After yesterday’s furious Powell-inspired rally, the overnight kneejerk reaction has been muted, with US equity futures giving up some of yesterday’s gains while Europe’s Stoxx 600 Index faded earlier gains following a mostly upbeat Asia session.
After 10Y Treasuries surprisingly barely moved following yesterday’s Powell speech, the benchmark yield finally saw a more pronounced move on Thursday morning, extending its decline after the Fed Chairman fueled speculation the central bank may pause interest rate increases next year…
… while the greenback drifted in a tight range following Wednesday’s drop, it rebounded from session lows and was roughly unchanged.
In the wake of Powell’s “dovish” comments that Fed Funds are “just below” estimates of the neutral rate (vs. “a long way” in October), hinting at a potential slowdown in the hiking cycle, the DXY gave up the 97.000 level and witnessed its steepest one-day percentage decline this month so far, to 96.622 at one stage. However, the USD has pared some losses with month-end and SOMA demand still in play, while some rival currencies also suffer further weakness. Looking ahead, FOMC Minutes are due to be published later today although with the market now pricing in just one rate hike in 2019 (from more than less than two months ago), it is unlikely that any further dovish news is possible.
At the same time, European bonds rose, and even though demand for five-year Italian debt at an auction fell to the lowest since June. Italy’s five-year bond yield dipped 4 bps to 2.36 percent and the closely-watched spread over Germany was at 294 bps. Italian debt has rallied this week as the government said it was ready to compromise with the European Union on its budget deficit target. German bonds extended gains after inflation data from the German state of Saxony and Treasury.
European shares gave up early gains of as much as 0.7%, with the Stoxx 600 Europe Index trading up just 0.2% as of 1:02pm CET, dragged lower by the real estate shares which remains the worst performer sector in the index, while tech shares trim gains of as much as 2%. Deutsche Bank dropped more than 3% after prosecutors said its headquarters were being searched in a money laundering probe.
Material names are also seeing support this morning, in-fitting with price action in the metals scope with gains seen in Antofagasta (+4.9%), Glencore (+1.8%), Rio Tinto (+1.1%); upside in mining names and a softer GBP has pushed the FTSE 100 (+0.8%) towards the top of the leaderboard.
Earlier in the session Asian stocks were broadly higher, with MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6 percent, although the Shanghai Composite Index dropped 1 percent. Gains were tempered by investor jitters before trade talks between U.S. President Donald Trump and Chinese President Xi Jinping on Saturday, during the G20 summit in Argentina.
The euro erased an earlier advance after a raft of weak economic data, while emerging-market equities rose to the highest level since early October and developing-nation currencies strengthened. The dollar held steady even as the U.S. 10-year note yield fell below 3% for the first time in two months. The euro failed to sustain early gains amid mixed regional German inflation prints, while the pound led losses in G-10 as PM Theresa May said the U.K. should be ready for no deal if Dec. 11 Parliament vote rejects her Brexit plan. Fed’s hike path stays in focus with several speeches by policy makers and minutes from latest meeting due Thursday.
With Powell now out of the way, the market is looking for any signals on trade from a meeting between the U.S. and Chinese presidents that will take place at the Group of 20 summit in Buenos Aires this weekend.
“The next catalyst will be the G-20 meeting between Trump and Xi; we believe risk assets will tactically trade in the green following a tariff cease-fire,” said Eleanor Creagh, a strategist at Saxo Capital Markets in Sydney. “A tradable risk bounce on a paper deal at G-20 will be unlikely to reverse sentiment structurally as the underlying U.S.-China relationship is still deteriorating.”
Elsewhere, West Texas oil tumbled below $50 a barrel for the first time in more than a year as Russia signaled little urgency to commit to supply cuts and traders fretted that OPEC won’t act decisively to clear a resurgent surplus in the global crude market while U.S. crude stockpiles continue to grow.
