaled a new openness to alter the country’s budget deficit target for next year; BTPs rally through the 100-DMA and short-dated futures push above September highs ahead of this evening’s “decisive” budget talks as the Bund/BTP spread tightened ~19bps to 286bps.
Europe’s Stoxx 600 Banks Index surged on Monday as news on Brexit and Italian developments lifted the broader market: banks advance 2.6%, topping the European benchmark’s 1.3% gain after Italy’s populist cabinet suggested he is willing to change the nation’s budget deficit target for next year. Greek markets also rallied as Eurobank revealed a plan to deal with troubled loans.
Italy’s FTSE MIB surged up as much as 3.2%, its biggest one-day gain since June, and outperforms its peers as Italian Banks benefited from the positive BTP price action amid reports that the country’s coalition government is discussing reducing the 2019 deficit target to 2.0%-2.1% from 2.4%. In turn hinting that Italy are willing to be flexible on the budget after the European Commission rejected it earlier this month. Italian PM Conte and Deputy PM Salvini have since declined to comment on specific numbers. As such, Italian banks UBI +6.1%, UniCredit +6%, BPM +5.3%, Intesa Sanpaolo +5.3%, were among the top performers in the index, while
The Italian Government is to meet Monday evening to discuss a potential reduction of the deficit goal; Il Messaggero also reported that Italian Finance Minister Tria will bring various simulations on budget changes to top-level Italian government this evening in Rome. Additionally, are discussing reducing the 2019 deficit target to 2.0-2.1% from the current 2.4% target.
Elsehwhere, Italian Deputy PM Di Maio says budget deficit target reduction is not a problem as long as budget measures remain the same. Adding that the government remains committed to reform, and there can be a dialogue with the EU on the deficit target; also seeking to talk to the EU regarding more investments. Says there can be dialogue with the EU on the deficit target; also wants to talk to the EU regarding more investments.Additionally, Salvini said they’ve had “positive feedback” form Brussels when asked about lowering their 2019 deficit target, but refuses to talk about numbers. Italy’s PM Conte has declined to comment about the specific numbers on the budget.
Elsewhere, UK banks have also received a lift after the European Council endorsed UK PM May’s Brexit deal, which still has to pass through parliament, with Dec 12th touted as the possible date for a vote, hence RBS (+2.6%) and HSBC (+2.6%) and Barclays (+2.6%) shares are higher. Gilts will be focused on PM May’s speech to Parliament at 3:30pm London time.
Credit-default swap indexes for both European high-grade and high-yield debt fell in tandem amid the general risk-on mood, with the cost of insuring against default retreating from a two-year high
Earlier, Asian stocks began the week broadly positive as stock markets picked themselves up from the Thanksgiving holiday lull, but with upside capped amid ongoing commodity weakness. ASX 200 (-0.8%) and Nikkei 225 (+0.8%) were mixed with Australia dampened by losses in miners after the broad weakness across energy and metals in which crude slipped nearly 8% on Friday, while the Japanese benchmark was propped up by favorable currency moves. Elsewhere, Hang Seng (+1.8%) and Shanghai Comp. (-0.1%) conformed to the broad rebound in sentiment, but with the mainland less decisive as Chinese commodity prices followed suit to their global peers in which Dalian iron ore futures dropped around 6% at the open and China oil futures hit limit down. Finally, 10yr JGBs saw mild gains amid the BoJ’s presence in the market for JPY 680bln of JGBs in the belly to super-long end and which coincided with a decline in the Japanese 10yr and 20yr yields to their lowest in 3 months.
The yen and dollar were broadly weaker, Treasuries edged lower with the 10Y TSY at 3.05%, while high-beta currencies gained as global equities advanced. The euro followed Italy’s stocks and bonds higher as the nation’s government signaled it was looking to lower its 2019 budget deficit target. Sterling advanced after EU leaders agreed to the Brexit deal and as Theresa May prepared to sell her Brexit deal to U.K. lawmakers Monday, while oil attempted to form a short-term base.
