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Futures Flat As FOMC Meeting Begins; Brent Jumps Over $65 For First Time Since 2015

Courtesy of ZeroHedge. View original post here.

E-mini futures are modestly in the green this morning, though net of fair value the S&P index is poised for another record high open as the FOMC begins its last meeting for 2017 in which it is expected to raise rates by 25bps. European stocks gain while Asian equities slide led by weakness in Chinese airplane stocks. Brent has jumped above $65 for the first time since 2015 as a result of a shutdown in the Forties North Sea pipeline, which carries 40% of UK North Sea oil & gas production while sterling declines amid the ongoing Brexit drama despite the highest UK inflation print since 2012.

The Forties pipeline is important for the global oil market because the crude it carries normally sets the price of dated Brent, a benchmark used to price physical crude around the world and which underpins Brent futures. The shutdown comes as oil supply cuts by OPEC have helped chip away an excess of inventories built up following a global supply glut which began to emerge in late 2014.

“Such a reaction (in prices) indicates that supply disruptions can no longer be ignored in tight markets,” said Hussein Sayed, analyst at FXTM. U.S. crude oil futures were last 0.5 percent higher at $58.30 a barrel.

Across macro, the Aussie 10-year yield fell four basis points while T-note yields were a basis point lower at 2.38%. The Bloomberg Dollar Index steady near three-week high; kiwi outperformed G-10 peers for second day. In China, the PBOC added a net 40bn yuan of liquidity, after injecting 20bn the day before, while keeping the CNY fixing little changed.

Europe's Stoxx 600 Index gained 0.2% as technology shares rebounded after a tech deal in the sector, in which Atos offered to buy Gemalto for $5 billion, lifting shares of peer Ingenico. Energy shares also rose, helped by firmer oil prices as brent jumped above $65 for the first time since 2015 on a North Sea pipeline closure.

In Asia earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan drifted off 0.3 percent, having bounced 2% in the past three sessions, with markets consolidating in the hope an upswing in global growth could outlast a likely hike in U.S. interest rates this week. The Nikkei 225 retreated from a 26-year high, and Hong Kong and Chinese shares slipped. Australia's ASX 200 (+0.3%) and Nikkei 225 (-0.3%) were mixed with strength in commodity related stocks keeping the Australian benchmark afloat. This was after copper rose to above USD 3/lb and Brent crude rallied to a 2-year high on reports the Forties pipeline, which carries 40% of UK North Sea oil production, will be shut for weeks due to repairs. Meanwhile the Hang Seng (-0.6%) and Shanghai Comp. (-1.3%) were subdued on plans of further regulatory steps for insurers to help curb risks and reports of possible contingency measures such as higher interest rates and tighter capital controls to combat possible outflows and support CNY from the impact of US tax reform and Fed hikes.

Losses for large-cap Chinese shares accelerated toward the close as A shares of the nation’s big three carriers all posted their worst daily declines since February 2016 amid rising oil prices. China Southern Airlines Co. slumped 6.5% in Shanghai, Air China Ltd. lost 5.5% and China Eastern Airlines Corp. dropped 5.3%. All three rose more than 10% over one month through Monday, led by China Southern with a 23% gain; even after Tuesday’s losses, China Southern and Air China are up more than 40% this year. “Airlines stocks have been rising in defiance of an oil rally because of better performance in ticket prices in what is traditionally a slow season,” said Su Baoliang, an analyst at Sinolink Securities Co. “Today’s decline shows the continued oil rally finally having its toll. Some investors have decided to lock in their gains.” As a result, the CSI 300 Index closed down 1.3%, its biggest loss in two weeks.

Hong Kong stocks fell in tandem with mainland equities Tuesday afternoon, as airlines tumbled amid rising oil prices. Sunny Optical Technology Group Co. led a retreat among technology shares after a recent rally.  The Hang Seng Index closed down 0.6% after rising as much as 0.4% in the morning; that ended three days of gains that had added 2.6%. Hang Seng China Enterprises Index drops 1%. Shanghai Composite Index falls 1.3%.