Oil futures tumbled as much as 1.8% in New York to $49.41 a barrel, the lowest since early October 2017. Brent for January settlement, which expires Friday, fell as much as 2.1% to $57.50 a barrel on London’s ICE Futures Europe exchange. The global benchmark traded at an $8.23 premium to WTI. The more-active February contract lost as much as 2.2 percent. 
While Putin praised Saudi Crown Prince Mohammed Bin Salman and said Moscow is ready to cooperate further, he said crude around $60 a barrel is “balanced and fair” and well above the level needed to to keep his government’s budget in surplus. “Putin is fine with $60, but this time next week we will be well below that if there is no deal,” said Warren Patterson, commodity strategist at ING. “I think we are going to have to see the Saudis actively reduce flows to the U.S.”
As noted yesterday, US crude stockpiles rose by 3.58 million barrels last week in the longest run of gains since November 2015, according to the Energy information Administration. The build was higher than the 1-million-barrel gain predicted in a Bloomberg survey, overshadowing a surprise draw in gasoline inventories.
“Oil has moved into our bear case scenario,” Norbert Ruecker, head of macro and commodity research at Julius Baer Group told Bloomberg. “Today’s price levels imply that the petro-nations will maintain their output hikes or that the world economy is about to slow down significantly.”
Gold has rebounded from two-week lows, as the dollar fell following comments from Fed Chairman Powell saying that the policy rate is just below the estimated neutral range. China’s steel prices have dropped following a two day gain largely due to ample supply and lean demand in markets, with iron ore now rising following Monday’s sell off. Additionally, spot Palladium has hit a record high of USD 1186.30/oz.
In geopolitical news, US Secretary of State Pompeo said he is very hopeful for a new meeting with North Korean officials to discuss denuclearization, while there were separate reports that US requested that North Korea change its chief negotiator. The US Senate voted 63-37 to advance a bill that would end US participation in Saudi Arabia-backed war in Yemen which paves way for additional vote next week, although White House has previously noted it would veto the bill if passed. Russia are to construct a missile early-warning radar station in Crimea in 2019, according to Interfax.
Expected data include personal income and jobless claims. Dollar Tree, TD Bank, HP Inc., VMware, and Workday are among companies reporting earnings.
Market Snapshot
- S&P 500 futures down 0.3% to 2,732.00
- STOXX Europe 600 up 0.7% to 359.89
- MXAP up 0.7% to 153.87
- MXAPJ up 0.6% to 493.83
- Nikkei up 0.4% to 22,262.60
- Topix up 0.4% to 1,659.47
- Hang Seng Index down 0.9% to 26,451.03
- Shanghai Composite down 1.3% to 2,567.44
- Sensex up 1.3% to 36,186.13
- Australia S&P/ASX 200 up 0.6% to 5,758.42
- Kospi up 0.3% to 2,114.10
- German 10Y yield fell 2.4 bps to 0.325%
- Euro up 0.07% to $1.1374
- Italian 10Y yield fell 3.2 bps to 2.888%
- Spanish 10Y yield fell 2.4 bps to 1.519%
- Brent futures down 1.3% to $58/bbl
- Gold spot up 0.4% to $1,226.36
- U.S. Dollar Index up 0.1% to 96.86
Top Overnight News
- Deutsche Bank AG’s premises including its headquarters in Frankfurt were being searched by prosecutors on Thursday in a money laundering probe, prosecutors said in a statement. In an emailed statement, Deutsche Bank confirmed that police are investigating at several German locations in relation to Panama Papers, and said it is fully cooperating with authorities.
- President Vladimir Putin said crude around $60 a barrel is “absolutely fine” just days before talks on oil policy with Saudi Arabia
- The Swiss economy unexpectedly shrank in the third quarter by 0.2%, blighted by a drop in exports and weak domestic demand.
- Benchmark Treasury yields fell below 3% for the first time since September and stocks climbed in Europe and Asia after a dovish tone from the Federal Reserve chairman boosted markets ahead of this weekend’s G-20 gathering.
- U.K. Prime Minister warned the country to prepare for a no-deal Brexit if her deal fails to be approved by the House of Commons on Dec. 11. Sterling fell sharply following the comment, down as much as 0.5% to day’s low of 1.2758.