In geopolitical news, Ukraine accused Russia of an act of war after the latter fired at Ukrainian ships and seized 3 vessels off Crimea, while Russia said the Ukrainian ships entered its territorial waters near Crimea. Furthermore, Ukrainian President Poroshenko has reportedly asked Parliament to meet on Monday to discuss martial law. On Monday, Russia reopened the Kerch Strait near Crimea for shipping according to sources.
In overnight central bank speak, ECB’s Praet said that recent developments indicate some loss of growth momentum, with factors related to protectionism, financial market volatility and vulnerabilities in emerging markets are creating headwinds that are becoming increasingly noticeable. And the underlying strength of the euro area economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed. Also says that they will need to clarify, possibly in the December meeting, what the ECB means by reinvesting for an extended period of time. Adds that they need big changes in scenarios to not follow rate guidance, it is clear that risks to the downside have increased noticeably.
Looking ahead, investors will turn their focus this week to Federal Reserve speeches and policy-meeting minutes that may give clues on the 2019 rates outlook, and a key sit-down between Presidents Xi Jinping and Donald Trump ahead of the next scheduled escalation in tariff hikes. With bond traders having reduced expectations for the pace of U.S. monetary policy tightening, Fed Chairman Jerome Powell has the opportunity of shedding light on prospects for a pause in a speech Wednesday.
“The market will be looking for potentially some signs of dovish overtures coming through” from the Fed this week, John Lockton, head of investment strategy in Sydney at Wilsons Advisory & Stockbroking, told Bloomberg TV. On trade, investors “are looking for a pathway. I am not sure we are going to see a detailed agreement. A pathway to success, a pathway to an outcome will be highly supportive of equities globally,” he said.
WTI (+1.1%) and Brent (+1.8%) have retraced recent losses as the USD eases from highs and market risk-sentiment improves after the complex plummeted almost 8% on Friday amid concerns of a supply glut and lower January oil demand. This comes as Saudi Arabia reported that crude production stands at an all time high at 11.1-11.3mln BPD. WTI flirts with the USD 51.00/bbl handle while Brent hovers around USD 60.00/bbl in early European trade, with traders keeping an eye on any hints to next year’s oil production from OPEC+ countries, with the Dec 6th meeting looming. However, we may get some sort of direction just before December with the Saudi Crown Prince and Russian president meeting on the side lines of the G20 summit this coming weekend. Furthermore, some traders are noting that hedge funds haven’t been this pessimistic in regard to global oil prices for almost three years. Finally, Shanghai International energy Exchange said they will raise the margin requirement for crude oil futures to 10% from 7%, effective Nov 28th.
In metals, gold (+0.2%) is higher as the yellow metal moves conversely to USD actions, while silver (+1.0%) outperforms with markets gearing up for the FOMC minutes release later this week. Elsewhere, base metals hover near last-week’s lows with the global growth slowdown weighing on investors’ minds.
Expected data include Dallas Fed Manufacturing Outlook. StoneCo is among companies reporting earnings
Market Snapshot
- S&P 500 futures up 1.3% to 2,663.25
- STOXX Europe 600 up 1.2% to 358.30
- MXAP up 0.5% to 151.35
- MXAPJ up 1% to 485.39
- Nikkei up 0.8% to 21,812.00
- Topix up 0.2% to 1,632.20
- Hang Seng Index up 1.7% to 26,376.18
- Shanghai Composite down 0.1% to 2,575.81
- Sensex up 1% to 35,332.84
- Australia S&P/ASX 200 down 0.8% to 5,671.57
- Kospi up 1.2% to 2,083.02
- German 10Y yield rose 1.9 bps to 0.359%
- Euro up 0.4% to $1.1380
- Italian 10Y yield fell 4.6 bps to 3.036%
- Spanish 10Y yield fell 3.0 bps to 1.602%
- Brent futures up 1.8% to $59.85/bbl
- Gold spot up 0.3% to $1,227.10
- U.S. Dollar Index down 0.3% to 96.68
Top Overnight News
- Theresa May will begin selling her Brexit agreement to skeptical politicians in Britain on Monday with a warning that “there is not a better deal available.” Macron’s fish fight offers May a glimpse of Brexit battles ahead