The euro edged higher and most European bonds declined even as German investor confidence slid in December for the first time in four months. The Bloomberg Dollar Spot Index erased overnight losses before the start of the FOMC’s two-day meeting and 10-year Treasury yields edged lower. Sweden’s krona led G-10 gains after inflation beat expectations.  Meanwhile, sterling fluctuated as U.K. inflation unexpectedly accelerated to the highest rate in more than five-and-a-half years.  Commodity-linked currencies also got a boost from the pick up in oil prices. The Australian dollar and the New Zealand dollar were both over half a percent higher while the Norwegian crown rose 0.7 percent.

The dollar was idling at 113.42 yen just off a one-month top of 113.69, while the index that measures it against a basket of peers was down 0.1 percent. Dealers at Citi noted interbank volumes in the forex market had been 35 percent below average overnight and another thin session was in prospect for Tuesday. There was a little more action in bitcoin, which was last up over half a percent on the day at $16,540 on the Bitstamp exchange BTC=BTSP. The cryptocurrency's newly launched 1-month futures contract fell 4% to stand at $17,780 on its second day of trading.

The fate of the dollar is now in the hands of the 3-day FOMC meeting which started today, while the European Central Bank and the Bank of England will meet for the last time in 2017 on Thursday.

JPMorgan economist David Hensley suspects the Fed will revise up its growth forecast while trimming the outlook for the unemployment rate, potentially adding upside risk to the “dot plot” forecasts on interest rates. “The dot plot previously called for three hikes in 2018; it is a close call whether this moves to four hikes,” he warned, a shift that would likely boost the dollar but could bludgeon bonds. “For its part, the European Central Bank (ECB)is likely to emphasize its low-for-long stance and continue to distance itself from the Fed,” he added. “The staff is likely to revise up its 2018 growth forecast, while we think the core inflation forecast will reveal an even slower recovery than before.”

The divergence in Fed and ECB policy was supposed to be bullish for the dollar, given it had widened the premium offered by U.S. two-year yields over German yields to 256 basis points from 188 basis points this time last year. The last time the spread was so wide was in 1999 according to Reuters.

In commodities, the big mover was Brent which topped $65 for the first time since 2015 amid reports of an outage in the Forties North Sea pipeline. Subsequently, this saw the WTI/Brent widen to $7.35, the widest since May 2015, while UK gas futures saw its largest rise since 2011 with support also coming from an explosion at OMV’s gas facility in Baumgarten.

In metals markets, gold is currently trading relatively flat whilst base metals in China continued to be supported overnight by domestic supply cuts. Goldman Sachs says on a long term basis expects commodities to outperform other asset classes even as policy makers are forced to hike rates, most bullish copper and most bearish aluminium. Protesters in Nigeria claim they have halted flows from 3 of Eni's (ENI IM) wells. U.K. natural gas prices surged after a pipeline explosion in Austria threatened to tighten flows.

In rates, the yield on 10Y TSYs dipped less than one basis point to 2.39%, while Germany’s 10Y Bund rose two bps to 0.31%, the highest in a week. Yield on Britain’s 10Y Gilt climbed two basis points to 1.225% as Japan’s 10Y JGB yield declined less than one basis point to 0.047%, the lowest in a week.

VeriFone and MongoDB are among companies reporting earnings. Economic data include PPI readings, monthly budget statement.

Bulletin Headline Summary from RanSquawk

  • European equities trade with little in the way of firm direction. Energy names outperform in the wake of yesterday’s Forties pipeline outage
  • In FX markets, EUR and JPY are a tad firmer vs the Dollar, as the DXY struggles to stay within touching distance of the 94.000
  • Looking ahead, highlights include US PPI and supply from the US

