Futures Rise, Yen Soars, JGBs Tumble As BOJ Rattles Markets

US equity futures are mixed with tech outperforming notably, as both GOOG and AMD rose +2.8% and 3.7% pre-mkt, respectively. As of 8:00am ET, S&P futures were up 0.1% to 4,560 and Nasdaq futures gained 0.2%.  10Y Treasury yields rose 5 basis points as Japanese bonds tumbled and the yen surged 1.6% against the dollar amid renewed speculation that the Bank of Japan will scrap the world’s last negative interest-rate regime as soon as the Dec 19 BOJ meeting (spoiler alert: it won’t). Of course, if the BOJ does indeed hike yields, US yields will move sharply higher. Elsewhere, the USD is weaker and commodities are higher led by a rebound in the energy complex; WTI is back above $70. Today’s macro data is on Job Cuts, Initial/Continuing Claims, and Consumer Credit. Tomorrow’s NFP data is the more market moving data.

In premarket trading, US mega-tech stocks rose helped by gains in Alphabet and AMD, while the broader market struggled for direction. Here are the most notable premarket movers:

• Alphabet shares rise 2.6% a day after Google released Gemini, the “largest and most capable AI model” the company has ever built, as analysts were largely positive about its long-awaited AI model. JPMorgan notes that investors might have snoozed on the release, but he is positive about Google’s progress in this area.
• AMD shares rise 3.2% after the chipmaker unveiled new so-called accelerator chips aimed at taking on the lucrative artificial intelligence market dominated by its peer Nvidia. The company noted that it will be able to run AI software faster than rival products.
• Braze (BRZE) climbs 8.6% after the software company boosted its revenue guidance for the full fiscal year, beating the average analyst estimate.
• Bumble (BMBL) shares gain 0.9% after the dating-app company was initiated with an overweight recommendation at Wells Fargo, which expressed optimism on the sustainability of growth in its namesake app.
• Cerevel Therapeutics shares rise 13% after AbbVie agreed to acquire the biotech company in a deal valued at about $8.7 billion. This is the second acquisition for AbbVie in about a week as it comes on the heals of the $10.1 billion deal to purchase cancer-drug maker ImmunoGen.
• C3.ai falls 9.8% as the data management and analysis software company reported revenue for the second quarter that missed the average analyst estimate. It also issued a forecast for an operating loss in the fiscal year that was worse than projected.
• Chewy shares drop 9.9% after the online pet supplies retailer cut its full-year net sales guidance, which missed consensus estimates. Analysts viewed the results as disappointing, with Citi describing them as “lackluster.” Additionally, analysts noted that the focus now turns to the analyst day, which takes place next week.
• GameStop shares drop 7% after the video-game retailer reported third-quarter net sales that missed estimates. The company also announced a new policy that would allow chief executive officer Ryan Cohen to invest the company’s excess cash in equity securities, which Wedbush said was “the most inane decision we have ever seen.”
• Datadog shares rise 1.8% after Stifel upgrades the software platform provider to buy from hold, citing a survey indicating fewer customers looking to cut spending.
• GameStop shares drop 7.7% after the video-game retailer reported third-quarter net sales that missed estimates. Analysts called the print “mixed,” noting that revenue came in lower than expected.
• Rivian shares gain 3.0% after Stifel initiates coverage of the electric-vehicle maker with a buy rating, while peer Lucid’s shares ease as it is started at hold. The broker expects industry hurdles to diminish over the next few years and make way for sales growth.
• MicroAlgo gained 48%, adding to Wednesday’s 296% rally that was driven by an announcement that its Chinese companies plan to sign a cooperation agreement over postgraduate training with two other bodies.
• Rivian gains as much as 1.5% after Stifel initiates coverage of the electric-vehicle maker with a buy rating, while peer Lucid’s shares ease as it is started at hold. The broker expects industry hurdles to diminish over the next few years and make way for sales growth.
• Semtech shares are up 9.5% after the semiconductor device company reported third-quarter results that beat expectations and gave a forecast. Analysts said the report suggests a bottom ahead.
• Sprinklr shares slump 25%, set for their worst day on record, as analysts highlighted disappointing preliminary guidance for 2025 from the application software firm, seeing it as a sign that tough economic conditions are starting to bite.
• Take-Two falls 1.8% as BofA Global Research cut the recommendation on the video game publisher to neutral from buy, assuming a later launch of the company’s highly-anticipated Grand Theft Auto VI video game