- The British Parliament will probably reject May’s Brexit deal, but then approve it on a second attempt amid market pressure, according to UBS Wealth Management’s chief economist Paul Donovan. He reckons that prediction is now the consensus view in financial markets
- Deputy Premier Matteo Salvini signaled a new openness to change Italy’s budget deficit target for next year. Asked whether a 2.4 percent target is set in stone, Salvini told newswire AdnKronos: “I think nobody is fixated on this, if there is a budget which makes the country grow, it could be 2.2 percent or 2.6 percent”
- Switzerland overwhelmingly rejected a plan that could have caused a worsening of relations with the European Union by forcing the government in Bern to renegotiate international treaties
- Oil traded below $51 a barrel on concerns record output by Saudi Arabia may exacerbate a supply glut, and as President Donald Trump continues to call for lower prices
- Russia fired on Ukrainian warships and injured some of their crew members, marking a dramatic renewal of tensions between the ex-Soviet neighbors near the peninsula of Crimea that President Vladimir Putin annexed four years ago
- ECB Chief Economist Peter Praet said the end of the institution’s bond-buying program this year doesn’t mean policy is being tightened, as he pointed to “increasingly noticeable” headwinds for the economy
Asian equities began the week mostly positive as stock markets picked themselves up from the Thanksgiving holiday lull, but with upside capped amid the ongoing commodity rout. ASX 200 (-0.8%) and Nikkei 225 (+0.8%) were mixed with Australia dampened by losses in miners after the broad weakness across energy and metals in which crude slipped nearly 8% on Friday, while the Japanese benchmark was propped up by favourable currency moves. Elsewhere, Hang Seng (+1.8%) and Shanghai Comp. (-0.1%) conformed to the broad rebound in sentiment, but with the mainland less decisive as Chinese commodity prices followed suit to their global peers in which Dalian iron ore futures dropped around 6% at the open and China oil futures hit limit down. Finally, 10yr JGBs saw mild gains amid the BoJ’s presence in the market for JPY 680bln of JGBs in the belly to super-long end and which coincided with a decline in the Japanese 10yr and 20yr yields to their lowest in 3 months.
Top Asian News
- Kuroda: BOJ Can Shrink Balance Sheet at Suitable Pace at Exit
- Hong Kong’s Hottest IPOs Bring Worst Returns to Investors
- Asia-Based Macro Hedge Funds Stumble in October Amid Sell-Off
- Hong Kong Stocks Rise on Expectations Fed May Slow Rate Hikes
- Japan Life Insurers Cut Dollar Hedges Below 50%: Deutsche Bank
European equities started the week on the front foot (Eurostoxx 50 +1.1%) following the upbeat performance experienced over in Asia, with moves exacerbated as US participants re-enter the market following the long Thanksgiving weekend. Italy’s FTSE MIB (+2.8%) largely outperforms its peers as Italian Banks benefit from the positive BTP price action amid reports via government sources that the country’s coalition government are discussing reducing the 2019 deficit target to 2.0%-2.1% from 2.4%. In turn hinting that Italy are willing to be flexible on the budget after the European Commission rejected it earlier this month. Italian PM Conte and Deputy PM Salvini have since declined to comment on specific numbers. As such, Ubi Banca (+5.9%), Unicredit (+5.9%), Bper Banca (+5.7%), Banco BPM (+5.1%) and Intesa Sanpaolo (+5.1%) all rest at the top of the Italian benchmark. Elsewhere, UK banks have also received a lift after the European Council endorsed UK PM May’s Brexit deal, which still has to pass through parliament, with Dec 10th, 11th, or 12th touted as the possible dates for a meaningful vote, hence RBS (+2.6%) and HSBC (+2.6%) and Barclays (+2.6%) shares are higher. In terms of sectors financials are largely outperforming amid Brexit and Italian budget developments, whilst consumer staples underperform. Looking at stock specifics, Melrose (-5.0%) shares dropped after Sky News reported that the company is weighing options for GKN Powder Metallurgy division with a “low-ball” offer valuing the business at GBP 1.6bln, below analyst expectations. On the flip side Eurofins Scientific rose to the top of the Stoxx 600 after the company confirmed their guidance.
