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Tax Euphoria Fades As Tech Rout Spreads

Courtesy of ZeroHedge. View original post here.

One look at S&P futures this morning reveals an unchanged market, however it is again the violent sector rotation that is taking place behind the scenes that is the real story, with defensive sectors real estate, retail, food, utilities outperforming while investors continue to bail and book profits on tech stocks after sharp gains since the start of the year. Monday's Nasdaq rout also spread to European and Asian markets which fall on last minute changes to the tax plan, most notably the retaining of AMT which could prevent companies from making use of intellectual property tax breaks, effectively raising their tax rates. As a reminder, on Monday the Nasdaq fell 1.2% following broad based hedge fund liquidation from the most crowded sector, after tax experts said Senate Republicans unwittingly passed a bill that would mean higher-than-intended taxes for technology firms and other corporations; in sympathy Europe's Stoxx tech sector index SX8P hit the lowest since late September, down 8% since mid-November

European stocks dipped, trimming the previous session’s sharp gains amid a renewed selloff in tech stocks globally and as weaker industrial metal prices weighed on mining shares which slumped “due to a marked slowdown in China’s metal consumption growth, with market participants foreseeing weaker public infrastructure spending growth extending into 2018,” SP Angel analysts including John Meyer, Simon Beardsmore and Sergey Raevskiy write in note.

The Stoxx 600 is down 0.2%, remaining in a range between its 50-DMA and 200-DMA started in mid-November. The Stoxx tech sector SX8P index falls 0.6%, mirroring a drop in the Nasdaq Monday. As noted above, Europe's tec sector is down about 8% since a peak in early November, amid a sharp sector rotation out of momentum stocks and into potential winners of the U.S. tax reform. UK's FTSE 100 outperforms peers amid the weaker pound which had briefly tripped through 1.34 as Brexit talks had been unravelled over disagreements from the DUP in regards to a hard border between Ireland and Northern Ireland. UK grocery retailers are among the top movers in the FTSE 100 after a positive note from Goldman Sachs. Elsewhere, to the downside, health care and material names lag.

Another sharp drop in UK car buying also dampened the mood though analysts said the pound's drop might only be temporary. “The immediate fallout should be limited as markets have become well versed with the idea that Brexit won’t be solved overnight,” said ING. “We remain constructive on GBP.”

Earlier, benchmark indexes fluctuated in Tokyo, while shares in Hong Kong and Shanghai fell even as a report showed China’s service sector expanded more firmly last month than in October. ASX  200 (-0.2%) and Nikkei 225 (-0.4%) were negative as tech names tracked the weakness of their US counterparts. Hang Seng (-1.0%) was also subdued by tech woes, while Shanghai Comp (-0.2%) traded indecisive after encouraging Caixin Services and Composite PMIs were counterbalanced by continued PBoC inaction, which resulted to net daily drain of CNY 170bln. Finally, 10yr JGBs were lacklustre with demand sapped amid a 10yr auction, which showed weaker demand and lower accepted prices than prior.

In macro, sterling continued to weaken, at one point triggering stops below 1.34, as Brexit talks continued to resolve the Irish border question and retail sales and services data disappointed.

The euro pared losses as indicators showed economic momentum accelerated to its fastest pace in over six years in November. The early blitz of European data included the best Spanish industrial production numbers in 14 months a rebound in Italy’s services sector, a private sector jump in Sweden and signs of a hiring boom in France. Most European government bonds rose, with Greek bonds outperforming after progress on the country’s bailout.

The Australian dollar strengthens to a three-week high on stronger-than-expected retail sales data and after the central bank signaled inflation is set to quicken.  Overnight, the RBA kept the Cash Rate at a record low 1.50% as expected and reiterated it judged steady policy is consistent with growth and inflation targets, and while noting that wage growth remains weak, the RBA said that “some employers are finding it more difficult to hire workers with the necessary skills”. Furthermore, the central bank repeated that rising AUD would slow economy and inflation, while it also commented that forecast remains for inflation to increase gradually and that the outlook for non-mining business investment further improved.  RBNZ Acting Governor Spencer said should be cautious on making any recommendations for changes to current policy framework and that there remains broad confidence in effectiveness of current framework. Spencer also commented that weak global inflation is assumed to persist in line with the forecasts of the international institutions, which now puts some risk on the upside for inflation and interest rates.