Market Snapshot

  • S&P 500 futures up 0.08% to 2,663.50
  • STOXX Europe 600 up 0.2% to 389.75
  • MSCI Asia down 0.1% to 170.21
  • MSCI Asia ex Japan down 0.3% to 552.60
  • Nikkei down 0.3% to 22,866.17
  • Topix up 0.1% to 1,815.08
  • Hang Seng Index down 0.6% to 28,793.88
  • Shanghai Composite down 1.3% to 3,280.81
  • Sensex down 0.7% to 33,222.70
  • Australia S&P/ASX 200 up 0.3% to 6,013.20
  • Kospi down 0.4% to 2,461.00
  • German 10Y yield rose 0.7 bps to 0.3%
  • Euro up 0.1% to $1.1783
  • Italian 10Y yield rose 0.3 bps to 1.391%
  • Spanish 10Y yield fell 0.5 bps to 1.408%
  • Brent Futures up 1.1% to $65.37/bbl
  • Gold spot up 0.2% to $1,244.35
  • U.S. Dollar Index down 0.08% to 93.79

Top Overnight News via BBG
 

  • Alabama votes in a special general election to fill Senate seat vacated by Attorney General Jeff Sessions
  • U.S. and South Korea may delay joint military drills until after Pyeongchang Winter Olympics in February to reduce tensions with North Korea
  • International Trade Secretary Liam Fox said the U.K. would like a trading relationship with the EU after it leaves the bloc that’s “virtually identical” to the one it has now
  • China will continue its neutral monetary policy with a bias toward tightening next year, according to a front-page commentary in Securities Times; the country may cut RRR for some banks to provide liquidity and increase support for agriculture and small companies
  • Britons will see their real wages drop 0.5% next year, lagging behind a global average of a 1.5% gain, according to a salary forecast from Los Angeles-based recruitment firm Korn Ferry
  • Unibail Buys Westfield for $16 Billion as Mall Owners Merge
  • Disney Said to Near Deal for Fox Assets as Comcast Drops Out
  • Edison Sees Its Equipment Being Probed as Possible Cause of Fire
  • Atos Bids $5.1 Billion for Security- Software Maker Gemalto
  • Passport to Shut Global Hedge Fund After ‘Unacceptable’ Returns
  • State Dept. Said to Convene U.S. Airlines for ‘Open Skies’ Talks
  • Trump May Actually Be Right About the Trade Deficit With Canada
  • ‘Star Wars: Last Jedi’ Could Approach $200m in Domestic Opening
  • AMC, Saudi Arabia Fund to Explore Commercial Opportunities
  • J&J Says Darzalex Data Show Manageable Safety Profile, 12% IRs
  • Billionaire Zara Owner Said to Seek $472 Million for 16 Stores

Asia equity markets traded subdued as momentum from Wall Street where S&P 500 and DJIA posted fresh record closes, was lost on the region. ASX 200 (+0.3%) and Nikkei 225 (-0.3%) were mixed in which strength in commodity related stocks kept the Australian benchmark afloat. This was after copper rose to above USD 3/lb and Brent crude rallied to a 2-year high on reports the Forties pipeline, which carries 40% of UK North Sea oil production, will be shut for weeks due to repairs. Hang Seng (-0.6%) and Shanghai Comp. (-1.3%) were subdued on plans of further regulatory steps for insurers to help curb risks and reports of possible contingency measures such as higher interest rates and tighter capital controls to combat possible outflows and support CNY from the impact of US tax reform and Fed hikes. Finally, 10yr JGBs traded relatively flat, although some mild support was observed following a 5-yr auction in which the b/c and accepted prices were higher than previous. China's insurance regulator plans to revise certain guarantee fund rules for insurance industry as China seeks to strengthen insurers' capability to curb risks. PBoC injected CNY 80bln via 7-day reverse repos and CNY 70bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6162 (Prev. 6.6152)

Top Asian News

  • Philippines to Approve $2.6 Billion Tax Bill in Win for Duterte
  • Big 3 China Airlines Fall Most in 22 Months, Dragging Large Caps
  • Reliance Said to Weigh Jio IPO After $31 Billion Wireless Spree
  • China to Guide Private Capital into Internet Security Investment