Top European News
- Russian Assets Retreat as Ukraine Tension Adds to Sanctions Risk
- Greece’s Eurobank Plots Revival in $8 Billion Bad-Loan Sale
- Vectura Plunges After Asthma-Device Failure Raises Concern
- Saint-Gobain to Sell German Building Unit in Post-Sika Overhaul
In FX, the Usd and DXY have drifted down from highs amidst the all the above (Yen aside of course), with the DXY holding just above 96.500 vs a whisker over 97.00 at one stage and nearest tech support and resistance coming in at 96.318 and 97.055 respectively.
- AUD/NZD/CAD – A broad risk revival and commodity comeback of sorts has lifted the Antipodean Dollars alongside their Canadian counterpart that is benefiting from the recovery in oil prices especially. Aud/Usd is firmly back above 0.7250, while the Kiwi has managed to climb over 0.6800, albeit only just after a knee-jerk downturn in wake of weaker than forecast NZ Q3 retail sales overnight and ahead of trade data later today. Meanwhile, the Loonie has pared losses from 1.3200+ to circa 1.3190-85, but may struggle to get beyond 1.3180 where heavy supply is reported. Note also, a major US bank has entered a long Usd/Cad position at 1.3192, targeting 1.3450 with a 1.3075 stop.
- EUR – Also encouraged by the aforementioned upturn in risk appetite, but the single currency has appreciated independently on the latest Italian budget headlines indicating that the coalition Government may be ready to revise the 2019 deficit target, and significantly from 2.4% to 2.1% ore even 2%. This, ahead of a meeting in Rome tonight where Finance Minister Tria is expected to lay out several compromises for top officials to consider. Eur/Usd has bounced towards 1.1400 vs the low 1.1300 area, but not quite as far as its 30 DMA at 1.1394.
- GBP – The Pound has derived some support from official EU approval for the Brexit withdrawal agreement, with Cable back above 1.2800 and trying to clear 1.2850, but not convincingly as UK PM May begins the arduous task of selling the deal to her party and parliament before a meaningful vote on December 12 (or perhaps 1-2 days earlier if the roadshow goes well).
- JPY – The G10 loser and underperformer as safe-haven demand/flows wane and Usd/Jpy clears 113.00 with a bit more vigour to a 113.35 peak and fleetingly, but not sustainably thus far, a 50% Fib at 113.25.
In commodities, WTI (+1.1%) and Brent (+1.8%) are retracing recent losses as the USD eases from highs and market risk- sentiment improves after the complex plummeted almost 8% on Friday amid concerns of a supply glut and lower January oil demand. This comes as Saudi Arabia reported that crude production stands at an all time high at 11.1-11.3mln BPD. WTI flirts with the USD 51.00/bbl handle while Brent hovers around USD 60.00/bbl in early European trade, with traders keeping an eye on any hints to next year’s oil production from OPEC+ countries, with the Dec 6th meeting looming. However, we may get some sort of direction just before December with the Saudi Crown Prince and Russian president meeting on the side lines of the G20 summit this coming weekend. Furthermore, some traders are noting that hedge funds haven’t been this pessimistic in regard to global oil prices for almost three years. Finally, Shanghai International energy Exchange said they will raise the margin requirement for crude oil futures to 10% from 7%, effective Nov 28th. In the metals complex, gold (+0.2%) is higher as the yellow metal moves conversely to USD actions, while silver (+1.0%) outperforms with markets gearing up for the FOMC minutes release later this week. Elsewhere, base metals hover near last-week’s lows with the global growth slowdown weighing on investors’ minds.
On today’s calendar, it’s a fairly quiet start to the week for data on Monday with the Chicago Fed’s October National activity index and the Dallas Fed’s November manufacturing activity index. Away from the data, it’s a busy day for central bank speak, with the ECB’s Draghi, Praet, Nowotny and Coeure all speaking at different times along with the BoE’s Carney and former Fed Governor Greenspan.