Going back to the tax bill and the reason behind the tech rout, Bloomberg explained that as amended, the Senate tax bill would preserve the existing 20 percent corporate alternative minimum tax, a levy designed to stymie companies’ tax avoidance that applies to fewer than 1 percent of U.S. companies under current law. But under the Senate plan, retaining the AMT could prevent companies from making use of planned tax breaks related to intellectual property, to spending on new equipment and to research and development. The AMT may fall hardest on technology and utilities companies — though the snag would apply broadly, experts say. “The fact is, almost everyone who’s a corporate taxpayer is going to be an AMT taxpayer” under the bill, said Bret Wells, a tax law professor at the University of Houston.

In the U.S., House and Senate lawmakers are now poised to begin working on compromise tax-overhaul legislation — a key step in their drive to send a bill with tax cuts for corporations and individuals to President Donald Trump by the end of the year. A global stock rally that has led indexes to record highs has stalled so far this month as investors lock in profits in tech stocks, the year’s best performers, and switch to firms seen benefiting most from a potential reduction in the corporate tax rate such as banks.

“It’s been noticeable that there has been a distinct sector rotation over the last week which is impacting the momentum of the market,” Jim Reid, global head of credit strategy at Deutsche Bank AG in London, wrote in a note to clients.

In bond markets, U.S. Treasuries were still lingering below 2.4%, while the euro zone data and signs the ECB’s bond buying continues to have favorites cut Italian-German spread to its smallest in more than a year.  France and Italy each enjoyed ECB purchases last month that were nearly a billion euros above their ‘capital key’ at 10.439 billion euros and 9.077 billion euros.  “The latest ECB buying data underscores the flexibility of the scheme that tends to benefit the periphery,” said Commerzbank rates strategist Christoph Rieger.

The day’s other significant moves came in metal markets on a retreat. Copper, which is often jumpy around key China data, dropped over 2 percent to a near two-month low. Nickel took a similar hit and zinc dropped 1 percent. That was despite UBS raising its forecast for electric vehicles, which eventually led to an upgrade in the 2020-2021 nickel outlook. However, the Swiss brokerage warned there remained at a vast inventory pile of the metal and its ore.

Crude prices softened further this morning with investors weighing the impact of rising US output in light of last week’s deal between OPEC and Non-OPEC members; WTI extended losses below $58 a barrel before U.S. government data forecast to show crude stockpiles decreased for a third week. Energy newsflow for energy markets remains light with markets looking ahead to an expected decline in inventories in the API report. 

Some market players fear the killing of former Yemeni president Ali Abdullah Saleh on Monday may destabilize the impoverished and worn-torn country even further, threatening the safety of a major shipping route through the Strait of Bab al-Mandeb on the Red Sea off the Yemeni coast.

In the precious metals complex, gold prices have held within a tight range with support from a slightly weaker USD. Elsewhere, base metals prices saw some modest softness overnight despite encouraging Chinese data amid touted profit-taking.

Looking at the day ahead, a fairly packed day for data including the final November services and composite PMIs in Europe and the US. Also, in the US, the October trade balance and November ISM non-manufacturing will be out (59 expected).