- Federal Reserve Chairman Jerome Powell opened the door for a potential pullback in projected interest-rate hikes for 2019 following a widely expected increase in December. In what was seen as a shift in tone from remarks last month, Powell said Wednesday that the Fed’s series of rate increases had brought policy to “just below” the range of estimates of neutral
- U.K. consumer confidence slumped to the lowest in a year as the country copes with the economic uncertainty of Brexit. The index compiled by YouGov and the Centre for Economics and Business Research fell in November and remains “notably below” where it was before the 2016 referendum to leave the European Union
- Chinese President Xi Jinping said the global economy is at a turning point as he prepares for a critical meeting with Donald Trump this weekend. Xi said the world has to decide whether to continue working to support the global trading system. Failure to do so will lead to new barriers emerging between nations
- President Donald Trump raised the prospect of slapping a 25 percent tariff on imported cars and ordered a review of China’s retaliatory auto tariffs against the U.S
Asian stocks traded mostly positive after risk appetite was ignited by Fed Chair Powell’s dovish comments which spurred hopes the Fed may begin to slow down on its hiking cycle and helped US stocks notch their biggest daily gain since March. ASX 200 (+0.6%) and Nikkei 225 (+0.4%) were underpinned from the open but with gains capped amid lingering trade uncertainty and inconclusive capex data for Australia, as well as mixed Japanese retail sales and a decline in USD/JPY. Hang Seng (-0.8%) and Shanghai Comp. (-1.3%) both initially conformed to the positive tone but then stalled amid tariff threats with Chinese President Xi’s offer of an olive branch to the US somewhat falling on deaf ears, as USTR Lighthizer said China has yet to offer meaningful proposals and suggested that the US are seeking to match China’s tariffs on autos. Finally, 10yr JGBs were marginally higher as they nursed the prior day’s losses after having found support around the 151.00 level and although today’s mixed 2yr auction results failed to spur a reaction, prices continued to gain as the strength in the regional stock markets moderated.
Top Asian News
- China Is Said to Plan Major Purge of $176 Billion Loan Market
- HNA Is Said to Widen Sales Push, Marketing More Than 90 Assets
- Singaporean Regulators Widen Noble Group Probe to Auditor EY
- South Korea-Japan Spat Deepens Over Mitsubishi Forced Labor Case
- China Bond Defaults Surpass 100 Billion Yuan for 1st Time
European equities (Eurostoxx 50 +0.3%) piggybacked on the optimism seen on Wall St and during the Asia-Pac session as perceived dovish rhetoric by Fed Chair Powell continues to guide markets. Initial reports via WiWo that European Commissioner Oettinger expected US auto tariffs before Christmas resulted in downside to European equities, especially German autos, though DAX (+0.2%) saw a rebound after these comments were denied by the European Commission. Sectors are mixed with IT names the outperformer following gains seen yesterday during US hours which has prompted upside in chip-makers such as Wirecard (+3.3%), STMicrolectronics (+2.5%) and Infineon (+2.2%). Material names are also seeing support this morning, in-fitting with price action in the metals scope with gains seen in Antofagasta (+4.9%), Glencore (+1.8%), Rio Tinto (+1.1%); upside in mining names and a softer GBP has pushed the FTSE 100 (+0.8%) towards the top of the leaderboard. To the downside, energy names lag their peers with WTI and Brent crude unable to halt recent declines. In terms of stock specifics, once again, Deutsche Bank (-3.3%) have found themselves in the centre of further controversy with their offices raided earlier this morning in a money laundering probe involving two members of staff. Elsewhere, Intu Properties’ (-35%) shares have slumped to a record low this morning after reports that a consortium led by their Deputy Chairman has abandoned their plans to buy the Co.
