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European Stocks, US Futures Rise, Dollar Steady Ahead Of Powell Hearing, Tax Debate

Courtesy of ZeroHedge. View original post here.

US equity futures in the green ahead of critical Senate debate on US tax reform and a much anticipated testimony from Yellen replacement Jerome Powell for Fed’s current policy approach.  European stocks advance, led by oil and gas stocks after Shell fully restored its cash dividend and unveiled a bullish outlook. Asian shares slide despite the reappearance of the Chinese "National Team" which stabilized the SHCOMP selloff in the last hour. USD recovers gradually from overnight lows against G-10, pushing GBP/USD and EUR/USD to session lows, while oil and treasuries edged lower.

In a rerun of Monday's overnight trading, it has been another choppy session without key catalysts to set market direction according to Bloomberg. While the dollar rebounded, commodity FX was pressured by a consistent grind lower in copper and oil futures, while reports of Russia not committing to OPEC cut extension coupled with a Goldman report warning the OPEC meeting this week may disappoint weighed on crude. U.S. equity futures approach yesterday’s highs in early trading while core fixed income product hold in a tight range, as peripheral EGB spreads are marginally tighter. The flattening Treasury curve pivots around 7Y sector before today’s auction.

After an early selloff, European equities traded higher across the board (Eurostoxx 500 +0.4%) in what has been a relatively light session thus far in terms of macro newsflow. On a sector specific basis, energy names are the notable outperformers with oil & gas heavyweight Shell (+3.0%) top of the FTSE 100 after restoring its full cash dividend as it emerges from the crude-oil slump with investor sentiment spurred by the company lifting their guidance for free organic cash flow and the company's intention to carry out at least $25bln in share buybacks between 2017 and 2020. Meanwhile, miners lagged as metal prices continued to slide while material names lag given the movements in metals markets during Asia-Pac trade which has subsequently capped gains in the mining-heavy FTSE100.

Most of Asia was in the red, with Hong Kong's China Enterprises Index leading the losses. Shares drifted from decade highs as Chinese stocks stumbled for a second straight session, with confidence dented by rising bond yields as Beijing intensified a crackdown on risky financing, threatening to squeeze corporate profits. Additionally, Chinese shares traded in Hong Kong fell amid concerns the country’s regulators will limit the flow of mainland funds into the city’s stocks, while mainland equities rebounded after the National Team made a long-awaited reappearance. The MSCI Emerging Market index was up 0.2 percent

The CSI300 index has jumped 22 percent in 2017 so far, with the gains concentrated in a handful of large index-weighted stocks. “The question is whether further downside in Chinese mainland equities continues in the session ahead and will there be a spillover into Hong Kong and potentially even Japan, Korea and Australia?” asked Chris Weston, Melbourne-based chief strategist at IG Markets.

The yen reversed gains after a rally partly fueled by a Kyodo News report that Japan detected radio signals suggesting North Korea is preparing for a missile launch. 10yr JGBs were mildly supported at the open after gains in T-notes and as Japanese markets began on a cautious note, although upside was capped as sentiment briefly improved and after an uninspiring 40yr auction result.

The Bloomberg Dollar Spot Index swings between losses and gains as intraday traders dominate price action; leveraged accounts are waiting for Powell testimony and tax plan developments before adding positions according to Bloomberg.  The USD Index recovered some lost ground after Monday’s slide, but remains heavy just under the 93.000 handle as bearish sentiment persist (mostly over US tax reform uncertainty, ‘lowflation’ and Fed policy implications beyond December). EUR back to pivoting the 1.1900 level vs the USD, but underpinned on pull-backs below the big figure with bulls still positioned for a test of 1.1961 ahead of 1.2000 and 1.2033 before September 8’s YTD peak at 1.2092. Elsewhere, sterling drifted and Ireland’s bonds rose despite controversy engulfing the Irish government and threatening Brexit talks escalated.

The BoE said none of Britain’s major lenders would need to raise extra capital if the country crashed out of the European Union, the first time it had come to such a conclusion since it started stress-testing banks in 2014. But the chances of a hard Brexit were increased by the prospect of a snap election in Ireland which could be called as early as Tuesday, and which would complicate a key Brexit summit next month.

Euro zone government bond yields were pinned to recent lows as the Irish government teetered, with 10-year German yields – the regional benchmark – dropping to 0.33%, barely 2 basis points of the November lows.  “If we have snap elections and then if a Brexit deal is in jeopardy then it will have a major impact,” said DZ Bank analyst Sebastian Fellechner. “It could lead to a risk-off environment and be a disruptive factor in this very calm market.”

