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World Stocks At All Time Highs After Nikkei’s Record Winning Streak; Euro Slides With Spain On Edge

Courtesy of ZeroHedge. View original post here.

In an otherwise quiet session, Sunday's convincing election victory for Japanese Prime Minister Shinzo Abe’s ruling coalition, which gave it another constitution-changing supermajority, pushed the Nikkei to the highest level since 1996, after a record 15 consecutive days of gains - the longest winning streak on record – and sent world stocks to new all-time highs on Monday.

Over the weekend, Japan’s Abe was re-elected and his coalition reinvigorated by an increased share of the vote. Common "hot takes" are that this means: further stimulus for Japan; Governor Kuroda is now more likely to serve another term at the BoJ; and therefore a weaker JPY. On the flip side, just as many argue that this is simply an extension of the status quo – USDJPY is little changed so far, after rising briefly above 114.

That said, it appears that the BOJ's relentless buying of anything that isn't nailed down has started to trickle down: corporate Japan is having its best year for earnings since 2000, with the country getting the most EPS upgrades since 2010.

Meanwhile, in Europe an escalation of Spain’s constitutional crisis weighed on the country’s banks. S&P index futures are modestly green, and set for another record high in the cash index, while stocks in Asia and Europe were mixed after an early push higher, on concerns over the outcome of the Catalonia independence crackdown.

Still, it could be worse: “At this moment you’ve not got contagion from Spain to the broader European market. It’s seen as a national and localized issue,” said Pierre Bose, head of European equities strategy at Credit Suisse.

Among the other key developments over the weekend, Spanish PM Rajoy invoked article 155, in which he plans to dissolve Catalonia government and curb its authority, while he also seeking to call elections within 6-months. Voters in Italy's Lombardi and Veneto regions overwhelmingly voted for more autonomy from Rome.  UK Brexit Sec Davis said on Friday that the UK doesn't want a 'no deal' outcome on Brexit, but added that the UK will be ready if it occurs.  Markets are bracing for the European Central Bank to signal baby steps away from its ultra-easy monetary policy stance this week and for the U.S. Federal Reserve to hike rates in December.

“Now there’s a renewed mandate for quantitative easing, which means a weaker yen and stronger Japanese government bond prices. It also has a significant spillover for other developed markets,” said Peter Chatwell, head of euro rates strategy at Mizuho.

In macro, the dollar strengthened while 10-year Treasury yields hovered near 2.40% on optimism Trump is close to pulling off a tax overhaul and may announce the next Fed chief as soon as this week. The Bloomberg dollar index DXY extended gains from Friday when it closed above its 100-DMA for first time since March. Late last week, Trump said he’s considering Stanford University economist Taylor – the most hawkish candidate – and Governor Powell for top job at the Fed, while indicating Chair Yellen remains in the running.

“The U.S. dollar is finding fresh yield support on optimism over a deal to cut corporate taxes and the perception that John Taylor remains a strong contender for Fed chair,” Sean Callow, an FX strategist at Westpac told Bloomberg. “The 2.40 percent level remains critical for the 10-year Treasury note, so the dollar is not yet off to the races.”

The USD/JPY rose to a fresh 3-month high after Japan’s ruling coalition retained its two-thirds lower house majority in Sunday’s election, ensuring continuity of BOJ’s loose monetary policies; it traded above 114 in the early part of the session, before sellers stepped in to fill the gap. Meanwhile the euro weakened a second day as investors waited for the next big development in Spain, where Catalan separatists are planning their response after Prime Minister Mariano Rajoy moved to stamp his authority on the region.

Major Asia-Pac indices were mixed although Japan stocks rose again by 1%, after the blowout win by PM Abe’s ruling bloc at the snap election. Nikkei 225 (+1.1%) led the region after the ruling coalition gained a supermajority at Sunday’s election, which keeps Abenomics firmly in place and paves the way for possible constitutional changes. Japan’s Topix index also climbed 0.8%, cementing a rally to the highest since mid 2007. Australia's ASX 200 (-0.2%) failed to hold onto initial gains and a mixed tone was observed in Chinese markets, in which the Shanghai Composite (flat) ignored a significant liquidity operation by the PBoC; there were strong gains in consumer and healthcare firms although trading volumes remained thin as investors awaited policy cues from a party congress and fresh data showed growth in new home prices slowed to a crawl in September. The Hang Seng (-0.7%) underperformed on technical selling after it met resistance around 28,500. 

