While the key geopolitical event of the last three days days continues with Brussels which remains on lockdown over terrorism fears, the main event in overnight markets was the latest tumble in commodities, which dropped to the lowest level since 1999, facilitated by the soaring dollar. Oil likewise continued its downward trend following a warning by Venezuela prices may drop to the mid-$20s while Chinese storage capacity appears to be topping out, leading to a slowdown in oil imports as noted earlier.
As a result, global stocks have fallen for the first time in six days as the sell-off in commodities continued, dragging both US equity futures and European stocks lower. However, putting this in context, last week the MSCI All Country World Index posted its biggest weekly gain in six weeks: alas, without a coincident rebound in commodity prices, it will be merely the latest dead cat bounce.
The reason for the latest surge in the US Dollar (overnight the DXY has risen to the highest level since April, almost touching the 100 level) is that over the weekend San Francisco Fed President John Williams said there is a "strong case" for a U.S. rate increase in December, assuming economic data continue to be encouraging. The odds of a move have risen to 70 percent from 36 percent a month ago, according to Bloomberg data.
Top news stories include Pfizer/Allergan merger; UAW’s new contracts with Ford, GM; possible pilot union deal for UAL; CVC/Canadian Pension deal for Petco, Diebold’s deal for Wincor Nixdorf, and Argentine presidential election.
Market Wrap:
- S&P 500 futures down 0.2% to 2085
- Stoxx 600 down 0.5% to 380
- MSCI Asia Pacific down 0.4% to 134
- FTSE 100 down 0.6% to 6297
- DAX down 0.3% to 11088
- US 10-yr yield up 2bps to 2.28%
- Dollar Index up 0.31% to 99.87
- WTI Crude futures down 3.1% to $40.61
- Brent Futures down 2.1% to $43.73
- Gold spot down 0.8% to $1,069
- Silver spot down 1.5% to $13.97
- German 10Yr yield up 4bps to 0.52%
- Italian 10Yr yield up 3bps to 1.53%
- Spanish 10Yr yield up 3bps to 1.67%
- S&P GSCI Index down 1.6% to 332.2
Looking at global markets, Asian stocks traded higher following last week's firm US gains which saw the S&P 500 post its best week YTD, although a slump in commodities capped further gains in the region. ASX 200 (+0.4%) led the region higher amid gains in consumer staples following reports of interest in retail giant Woolworth's Big W unit. Shanghai Comp. (-0.6%) initially traded higher as margin debt approached 3-month highs before paring gains heading into the European open, while the Hang Seng (-0.4%) was weighed on by energy as crude tests the USD 41/bbl level and mild weakness in the financial sector amid reports that banks are set to keep deposit rates high. Markets in Japan are closed due to Labour Thanksgiving holiday. PBoC set the CNY mid-point at 6.3867 vs. last close. 6.3850 (Prey. mid-point 6.3780); which was the weakest setting since August 31st.
ASIA TOP NEWS
- Guotai Junan International Plunges as Chairman Out of Reach: Yim Fung hasn’t been in contact since Nov. 18.
- PetroChina, CNPC Said to Consider Pipeline, Refinery Sales: Would be first major divestment since pipelines sale in 2013.
- Fitch Doubts Modi Budget as $15 Billion Salary Boost Hurts Bonds: Moody’s says fiscal challenges constrain India’s credit rating.
- Tokyo Authorities Investigate After Fire in Toilet at War Shrine: Sound of an explosion reported.
- China Pulled Further Into Syria Crisis Amid Terrorism Threat: Execution of Chinese national shows Islamic State’s reach.
- Alibaba’s Ma Said to Be in Discussions to Buy SCMP Stake: Ma in talks to buy a stake in publisher of Hong Kong’s South China Morning Post.
Stocks in Europe are seen lower across the board, however have come off lows in recent trade (Euro Stoxx: -0.50%) amid generally upbeat preliminary readings of manufacturing and services PMIs out of Europe.
European shares decline for first day in 3, with Swiss, French, Norwegian bourses underperforming. Energy names leads the way lower amid ongoing pressure on commodity prices, with WTI down over USD 1.00 and gold down by around USD 9.00 in early trade. Elsewhere, Silver (USD -0.18) has since recovered from worst levels having hit 6 year lows overnight, as the stronger USD (USD Index +0.10%) continues to weigh on precious metals.