Top European News
- Euro-Area Economic Confidence Falls, Complicating ECB’s Mission
- Swiss, Swedish Economies Shrink as Trade Slump Hits Europe
- Mother and Son Lose $16 Billion in 2018 as Continental Sinks
- Eurofins Finance Chief Says Company Has No Liquidity Problem
In FX, in the wake of Powell’s “dovish” comments that Fed Funds are “just below” estimates of the neutral rate (vs. “a long way” in October), hinting at a potential slowdown in the hiking cycle, the DXY gave up the 97.000 level and witnessed its steepest one-day percentage decline this month so far, to 96.622 at one stage. However, the USD has pared some losses with month-end and SOMA demand still in play, while some rival currencies also suffer further weakness. Looking aheadd, FOMC Minutes are due to be published later today. GBP,EUR – Major G10 underperformer with ongoing Brexit bickering and meaningful vote concerns driving Cable below 1.2800 with a low print of 1.2759 (vs. highs of 1.2850, with offers seen between 1.2855-65) , while Sterling also fell victim to cross positioning for month end as EUR/GBP climbed above the key psychological 0.8900 level, before the single currency came under renewed pressure on latest auto tariff headlines as press reported that EU Commissioner Oettinger expects US auto tariffs before Christmas. This pushed EUR/USD to fresh session lows of 1.1350 and bringing into play options around 1.1340-50 (3.2bln) and 1.1360-65 (1.35bln). Note, the EUR did not really react to mixed German state CPIs but did respect a key fib just ahead of 1.1400 (1.1394). Looking ahead German national CPIs are due at 13.00GMT. AUD – In contrast the AUD has showed some resilience despite lower than expected capital expenditures with the antipodean staying afloat above 0.7300. JPY – The major beneficiary of the post-Powell Dollar weakness as USD/JPY fell through 114.00, 113.50 and currently rests around 113.40. In terms of technicals, the next level to the downside is at 113.17 (tenkan line), looking ahead, Tokyo CPIs are due to be released later today. TRY – The clear EM outperformer with the currency breaching 5.1500 (and temporarily rallying through a key fib at 5.1562) vs. the buck as the move was exacerbated by the drop below 5.2000 in the wake of a significan improvement in Turkish economic confidence index and falling oil prices (as Turkey is a large net importer).
In commodities, Brent (-1.3%) and WTI (-1.0%) have moved lower recently, which may have been exacerbated by reports that 7k WTI contracts were dropped at the same time. Overnight oil prices had moved higher, despite a greater than expected build shown in EIA weekly crude stocks of 3.577mln vs. Exp. 0.769mln, with prices boosted by a stronger dollar in addition markets are looking optimistically to this weeks G20 meeting to improve global demand. Gold has rebounded from two-week lows, as the dollar fell following comments from Fed Chairman Powell saying that the policy rate is just below the estimated neutral range. China’s steel prices have dropped following a two day gain largely due to ample supply and lean demand in markets, with iron ore now rising following Monday’s sell off. Additionally, spot Palladium has hit a record high of USD 1186.30/oz.
US Event Calendar
- 8:30am: Powell Greets Students at 15th Annual College Fed Challenge
- 8:30am: Personal Income, est. 0.4%, prior 0.2%
- 8:30am: Personal Spending, est. 0.4%, prior 0.4%; Real Personal Spending, est. 0.2%, prior 0.3%
- 8:30am: PCE Deflator MoM, est. 0.2%, prior 0.1%; PCE Deflator YoY, est. 2.07%, prior 2.0%
- 8:30am: PCE Core MoM, est. 0.2%, prior 0.2%; PCE Core YoY, est. 1.9%, prior 2.0%
- 8:30am: Initial Jobless Claims, est. 220,000, prior 224,000; Continuing Claims, est. 1.66m, prior 1.67m
- 9:45am: Bloomberg Consumer Comfort, prior 61.3
- 10am: Pending Home Sales MoM, est. 0.5%, prior 0.5%; NSA YoY, est. -2.8%, prior -3.4%
- 2pm: FOMC Meeting Minutes
- 2pm: Five Fed Presidents Participate in Conference at Boston Fed
- 3:05pm: Fed’s Kaplan Speaks at Boston Fed Conference
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