The yield on 10-year Treasuries was unchanged at 2.33% while the UST yield curve flattens.

On the commodities front, copper and nickel led industrial metals lower as weakening Chinese macro data and slowing home sales increase concern about the outlook for demand in the world’s top user. WTI was down 55 cents at $57.56 amid uncertainty over a possible extension of output cuts by major crude producers and expectations of higher supply as the Keystone pipeline restarts. Brent crude futures were down 54 cents to $63.30. Spot gold inched lower to $1,293.11.

Today, investors will turn their focus to the U.S. where the Fed Chair nominee Jerome Powell faces his Senate confirmation hearing in Washington. In a statement to the Senate Banking Committee ahead of the meeting, he signaled broad support for how the Fed operates, regulates and guides the economy.

“His opening comments support current market expectations that his appointment as Fed Chair is likely to maintain monetary policy continuity. The Fed’s recent comments have signaled more concern over persistently low inflation, which has been weighing on the US dollar,” wrote MFUG currency analyst Lee Hardman.

Meanwhile, the Senate tax bill is headed for a marathon debate this week with the aim to hold a floor vote as early as Thursday.

Scheduled earnings include Bank of Nova Scotia, Autodesk. Economic data include wholesale inventories, consumer confidence. Jerome Powell is set for his confirmation hearing to head the Federal Reserve.

Overnight Bulletin Summary from RanSquawk

  • A slew of central bank speak from the likes of Powell, Dudley and Kashkari has done little to move the USD with all eyes now on Powell’s hearing
  • European equities enter the North American crossover in positive territory with energy names the outperformers due to gains in Royal Dutch Shell
  • Looking ahead, highlights include US Wholesale Inventories, Fed’s Powell and Harker

Markets Snapshot

  • S&P 500 futures up 0.12% to 2,604.75
  • STOXX Europe 600 up 0.3% to 386.15
  • MSCI Asia down 0.1% to 172.10
  • MSCI Asia ex Japan up 0.1% to 564.24
  • Nikkei down 0.04% to 22,486.24
  • Topix down 0.3% to 1,772.07
  • Hang Seng Index down 0.02% to 29,680.85
  • Shanghai Composite up 0.3% to 3,333.66
  • Sensex down 0.3% to 33,620.80
  • Australia S&P/ASX 200 down 0.08% to 5,984.25
  • Kospi up 0.3% to 2,514.19
  • German 10Y yield fell 0.5 bps to 0.337%
  • Euro down 0.03% to $1.1894
  • Italian 10Y yield fell 2.7 bps to 1.519%
  • Spanish 10Y yield fell 0.8 bps to 1.465%
  • Brent Futures down 0.8% to $63.35/bbl
  • Gold spot down 0.08% to $1,293.45
  • U.S. Dollar Index up 0.1% to 93.00

Top Overnight News

  • The U.S. Senate tax bill faces a crucial committee vote Tuesday as Republicans try to push it through to full Senate passage by the end of the week. Two top members of the Senate’s budget panel may block tax bill if no changes are made.
  • All OPEC members support extending their oil production cuts until the end of 2018, although Russia hasn’t yet committed to the proposal before Thursday’s meeting in Vienna, said people familiar with the matter
  • OPEC’s in a quagmire, foreshadowing disappointment for oil bulls counting on the group and its allies extending output curbs by nine months, according to Goldman Sachs
  • Fed’s Dudley says the U.S. economy is finally in the vicinity of full employment, and, as a consequence of that, the Fed is removing monetary accommodation
  • BOE Governor Mark Carney doubled down on his warning that a Brexit transition period is needed to avoid disruption to the financial industry, saying a period of 18-24 months would be the minimum required; Brexit May Mean BOE Ramps Up Buffer for U.K.’s Banks Again
  • The controversy engulfing the Irish government and threatening Brexit talks escalated, as the release of a cache of emails threatened to further undermine the nation’s deputy leader and bring an election closer
  • The China Securities Regulatory Commission is suspending approvals for some mutual funds that plan to allocate more than 80% of their portfolios in Hong Kong-listed shares, according to people briefed on the matter; the Hang Seng China Enterprises Index pared losses after retreating as much as 1.8%
  • Shell Restores Full Cash Dividend as It Emerges From Slump
  • Temasek Is Said to Prepare $1 Billion Zuellig Pharma Stake Sale
  • Roark Is Said to Reach $2.4 Billion Buffalo Wild Wings Deal
  • Powell Defends Status Quo at Fed Before His Confirmation Hearing
  • EPA to Hold Its One Hearing on Climate Rollback in Coal Country
  • Chinese Rival to Elon Musk Is Said to Face Crunch at Car Startup
  • Credit Suisse CEO Says Very Positive About U.S., World Growth
  • Cyber Monday Largest Online Sales Day Ever at $6.59b: Adobe
  • USDA Beef Graders Given More ‘Flexibility’ to Override Cameras
  • Manafort Bankers, Associates Summoned to Talk to Manhattan D.A.