Stoxx 600 rose 0.4%, powered by the slumping Euroe even as the IBEX 15 once again lagged peers in early European trading, led lower by banking stocks after Spain moved to take full control of Catalonia over the weekend, while Catalan officials state that they will not follow orders from Madrid and meet Monday to prepare their reply to Rajoy. Elsewhere, major EU bourses have been oscillating between gains and losses amid quiet newsflow. The biggest losers are Spanish banks, with  BBVA down 1.8%, Sabadell down 1.4%, Bankia down 1.2%, CaixaBank down 1.1%. As Bloomberg notes, Sabadell is down 9% since Catalan referendum on Oct. 1, CaixaBank down 10%, IBEX down 2.1%; Stoxx 600 is up 0.5% over same period.

Concerns about Spain weighed on rates, with the yield on 10-year Treasuries was unchanged at 2.38 percent, after rising to 2.40%, the highest in more than 15 weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest fall in a week.

London copper traded steady after Chinese authorities reaffirmed that the country’s economy was on track to achieve the official growth target, while a firmer dollar nudged gold down 0.4 percent to $1,275.60 an ounce. Oil prices edged ahead on supply concerns in the Middle East and as the U.S. market showed further signs of tightening while demand in Asia keeps rising. West Texas Intermediate crude declined 0.1 percent to $51.79 a barrel. Gold decreased 0.4 percent to $1,275.31 an ounce, the weakest in more than two weeks.

This week is heavy on potential investor catalysts, from the election in Japan to the boiling Catalonia crisis and very different moves toward autonomy in parts of Italy. Away from politics central banks loom large, with a pivotal European Central Bank meeting due and the possible unveiling of President Donald Trump’s pick for Fed chair. Traders will also be watching U.S. growth data and Trump’s efforts to overhaul America’s tax code. U.K. Prime Minister Theresa May is likely to make a statement to Parliament on Monday on the progress of Brexit talks following the latest European Union summit. The U.S. economy probably expanded at about a 2.5 percent annualized pace in the third quarter, restrained in part by the effects of two hurricanes, economists forecast the government to report on Friday. The European Central Bank holds a policy meeting on Thursday at which it’s expected to announce its stimulus plan for 2018.

It’s the biggest week for earnings, with Amazon.com Inc., Alphabet Inc., Microsoft Corp., Facebook Inc., and Twitter Inc. set to report among tech names; we also get General Motors Co., Ford Motor Co., Volkswagen AG and Boeing Co. headline cars and planes. Fast food giant McDonald’s Corp., Coca-Cola Co. and brewer Heineken NV join European banks including UBS Group AG, Deutsche Bank AG and Barclays Plc. Today, the key names set to report are Kimberly-Clark, Halliburton, State Street Corp, Franklin Financial Services, NBT Bancorp, Majesco. So far in the earnings season, about 17% of S&P 500 companies have reported results. Of them, 76% have posted better-than-expected profits, vs 73% in the third quarter of 2016. In absolute terms, earnings are up 6%, vs analyst forecast for 2.6% growth in profits.