The highlight of the overnight session was the surge in the yen and the plunge in JGBs which followed a jump in bets on a BOJ rate hike after hawkish hints by Governor Kazuo Ueda and his deputy spooked markets. Swaps at one point signaled a 45% chance of a policy shift this month. The move was another jolt to the global government rally, raising further doubts that central banks are ready to pivot toward rate cuts.

Traders also pointed to the fact that markets have run up in recent weeks and are due for a pause. There was a sense of caution ahead US labor market data, including jobless claims today and non-farm payrolls on Friday.

“Both valuation and positioning would argue for exhaustion in the recent bond rally,” said Mohit Kumar, chief European economist at Jefferies International. “Given our view of only a mild recession and inflation still remaining sticky, we would argue that the market has run a bit ahead of itself.”

European stocks ticked lower on Thursday, pausing after rallying to a four-month high as concerns over economic weakness outweighed recent hopes that interest rate cuts could be on the table for next year. The Stoxx Europe 600 was down 0.2% led lower by losses across rate-sensitive sectors including real estate and technology as bond yields rose, and a drop in travel and leisure stocks as JPMorgan turned more cautious on airlines. Among individual movers, shares in Swiss IT services firm SoftwareOne Holding AG edged higher following a Reuters report that Bain Capital is the last remaining bidder for the company after others dropped out, while Renault SA was little-changed after the French carmaker unveiled plans to cut electric vehicle production costs in half by 2027. European equities have rallied over 8% since reaching an October low, driven by gains across real estate stocks and technology as traders upped their bets on monetary easing from the ECB next year. Here are the biggest movers Thursday:

• Games Workshop shares drop as much as 15%, the biggest intraday decline since September 2022, after the table-top games maker issued a trading update for the first-half of the year
• Air France drops as much as 6.9%, Lufthansa -4.9% and IAG -3.7%, dragging down the Stoxx 600 transport & leisure index after JPMorgan turns more cautious on airlines, downgrading several
• Future plc shares drop as much as 31% after earnings missed estimates. The margin outlook for 2024 suggests a material cut to expectations, according to analysts
• Vodafone shares fall as much as 2.2% after Exane cuts the stock to underperform, saying the sale of its operations in Spain and potential deals in the UK and Italy are likely to dilute FCF
• Branicks drops as much as 11% after Bankhaus Metzler downgraded its rating on the commercial property investor to sell, citing the need for further disposals to pay its debt
• Hanza falls as much as 11% to SEK85.8, hovering just above the level of an offering of 3.53m new shares. The offering was priced at SEK85 apiece, a discount of about 10% to the last close
• Vertu Motors plunges as much as 24%, a record drop, after the UK automotive dealership issued a profit warning citing “negative external market factors”
• Smart Metering Systems gains as much as 43% to 969p, exceeding the 955p/share recommended cash offer from KKR, which values the utility company’s shares at about £1.3b
• Coats Group rises as much as 11% after the industrial thread manufacturer said it will no longer make payments to plug its pension deficit from the start of 2024
• Kin & Carta gains as much as 11% at 114.80p to trade just below Apax Partners improved offer price of 120p per share in cash.

“We do think that [European] equities have gone too far, we are quite cautious on the economic outlook,” Joost van Leenders, senior investment strategist at Van Lanschot Kempen, said by phone. “Since central banks started hiking interest rates, that we’ve seen an environment where higher yields are bad for equities and lower yields are good for equities, and that’s also driving the market at the moment.”

Earlier in the session, Asian stocks declined following the weak lead from Wall St where risk sentiment soured after more soft labour data, while markets digested mixed Chinese trade data which showed the first expansion in exports since April although imports surprisingly contracted.

