US Factory Orders Contract YoY For 3rd Straight Month
Having fallen for the last two months, analysts expected a modest rebound in factory orders in October (despite renewed ISM weakness) and as expected they did rise 0.3% MoM (but from a downward-revised 0.8% MoM drop in September).
On a YoY basis, factory orders dropped 1.2% (better than the 3.7% drop in September but still in the red)…
Source: Bloomberg
This is the 3rd straight month of annual declines (and 5th of the last 6 months).
Factory orders ex-trans rose 0.2% in Oct. after falling 0.3% the prior month.
New orders ex-defense for Oct. unchanged after falling 1.0% in Sept.
The proxy for capital spending – Capital goods non-defense ex aircraft new orders – for Oct. rose 1.1% after falling 0.5% in Sept (but lower than the initial +1.2%)
“This is the most prosperous economy the world has ever seen and it’s going to be a very prosperous economy for the next 100 years.” – Jamie Dimon
That’s what the head of JP Morgan Chase told viewers in a recent “60-Minutes” interview.
“The consumer, which is 70% of the U.S. economy, is quite strong. Confidence is very high. Their balance sheets are in great shape. And you see that the strength of the American consumer is driving the American economy and the global economy. And while business slowed down, my current view is that, no, it just was a slowdown, not a petering out.” – Jamie Dimon
If you’re in the top 1-2% of income earners, like Jamie, I am sure it feels that way.
For everyone else, not so much.
This isn’t the first time that I have discussed Dimon’s distorted views,and just as we discussed then, even just marginally scratching the surface on the economy and the “household balance sheet,” reveals an uglier truth.
The Most Prosperous Economy
Let’s start with the “most prosperous economy in the world” claim.
“How did a country which was once the shining beacon of ‘capitalism’ become a country on the brink of ‘socialism?’
Changes like these don’t happen in a vacuum. It is the result of years of a burgeoning divide between the wealthy and everyone else. It is also a function of a 40-year process of capitalism morphing an entire population into ‘debt slaves’ to sustain economic prosperity.
It is a myth that the economy has grown by roughly 5% since 1980. In reality, economic growth rates have been on a steady decline over the past 40 years, which has been supported by a massive push into deficit spending by consumers.”
With the slowest average annual growth rate in history, it is hard to suggest the economy has been the best it has ever been.
However, if an economy is truly prosperous it should benefit the majority of economic participants, which brings us to claim about “household balance sheet” health.
For Billionaires, The Grass Is Always Green
If you are in the upper 20% of income earners, not to mention the top .01% like Mr. Dimon, I am quite sure the “economic grass is very green.” If you are in the bottom 80%, the “view” is more akin to a “dirt lot.” Since 1980, as noted by a recent study from Chicago Booth Review, the wealth gap has progressively gotten worse.
“The data set reveals since 1980 a ‘sharp divergence in the growth experienced by the bottom 50 percent versus the rest of the economy,’ the researchers write. The average pretax income of the bottom 50 percent of US adults has stagnated since 1980, while the share of income of US adults in the bottom half of the distribution collapsed from 20 percent in 1980 to 12 percent in 2014. In a mirror-image move, the top 1 percent commanded 12 percent of income in 1980 but 20 percent in 2014. The top 1 percent of US adults now earns on average 81 times more than the bottom 50 percent of adults; in 1981, they earned 27 times what the lower half earned.“
The issue is the other 80% are just struggling to get by as recently discussed in the Wall Street Journal:
Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.
Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.” – WSJ
The ability to simply “maintain a certain standard of living” has become problematic for many, which forces them further into debt.
“The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.” – WSJ
I show the “gap” between the “standard of living” and real disposable incomes below. Beginning in 1990, incomes alone were no longer able to meet the standard of living, so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2600 annual deficit that cannot be filled. (Note: this deficit accrues every year which is why consumer credit keeps hitting new records.)
But this is where it gets interesting.
Mr. Dimon claims the “household balance sheet” is in great shape. However, this suggestion, which has been repeated by much of the mainstream media, is based on the following chart.
The problem with the chart is that it is an illusion created by the skew in disposable incomes by the top 20% of income earners, needless to say, the top 5%. The Wall Street Journal exposed this issue in their recent analysis.
“Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level. Without adjusting for inflation, over the three decades through 2017, incomes are up 135%.” – WSJ
“The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.
Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data.
‘On the surface things look pretty good, but if you dig a little deeper you see different subpopulations are not performing as well,’ said Cris deRitis, deputy chief economist at Moody’s Analytics.” – WSJ
With this understanding, we need to recalibrate the “debt to income” chart above to adjust for the bottom 80% of income earnings versus those in the top 20%. Clearly, the “household balance sheet” is not nearly as healthy as Mr. Dimon suggests.
Of course, the only saving grace for many American households is that artificially low interest rates have reduced the average debt service levels. Unfortunately, those in the bottom 80% are still having a large chunk of their median disposable income eaten up by debt payments. This reduces discretionary spending capacity even further.
The problem is quite clear. With interest rates already at historic lows, the consumer already heavily leveraged, and wage growth stagnant, the capability to increase consumption to foster higher rates of economic growth is limited.
With respect to those who say “the debt doesn’t matter,” I respectfully argue that you looking at a very skewed view of the world driven by those at the top.