Market Snapshot

  • S&P 500 futures down 0.02% to 2,573.50
  • STOXX Europe 600 up 0.07% to 390.40
  • MSCI Asia up 0.09% to 167.01
  • MSCI Asia ex Japan down 0.2% to 549.58
  • Nikkei up 1.1% to 21,696.65
  • Topix up 0.8% to 1,745.25
  • Hang Seng Index down 0.6% to 28,305.88
  • Shanghai Composite up 0.06% to 3,380.70
  • Sensex up 0.03% to 32,398.63
  • Australia S&P/ASX 200 down 0.2% to 5,893.96
  • Kospi up 0.02% to 2,490.05
  • German 10Y yield fell 1.6 bps to 0.436%
  • Euro down 0.3% to $1.1746
  • Brent Futures unchanged at $57.75/bbl
  • Gold spot down 0.4% to $1,275.42
  • U.S. Dollar Index up 0.2% to 93.92
  • Italian 10Y yield rose 1.3 bps to 1.774%
  • Spanish 10Y yield fell 2.1 bps to 1.642%

Top Overnight News

  • A day after his election victory, PM Abe pledged to seek a broad consensus on revising Japan’s 70-year-old pacifist constitution and reiterated there was no fixed schedule for change
  • President Trump is close to pulling off a tax overhaul and may soon select the next Fed chief
  • U.K.’s PM May seemed disheartened, discouraged during a dinner with EU Commission President Jean-Claude Juncker in Brussels last week; she “begged for help,” telling Juncker of the risk she took when giving up hard Brexit plan and asked for a two-year transition period, Frankfurter Allgemeine Sonntagszeitung reports
  • May’s battle to get her Brexit legislation through Parliament hit a new roadblock as the Labour Party threatened to unite with Tory rebels, eclipsing the small victory she brought home from a summit of European leaders
  • Catalan separatists meet Monday to craft their reply to Prime Minister Rajoy after he announced a barrage of measures to stamp his authority on the rebel region
  • Leaders of two regions in Italy’s wealthy north claimed victory in referendums Sunday to demand more autonomy from the state, in a ballot that could strengthen the anti-immigrant Northern League party ahead of national elections early next year
  • Hedge funds are finding betting on West Texas Intermediate crude more attractive again, with total positioning on the U.S. benchmark increasing to the highest in almost a year
  • Catalan separatists meet Monday to craft their reply to Prime Minister Rajoy after he announced a barrage of measures to stamp his authority on the rebel region
  • The U.S. has been disappointed this year at China’s lack of progress in pursuing market-oriented reforms, said a senior administration official, ratcheting up the pressure on the world’s second-largest economy ahead of Trump’s visit there next month.
  • U.S. President Donald Trump Says Facebook Was on Clinton’s Side
  • Apple Sourced 100% IPhone and IPad Chip Orders to TSMC

The major Asian indices were mixed after the momentum from last Friday’s fresh record levels in the S&P 500, DJIA and Nasdaq Comp gradually dissipated, although Japan remained buoyant after the firm win by PM Abe’s ruling bloc at the snap election. Nikkei 225 (+1.2%) led the region after the ruling coalition gained a supermajority at Sunday’s election, which keeps Abenomics firmly in place and paves the way for possible constitutional changes. In Australia, the ASX 200 (-0.2%) failed to hold onto initial gains and a mixed tone was observed in Chinese markets, in which the Shanghai Comp. (Unch) ignored a significant liquidity operation by the PBoC, while the Hang Seng (-0.7%) underperformed on technical selling after it met resistance around 28,500. Finally, 10yr JGBs were flat with demand dampened amid the heightened risk appetite in Japan and an absence of a BoJ Rinban announcement. Japanese PM Abe’s LDP led ruling coalition won a supermajority at Sunday’s election, as unofficial results showed the ruling bloc is set to win 312 of the 465 seats or over two-thirds of seats in the lower house. Chinese China House Prices YY (Sep) 6.3% (Prev. 8.3%); PBoC injected CNY 110bln via 7-day reverse repos and CNY 90bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6205 (Prev. 6.6092)

Top Asia News

  • Abe Placed to Lead Japan Through 2021 After Big Election Win
  • China Vows No Return for Shuttered Steelmakers as Curbs Hit Home
  • Deripaska’s En+ Group Targets $8.5 Billion Valuation in IPO
  • Toshiba Sees 110 Billion Yen Loss on Tax Impact of Chip Sale
  • Noble Group Warns of Loss Topping $1 Billion as Vitol Buys Unit