• Hang Seng and Shanghai Comp were varied with the mainland choppy amid mixed Chinese trade data in which exports expanded but the surprise contraction in imports suggested weaker domestic demand, while the Hong Kong benchmark suffered after Moody’s revised its credit outlook for the special administrative region to negative.
• Japan’s Nikkei 225 was the worst hit and slipped back beneath the 33,000 level amid headwinds from a firmer currency and higher yields.
• Australia’s ASX 200 was subdued amid notable underperformance in energy following the recent drop in oil prices to multi-month lows and with mixed trade data from both Australia and its largest trading partner.

In FX, the Bloomberg dollar spot index fell 0.2% reversing three sessions of gains to fall against all Group-of-10 peers; the yen soared, building on Asian-hours strength and Japanese bond futures fell sharply after the BOJ Governor Ueda discussed possible exit options in semiannual testimony. CAD and EUR are the weakest performers in G-10 FX, JPY and NOK outperform. The Swiss franc rose to the strongest level against the euro since the Swiss National Bank abandoned its currency cap almost nine years ago. The move reflects a shift in interest-rate expectations as confidence grows that the European Central Bank will move to cut rates sooner than its Swiss counterpart.

• USD/JPY dropped as much as 1.8% to a three-month low of 144.64 in the currency pair’s biggest move since January
• EUR/USD turned six sessions of losses to rise as much as 0.2% to 1.0785; One-week volatility increases to 9.53%, highest since May 4 as the tenor now captures the Fed and ECB policy decisions
• EUR/CHF dropped as much as 0.1% to 0.94087, the Swiss franc’s highest level against the euro since the SNB axed its cap in 2015

In commodities, crude futures advanced reversed several days of losses. Spot gold rose roughly $8 to trade near $2,033/oz.  Bitcoin slipped below $44,000.

Looking To the day ahead now, and data releases include the US weekly initial jobless claims, German and Italian industrial production for October, along with Italian retail sales for October. Meanwhile from central banks, we’ll hear from the ECB’s Holzmann and Elderson.

Market Snapshot

• S&P 500 futures little changed at 4,554.25
• MXAP down 0.2% to 161.07
• MXAPJ down 0.4% to 498.16
• Nikkei down 1.8% to 32,858.31
• Topix down 1.1% to 2,359.91
• Hang Seng Index down 0.7% to 16,345.89
• Shanghai Composite little changed at 2,966.21
• Sensex down 0.2% to 69,524.31
• Australia S&P/ASX 200 little changed at 7,173.34
• Kospi down 0.1% to 2,492.07
• STOXX Europe 600 down 0.3% to 468.74
• German 10Y yield little changed at 2.21%
• Euro up 0.1% to $1.0778
• Brent Futures up 0.9% to $75.00/bbl
• Gold spot up 0.3% to $2,032.05
• U.S. Dollar Index down 0.27% to 103.88

Top Overnight Stores

• Moody’s Investors Service advised staff in China to work from home ahead of its cut to the outlook for the country’s sovereign credit rating, a suggestion staff believed was prompted by concern over Beijing’s possible reaction, according to two employees familiar with the situation. FT
• The amount of money that institutional investors have in Chinese stocks and bonds has declined by more than $31 billion this year, through October, the biggest net outflow since China joined the World Trade Organization in 2001, official Chinese data show. WSJ
• Bets on a BOJ rate hike surged after hawkish hints by Governor Kazuo Ueda and his deputy spooked markets. Swaps at one point signaled a 45% chance of a policy shift this month, but Bloomberg Economics said it’s too soon. BBG
• The European Union is nearing a deal on what is poised to become the most comprehensive regulation of artificial intelligence in the western world but negotiators are still trying to hammer out the final details. BBG
• Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months following the sharp global bond market rally. Corporate borrowers in the US and Europe issued $246bn worth of investment-grade and junk bonds in November alone — 57 per cent more than October’s total, and $16bn higher than the average figure for the first 10 months of the year, according to data from LSEG. FT
• OpenAI has a new board, but its directors may still confront the same old problem. The artificial-intelligence startup’s unusual business structure that gave oversight of its for-profit business to a nonprofit board will be an unresolved issue for the new board to tackle. WSJ
• Nikki Haley drew attacks from rivals over her links to Wall Street in last night’s debate as her GOP bid gains steam. President Biden suffered a setback when Senate Republicans blocked $66 billion in emergency Ukraine aid. BBG
• Blackstone-backed Candle Media asked lenders to restructure some of its debt after recent acquisitions like Reese Witherspoon’s company failed to hit profit targets. The startup led by two Disney veterans has more than $1 billion in debt. BBG
• SpaceX started talks about selling shares at a raised valuation of over $175 billion, people familiar said, a boost from the summer’s $150 billion. The tender offer may range from $500 million to $750 million and value the shares at about $95 apiece. BBG