Mr. Dimon’s Last Call
What Mr. Dimon tends to forget is that it was the U.S. taxpayer who bailed out the financial system, him included, following the financial crisis. Despite massive fraud in the major banks related to the mortgage crisis, only small penalties were paid for their criminal acts, and no one went to jail. The top 5-banks which were 40% of the banking system prior to the financial crisis, became 60% afterwards. Through it all, Mr. Dimon became substantially wealthier, while the American population suffered the consequences.
Yes, “this is the greatest economy ever” if you are at the top of heap.
With household debt, corporate debt, and government debt now at records, the next crisis will once again require taxpayers to bail it out. Since it was Mr. Dimon’s bank that lent the money to zombie companies, households again which can’t afford it, and took on excessive risks in financial assets, he will gladly accept the next bailout while taxpayers suffer the fallout.
For the top 20% of the population that have money actually invested, or directly benefit from surging asset prices, like Mr. Dimon, life is great. However, for the vast majority of American’s, the job competition is high, wages growth is stagnant, and making “ends meet” is a daily challenge.
While Mr. Dimon’s view of America is certainly uplifting, it is delusional. But of course, give any person a billion dollars and they will likely become just as detached from economic realities.
Does America have “greatest hand ever dealt.”
The data certainly doesn’t suggest such. However, that can change.
We just have to stop hoping that we can magically cure a debt problem by adding more debt, and then shuffling it between Central Banks.
But then again, such a statement is also delusional.
Tiffany’s Disastrous Earnings Explains Company’s Eagerness To Sell To LVMH
Tiffany & Co shares slid Thursday morning after missing Wall Street expectations for quarterly profits and sales, reported Reuters.
Net Sales in North America dropped 4% in 3Q, mostly due to a deteriorating consumer. Sales in the Asia-Pacific region were flat, crushed by a 49% drop in Hong Kong amid deepening socio-economic chaos.
Mainland China bucked the trend, recorded double-digit growth for sales, according to Refinitiv data
Net earnings for the company declined to $78.4 million, or about 65 cents per share, in 3Q, from $94.9 million, or 77 cents, last year.
Wall Street was betting the company would earn 85 cents per share on the quarter, mostly because of trade war optimism and the hopes for a strong US consumer. Though, the hope hasn’t translated into any meaningful pick up in growth in 2H. Net sales were flat in the quarter at $1.01 billion.
Last week, the boards of both LVMH Moët Hennessy and Tiffany approved a deal that would sell Tiffany for $16.2 billion, or at $135 per share in cash to LVMH. The transaction is expected to be completed in early 2020, explains the eagerness of Tiffany’s board to unload the company after today’s disastrous earnings.
As we’ve been reporting in recent months, a sudden pullback in spending by the consumer could ripple through the service economy, which is about 70% of GDP.
Already an employment downturn is at risk of becoming more profound and will likely shift consumer sentiment lower.
Ahead of recessions, consumers tend to pull back on jewelry purchases as pessimism changes spending habits.
It’s clear that Tiffany’s board knows the next recession is imminent, they’re attempting to unload the company at the peak.
Summary: Equities continue to rally although the first week of December has been more choppy due to mixed trade headlines from the US and China. Overall, US equity valuations have hit dangerous levels for long-term investors and the recent Swedish Services PMI figures are highlighting emerging spillover effects from manufacturing into the services sector which is a dangerous dynamic as it goes against the current economic rebound narrative holding up equities.
* * *
As regular readers of our views on equities know we have been defensive on equities for more than a year. The last two months we raised the concerns that equities are detaching from the realities of macro risks while acknowledging the momentum in equities. The broader narrative supporting equities is central bank easing, hopes of more fiscal impulse and lastly the “phase one” trade deal between the US and China.
This first week of December has seen yet another rollercoaster event on the trade talks from Trump signing the Hong Kong bill agitating the Chinese side, to both sides saying that trade talks are progressing before Trump the other day said “trade deal might wait until after 2020 election”, before both sides again yesterday said talks are advancing. The facts are that the US has a 15 December deadline on additional tariffs on Chinese goods, and given Trumps unpredictable nature and his recent action to slap tariffs on steel and aluminum on Argentina and Brazil, he could surprise the market by raising the tariffs on 15 December. In this event equities would hurt as liquidity is typically declining leading up the Christmas holiday period. But for now this week’s trade headlines have not really tested the market as shown by the spread between the VIX Index and the two-month futures contract.
Another concern that investors should take note of is equity valuations. S&P 500 is now seeing a valuation that is the highest since 2001 (excluding the Jan 2018 observation) highlighting stretched market conditions and lower implied expected returns. Based on the current valuation level in the S&P 500 we observe historically a 0.5% real return annualized with a +/- 2%-points uncertainty. This means that investors buying into current valuation levels are pursuing momentum effects rather than long-term return expectations. These moves never end good.
But the central question for investors should be whether yesterday’s weak Swedish PMI Services print for November at 47.9 is a sign of emerging spillover effects into the broader economy. If Sweden leads Europe and potentially the US due to its pro-cyclical characteristics then yesterday’s print is ugly reading for investors. Sweden’s economy is approaching activity levels not observed since the euro area crisis in 2012. If the spillover effects from the manufacturing recession are real and growing then the global economy will be hurt badly. Policy rates are already low providing little firepower for central banks so fiscal will have to take over to reverse the bleeding. But fiscal moves slower and is certainly behind the curve in many countries, most notably Europe, which means macro weakness in 2020 could be worse than most think today. Watch Sweden is our only message in this monthly equity update.