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.2
- 10:30am: Dallas Fed Manf. Activity, est. 24.5, prior 29.4
DB’s Jim Reid concludes the overnight wrap.
Yesterday marked a month until Christmas and there’s a lot to resolve before we can overeat, drink too much, watch bad TV and argue with our families.
In terms of major events, in reverse order we have a FOMC meeting on December 19th (will we be debating an imminent pause by then?), the ECB equivalent on the 13th (surely QE to end… but the recent data…), the House of Commons vote on the Brexit WA likely earlier that week (and all the associated consequences), a big OPEC meeting on December 6th (after a 31% slump in 7 weeks since the peak), and a crucial G20 meeting in Buenos Aires this weekend where US/China trade stands at a major fork in the road with the ramifications likely to be significant for years to come. We will also learn more about the future relationship between the EC and Italy over the next month so plenty of opportunity for the financial world to look very different over Turkey and Xmas pudding than it does today – for better or for worse.
As for this week the G20 meeting on Friday and Saturday looms over us and headlines will start as leaders start to gather in Buenos Aires from today onwards. To be honest the G20 overall is a sideshow to the sideline meeting between US President Trump and Chinese President Xi Jingping to discuss trade. Recent comments (per Bloomberg) from White House economic advisor Kudlow have been mixed, however Kudlow has said that Trump is trying to “inject a note of optimism into trade talks with China” while Trump himself has been reported as saying that “China wants to have a deal”, suggesting that the President has been siding with the more pro-free trade advisers in the White House recently. Since then, the news that China hawk Navarro will not be attending the meeting also lends some support to the view of possible progress at the meeting. That being said, it’s still extremely difficult to predict the outcome but expect plenty of headlines and hints through this week.
Elsewhere Fed Chair Powell’s speech at the Economic Club of New York on Wednesday evening which will likely be closely watched in light of what has been greater discussion in recent weeks from officials on downside risks to the outlook and softer inflation. In addition to that, Vice-Chair Clarida speaks tomorrow and will be closely watched in light of his dovish remarks 10 days which seemed to signal a notable repricing of Fed expectations. The FOMC minutes on Thursday may be a touch backward looking but are always interesting. The data highlights are US PCE (Thursday) and European flash inflation (Thursday/Friday). Watch out for Black Friday and Cyber Monday sales data as well for a barometer on the consumer.
In terms of weekend news, seeing a Sunday EU leaders summit brought back memories of the crisis years and fraught midnight statements. However yesterday’s Brexit summit saw EU leaders sign off the Withdrawal Agreement in 38 minutes and before lunch! Many quipped on social media that for EU leaders to sign it off that quickly it must be a bad deal for the UK. Joking aside we are at a crossroads as European leaders yesterday warned that there was no better deal on offer. However the Parliamentary arithmetic still points to this deal being firmly rejected in the House of Commons. Interestingly PM May refused to answer a question on ruling out resigning if her deal failed to pass.
It seems all outcomes are possible here. Personally I can’t help thinking that a second referendum is getting closer and closer to being the most likely of 3 or 4 outcomes. However whether that’s a good or bad idea I cant help worry that the unintended consequence of this if “remain” win is that British politics will be thrown into chaos for many years. Interestingly the Brexit referendum in 2016 led to the general election in 2017 seeing the two mainstream parties (Conservatives and Labour) with their largest combined support for several decades as UKIP saw their vote collapse. This is in sharp contrast to the other big three EU countries. France saw both established parties fail to make it into the second round of the election last year for their first time in 60 years of the current set-up. Germany has seen the ruling CDU and CSU at their lowest levels of support over a similar period and in Italy as we know we now have two populist parties in Government.
If the UK votes a second time to stay in the EU then we could see a renewed surge in support for UKIP or maybe even more extremist parties. So whatever the outcome it does feel a bit like “whack-a-mole” with unintended consequences from all sides.