A more detailed look at global markets courtesy of Newsquawk

APAC stocks declined following the weak lead from Wall St where risk sentiment soured after more soft labour data, while markets digested mixed Chinese trade data which showed the first expansion in exports since April although imports surprisingly contracted. ASX 200 was subdued amid notable underperformance in energy following the recent drop in oil prices to multi-month lows and with mixed trade data from both Australia and its largest trading partner. Nikkei 225 was the worst hit and slipped back beneath the 33,000 level amid headwinds from a firmer currency and higher yields. Hang Seng and Shanghai Comp were varied with the mainland choppy amid mixed Chinese trade data in which exports expanded but the surprise contraction in imports suggested weaker domestic demand, while the Hong Kong benchmark suffered after Moody’s revised its credit outlook for the special administrative region to negative.

Top Asian News

• Chinese President Xi met with European Council President Michel and European Commission President von der Leyen and said that both sides should maintain development momentum between China and the EU. Xi added that China and the EU have the responsibility to work together to provide more stability for the world and should be partners in mutually beneficial cooperation, as well as continuously enhance political mutual trust.
• BoJ Governor Ueda suggested that “handling of monetary policy would get tougher from the end of the year”; Japan’s economy is to continue recovering moderately, supported mainly by accommodative financial conditions and effects of economic stimulus measures but noted that uncertainty over Japan’s economy is extremely high. Ueda reiterated they will patiently continue monetary easing under YCC to support economic activity and the cycle of wage growth, while they have not yet reached a situation in which they can achieve the price target sustainably and stably with sufficient certainty. Furthermore, Ueda said they have not made a decision on which interest rate to target and don’t have any specific idea in mind on how much they will raise rates once they end NIRP.
• ASEAN Plus Three deputy financial chiefs agreed on a system framework for a new regional emergency lending facility, according to a joint statement cited by Reuters.
• BoJ Governor Ueda said no specific discussion on FX with Japanese PM Kishida and there were no special demands from PM Kishida
• China’s State Council has published a document to support further development of Shanghai Free Trade Zone
• Chinese Foreign Minister Wang Yi says expressed concerns about EV subsidy probe

European equities Eurostoxx50 (-0.3%) are on a weaker footing following a negative handover from the APAC session. European sectors have a heavy negative bias, though Utilities hold onto marginal gains; whilst Travel & Leisure is weighed on by Air France (-5.9%) and Lufthansa (-4.5%) amid broker downgrades. Additionally, Retail names are impacted to varying degrees amid research reports of shows that the named brands are at risk of sourcing products which have been made by Uyghurs forced to work in state-imposed labor transfer programs. US equity futures are mixed with specifics relatively light thus far; NQ (+0.2%) is holding onto gains ahead of US IJCs and Wholesale Sales.