As we have argued many times recently negative rates have hit the end of the road. It’s clearly not strengthening the credit channels and the banking sector business model is not working on the current monetary policies. In our view, led by the Riksbank, ECB will begin next year to forward guide markets about lifting rates regardless of the macro outlook in order to soft pressure Europe’s government to do more and create a better “policy mix” using ECB president Lagarde’s own words.
When we look across the economic landscape it’s clear that the UK and Europe have the most room for maneuvering on the fiscal side with especially Europe running too tight budgets relative to the current trajectory of the global economy. But here lies also the upside potential for next year. European equity markets could be the big surprise next year if both the UK and EU loosens the purse string as it could drive stronger currency and ultimately demand. If the ECB in addition indicates a shift in its monetary policy then banks would significantly add to performance. Also note today’s decision by the Japanese government to launch a $121bn stimulus programme to revive growth. It’s already starting.
Semiconductors stocks have done very well despite challenging trade environment as demand has remained robust and some frontloading by China has likely taken place. We like to use South Korea and semiconductors as leading indicators on the economy. Numbers out of South Korea are still worsening and the trade uncertainty is holding back investments among many companies. The hesitation to do investments are beginning to feed through to the semiconductor industry with operating earnings showing the biggest drawdown since 2012. Semiconductor earnings doubled from late 2016 to late 2018 which has fueled strong sentiment. Our view is that a lot of the hype around AI will cool down significantly in 2020 and with it demand for semiconductors.
Watch Live: Pelosi To Deliver Impeachment Probe “Update” At 9 AM
Prompting speculation that she could be announcing a timeline for an impeachment vote, House Speaker Nancy Pelosi is reportedly planning to deliver an update on the status of the impeachment inquiry Thursday morning at 9 am.
Pelosi will speak from the Speaker’s Balcony Hallway, the same spot from where she announced the launch of the impeachment probe back in September, roughly 71 days ago.
The statement comes as Democrats on the Judiciary Committee have been asked to stay in Washington this weekend to “prep”.
Even if she doesn’t announce plans for an imminent impeachment vote, the speaker’s remarks should at least help clarify the path forward, as Dems quietly debate whether to expand the scope of impeachment to go beyond the alleged quid pro quo with Ukraine.
On Wednesday, three Democratic witnesses made the case for Trump’s impeachment, while a fourth Republican witness argued that the Dems’ evidence falls well short of establishing a ‘quid pro quo’ between Trump and the Ukrainian government.
That the Dems are moving ahead shouldn’t come as a surprise to anyone – after all, 16 Democratic members of the committee already voted to impeach Trump back in July.
Let’s be clear: 16 Dems on the Judiciary Committee already voted to impeach the President back in July.
Tomorrow’s hearing is an orchestrated scam against @realDonaldTrump with a pre-determined outcome.
This has been their plan since Day 1. Don’t let them tell you otherwise.
The US trade deficit shrank to its smallest since June 2018 in October, as trade with China extended its slide with goods imports from the nation dropping to a fresh three-year low.
The overall U.S. deficit in goods and services trade narrowed to $47.2 billion in October (less then the $48.5bn expected)…
Source: Bloomberg
Merchandise imports from China declined 4.8% from the prior month to $35.3 billion while exports tumbled 17% to $7.49 billion, the least in almost a year
Source: Bloomberg
Perhaps most notably: U.S. OCT. SOYBEAN EXPORTS FALL 42% M/M TO $1.11 BLN
Finally, as Bloomberg notes, the report showed exports and imports both dropped and gave a hint of the impact of trade on fourth-quarter gross domestic product.
Journalist and book author Michael Snyder says corporate debt is at record highs standing at $10 trillion.
Snyder points out debt is setting records in every aspect of the economy and contends, “If you include all other forms of corporate debt not listed on the stock exchanges, that brings the total to $15.5 trillion, which is equivalent to 74% of GDP. We’ve never seen anything like this before in all of U.S. history.“
“That is just one form of debt and how our society has grown the debt. People need to realize the only reason why we have any prosperity in this country today is because it is fueled by debt. We have been building up this bubble, and it is the bubble to end all bubbles. Look at consumers. U.S. consumers are now $14 trillion in debt, which is an all-time record. State and local governments are at all-time debt record levels. The U.S. government.. just hit $23 trillion in debt, more than double since the last financial meltdown…
We are stealing from future generations more than $100 million every single hour of every single day. This is a crime beyond comprehension, and it’s been going on more than a decade. . . .All the debt has bought for us is more time to expand the bubble for relative stability. Meanwhile, we are literally committing national suicide and literally destroying the future of this country and the future of this republic. We are destroying everything the founders built by insatiable greed in this generation.”
Snyder says you don’t have to wait for the next recession because it’s already started. Snyder says,
“Eventually, this whole thing is going to come crashing down. This thing is not sustainable. Here in the United States, we are already in a manufacturing recession. We are already in a transportation recession. We’re already in a corporate earnings recession. We are already in trouble that I document regularly on my website. We are already seeing dozens of data points that an economic slowdown is already happening. This is what we will notice first. We will go into a recession, and things are going to start getting bad, but beyond that . . . we are headed for the Greatest Depression.