At the same time, despite the weakness in equities and the month-end supportive flow for fixed income products, Bunds remain in the red and have grinded lower throughout the European session. The weakness is in part driven by the upcoming supply this week, with Belgian debt agency auctioning off EUR 2bIn in 2025 and 2028 bonds. USTs also trade lower, as expectations of Fed rate hike continue to pressure prices. Elsewhere, Gilts also reside firmly in the red, while it is worth noting that December coupon-paying Gilts are going ex-dividend on 26th November. Also of note, Moody's said that Britain may not face a credit rating downgrade if it votes to leave the European Union in a membership referendum due by the end of 2017.
European Top News:
- European Business Index Points to Strongest Economy Since 2011: Composite index of services & manufacturing rose to 54.4 from 53.9 in Oct., to highest reading since May 2011.
- Euro Area’s Negative-Yielding Debt >$2 Trillion on Draghi: Investor expectations of further monetary easing from ECB President Mario Draghi have pushed yields on more than $2t of euro-area govt debt below zero.
- Deutsche Bank Said Planning 1k London Job Cuts: Sunday Times: Bank plans to shrink its workforce by 9,000 people by 2018, according to report citing people familiar.
- Carney to Assess Economy as Official Muddies BOE Rate Outlook: Mark Carney will give his latest assessment of U.K. economy tomorrow in testimony.
- Riksbank ‘Rapped Over Knuckles’ on Covered Bond Downgrade: Debt office, financial watchdog lashed out against central bank for failing to check with them before proposing tougher collateral rules on covered bonds.
- Amazon Strikes Won’t Prevent Record German Sales: Reuters: Cites Amazon Germany head Ralf Kleber.
European Eco Data:
- Markit Eurozone composite Nov. preliminary PMI 54.4 vs survey 54
- Markit Germany composite Nov. preliminary PMI output 54.9 vs survey 54
- Markit France composite Nov. preliminary PMI 51.3 vs survey 52.5
GLOBAL TOP NEWS:
- Pfizer, Allergan Said to Be Close to $150b Combination: Cos. may announce merger as soon as today, creating a drugmaking behemoth with products from Viagra to Botox, with low-cost tax base
- Brussels Stays on Lockdown Amid Hunt for Terror Suspects: Lockdown continued for thrid day on Monday, with schools, shops and entire metro system shut
- Auto Workers Approve Ford, GM Contracts With Raises for All: New contracts with Ford, GM wrapped up one of most lucrative rounds of negotiations for UAM after it offered concessions to help Big Three
- CVC, Canadian Pension Said to Agree $4.7 Billion Petco Deal: 2 firms beat joint offer from KKR, Hellman & Friedman, as well as Apollo Global bid
- Diebold Agrees to Buy Wincor Nixdorf for About $1.9b: Takeover to create biggest maker of cash machines, security systems with >$5b in sales
- Oil Slides as Venezuela Sees Mid-$20 Crude If OPEC Doesn’t Act: Oil has slumped ~46% in past year as OPEC continues to pump above its collective quota
- Copper Slumps Below $4,500; Nickel Falls 5% as Metals Slide: At lowest since May 2009 as investors fear China’s shift to consumer-driven economy from investment-led expansion will slow demand
- United Airlines Reaches Proposed Two-Year Labor Deal With Pilots: The Air Line Pilots Association on Friday told its members it has reached an “agreement in principle” with co.
- Argentina Elects Pro-Business President; Big Change Expected: Center-right opposition leader Mauricio Macri to be president in decisive end to 12 years of leftist populism.
- Masters of Universe Scared of China Risks See Yuan Devaluation: Hedge fund managers warn that China hard landing may spark global recession.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Stocks in Europe are seen lower across the board, however have come off lows in recent trade amid generally upbeat preliminary readings of manufacturing and services PMIs out of Europe.
- Bunds remain in the red and continue to edge lower, with the weakness in part driven by the upcoming supply this week.
- Looking ahead today sees the release of US manufacturing PMI, existing home sales and comments from ECB's Weidmann, Coeure and Lautenschlager.
- Treasuries decline despite weakness in stocks and commodities and before week’s auctions begin with $26b 2Y notes, WI 0.97%, highest since April 2010.
- As some economists warn the Fed will err if it raises interest rates in December, Paul Mortimer-Lee of BNP Paribas SA is taking a different tack as he argues the central bank may have already blundered by not hiking sooner
- Economic activity in the euro area hit a 4-1/2 year high, according to Markit’s composite PMI; however, the report also showed output prices falling for a ninth month
- Growth in France’s services sector slowed this month, with hotels and restaurants reporting that the Nov. 13 terrorist attacks in Paris had a negative impact on business.