Top European News

• ECB’s Villeroy reiterated that the issue of possible rate cuts could be raised in 2024 but not right now, while he also repeated that disinflation is happening quicker than expected.
• Reuters poll showed all 90 economists unanimously expect the ECB to keep the Deposit Rate at 4.00% at next week’s meeting, while 51 out of 90 expect a rate cut by end-Q2 2024 and the rest forecast a cut in Q3 2024 or later.
• Reuters Poll, BoE: to hold the Bank Rate at 5.25% through Q2-2024 (same as the November poll); UK economy to expand 0.4% in 2024 and 1.2% in 2025 (same as November)
• Norges Bank Regional Network Report: enterprises expect annual wage growth of 5.45 (prev. 5.4%) in 2023 and 4.5% (prev. 4.6%) in 2024.
• French Finance Minister Le Maire says we are 90% in agreement with Germany on reform of the EU’s stability and growth pact, but our red line is that incentive to invest and reform must be kept.
• EU Commission approves France’s EUR 4.12bln scheme to develop additional offshore wind energy
• EU AI Act could exclude open-source models from regulation, via Reuters citing a proposal

FX

• The broader Dollar and index are pressured in early European trade by a rampant Yen, with participants attributing the notable upside in the Japanese currency to a surge in JGB yields coupled with commentary from BoJ Governor Ueda.
• USD/JPY has now extended losses of around 1.8% bringing the price below the 145.00 level; down to a 144.55 trough.
• Both the EUR and GBP trade with modest gains against the Dollar and flat against each other, with the currencies failing to fully benefit from the Dollar’s pullback amid losses in EUR/JPY and GBP/JPY.
• AUD, NZD, CAD trade mixed with the NZD and CAD flat against the Dollar while the AUD narrowly outperforms as base metals attempt a recovery.
• PBoC set USD/CNY mid-point at 7.1176 vs exp. 7.1623 (prev. 7.1140).

Fixed Income

• Déjà vu for Bunds with another data-driven uptick occurring at the start of the session lifting the contract above the 135.00 mark to a 135.77 high.
• Gilts and USTs are once again softer as recent pronounced dovish pricing eases incrementally ahead of US NFP (Fri), CPI (Tue) and then the FOMC/BoE next week.
• France sells EUR 4.99bln vs exp. EUR 4-5bln 2.75% 2027, 0.00% 2032, 1.25% 2034 OATs and 0.10% 2029 I/L OAT
• Spain sells EUR 2.93bln vs exp. EUR 2.5-3.5bln 0.60% 2029, 3.90% 2039 Bono and EUR 0.505bln vs. exp. 0.25-0.75bln 0.70% 2033 I/L
• BoE allots GBP 4bln of one-week funds in the short-term repo operation, a new record

Commodities

• WTI and Brent (+1.1%) are firmer intraday amid the pullback in the Dollar coupled with some corrective price action after yesterday’s slump.
• Spot gold tilts higher amid the softer Dollar but remains around recent ranges near USD 2,030/oz awaiting today’s US data ahead of Friday’s NFP; base metals also benefit from Dollar weakness.
• Russia’s Kremlin spokesman said President Putin and Saudi Arabia’s Crown Prince discussed OPEC+ cooperation which will continue, according to TASS.
• Kuwait supports the OPEC+ agreement and is committed to voluntary cuts, according to the state news agency.
• Algeria does not rule out extending voluntary oil cuts beyond Q1 or taking additional measures, according to the energy minister.
• Venezuela’s PDVSA authorised loading for the first two crude cargoes bound for India following sanctions relief, which were sold by Eni (ENI IM) and Chevron (CVX) to Indian refiners.
• First Quantum (FM CA) Panama workers agreed to a severance package with the copper mine remaining halted with 10-20% of staff working, according to the union.
• Russian Kremlin: President Putin confirmed with Saudi’s MBS the specific agreements reached at OPEC+

Geopolitics

• G7 leaders’ statement noted commitment remains to restrict exports of all items critical to Russia’s military and industrial base and they will work to further curtail Russia’s use of the international financial system to further its war with Ukraine. Furthermore, G7 leaders are committed to tightening compliance and enforcement of the price cap policy on Russian oil, including by imposing sanctions on those engaged in deceptive practices.
• Senior Biden administration officials agreed that striking Houthis is the wrong course of action for now, according to Politico.
• White House’s Kirby said they are watching the “worrisome” burgeoning defence relationship between Iran and Russia.
• US Secretary of State Blinken spoke with Guyanese President Ali and reaffirmed US unwavering support for Guyana’s sovereignty, while it was separately reported that a Guyanese army helicopter reportedly went missing near the border with Venezuela, according to AFP News Agency.