It’s the perfect storm. . . . We are talking about the breakdown of trade with China. . . . We have witnessed the complete and total breakdown of relations between the United States and China. . . . They (China) view us (America) as their primary global enemy. So, there is not going to be any kind of comprehensive trade agreement. You can forget that, and that has been one of the only things holding this stock market up.”
Snyder says no China trade deal will cause the stock market to “lose hope for the future.” Snyder predicts stocks will “fall at least back to its long term averages, which is 40% to 50% lower than stocks are today.” Snyder also says,
“The system is failing. People that have faith in Wall Street, people that have faith in Washington, people that have faith in the Federal Reserve and in the system, ultimately, they are going to be extremely, extremely disappointed. Most Americans are going to be blindsided by this, and most people have no idea what’s coming, absolutely no idea. We’re not just talking about Mad Max. We’re not just talking about Armageddon. We’re talking about the end of America. In the long term, if you want to prepare, you need to prepare for the end of our country.”
Trump Warns “Schiff, Bidens, & Pelosi Will Testify” If Impeachment Goes To Senate
After yesterday’s farcical partisan discussion of just how terrible President Trump’s “high crime and/or misdemeanor” was (or wasn’t), and the recent chatter about ‘censure’, one could be forgiven for thinking that the Democrats are looking for an off-ramp from their NeverTrump campaign.
And in two tweets this morning, perhaps President Trump has highlighted the reason why Schiff et al., may prefer to end this soon…
“The Do Nothing Democrats had a historically bad day yesterday in the House. They have no Impeachment case and are demeaning our Country. But nothing matters to them, they have gone crazy. Therefore I say, if you are going to impeach me, do it now, fast, so we can have a fair trial in the Senate, and so that our Country can get back to business. “
And here’s the kicker…
“We will have Schiff, the Bidens, Pelosi and many more testify, and will reveal, for the first time, how corrupt our system really is. I was elected to “Clean the Swamp,” and that’s what I am doing!”
We suspect it’s not just the Republicans, Deplorables, and Expendibles that would like to see that happen.
Equity Futures Jump On, You Guessed It, “Increased Hope Of Trade Deal”
After two gloomy days for stocks at the start of the month which led to the worst December for the S&P since 2008, markets rebounded around the globe following an unsourced Bloomberg report that said the trade negotiations with China are still very much on track “according to people who wish to remain anonymous” (such as Larry Kudlow), yet who apparently are too worried to reveal that they have a different agenda than the president. In any case, the lack of new trade deal pessimism coupled with a report that Chinese Ministry of Commerce spokesman said officials are in “close contact” with U.S. counterparts, even though China officially reiterated that the US must rollback existing tariffs to agree to a Phase 1 deal, was sufficient for global stocks to extend their levitation for a second day and for Reuters to proclaim that…
Indeed, the latest batch of headlines around trade suggested the world’s two largest economies were closer to agreeing how many tariffs would be rolled back in a “phase one” trade deal, while President Donald Trump said talks with China were going “very well”. This more optimistic tone around trade helped Wall Street’s main indexes snap a three-day losing streak in the previous session, putting the benchmark S&P 500 index just 1% away from an all-time high hit last week. Of course, things could turn sour fast: if no agreement is reached soon, around $160bn in tariffs on Chinese goods would come into effect from Dec. 15.
Or as DB’s Jim Reid put it:
We are living in a pre-December 15th world where one headline or tweet on trade has the ability to turn a good day into a bad one and visa-versa. The same story has the ability to wipe or add hundreds of billions (even trillions) from/to the value of global financial assets. That’s what we’re dealing with at the moment.
At 7am, Dow e-minis were up 104 points, or 0.38%; S&P 500 e-minis were up 11 points, or 0.35% and Nasdaq 100 e-minis were up 37 points, or 0.45%.
In the US, shares of tariff-sensitive semiconductor companies looked set to rise for the second straight day, with Micron Technology, Advanced Micro Devices and Nvidia gaining between 1% and 1.3% in premarket trading. Among stocks, Dollar General Corp jumped about 5% after the discount store chain raised its full-year profit forecast. Nike shares climbed 2% after a report said Goldman Sachs upgraded the sportswear maker’s stock to “buy” from “neutral”, while Tiffany which is being bought by Louis Vuitton owner LVMH, nudged 0.5% lower after the luxury jeweler fell short of analyst’s estimates for quarterly sales.
European stocks were also a sea of green, as the Stoxx Stoxx Europe 600 rose as much as 0.5%, extending earlier gains, along with U.S. index futures. Most sectors were in the green, led by healthcare +0.9% and retail +0.8%; travel & leisure little changed.
Earlier in the session Asian stocks climbed, led by technology companies; most markets in the region were up, with Australia leading gains and South Korea slipping. Japan’s Topix rose, driven by electronic firms and drug makers, as Prime Minister Shinzo Abe announced a $239 billion stimulus package to support growth. The Shanghai Composite Index closed higher, with China Life Insurance and Foshan Haitian Flavouring among the biggest boosts. The Sensex gained for a second day as India’s central bank defied expectations for a rate cut and kept borrowing costs unchanged
There is other stuff besides trade too: after lackluster readings on domestic services sector activity and private payrolls growth on Wednesday, traders are also awaiting the Labor Department’s non-farm payrolls data due Friday.
Treasuries added to their losses from Wednesday, and were modestly cheaper across the curve, dragged lower by wider losses across bunds and gilts over early European session. Yields were higher by at least 1bp vs Wednesday’s close, 10-year by 1.7bp to ~1.79%; 10-year gilts and bunds underperformed by ~1bp. Indian government bonds tumbled after its central bank unexpectedly left interest rates unchanged.