Asia stocks were downbeat on what was a choppy session amid a lack of drivers and a humdrum lead from Wall St. ASX 200 (-0.1%) and Nikkei 225 (-0.1%) were indecisive with the Japanese benchmark at the whim of currency swings, while Toray shares were among the worst performers after the Co. fell afoul of ethical standards and became the latest to admit to product data falsification. Shanghai Comp. (+0.3%) and Hang Seng (Unch) were intiially subdued, with underperformance in the latter following reports that the CSRC are to postpone approval of ‘south-bound’ funds which plan to invest over 80% in the Hong Kong stock market. However, both bourses pared losses heading into their respective closes. Finally, 10yr JGBs were mildly supported at the open after gains in Tnotes and as Japanese markets began on a cautious note, although upside was capped as sentiment briefly improved and after an uninspiring 40yr auction result. PBoC injected CNY 130bln via 7-day, CNY 110bln via 14-day and CNY 10bln via 63-day reverse repos. PBoC set CNY mid-point at 6.5944

Top Asian News

  • Hong Kong’s China-Fueled Equity Rally Is Now at Beijing’s Mercy
  • Bitcoin ‘Arms Race’ Proves a Boon for These Asian Companies
  • Malaysia Names New Central Bank Deputy as Analysts See Rate Hike
  • Chinese Bank Said to Seek Insolvency Proceedings for RCom
  • Noble Group Foe Iceberg Makes Fresh Attack on Embattled Trader
  • S.Korea Says Chance of N.Korea Declaring Nuke Completion in 2018
  • China Bond Rout Is ‘Early Warning Signal’ to Global Debt Market

European equities trade higher across the board (Eurostoxx 50 +0.3%) in what has been a relatively light session thus far in terms of macro newsflow. On a sector specific basis, energy names are the notable outperformers with oil & gas heavyweight Shell (+3.0%) top of the FTSE 100 despite scrapping their scrip dividend programme (as previously touted) with investor sentiment spurred by the company lifting their guidance for free organic cash flow and the Co.’s intention to carry out at least USD 25bln of share buybacks between 2017 and 2020. To the downside, material names lag given the movements in metals markets during Asia-Pac trade which has subsequently capped gains in the mining-heavy FTSE100. The main stock specific mover has been Ocado (+18.25%) amid investor relief that the Co. has finally been able to strike an international partnership. Bunds appear to have settled down somewhat after some volatile trade in decent volumes (turnover 120k+) that saw the German benchmark bond extend both sides of the range. Market contacts noted offers around 163.21-22 resistance (encompassing yesterday’s session high), with the sellers looking for a pull-back to 163.11, which was duly achieved via what looks like some spread positioning for the Dec17 expiry and roll into Mar18. Indeed, the lows so far is 163.07 and presumably intraday shorts covered or at least booked some profits before the subsequent rebound to a fresh 163.32 peak. Technically, 163.30 and 163.40 are still preventing further upside and protecting this month’s 163.63 high, so far, while bears will note that a 50% retracement of Monday’s move equates to 162.98, with stops said to be in place if 162.95 fails to hold – hence, the 10 year debt future is still ensconced within the broader parameters. Elsewhere, UK Gilts have been mostly outperforming between 125.24- 50 vs Monday’s 125.21 close with today’s DMO tender in the long-end being well-received by the market with a 2.1b/c. USTs have also seen more heavy rolls activity with over 60k lots of the Dec17/Mar18 spread said to have been sold on top of 300k+ contracts late yesterday.

Top European News

  • BOE Says Stress Test Shows Banks Can Withstand Disorderly Brexit
  • SocGen to Take Fourth-Quarter Charges of as Much as $678 Million
  • Siemens Gamesa Gets 950MW Turbine Order from Vattenfall
  • Vestas Wins 100 MW Order in U.S. With 4 MW Platform

In FX markets, the USD Index has recovered some lost ground after Monday’s slide, but remains heavy just under the 93.000 handle as bearish impulses persist (ie ongoing US tax reform uncertainty, ‘lowflation’ and Fed policy implications beyond December). EUR back to pivoting the 1.1900 level vs the USD, but underpinned on pull-backs below the big figure with bulls still positioned for a test of 1.1961 ahead of 1.2000 and 1.2033 before September 8’s YTD peak at 1.2092. Nearest support seen at 1.1837. JPY has been very volatile trade vs the Dollar amidst risk-on/off sentiment swings overnight, with the headline pair back above 111.00, but still relatively close to yesterday’s 110.90 approx 10 week lows.