In Europe, the IBEX is once again lagging peers in early European trading, after Spain moved to take full control of Catalonia over the weekend, while Catalan officials state that they will not follow orders from Madrid. Elsewhere, major EU  bourses have been oscillating between gains and losses with newsflow on the quieter side. The 10 year German benchmark had been initially firmer amid the latest Spanish-Catalan developments and reports that 2 Italian regions are also keen on gaining more autonomy. Political instability in the region is also underpinning French OATs, as core bonds benefit from a degree of safe-haven positioning and spreads to the periphery re-widen. However, the prime focus and market driver this week will be Thursday’s ECB policy meeting and the much hyped/eagerly awaited QE tapering announcement. Although much of the early morning gains have been pared given the slight move higher in equities.

Top European News

  • Catalan Separatists Plot Response to Spain’s Shock and Awe
  • Italy Real Estate Stocks Rise on Report of Budget Measures
  • Spire Rejects Bid From Holder Mediclinic for Rest of Shares
  • U.K. Car Dealers Skid on Pendragon’s Consumer Confidence Warning
  • Linde Drops Tender Threshold, Extends Deadline for Praxair Deal

In FX, the greenback remains undecisive, as the anticipation of the announcement of the new Fed Chair continues to loom over markets, with reports stating that Powell, Taylor and Yellen are all still in the frame. The DXY trades below 94.00, struggling to find any real direction, with its major pairs seeing the same subdued, range-bound trade. The headline news over the weekend was Japanese PM Abe winning the supermajority, as flows flooded into the Asian stock market, with risk flow causing some selling in JPY. USD/JPY gapped higher, briefly spiking through 114.00. GBP grinded higher throughout the Asian session, however did later run into resistance at around 1.3228 (last Thursday’s high) In turn, GBP tripped through 1.32 to move to a low of 1.3164. Risks continue to remain to the downside with the outcome of Brexit still very much unknown.

In commodities, WTI and Brent crude futures slightly firmer with prices aided by another drop in the Baker Hughes rig count, showing a 3rd straight weekly loss. Gold decreased 0.4 percent to $1,275.31 an ounce, the weakest in more than two weeks.

It is a fairly light start to the week for data with mostly second tier releases including China property prices data for September, Eurozone consumer confidence for October and UK CBI business optimism and total orders data for October. Perhaps the most significant event will be a likely statement from UK PM Theresa May to Parliament on the progress of Brexit talks following the EU summit.

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. -0.1, prior -0.3

DB's Jim Reid concludes the overnight wrap

The main event of the week is undoubtedly Thursday's ECB blockbuster meeting where DB currently expect a cut in purchase at the start of 2018 from EU60bn per month to EU30bn and for this to be confirmed for 9 months. The consensus seems to have migrated lower towards EU25-30bn over the last month and from a 6 to a 9 month extension. However with reinvestments expected to be EU15bn per month on average next year, this could yet lead to a number at the lower end of expectations if the ECB focus on this. Our rates strategists think an explicit mention of gross purchases from the ECB could be quite hawkish as it would acknowledge the reinvestment issue that would naturally keep policy looser if they recycled all proceeds.

Another hawkish signal could be mention of an explicit end date for purchases but this is not expected at the moment. Nevertheless our strategists think the current market pricing of the first rate hike being pushed back to early 2020 is too far. They think it’s more likely to be between Q2 and Q3 2019. Elsewhere for credit investors it’s unlikely they'll explicitly mention the specifics of the CSPP/PSPP split but we think there's a good chance that when the data comes through in early 2018 it will show no or limited CSPP tapering relatively to PSPP.

The one thing about highlighting this as a blockbuster meeting is how much is already priced in? We've had a number of credible yet unconfirmed press stories of late detailing quite specific behind closed doors ECB discussions. So a lot has been flagged and we may have to have a deviation from the above (e.g. an end date to purchases or rolling in reinvestments to the tapered amount) to make a big impact.