In FX, the Bloomberg Dollar Spot Index headed for a fifth day of losses. The pound rose for a fifth day against the greenback as expectations grow for a Conservative victory in next week’s election, while the euro stayed near $1.11 as real money interest lent support.
Market Snapshot
S&P 500 futures up 0.1% to 3,115.50
STOXX Europe 600 up 0.1% to 403.67
MXAP up 0.5% to 163.97
MXAPJ up 0.6% to 521.04
Nikkei up 0.7% to 23,300.09
Topix up 0.5% to 1,711.41
Hang Seng Index up 0.6% to 26,217.04
Shanghai Composite up 0.7% to 2,899.47
Sensex up 0.02% to 40,857.88
Australia S&P/ASX 200 up 1.2% to 6,682.95
Kospi down 0.4% to 2,060.74
German 10Y yield rose 1.3 bps to -0.302%
Euro up 0.1% to $1.1092
Brent Futures down 0.08% to $62.95/bbl
Italian 10Y yield rose 0.4 bps to 0.942%
Spanish 10Y yield rose 1.6 bps to 0.458%
Brent Futures down 0.08% to $62.95/bbl
Gold spot up 0.02% to $1,474.91
U.S. Dollar Index down 0.1% to 97.52
Top Overnight News from Bloomberg
Japan announced a stimulus package amounting to around 26 trillion yen ($239 billion) spread over the coming years, with fiscal measures around half that figure
ECB Governing Council members, who collectively lowered the key rate to minus 0.5% shortly before Draghi’s term ended, are increasingly portraying it as a necessary evil that shouldn’t be compounded
Federal Reserve officials won’t allow the 2020 presidential election to sway their monetary policy decisions and will keep interest rates on hold for the next two years, according to economists surveyed by Bloomberg
German factory orders unexpectedly declined, suggesting Europe’s largest economy is still struggling to overcome a manufacturing slump and fend off recession
India’s central bank defied expectations for an interest rate cut, keeping borrowing costs unchanged to assess the effect of its policy after five reductions this year
Chinese officials are in “close contact” with U.S. counterparts on trade negotiations, Ministry of Commerce spokesman Gao Feng said, while reiterating that tariffs should be reduced proportionately as part of a phase-one accord
Adrian Lee & Partners, among the largest active currency management firms with over $14 billion in assets, announced Wednesday the launch of a Global Macro Alpha Fund, which will invest in equities and fixed-income alongside currencies at a time when historically-low levels of volatility are making it difficult for some in the industry to make profits from foreign exchange
Asian equity markets were mostly positive as they took their cue from global peers after the trade mood flip-flopped once again to a more positive tone yesterday. ASX 200 (+1.2%) was led by outperformance in the tech and energy sectors amid the trade optimism and recent 4% surge in crude prices, with banks also welcoming the RBNZ’s increased capital requirements as some now expect a lower impact than they had previously anticipated. Nikkei 225 (+0.7%) was underpinned by recent currency moves and with Japan set for a multi-trillion stimulus package, as well as talks with South Korea this month to address the trade spat. Elsewhere, Hang Seng (+0.6%) and Shanghai Comp. (+0.7%) were also lifted on the trade hopes and following the announcement of measures to support the Hong Kong economy, but with gains capped given the lack of actual meaningful breakthrough on the trade front and amid continued PBoC liquidity inaction. Finally, 10yr JGB were initially lower on spill-over selling from USTs and as demand was sapped by the gains across equities, although prices were later rebounded which was helped after the results of the 30yr JGB auction showed slight improvements across all metrics.
Top Asian News
Japan’s Abe Says Stimulus Opens Path to Future Growth
India Central Bank Surprises With Pause as Inflation Spikes
Hedge Fund Sends Letter to Korea Lawmakers on Stock Value Boost
Major European bourses (Euro Stoxx 50 +0.6%) are higher as the market maintains a positive risk tone as it awaits further news on the US/China trade front and the outcome of today’s OPEC & JMMC meetings. The FTSE 100 (-0.1%) is again the laggard, amid a firmer Pound. Elsewhere, the CAC 40 (+0.4%) is holding up well despite France being hit by nationwide strikes, as workers across a range of professions protest French President Macron’s proposed pension reforms. Subsequently, a walk out by air traffic controllers has however resulted in some airlines being hit; Air France (-1.0%) said it was axing 30% of internal flights and 15% of short-haul international routes and easyJet (-0.8%) reportedly cancelled 223 domestic and short-haul international flights and warned that others risk being delayed, although yesterday’s approximate 4% rally in crude oil prices is also likely weighing on airlines in general – other names including IAG (-1.1%) and Deutsche Lufthansa (-1.2%) are also lower. Elsewhere, luxury names including Hermes (+1.6%) and Swatch Group (+1.6%) are on the front foot after Kering (+1.6%) reportedly held explanatory talks with Moncler (+9.2%) regarding a potential combination, which would mark continued consolidation within the sector following LVMH’s (+0.9%) buyout of Tiffany & Co. last month. Sectors are mostly in the green, barring Tech (unch.), Materials (unch.) and Telecoms (-0.1%), the latter weighed by continued underperformance in Orange (-0.7%), with the Co. still suffering following yesterday’s disappointing dividend outlook. In terms of other individual movers; Novartis (+0.7%) shares are underpinned by the news that around 90 innovative new molecular entities are emerging from the Co.’s institutes for BioMed research. Elsewhere, Fiat Chrysler (-0.9%) shares are under pressure after reports that the Co. is in talks with Italian tax authorities regarding an audit, which added that the Co. may be liable for up to USD 1.5bln in “exit tax”. Metro Bank (+0.6%) shares are supported following the resignation of its CEO Donaldson, who will be replaced by Frumkin on an interim basis. Finally, negative broker moves for Siemens (-0.7%), Berkley Group (-0.6%), Vinci (-0.5%) and Tullow Oil (-0.2%) weighs on their shares.