In commodities, WTI and Brent crude futures have continued to drift lower in European trade after breaking below the prior session’s lows where prices dropped over 1.0% to below USD 58/bbl. Energy newsflow remains light, however, Goldman Sachs have suggested that oil risks are skewed to the downside as a 9-month OPEC/non-OPEC extension seems to be already priced in. In metals markets, gold trade has been relatively uneventful in tandem with a flat greenback whilst copper extended this week’s pullback amid the dampened risk tone. Additionally, Chinese metals trade was hampered by concerns related to steel demand which saw Shanghai nickel prices drop over 3.5%.

Looking at the day ahead, the most significant event today will likely be the Fed Chair nominee Jerome Powell’s confirmation hearing (10am EST / 3pm GMT). Also worth noting is a likely meeting between President Trump and Democratic and Republican congressional leaders with the discussion expected to focus on a federal spending plan to prevent a partial government shutdown post funding expiring on December 8th. Away from this, the Fed’s Dudley speaks overnight while later in the day the Fed’s Harker is due to speak. In the US the October advance goods trade balance, October wholesale inventories, September FHFA house price index, September S&P/CoreLogic house price index, November consumer confidence and November Richmond Fed manufacturing index prints are all due.

US Event Calendar

  • 8:30am: Advance Goods Trade Balance, est. $64.9b deficit, prior $64.1b deficit, revised $64.1b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.3%; Retail Inventories MoM, prior -1.0%
  • 9am: FHFA House Price Index MoM, est. 0.5%, prior 0.7%; House Price Purchase Index QoQ, prior 1.6%
  • 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.3%, prior 0.45%; YoY NSA, est. 6.04%, prior 5.92%
  • 10am: Conf. Board Consumer Confidence, est. 124, prior 125.9; Present Situation, prior 151.1; Expectations, prior 109.1
  • 10am: Richmond Fed Manufact. Index, est. 14, prior 12

DB's Jim Reid concludes the overnight wrap

This week will rest on what comes out of the Senate. The tax bill was on track for a full Chamber vote by the end of the week, potentially as early as this Thursday. However, late in the evening, two members of the Senate Budget Committee (Senator Johnson & Corker) noted they may not agree to vote the bill out of the committee and send it for debate. Once this is sorted, the GOP need at least 50 votes to approve the bill in the Senate (GOP control 52 seats). Of the half dozen undecided Republican Senators, Mr Rand Paul has now publicly given support to the bill, but Senator Johnson and Senator Daines have both said they’re against the current bill, instead seeking more generous treatment for partnerships and limited liability companies. In response, Senate Finance Chairman Hatch noted “we’re going to make them happy, but we’re not sure we can do exactly what they want to do”. The Senate Majority Whip Mr Cornyn confirmed yesterday he is still confident he will get the 50 votes. Expect the tension on tax to build as the week progresses.

Staying with the US, in his prepared remarks for the confirmation hearing before the Senate Banking Committee, the new Fed Chair Mr Powell broadly conveyed a message of continuity, he noted that “we expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink” and our aim is to sustain a strong jobs market with “inflation moving gradually to  toward our target”. On reforms, he said “we will…consider appropriate ways to ease regulatory burdens while preserving core reforms”.

Over in Germany, progress to form the new coalition government appears to be heading in the right direction. Ms Merkel took a conciliatory tone, noting “we are ready to start talks with the SPD” and “know such talks require compromise”. She stressed that the starting point was that partners should support a balanced budget and broadly pro-business policies. This was echoed by CDU board member Jens Spahn, who noted “of course we have to move toward each other…make compromises”, but “no one (should) make demands that the other party definitely can’t meet”. On the other side, the leader of the SPD Mr Schulz has also softened his resistance to forming a grand coalition with Merkel’s party as he noted “no option is off the table”, but added “we’re entering into talks and we don’t know where they’ll lead”. Looking ahead, Ms Merkel and Mr Schultz are expected to formally meet with President Steinmeier this Thursday to discuss next steps.