US Event Calendar

• 07:30: Nov. Challenger Job Cuts -40.8% YoY, prior 8.8%
• 08:30: Nov. Continuing Claims, est. 1.91m, prior 1.93m
• 08:30: Dec. Initial Jobless Claims, est. 220,000, prior 218,000
• 10:00: Oct. Wholesale Trade Sales MoM, est. 1.0%, prior 2.2%
• 10:00: Oct. Wholesale Inventories MoM, est. -0.2%, prior -0.2%
• 12:00: 3Q US Household Change in Net Wor, prior $5.49t
• 15:00: Oct. Consumer Credit, est. $8.5b, prior $9.06b

DB’s Jim Reid concludes the overnight wrap

Our year-end EMR survey aimed at market participants is currently ongoing. We’ve got lots of questions about 2024, and are interested in how you expect the year ahead to play out. Questions include where you see the biggest risks, whether there’ll be a US recession, and the chance of Donald Trump being elected President. At the end we also ask about your favourite Christmas song. The survey will close on Friday and the link to answer is here. All responses are anonymous, and it’s possible to skip questions without answering and move on. All help gratefully received.

When it comes to the last 24 hours, markets have seen a sharp reversal in tone, with bond yields seeing a significant increase overnight and equities losing ground, despite a major bond rally taking place yesterday. The main catalyst for this have been comments from Bank of Japan officials, which have suddenly seen investors ramp up the chances that the BoJ could bring an end to their negative interest rate policy. For instance, yesterday saw Deputy Governor Himono discuss the impact of negative rates, pointing out that households could benefit from higher net interest income if rates were positive. Indeed, he also added that “there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices”. So some fairly positive remarks about what could happen in such a scenario.

This morning, we’ve since heard from BoJ Governor Ueda, who added to that speculation by saying that policy management would “become even more challenging from the year-end and heading into next year”. In turn, investors are now pricing in a 37% chance that the BoJ are going to end their negative interest rate policy at the meeting on December 19, and at one point overnight that even got as high as 45%. J apanese government bonds have also seen a sharp selloff, with yields on 10yr JGBs up +11.5bps overnight, and that move got further support after a 30yr auction saw weak demand. Moreover, the impact hasn’t just been confined to Japan, with yields on 10yr Treasuries up +6.8bps overnight to 4.17%.

This backdrop has meant equities have lost ground in Asia, with Japanese equities seeing the biggest underperformance and the Nikkei down by -1.88%. We’ll have to see what happens at the next meeting, but in some respects this echoes what happened in markets last December 2022, when there was a late selloff at year-end after the major central banks remained hawkish, and the BoJ announced a surprise shift in its yield curve control policy, which was seen as paving the way for a potential end to their ultra-loose monetary policy. Remember as well that a BoJ normalisation will have a broader impact, because it would remove one of the last global anchors that’s helped to keep borrowing costs at lower levels more broadly .

Before those overnight developments, yields had actually fallen to their lowest levels in months, with investors growing increasingly optimistic about a soft landing and the chance of rate cuts. Clearly overnight’s developments could change things, and we’ve got a very important round of central bank meetings next week, but several developments yesterday helped support the bond rally. For instance, the ADP’s report of private payrolls came in beneath consensus, which helped cement expectations that the Fed would be cutting rates in the months ahead. Moreover, oil prices saw their weakest day in three weeks, falling to a new 5-month low, which added to the sense that inflationary pressures were easing. And in turn, many risk assets also put in a decent performance, with Europe’s STOXX 600 (+0.52%) at a 4-month high, whilst US HY spreads reached their joint-tightest level in over 18 months. There was a bit of a late selloff in the US session however, and the S&P 500 (-0.39%) lost ground for a third consecutive day.