- The search for a key suspect in the Paris terror attacks kept Brussels in an unprecedented lockdown that brought business to a standstill as European leaders vowed to tackle the crisis at its roots in Syria
- OPEC ministers are likely to keep its output quota steady at a meeting on Dec. 4 in Vienna, according to analysts; supply may swell further next year if Iran resumes sales that were halted by sanctions
- Oil prices may drop to as low as the mid-$20s a barrel unless OPEC takes action to stabilize the market, Venezuelan Oil Minister Eulogio Del Pino said
- $32.8b IG priced last week, $4.63b HY. BofAML Corporate Master Index OAS holds at +162, YTD range 180/129. High Yield Master II OAS widens 4bp to +632, YTD range 683/438
- Sovereign 10Y bond yields higher. Asian stocks mixed, European stocks lower, U.S. equity-index futures decline. Crude oil, gold and copper decline
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, Oct. (prior -0.37)
- 9:45am: Markit US Manufacturing PMI, Nov. P, est. 54 (prior 54.1)
- 10:00am: Existing Home Sales, Oct., est. 5.40m (prior 5.55m); Existing Home Sales m/m, Oct., est. -2.7% (prior 4.7%)
- 1:00pm: U.S. to sell $26b 2Y notes
DB's Jim Reid completes the overnight wrap
In a week marred by the aftermath of the tragic events in Paris, markets proved their resilience last week and closed out Friday mostly on a positive note on a light news-flow day. Sentiment was boosted by more dovish comments from Draghi. In Europe the Stoxx 600 finished +0.22% and the Dax closed +0.31%, while across the pond and despite weakening through lateafternoon, the S&P 500 (+0.38%), Nasdaq (+0.62%) and Dow (+0.51%) all finished in the green to cap a strong week – the latter in particular now back to exactly flat for the year. It continues to be a different story in the commodity market however where volatility remains a big feature. Oil markets (WTI +0.43%, Brent +1.09%) actually nudged a bit higher on Friday to close the week broadly flat, but Copper was down another 1% and creeping close to $4500 along with across-the-board losses for much of the metals space, while natural gas was down nearly 6% and at a fresh low for the year.
Meanwhile, in the bond space US 2y yields (+2.5bps) closed at 0.917% and above 0.90% for the first time this year as the Fed commentary on Friday all hinted towards a December liftoff bias. In stark contrast, 2y Bund yields were down another basis point on Friday and extending their move deeper into negative territory at -0.396%. That spread between the two now has gone above 130bps which is the most 2y Treasuries have traded above similar maturity Bunds this year and in fact the most since August 2006. With regards to ECB President Draghi’s speech on Friday, markets latched onto his comment that ‘if we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible’, saying that this ‘is what our price-stability mandate requires of us’. Bundesbank President Weidmann, speaking at the same event, was a lot more upbeat, saying that ‘I see no reason to talk down the economic outlook and paint a gloomy picture’ and that ‘we should also not forget that the monetary policy measures already taken still need time to fully feed into the economy’.
With Thanksgiving Day on Thursday this week in the US, as you’ll see in the week ahead at the end it’s set to be a fairly front-loaded week for data, with a bumper day for releases on Wednesday in particular and the usual focus on the retail sales stats on the back of Black Friday at the end of the week. Tomorrow’s big release however is the second reading for Q3 GDP in the US. Our US economists expect growth to be revised up to 2.3% saar from the initial 1.5% saar at the first read based on stronger inventory accumulation. This is slightly more bullish than the current 2.1% consensus forecast on Bloomberg.
Ahead of this, it’s been a mixed start for Asian equity bourses this morning. In China the Shangahi Comp is up -0.06% in early trading, while the CSI 300 is -0.05% with both bourses down following the midday break. The Hang Seng is -0.25% but there are gains for the Kospi (+0.69%) and ASX (+0.39%) while markets in Japan are closed for a public holiday. Commodity markets have kick started the week on the back foot. Oil in particular has given up Friday’s gains and more, with WTI down -2.12%. Natural Gas is down another 3% also while there’s broad based losses across much of the metals space.
Over the weekend there’s also been more Fedspeak to highlight. San Francisco Fed President Williams played up the recent labour market data in the US and said that ‘assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2% inflation’ then if that ‘continues to happen there’s a strong case to be made in December to raise rates’. Like his colleagues, Williams stressed the importance of the slope of rate rises being the most important thing to communicate.
These comments followed Friday’s Fedspeak. In particular, NY Fed President Dudley said that he hoped that relatively soon he will be confident of hitting the 2% inflation target which will allow policy makers to ‘start thinking about raising the short-term interest rates’, again also stressing the importance of this being data dependent. Meanwhile, St Louis Fed President Bullard said that he would welcome the return of an era where there is a bit more uncertainty about what the FOMC will do meeting-to-meeting, noting that this is ‘normal monetary policy’.