Asian markets have started the week on a positive footing with the Nikkei (+0.57%), Hang Seng (+1.69%), Shanghai Comp (+0.29%) and Kospi (+1.16%) all up. Elsewhere, futures on the S&P 500 (+0.45%) are pointing towards a positive start and oil prices are showing signs of stabilizing (WTI prices up +1.03% and Brent +1.62%) this morning. In terms of data releases, Japan’s preliminary November manufacturing PMI softened to 51.8 from 52.9 in the previous month. Elsewhere in a sign of escalating geo-political tensions Ukraine’s Navy said that Russian warships opened fire on Sunday on a group of its military vessels in neutral waters near the peninsula of Crimea while adding that three of its ships were captured by the Russian military. The UN Security Council is all set to hold an emergency meeting at 11 a.m. today in New York to discuss the situation. The Russian ruble is down -0.57% in early trade this morning.
In other news, Italy’s Deputy Premier Matteo Salvini has showed willingness to change next year’s budget deficit target in an interview with newswire AndKronos where he said nobody is fixated on 2.4% deficit target. He said “if there is a budget which makes the country grow, it could be 2.2 percent or 2.6 percent.” In the meantime, Repubblica reported over the weekend that the EC President Juncker has told Italian Premier Conte that spending cuts of €6bn-7bn may be sufficient to trim Italy’s planned 2019 deficit. This indicates that both the sides are now showing some openness to find some common ground. Italian Deputy Premiers Salvini and Di Maio are due to meet Italian Prime Minister Giuseppe Conte to discuss the budget this evening. Elsewhere, the PBoC’s Deputy Govenor Zhu Hexin said over the weekend that the PBoC will increase the oversight of financial holding companies due to an increasing number of risks to their operations with potential measures likely to include implementing stricter controls on market access and closer supervision of sources of funding and capital-adequacy ratios, amongst others.
Focus on Friday centered on preliminary November PMI data from Europe, which continued to point to softening macro momentum. The composite euro area PMI printed down -0.7pts at 52.4, compared to consensus expectations for 53.0. The German figure was 52.2, as the manufacturing index fell -0.6pts to 51.6 and services declined -1.4pts to 53.3. Somewhat worryingly, the readings indicated softening external demand (new export orders down -1pt to 46.6) and internal demand (services dropping faster than manufacturing). French figures came in slightly stronger, with the composite index at 54.0, actually +0.1pts higher than expected. We won’t get the Italian readings until December 3 and 5, but our economists estimate that the non-core countries must be down around -0.5pts on average, indicating that the slowdown from October is not completely transitory.
Given the US Thanksgiving holiday (US markets were open on Friday but trading volumes were thin and exchanges closed early), the European data drove price action. An MNI article said that the ECB may change its assessment of the balance of risks to its economic outlook, raising the potential spectre of an extension to QE beyond December. The euro shed -0.58% to trade -0.68% lower on the week, and German Bunds rallied -3.0bps (-2.7bps on the week). European equities ended the week lower with the Stoxx 600 down -1.04% (though it rallied +0.40% on Friday, boosted by the weaker euro).
Other risk markets ended the weak lower, as oil continued to slide, with Brent crude oil down -11.92% (-6.07% Friday) to $58.80 on the combination of the strong supply outlook and the softer demand data. Credit continued to be pressured, with HY CDX indexes widening +17.2bps and +17.0bps in the US and Europe, respectively on the week. Emerging market equities shed -2.84% (-1.17% Friday), with Chinese bourses underperforming as the Shanghai Composite retreated -3.72% (-2.49% Friday). As mentioned, US markets lacked major drivers, but the S&P 500 still ended the week -2.54% (-0.66% Friday) and the FANG index underperformed -6.67% (-1.47% Friday). The dollar rallied +0.47% (+0.21% Friday) as Treasuries rallied -2.4bps on the week (all of which came on Friday)
It’s a fairly quiet start to the week for data on Monday. In Europe, we get Germany’s November IFO survey, while in the US, we get the Chicago Fed’s October National activity index and the Dallas Fed’s November manufacturing activity index. Away from the data, it’s a busy day for central bank speak, with the ECB’s Draghi, Praet, Nowotny and Coeure all speaking at different times along with the BoE’s Carney and former Fed Governor Greenspan.
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