Also in terms of the impact on rates, the US seems to be a bigger swing factor of late. Bond yields seemed to have gone up and down like a yo-yo since Warsh's name was first seriously mentioned with regards to being Fed Chief c.3 weeks ago. The range has been less than 20bps for 10 years over this period but Warsh and averagely hourly earnings sent them first higher, before CPI then sent them lower before serious mention of Taylor last week and the passing of a budget at the Senate late on Thursday night sent them back towards the top of the recent range as we ended last week. Indeed Friday saw core 10y bond yields from around the globe jump by 5-7bps (UST: +6.6bp; Bunds +5.7bp; Gilts +5.3bp) while changes at the 2y part of the curve were more modest at c2-5bp (UST: +4.6bp; Bunds +1.5bp; Gilts +2.2bp). 10yr USTs have consolidated for now and kicked off the week fairly flat in the Asian session.

Turning to the weekend news now. In Spain, tensions have increased. At a press conference on Saturday, Spanish PM Rajoy formally invoked the Constitutional power from Article 155 and outlined a range of measures to retake control of the region, including: i) seeking to dismiss Catalan President Puigdemont and his cabinet, ii) dissolving the Catalan parliament with plans to call new regional elections within 6 months, and iii) assume control of the regional police force and publicly funded media outlets. PM Rajoy noted "no government in no democratic country can accept that the law is ignored". In response, Puidgemont said "the Catalan institutions and the Catalan people can't accept this attack" and El Confidencial reported that Party leaders in the Catalan Parliament are scheduled to meet today to discuss next steps, with suggestions that Puidgement is considering a formal declaration of independence with calls for an election this week. On the other side, the proposed measures by PM Rajoy requires approval from the Spanish Senate, which is expected to meet this Thursday afternoon with voting on the final measures on Friday (10am local time).

For those who missed it, DB’s European economists considered to what extent tensions around the situation in Catalonia could weigh on Spanish growth and confidence. While their conclusions were fairly benign absent a serious escalation, they find it prudent to consider the relevant risk channels and vulnerabilities were the current situation to weigh on Spanish growth or investor confidence.

Over in Japan’s general election, according to NHK tallies on Monday morning, PM Abe and his coalition partner have achieved a two third majority win by securing at least 312 of the 465 seats. The win by PM Abe is broadly in line with polls in the lead up to the election and could lead to a continuation of accommodative monetary policy along with potential changes towards higher sales tax and the approval of gambling resorts. This morning in Asia, markets are trading a bit mixed, with the Nikkei leading the gains, up 0.93%, but the ASX 200 (-0.01%), Kospi (-0.03%) and Hang Seng (-0.65%) are down slightly as we type with the HK market impacted by weakness in property developer stocks as recent data showed home prices fell last month in cities including Beijing (-0.6% mom) and Shanghai. Elsewhere, the JPYUSD has weakened 0.19%.

Across the pond, President Trump has signalled Ms Yellen is still in the race for the next Fed Chair, noting “most people are saying it’s down to two (Taylor & Powell). I also met with Janet Yellen…I really like her a lot”, so “I have three people that I’m looking at” and “I will make my decision very shortly”. Earlier on Friday, Bloomberg reported VP Mike Pence and Treasury Secretary Munchin were advocating Taylor and Powell to Mr Trump. Elsewhere, Ms Yellen defended the use of QE noting “the US economy is much stronger today than it would have been without the unconventional monetary policy tools deployed by the Fed…”

We should get the announcement by the end of next week on the Fed Chair appointment. Back to this week, the other main highlights are the first look at Q3 GDP for the UK (Wednesday) and US (Friday), while the flash global PMIs for October tomorrow will also be closely watched as ever. Brexit will never be too far from the spotlight while in China the CPC wraps up and in Germany the Bundestag will convene for the inaugural session following the election. Earnings season ramps with 186 S&P 500 companies due to report, including some of the tech heavyweights, and 107 Stoxx 600 companies. For the full week ahead and easy to read cutout of all events see our new "Next Week… This Week" document published every Friday. The week ahead at the end has the main text from it.