Market Snapshot

  • S&P 500 futures little changed at 2,637.50
  • MSCI Asia down 0.07% to 169.67
  • MSCI Asia ex Japan down 0.3% to 551.75
  • Nikkei down 0.4% to 22,622.38
  • Topix up 0.2% to 1,790.97
  • Hang Seng Index down 1% to 28,842.80
  • Shanghai Composite down 0.2% to 3,303.68
  • Sensex down 0.2% to 32,815.64
  • Australia S&P/ASX 200 down 0.2% to 5,971.82
  • Kospi up 0.3% to 2,510.12
  • STOXX Europe 600 down 0.2% to 386.80
  • German 10Y yield fell 1.9 bps to 0.325%
  • Euro down 0.1% to $1.1853
  • Italian 10Y yield unchanged at 1.452%
  • Spanish 10Y yield fell 1.1 bps to 1.403%
  • Brent Futures down 0.3% to $62.29/bbl
  • Gold spot little changed at $1,275.93
  • U.S. Dollar Index down 0.1% at 93.13

Top Overnight news

  • One of the last-minute, late-night changes Senate Republicans made to their tax-overhaul plan may mean higher taxes for corporations, including technology firms, than the bill’s drafters intended, experts say.
  • U.S. House votes to go to conference with Senate to reconcile tax bills
  • A divided U.S. Supreme Court let President Donald Trump’s travel ban take full effect while legal challenges go forward, handing him a major victory and suggesting the court ultimately will uphold the restrictions
  • Special prosecutor Robert Mueller zeroed in on President Donald Trump’s business dealings with Deutsche Bank AG as his investigation into alleged Russian meddling in U.S. elections widens
  • Theresa May came closer than ever on Monday to the Brexit deal she’s been working on for months. A last-minute upset over the Irish border left all parties embarrassed and doesn’t bode well for a second run at a breakthrough; no meeting planned between PM May and DUP leader Foster today, according to people familiar
  • European Union finance ministers will discuss the U.S. plan to slash taxes at a meeting in Brussels Tuesday and whether the new plan violates international trade rules
  • Geopolitics: Saudi Arabia says U.S. administration’s intention to recognize Jerusalem as Israel’s capital could have “grave consequences”; Turkish President Erdogan calls Jerusalem a red line
  • RBA keeps rate unchanged; notes non-mining outlook improvement, says inflation likely to pick up as economy strengthens
  • OPEC crude production dropped again in November to a six-month low of 32.47 million barrels a day as Angola led declines
  • The inflation miss is likely to trouble Marvin Goodfriend, President Donald Trump’s latest nominee to serve as a Fed Board governor, say people who know him, and he is the kind of scholar who will seek innovative ways to address it
  • Trump’s legal team says it’s no longer a question of whether Trump’s firing of FBI director James Comey could be considered obstruction of justice; they now say it’s impossible for the president to be charged with that crime at all
  • Brevan Howard AM is readying two funds to bet on a recovery in Greek assets as it branches out to stem an investor exodus
  • European Nov. Service PMIs: Spain 54.4 vs 55.0 est; Italy 4.7 vs 53.2 est; France 60.4 vs 60.2 est; Germany 54.3 vs 54.9 est; U.K. 53.8 vs 55.0 est; Markit note wage pressures within Italy, France and German service sectors; Eurozone November composite PMI 57.5 vs flash reading 57.5
  • China November Caixin Services PMI 51.9 vs 51.2 prev.
  • U.K. services PMI fell to 53.8 in November, from 55.6 in October as price pressures intensified

Asia equity markets were subdued following a similar close on Wall St where the S&P 500 and DJIA pulled back from intraday record levels and tech underperformed as rotation out of the sector resumed. ASX 200 (-0.2%) and Nikkei 225 (-0.4%) were negative as tech names tracked the weakness of their US counterparts. Hang Seng (-1.0%) was also subdued by tech woes, while Shanghai Comp. (-0.2%) traded indecisive after encouraging Caixin Services and Composite PMIs were counterbalanced by continued PBoC inaction, which resulted to net daily drain of CNY 170bln. Finally, 10yr JGBs were lacklustre with demand sapped amid a 10yr auction, which showed weaker demand and lower accepted prices than prior. In overnight Chinese data, the Chinese Caixin Services PMI (Nov) printed 51.9 vs. Exp. 51.5 (Prev. 51.2); Chinese Caixin Composite PMI (Nov) 51.6 (Prev. 51.0); More notably, the PBoC skipped open market operations again for a third day, for a net daily drain of CNY 170bln. PBoC set CNY mid-point at 6.6113 (Prev. 6.6105).