Top European News
Credit Suisse Wins Order Keeping Critical Report From Prosecutor
New CEO of U.K.’s Worst Stock of 2019 Will Have Work Cut Out
Surging Green-Bond Demand Starts Tempting East Europe Borrowers
Telecom Stocks Drop as Italian Finance Probe, Orange Weigh
In FX, sterling remains on a firmer footing in early EU trade, with the latest poll (Savana/ComRes) showing the market-friendly Conservatives maintaining its lead over Labour vs. the prior survey as election day looms. Aside from that, little pertinent news flow thus far to influence price action. GBP/USD extends gains above 1.3100 before hitting a wall just under the 1.3150 mark, ahead of resistance in the form of a Fib level at 1.3168 followed by 1.3185. Meanwhile, the EUR derives support from a marginally softer USD and largely side-lined a slump (and significant miss) in German industrial orders, albeit the country’s construction PMI indicated a decent rebound. EUR/USD continues to eke modest gains to session highs just under the 1.1100 mark (1.1078-93 intraday range thus far), with hefty options eyeing today’s NY cut – EUR 1.0bln between 1.1090-1.1100 and EUR 2.4bln around 1.1110-25.
NZD, AUD, CAD – Mixed trade down under with the Kiwi buoyed by the RBNZ’s attempt to bulletproof its financial system via a capital requirement hike in order to withstand economic volatility. The Central Bank also gave lenders an extra two years to raise the required capital and flexibility on how they raise it. NZD/USD remains underpinned but has subsided a bulk of its overnight gains with the pair still in the green but back below its 200 DMA (~0.6540), having hit resistance around 0.6562-65. Meanwhile, the Aussie remains lacklustre on the back of further sub-par data, this time in the form of retail sales and trade balance, with the former printing flat and the latter a smaller surplus than had hoped. AUD/USD remains in the red and closer to the bottom of the current intraday band (0.6855-31) with the pair’s 100 and 50 DMAs (0.6814 and 0.6811 respectively) in the way of the psychological 0.6800. Elsewhere, the CAD remains modestly firmer in the aftermath of yesterday’s BoC hawkish hold and upbeat view on the economy, although traders will be eyeing BoC’s Lane on the docket later today (1245GMT) who is likely to speak on the economy. USD/CAD remains sub-1.3200 having touched a base around 1.3180.
DXY, JPY – The broad Dollar and Index remain under pressure given the recent string of downbeat data and ahead of the monthly US jobs report tomorrow. DXY manages to stay afloat above 97.50 (just about) having clocked in a current range of 97.49-60 with little in terms of scheduled data/speakers to influence price action. Finally, USD/JPY is relatively flat and just a whisker away from the 109.00 mark, albeit above its 200 DMA at 108.87, with USD 1.4bln in options set to expire around 109.00-15.
In commodities, crude markets eke mild gains as the complex consolidates following yesterday’s strong price action and with participants cautious as they await the outcome of today’s JMMC and OPEC meetings; the former has already begun, while the latter is scheduled to begin at 14:00 GMT. Tomorrow OPEC+ will meet and the final decision on the cartels production cuts will be made. Sources this morning suggested that OPEC+ are to discuss deeper oil output cuts of more than 400k BPD as the main scenario, news which triggered some fleeting upside in crude markets and something which has been alluded to by the Iraqi oil minister on multiple occasions in recent days. This contrasts somewhat with the reported consensus amongst OPEC minister yesterday that a deeper cut will “be harder to pull off this time”. Russian Oil Minister Novak has so far declined to reveal the country’s stance for the upcoming OPEC+ meeting, but the country is expected to resist any push for further cuts; “Russia’s reluctance to deepen the cuts at the risk of compromising its market share and undermining the predictability of its oil rent is now well-known,” said Aperio Intelligence, adding “Russia’s strategy will be to seek to preserve the status quo without either overplaying its hand or overreaching”. Moreover, the country is also pushing to have its condensate output to become exempt from its quota, a request which may prove contentious, especially with Iranian Energy Minister stating that condensates of gas in the OPEC quota system is not a OPEC discussion. In terms of other crude specific news flow; the latest Platts Oil Survey revealed that OPEC pumped 29.65mln BPD of crude in November, with 11 quota members achieving cut compliance of 145%. The survey found that Iraq and Nigeria are still supplying in excess of the cap but are moving closer to compliance. Poor compliance by these members is a point of frustrations for the Saudis; just yesterday, it was reported that the Saudis are threatening to increase production back to its quota level, rather than reducing production by more than is required, due to growing frustration with those not complying with the existing OPEC cut agreement. Thus far, the Saudi’s have shouldered the bulk of the cuts, with recent analysis suggesting that without the Saudi’s overcompliance, OPEC+ compliance would be just 70%. On a different note, Goldman and Barclays provided some updates oil market forecasts; Goldman expects a Brent-WTI differential of USD 4.50/bbl in 2020, from the YTD levels of close to USD 7.0/bbl, while Barclays forecasts Brent to average USD 62/bbl and WTI to average USD 57/bbl for Q4 2019 and 2020. Moving over to metals; gold is slightly lower, amid a lack of demand for havens, but is relatively rangebound about the USD 1480/oz level. Meanwhile, positive risk tone has underpinned copper, which has this morning managed to eclipse yesterday’s USD 2.6655/lbs high, albeit only slightly.