Quickly recapping markets performance from last Friday. US bourses strengthened to new record highs with the S&P (+0.51%), Dow (+0.71%) and Nasdaq (+0.36%) all up modestly. Within the S&P, gains were led by financials (+1.16%) and industrials, with only real estate and consumers staples stocks mildly in the red. The latter was impacted by Procter & Gamble which fell 3.65% post result. European markets were broadly higher, but little changed with Stoxx600 (+0.26%), DAX (+0.01%) and FTSE (flat) up slightly.

Turning to currencies, the US dollar index gained 0.47% following the approval of the US FY18 budget resolution, while the Euro fell 0.57% but Sterling gained 0.24%. In commodities, WTI oil rose 0.64%, while precious metals (Gold -0.75%; Silver -1.3%) and other base metals trended slightly lower (Copper -0.53%; Zinc -0.43%; Aluminium -0.46%).

Turning to currencies, the US dollar index gained 0.47% following the approval of the US FY18 budget resolution, while the Euro fell 0.57% but Sterling gained 0.24%. In commodities, WTI oil rose 0.64%, while precious metals (Gold -0.75%; Silver -1.3%) and other base metals trended slightly lower (Copper -0.53%; Zinc -0.43%; Aluminium -0.46%).

Away from the markets and onto the US tax reforms where Republicans were reasonably upbeat on the various weekend talk shows. The Director of White House’s office of Management and Budget (Mick Mulvaney) said approving the tax bill “by December is realistic” and that economic growth “…ought to be growing about 3% a year”. Elsewhere, Senate Majority leader McConnell signalled the tax cuts may not add to the federal budget deficit, noting “….that’s a rather conservative estimate of how much growth you’ll get out of this pro-growth tax reform”, although refrained from discussing the details of the tax plan as “it’s going to be hashed out in the open.” Looking ahead, the tax writing committee plans to release draft legislations by early November for further debate.

Back onto Brexit, ahead of PM May’s statement on the progress of Brexit. UK’s shadow Foreign Secretary Thornberry noted on Sunday that a no-deal Brexit “is a serious threat to Britain”. That said, UK’s International trade secretary Fox was more circumspect, noting that “if we have no deal and we trade on current WTO terms”, which is similar to how the EU trades with the rest of the world on most cases, then “it’s not exactly a nightmare scenario”, although conceded that “I would prefer to have a deal, because it would bring greater certainty”.

Elsewhere, Communities Secretary Javid signalled more fiscal spending may be possible, noting “we can sensibly borrow more to invest in the infrastructure that leads to more housing” and that while deficit is important, “investing for the future, taking advantage of low interest rates, can be the right thing if done sensibly….”. It seems to us the momentum is pointing towards more fiscal policy across the world at the moment.

Onto macro data from last Friday which was relatively sparse. In the US, the September existing home sales was slightly above consensus at 5.39m (vs. 5.3m expected) along with the monthly budget statement at $8bln (vs. $6bln expected). Note that our US economists’ bottom-up tally of 3Q inflation-adjusted output points to less of a drag on the economy from hurricane-related disruptions than originally anticipated. Hence, they have revised up their 3Q real GDP growth forecast by 70bp to 2.7% versus consensus of 2.5%. In Canada, the September CPI was slightly lower than expected at 0.2% mom (vs. 0.3% expected) and 1.6% yoy (vs. 1.7% expected). In Germany, September PPI was higher than expected at 0.3% mom (vs. 0.1% expected) and 3.1% yoy (vs. 2.9% expected). Elsewhere, the Eurozone’s August current account balance was $33.3bln, slightly higher than last month after it was revised higher by c6bln to $31.5bln. In the UK, September public and private sector net borrowing were both modestly lower than expected at 5.3bln (vs. 5.7bln expected) and at 5.9bln (vs. 6.5bln expected) respectively, however, after adjusting for prior downward revisions of c1bn, this month’s underlying reading was more in line with consensus.

It is a fairly light start to the week for data with mostly second tier releases including China property prices data for September, Eurozone consumer confidence for October and UK CBI business optimism and total orders data for October. Perhaps the most significant event will be a likely statement from UK PM Theresa May to Parliament on the progress of Brexit talks following the EU summit.


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