Top Asian News

  • Foreign Investors Find Handful of Gems Among Shenzhen Stocks
  • China Large Caps Jump as Investors Shy Away From Riskier Stocks
  • India Govt Cash Position Was ’Somewhat Stressed’ in 2Q: Finmin
  • FamilyMart Uny Is Said to Mull Sale of Hong Kong Retail Business
  • Wary China Eyes U.S. Tax Cut as Currency Risk and Reform Chance

European bourses relatively mixed this morning. FTSE 100 outperforms peers amid the weaker pound which had briefly tripped through 1.34 as Brexit talks had been unravelled over disagreements from the DUP in regards to a hard border between Ireland and Northern Ireland. UK grocery retailers are among the top movers in the FTSE 100 after a positive note from Goldman Sachs. Elsewhere, to the downside, health care and material names lag. Amidst ongoing doubts about a Brexit deal in time for the mid-month EU Summit, some evidence of investor caution via the latest 6 year cash offering that was only just twice oversubscribed and came with a 0.3 bp tail. However, the 10 year benchmark future is maintaining the bulk of its recovery gains and holding near the top of its trading parameters as Bunds inch up again to probe a marginal new Eurex high at 163.49. Market contacts flag another upside chart hole to plug up to 163.54, and if follow through buying lifts prices through 163.58 then stops could carry the core German bond up towards 163.73 before any revisit of last Friday’s 163.92 Dec17 contract best. Elsewhere, US Treasuries also grinding high and recouping overnight losses, just.

Top European News

  • BOE Discussed Unexpected Increase in Banks’ Buffers on Brexit
  • Tod’s, Moncler Raised to Buy at Deutsche Bank, LVMH Downgraded

In FX, another ‘deadline’ day failure to secure an EU divorce agreement has pushed the Pound off its lofty pedestal, with Cable now testing support around 1.3380 having rallied to within striking distance of recent peaks (1.3550). From a USD perspective, aside from recovery gains vs Sterling, the Dollar has lost some of its US tax reform bullish momentum, as the Index consolidates on comeback gains in the low 93.000s. USD/JPY back below 113.00 and rangebound between 112.30-70 after light bids noted near the overnight base, while offers are said to be housed from 113.00-10. Elsewhere, a fillip overnight for both antipodeans, as Australian retail sales data beat consensus (RBA unchanged and not much new in terms of forward guidance) and RBNZ Governor Stevens said that the persistence of low global inflation poses risks to the upside for prices and rates. AUD/USD back up near 0.7650 and NZD/USD just under 0.6900 having briefly reclaimed big figure-plus status at one stage. Note, option expiries from 0.7645 to 0.7655-60 (600 and 300 mn approx.), and in the 0.6825/0.6900 strikes (circa 350 and 390 mn respectively).

In currencies, crude prices softer this morning with investors weighing the impact of rising US output in light of last week’s deal between OPEC and Non-OPEC members. Energy newsflow for energy markets remains light with markets looking ahead to an expected decline in inventories in the API report. In the precious metals complex, gold prices have held within a tight range with support from a slightly weaker USD. Elsewhere, base metals prices saw some modest softness overnight despite encouraging Chinese data amid touted profit-taking.