US Event Calendar
7:30am: Challenger Job Cuts YoY, prior -33.5%
8:30am: Initial Jobless Claims, est. 215,000, prior 213,000; Continuing Claims, est. 1.66m, prior 1.64m
8:30am: Trade Balance, est. $48.5b deficit, prior $52.5b deficit
10am: Factory Orders, est. 0.3%, prior -0.6%
10am: Factory Orders Ex Trans, prior -0.1%
10am: Cap Goods Ship Nondef Ex Air, prior 0.8%; Cap Goods Orders Nondef Ex Air, prior 1.2%
10am: Durable Goods Orders, est. 0.6%, prior 0.6%; Durables Ex Transportation, est. 0.6%, prior 0.6%
DB’s Jim Reid concludes the overnight wrap
We are living in a pre-December 15th world where one headline or tweet on trade has the ability to turn a good day into a bad one and visa-versa. The same story has the ability to wipe or add hundreds of billions (even trillions) from/to the value of global financial assets. That’s what we’re dealing with at the moment.
Indeed it was another see-saw day for markets yesterday as investors took heart from a Bloomberg report that said the US and China were moving closer towards a trade deal, even amidst the tougher rhetoric between the two sides over non-trade issues in recent days. So carrying on the theme, a couple of journalists writing this story basically helped add around $561 billion to global equity markets yesterday given the market cap of global equities.
Citing “people familiar with the talks”, the article said that the US negotiators thought a phase-one deal would be finished before December 15, when US tariffs on China are scheduled to increase, and that President Trump’s comments the previous day that a deal could wait until after the US election next year shouldn’t be taken as an indication the talks were stalling. Meanwhile, China’s Foreign Minister Wang Yi has said on whether the trade talks can be finished this year that “it depends. China’s stance is very clear. There is hope, as long as it is based on mutual respect and equal consultations.” Elsewhere, Mr Trump has now said that talks with China are going very well before adding, “We will make a lot of progress.” Overnight, CNBC also reported, citing people familiar with the talks, that President Trump’s son-in-law Jared Kushner, who helped bring the US-Mexico-Canada trade agreement to fruition, has increased his direct involvement in the negotiations with China over the past two weeks.
The situation remains highly changeable, but markets nevertheless rallied with the S&P 500 up +0.63% to end a run of 3 successive declines. Trade-sensitive stocks led the advance, with the Philadelphia semiconductor index up +1.55%, its strongest performance in over a week, while the NASDAQ (+0.54%) and the Dow Jones (+0.53%) also closed higher. Energy stocks were the strongest performers among US equities thanks to oil’s advance, with WTI (+3.98%) and Brent Crude (+3.60%) experiencing their best day since the aftermath of the Saudi drone strike in September that saw Brent rally +14.61% in a single session. The move was partially driven by expectations that OPEC will announce an expanded cut to output at today’s meeting, plus US inventories later in the day showed a larger-than-expected drawdown. It was a similar bullish equity story in Europe, with the STOXX 600 up +1.18% to end a run of 4 successive moves lower.
With the risk-on attitude, sovereign bonds sold off on both sides of the Atlantic, with 10yr Treasuries +5.5bps to 1.771%, while the 2s10s curve steepened by +2.1bps.Canadian bonds were the worst performer, +9.5bps after the Bank of Canada’s decision (more on which below), while in Europe 10yr Bunds (+3.3bps), OATs (+3.7 bps) and Gilts (+7.2bps) all lost ground. Higher rates helped bank stocks however, with the S&P 500 banks industry group +1.31% in its best performance for a month, while the STOXX Banks index in Europe was also up +2.08%.
In overnight news, Japan’s PM Shinzo Abe announced a total stimulus package amounting to JPY 26tn (c. $239 bn) spread over the coming years to support the economy. Remember that without a package fiscal would be tightening with tax increases. The total is perhaps bigger than expected but the fresh fiscal measures are not. Of the total, JPY 13.2 tn would be fiscal measures, according to a draft stimulus document seen by Bloomberg. Despite the big headline figure, the initial reaction to the package has been muted given that the headline stimulus figure for such announcements in Japan are typically inflated with promised loans and private-sector assistance and as details indicated that the actual central government spending is just JPY 7.6tn (per Bloomberg). Yields on 10y JGBs are up +1.3bps to -0.045%.
Asian markets are following Wall Street’s lead this morning with the Nikkei (+0.79%), Hang Seng (+0.36%) and Shanghai Comp (+0.41%) all up. The Kospi is down -0.45%. Elsewhere, futures on the S&P 500 are trading flat while the yield on 10y USTs is down -1.6bps.