In terms of that bond rally yesterday, there were significant milestones in Europe, with yields on 10yr bunds (-4.8bps) closing at a 7-month low of 2.20%, and those on 10yr OATs (-6.5bps) closing at an 8-month low of 2.74%. Meanwhile in the US, 10yr Treasury yields were down -6.1bps to 4.105%, marking their lowest closing level in nearly four months. The decline was led by breakevens, with the 10yr breakeven down -3.8bps to 2.16%, its lowest since March.

Overnight however, we’ve seen that momentum reverse, and investors are pricing in a slightly more hawkish path for the Fed. For instance, t he chance of a rate hike by the March meeting has fallen from 76% on Tuesday, to 69% by yesterday’s close, and 65% now. Nevertheless, the US data did point in the direction of rate cuts yesterday, with the ADP’s report showing that growth in private payrolls fell to +103k in November (vs. +130k expected), which is in line with the slower pace of the last couple of months. So that added to the indicators pointing to a softer labour market. It also comes ahead of tomorrow’s US jobs report, where our US economists are anticipating that nonfarm payrolls will be up by +130k. Second, the revised estimates for Q3 productivity showed that nonfarm productivity was up by an annualised +5.2% in Q3, which is up from the previous estimate of +4.7%. In addition, unit labour costs were revised down to show an annualised -1.2% decline, which is larger than the -0.8% reading in the previous estimate. So the data was favouring a more sanguine inflation outlook.

That rally got further support from the latest decline in oil prices, which left Brent Crude (-3.76%) at $74.30/bbl, and WTI (-4.07%) at $69.38/bbl. In both cases, that’s their lowest level in 5 months, and there’s been growing evidence that this decline is feeding through into the real economy. For example, data from the AAA shows that US gasoline prices were down to $3.216 per gallon on Tuesday, the lowest since January 1. Other commodities also struggled yesterday, with copper (-1.48%) down for a third consecutive day, and Bloomberg’s Commodity Spot Index (-2.03%) closed at a 5-month low.

For equities, yesterday brought another fairly divergent performance across regions and sectors. There was more weakness in the US, where the S&P 500 (-0.39%) lost ground for a third day running, and futures overnight are down a further -0.09%. Energy stocks were a notable underperformer amidst the latest decline in oil prices, with those in the S&P 500 down -1.64%, whilst the Magnificent 7 (-0.88%) also struggled. However, the e qual-weighted S&P 500 (+0.06%) saw a better performance, with 55% of S&P 500 constituents up on the day. Meanwhile, there were further milestones in Europe, with the DAX (+0.75%) closing at another all-time high thanks to a 7th consecutive advance, and the STOXX 600 (+0.52%) closed at a 4-month high. But overnight in Asia, we’ve seen a broader weakness in equities that hasn’t just been in Japan. For instance, the Hang Seng is down -1.20% to its lowest level since November 2022, whilst the Shanghai Comp (-0.21%), the CSI 300 (-0.26%) and the KOSPI (-0.14%) have all lost ground as well.

Elsewhere, the Bank of Canada announced their latest policy decision yesterday, leaving interest rates unchanged as expected. In their statement, it said they were “still concerned about risks to the outlook for inflation” and “prepared to raise the policy rate further if needed.” But as with other central banks, investors have become increasingly confident about the chance of a rate cut in recent weeks, and a 25bp cut is now fully priced in by the April meeting .

Looking at yesterday’s other data, German factory orders contracted by -3.7% in October (vs. +0.2% expected). In the meantime, the construction PMI for November fell to 36.2, which is the weakest it’s been since April 2020 at the height of the Covid-19 pandemic. Here in the UK, the construction PMI also fell to 45.5 in November.

To the day ahead now, and data releases include the US weekly initial jobless claims, German and Italian industrial production for October, along with Italian retail sales for October. Meanwhile from central banks, we’ll hear from the ECB’s Holzmann and Elderson.