US Event Calendar

  • 8:30am: Trade Balance, est. $47.5b deficit, prior $43.5b deficit
  • 9:45am: Markit US Services PMI, est. 55.2, prior 54.7
  • 9:45am: Markit US Composite PMI, prior 54.6
  • 10am: ISM Non- Manf. Composite, est. 59, prior 60.1

DB's Jim Reid concludes the overnight wrap

As the S&P 500 (-0.11%) reversed strong gains from the opening (+0.87% at the day’s early highs), it's been noticeable that there has been a distinct sector rotation over the last week which is impacting the momentum of the market. The NASDAQ fell -1.05% yesterday and more recently, the ‘FANG’ names have sold off -5.61% in last 5 sessions and were -1.83% lower yesterday. Within the S&P, the IT sector fell -1.93% and has fallen -3.9% over the same 5 days and is at c5 week lows. Meanwhile Telecoms (+1.60%) and US Financials (+1.55%) were the star performers yesterday and are now up 7.99% and 6.84% respectively over the last 5 days. For Financials the rally seemed to coincide with incoming Fed Chair Mr Powell confirming his belief that bank regulation shouldn’t go any further and also with momentum building that the tax reform package would pass the senate. The sector is at the highest level since October 2007. Elsewhere, Telcos were seen as big beneficiaries from proposed corporate tax cuts. So there’s a fair bit going on internally in US equities at the moment.

There’s also a fair bit going on with regards to Brexit this week and yesterday was an emotional rollercoaster for everyone involved and those following it. To cut a long story short, hopes built throughout the day that a deal had been reached. However these hopes were dashed c.40 minutes before the European close, most likely because of the Irish question and possibly because of the

minutiae around the ECJ powers. The DUP party seem to be the biggest roadblock as they want Northern Ireland to leave on the same terms as the rest of the UK. This seemed to put pay to the idea that the UK could offer some kind of special case scenario to avoid a hard border. Given the DUP effectively prop up the minority UK government, it’s a fascinating one. Do the Conservative Party play hard ball and gamble on the DUP folding knowing that the alternative is fresh elections and them likely losing their power? Or is there a political compromise coming after posturing and a brief cooling off period? It might be that today’s UK cabinet meeting is a chance for Mrs May to regroup and get the authority to move in either direction. The most likely scenario is we do get a  compromise this week to at least postpone this hard decision on Ireland to allow talks to progress. However it really is getting close to make or break. If no compromise is possible it could be difficult for the current administration to continue and new elections could be around the corner in the NY. So a pivotal week still. The GBPUSD also went on a mini roller coaster ride yesterday, initially up c0.9% and then falling back down c0.9% before inching higher to close broadly flat for the day.

Across the pond, the reconciliation of the House and Senate’s versions of the tax bill is likely to formally start this week once the conference committee members are named. Overnight, the House has named nine Republican and five Democrat lawmakers. However, the Senate will take “a couple of days” to appoint its members because of Senate procedures. Elsewhere, the Richmond Fed has confirmed they had chosen Thomas Barkin from McKinsey & Co as the institutions next President. Mr Barkin is a senior partner and chief risk officer at Mckinsey and is a 30 year veteran at the firm. Bloomberg noted the appointment may be controversial as Mr Barkin has plenty of consulting experience but has no background in monetary policy making. Note the Richmond’s President will be a FOMC voter in 2018.

Elsewhere, given how topical the low vol environment is, DB’s equity derivative strategy team yesterday published their 2018 outlook called ‘O’VIX Spikes Where Art Thou?’ They find it difficult to argue for a regime change for now with bullish drivers for US equities in place and robust global growth anticipated. They expect equity vol in the US to remain relatively subdued – albeit above  current levels – in Q1 next year and forecast the VIX to average 12-14 during the quarter. That said, they caveat that the market could see spikes in the range of 18-20 in H1, above the high of 16  in 2017. However in their view these spikes would be the cause of higher average volatility, rather than slowing economic growth. That said they do also highlight a few factors that have changed throughout 2017 and point to greater volatility spike potential going forward. This includes; (1) A greater risk of a 5% pullback for the S&P 500 (based on DB’s Binky Chadha’s 2018 US equity outlook) which can be intensified by crowded carry trades, (2) Short vol positioning which has grown and rapid de-risking which would exacerbate a downturn, (3) Leverage continuing to build in the long-running bull market and low levels of cash in retail accounts, (4) Less investor protection to limit losses after the pain trade of burning through options premiums in the rally. You can find the link to the report here.