Moving to the US holiday season shopping tally, early feedback suggests Cyber Monday is on track to become the biggest US online shopping day ever. Adobe analytics (which measures 80% of transactions at the largest 100 web retailers) noted that as of 4:30pm (local time), US$3.4bn has been spent online and total sales is on track to reach US$6.6bn (+16% yoy) by midnight. The use of  mobile phones for online shopping have set a new record, accounting for 45% of website visits. For those looking for gift ideas, Adobe found that the top online selling items on Black Friday included: Nintendo Switch, Hatchimals, L.O.L surprise and ride-on cars for kids.

This morning in Asia, we are digesting the latest North Korea news. Kyoto news and TBS reported late in the European session that Japan have detected radio signals that suggest a missile launch is being prepared. Markets are broadly lower, with the Nikkei (-0.30%), Hang Seng (-0.89%) and China's CSI 300 (-0.72%) all modestly down, while the Kospi is up 0.22% as we type.

Now recapping market performance from yesterday. US equities were little changed, with the S&P 500 (-0.04%) and Nasdaq (-0.15%) marginally down while the Dow rose 0.10%. Within the S&P, modest gains in the utilities and telco sectors were broadly offset by losses from energy (-1.03%) and material stocks following weakness in oil. European markets pared back gains and closed modestly weaker following the North Korean news that came out before the close. The Stoxx 600 and the DAX both fell -0.46%, impacted by mining and energy stocks, while the FTSE was down -0.35%.

Government bonds were firmer with core yields down 1-2bp, in part driven by the North Korean headlines above. The UST 10y was down 1.1bp, while Gilts were flattish (+0.3bp) and Bunds & OATs both fell c2bp. Turning to currencies, the US dollar index gained 0.13% while Euro and Sterling weakened 0.29% and 0.13% respectively. The JPYUSD rose 0.38% back to mid-September levels.  Elsewhere, the South Africa’s Rand rebounded 2.92% after Moody’s declined to follow S&P in downgrading the local currency debt to junk status.

In commodities, WTI oil retreated -1.88% from its two year high, in part as some investors are concerned whether OPEC members will extend production cuts this month given the oil price has risen back near levels that could induce more onshore shale production in the US. Elsewhere, precious metal were little changed (Gold +0.46%; Silver -0.02%) while other base metals softened following weaker Chinese macro data (Copper -0.61%; Zinc -0.91%; Aluminium -0.30%).

Away from the markets and onto central bankers commentaries. The Fed’s Kaplan noted a rate hike “in the near future….will likely be appropriate”, although reiterated that the removal of monetary policy support should be in a gradual manner and that the neutral interest rate is likely c2.5%. On inflation, he noted some downward factors are transitory, but some are due to structural forces, which “are limiting the pricing power of businesses and are likely to have a muting effect on wage pressure for certain type of workers”. On regulation, he favours a “prudent review of Dodd-Frank and the Volcker rule” and regulatory relief for “small and mid-sized banks”, but cautioned that maintaining strong macroprudential policies for big banks is very important. Elsewhere, he reiterated several labour market indicators suggests the US economy is “at or near full employment”. Finally, the Fed’s Kashkari noted the Fed can “put the brakes on” when inflation starts rising. The implied odds of a December rate hike per Bloomberg is currently 96% (+4ppt from Friday).

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the November Dallas Fed Manufacturing survey was lower than expectations but remained solid at 19.4 (vs. 24 expected), while the new orders index eased 4.8pts to 20.0. Elsewhere, the October new home sales were above market at 685k (vs. 625k expected) and grew 6.2% mom (vs. -6.3% expected), which has led to annual growth of 18.7% yoy – the highest in a decade. Given new home sales are recorded at contract signing, the recent uplift should bode well for permits in the coming months.

In Italy, the November confidence indicators retreated from its decade high in October and were slightly lower than expectations. Consumer (114.3 vs. 116.5 expected) and manufacturing confidence (110.8 vs. 111.8 expected) were both slightly below market, while economic sentiment came in at 108.8, marginally below last month’s reading (vs. 109.1).

Looking at the day ahead, the most significant event today will likely be the Fed Chair nominee Jerome Powell’s confirmation hearing (10am EST / 3pm GMT). Also worth noting is a likely meeting between President Trump and Democratic and Republican congressional leaders with the discussion expected to focus on a federal spending plan to prevent a partial government shutdown post funding expiring on December 8th. Away from this, the Fed’s Dudley speaks overnight while later in the day the Fed’s Harker is due to speak. Economic releases in Europe include October money and credit aggregates data for the Euro area and German and French consumer confidence. In the US the October advance goods trade balance, October wholesale inventories, September FHFA house price index, September S&P/CoreLogic house price index, November consumer confidence and November Richmond Fed manufacturing index prints are all due.


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