In other positive news for trade, the House Democrats said overnight that a deal on the stalled U.S.-Mexico-Canada free-trade agreement is within reach and urged Mexico to accept a compromise on labor-rights enforcement. Mexico’s top trade negotiator, Jesus Seade, met yesterday in Washington with his US counterpart, Robert Lighthizer, in an attempt to resolve final details and they are again going to meet today. Elsewhere, in France, unions representing a broad sweep of workers across the country are going on an indefinite “greve,” or strike, starting today in opposition of Prime Minster Macron’s plan for an overhaul of the pension system. So one to watch.
Bloomberg also reported overnight that Elizabeth Warren is drafting a bill that would call on regulators to retroactively review about two decades of “mega mergers” and ban such deals going forward. According to a draft of the bill reviewed by Bloomberg, the proposal would expand antitrust law beyond the so-called consumer welfare standard to also consider the impact on entrepreneurs, innovation, privacy and workers.
Back to yesterday, and the main data releases were the final services and composite PMIs for November from around the world. In terms of the numbers, the Euro Area composite PMI was revised up to 50.6 (vs. flash 50.3), although this strength was somewhat dependent on the country, with Germany revised up to 49.4 (vs. 49.2 flash) while France was revised down to 52.1 (vs. 52.7 flash). In the periphery, where we didn’t have the flash readings as a guide, Italy’s composite PMI fell into contractionary territory at 49.6, its lowest level in 7 months, while Spain saw an increase to 51.9, a 3-month high. On the services PMI for the Euro Area, this was also revised up, now at 51.9 (vs. 51.5 flash).
Turning to the US, and the non-manufacturing ISM index for November fell to 53.9 (vs. 54.5 expected). In a more promising sign, the employment component rose to a 4-month high of 55.5, but this was a contrast to the more negative message from the ADP report of private payrolls, which saw the weakest employment gain in 6 months, at just +67k (vs. +135k expected).
Here in the UK, with just one week now until the general election, sterling was the strongest performing G10 currency for the second day running, up +0.85% against the dollar at its highest level since May. In fact against the euro, sterling was at its highest level since May 2017, way back when the country was in the midst of the last general election campaign. In recent weeks, sterling has been supported by investor hopes that a Conservative majority at the election will support a smooth ratification of the Withdrawal Agreement through Parliament, taking away some of the short-term uncertainty over the Brexit process. The sole poll yesterday came last night and showed a 10pt lead for the Tories – unchanged from the previous poll and in-line with the poll of polls. Sterling was also helped by the PMI revisions, with the composite PMI revised up to 49.3 (vs. flash 48.5).
The Canadian dollar took 2nd place to sterling yesterday, up +0.73% against the US dollar after the Bank of Canada left rates unchanged yesterday at 1.75%. Although in line with expectations, the market took the message to be somewhat hawkish, with the statement from the BoC saying that there was “nascent evidence that the global economy is stabilising”. Looking forward, they said that future decisions would “be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy”.
Elsewhere, US Treasury Secretary Mnuchin sent a letter to the OECD arguing against unilateral digital services taxes like France’s recent measure. This follows Friday’s report from the USTR which said that the French proposal is discriminatory against US firms. Mnuchin’s letter pushed for multilateral measures via the OECD. For more on the OECD plans see our report on the future of corporate taxes from a few weeks back here .
To the day ahead now, and we’ve got a number of data releases, starting this morning with German factory orders for October, along with the country’s construction PMI for November. We’ll also get the Euro Area’s retail sales figures for October, as well as the final GDP and employment readings for Q3. Then from the US, there’s the October trade balance and factory orders data, along with the final reading for October durable goods orders and non-defence capital goods orders. Finally, there’ll be the weekly initial jobless claims, and from Canada October’s international merchandise trade. In terms of central banks, we’ll hear from the ECB’s Makhlouf, while the Fed’s Quarles will be testifying before the Senate Banking Committee on supervision and regulation.
Pound Climbs To 2-Year High As Traders Jump On Pre-Election Rally
Moving higher for a fifth straight session, the pound climbed to fresh cycle highs on Thursday after the London open, as expectations for the return of a Tory majority after next week’s snap vote have helped bolster the British currency, which has risen 9% off its lows.
The pound’s torrid pre-election rally has brought the currency to its highest level vs the dollar in more than 7 months, and its strongest level vs. the euro in 2 years.
Cable climbed another 0.2% on Thursday to trade above $1.31 for the first time since May 7. If it holds its gains until the end of the session, it will mark the pound’s longest winning streak (five sessions) since June.
As the FT explains, a Conservative majority is the more market-friendly outcome because it would promote greater certainty: PM Johnson would finally be able to push through his version of the withdrawal agreement negotiated with the EU27, allowing the UK to officially begin the process of separating from the EU, and initiating the next round of negotiations on the nature of the trade deal.
“Rarely have voters been asked to pass judgment at such a critical time for the economy and for financial markets,” Ruth Gregory, a senior economist at Capital Economics, told the FT.
But Johnson’s pledge not to extend the Brexit transition period beyond the end of next year could create problems for sterling bulls down the line.
After the currency’s initial rally, attention would shift “very, very quickly,” Willem Klijnstra, currency analyst at Legal & General Investment Management, told the FT. His firm has been neutral on its sterling exposure since September. “If we do get a Conservative win then we are straight back to Brexit.”
The pound has risen sharply since October, when Johnson successfully pushed for the snap vote, ending a period of market chaos instigated by his insistence that the UK could leave the EU without a deal.