This morning in Asia, markets are mixed but little changed. The Kospi (+0.21%) and China’s CSI 300 (+0.44%) are both up modestly, while the Hang Seng (-0.45%) and Nikkei (-0.18%) are down as we type. China’s November Caixin composite PMI was slightly above last month at 51.6 (vs. 51) while Japan’s Nikkei composite PMI retreated from October’s five month high to 52.2 (vs. 53.4 previous). Elsewhere, the US Supreme Court has let President Trump’s travel ban to take effect while the case is on appeal. The ban will allow Trump to restrict the entry of those people from countries such as Iran, Syria, Chad, Somalia, Libya, Yemen and North Korea.

Now recapping other markets performance from yesterday. European equities were broadly higher, up 0.5%-1.5% in key markets and largely reversing Friday’s losses. Across the region, the Stoxx 600 (+0.91%), CAC (+1.36%), FTSE (+0.53%) and DAX (+1.53%) all advanced, with the latter up the most for c5 weeks, likely helped by increased prospects of forming the next coalition government. The VIX rose for the sixth consecutive day to 11.68 (+2.2%).

Government bonds sold off modestly, reversing much of the changes on Friday. The UST 10y yields was up 1.1bp, while core European bond yields were up 4-5bp (Bunds +3.8bp; OATs +4.2bp; Gilts +5.4bp) and peripherals were little changed. Turning to currencies, the US dollar index and Sterling gained 0.22% and 0.02% respectively while the Euro weakened 0.25%. In commodities, WTI oil fell 1.53% as some investors were concerned that the higher oil price may induce more supply from US shale assets. Elsewhere, precious metal weakened slightly (Gold -0.35%; Silver -0.74%) and other base metals were little changed (Copper +0.08%; Aluminium -0.31%; Zinc -0.76%). Higher grade Iron ore jumped 3.67% (c24% since 31 Oct) and is up for the fifth consecutive day with prices continuing to benefit from higher demand from Chinese steel mills.

Away from markets and back to Germany. The prospects of forming a new coalition government appear to be higher with the National leadership of the SPD endorsing “open ended” talks with Ms Merkel’s Party to explore “whether and in which form the SPD can support a new federal government” and that we’ll conduct these talks “without prejudging the outcome”.

Staying in politics, House minority leader Ms Pelosi and Senate minority leader Mr Schumer have rescheduled their cancelled meeting and will meet with President Trump on Thursday to discuss the federal spending deal to avoid a partial US government shutdown.

Finally, the latest ECB holdings were released yesterday. Net CSPP purchases last week were €1.4bn and Net PSPP purchases €10.9bn. This left the CSPP/ PSPP ratio at 12.8% last week (14.1% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). We still think the ECB will likely keep CSPP relatively unscathed when they halve their APP in January.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was modestly above expectations. The October factory orders fell less than expected, at -0.1% mom (vs. -0.4% expected) and the prior reading was revised upwards by 0.3ppt. Elsewhere, the final reading for the October durable goods orders was also above market at -0.8% mom (vs. -1.1% expected), along with core capital goods orders at 0.3% mom (vs. -0.5% previous), leading to annual growth of 9.3% yoy.

In Europe, the October PPI was a touch higher than expectations at 0.4% mom (vs. 0.3%), but the prior reading was revised down by 0.1ppt. Elsewhere, the Sentix investor confidence for December fell from last month’s decade high to a still solid level of 31.1 (vs. 33.4 expected). Investors appear to be a little more positive about the current situation but a bit less positive about the outlook.

Looking at the day ahead, a fairly packed day for data including the final November services and composite PMIs in Europe and the US. Also, in the US, the October trade balance and November ISM non-manufacturing will be out (59 expected).


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