European stocks trade modestly higher in what’s been a relatively choppy session thus far. Shares have seen some support from M/A activity, alongside the strength in energy names. Gemalto shares surged some 30% after Atos’s EUR 4.3bln takeover proposal. Energy names gaining on the back of Brent crude futures rising to the highest level since 2015 amid reports of the outage in the Forties North Sea pipeline, which carries 40% of UK North Sea oil & gas production. It seems the path of least resistance remains south for fixed, with fresh losses made in recent trade, albeit in a gradual and measured manner. Bunds are just off a 163.27 base, and with the 10 year cash yield back above the 0.30% level that has been sticky despite a brief dip below on Monday, and even 2 year Schatz futures are retesting worst levels (112.130) despite a solid auction, but chart support around 112.120 could stall further declines. Elsewhere, Gilts just printed a tick below the initial post-UK inflation data low, at 124.69 before regrouping and USTs have also recovered some composure to sit just off worst levels awaiting the 2nd half and PPI data, plus the long bond offering.

Top European news

  • Genmab Drops; Bernstein Expects Near-Term Estimates to Come Down
  • Swedish Inflation Surprise Paves Way for Stimulus Retreat
  • Gas Explosion at OMV’s Baumgarten Hub Leads to Shutdown
  • Poland Triggers Alarm Bells as Judges Tumble in Eastern EU
  • Atos Bids $5.1 Billion for Security-Software Maker Gemalto

In FX markets, EUR and JPY are a tad firmer vs the Dollar, as the DXY struggles to stay within touching distance of the 94.000 level into day 1 of the December FOMC. Sterling saw a push higher with inflation rising by 3.1% above analyst estimates which is also against the peak that the BoE had estimated for October. However, the move was short-lived and GBP then proceeded to lose ground against its major counterparts with Brexit still at the forefront after European Parliament’s Verhofstadt stating that David Davis made an own goal with Brexit deal remarks. Elsewhere, we have seen a sharp reversal and retreat in EUR/SEK on the back of Swedish inflation data beats with CPI at 1.9% y/y in November vs 1.7% expected and last, while the Riksbank’s targeted CPIF index came in at 2% against the 1.8% forecast and the same previously. Finally, Kiwi continues to outperform its G10 peers, with NZD/USD forming a firmer base above 0.6900 and the rebound on less dovish RBNZ  expectations pushing the pair just over 0.6950 at one stage

In commodities, Brent crude futures are trading at 2015 levels after breaking above USD 65/bbl amid reports of an outage in the Forties North Sea pipeline. Subsequently, this saw the WTI/Brent widen to USD 7, while UK gas futures saw its largest rise since 2011 with support also coming from an explosion at OMV’s gas facility in Baumgarten. In metals markets, gold is currently trading

relatively flat whilst base metals in China continued to be supported overnight by domestic supply cuts. Goldman Sachs says on a long term basis expects commodities to outperform other asset classes even as policy makers are forced to hike rates, most bullish copper and most bearish aluminium. Protesters in Nigeria claim they have halted flows from 3 of Eni's wells. Ineos who operate the Forties pipeline state that the crack in the pipeline is 5-6 inches and they will know within the coming days

whether the pipeline will be closed for 2 or 3 weeks. Libya's Waha Oil Co. state that they are producing around 217k bpd.

Looking to the day ahead, the CPI/RPI/PPI prints are due in the UK (CPI 0.2% mom and 2.7% yoy core expected), and November PPI due in the US. The December ZEW survey will also be released in Germany while the November NFIB small business optimism and November monthly budget statement data are also out in the US. Away from the data, ECB President Draghi is scheduled to speak in Frankfurt while in the US a special general election will be held in Alabama to fill the US Senate seat, which has been vacated by Attorney General Jeff Sessions.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 104, prior 103.8
  • 8:30am: PPI Final Demand MoM, est. 0.3%, prior 0.4%; Ex Food and Energy MoM, est. 0.2%, prior 0.4%

    • PPI Final Demand YoY, est. 2.9%, prior 2.8%; Ex Food and Energy YoY, est. 2.35%, prior 2.4%
  • 2pm: Monthly Budget Statement, est. $134.5b deficit, prior $136.7b deficit

DB's Jim Reid concludes the overnight wrap

In between the snow showers in London yesterday there really wasn’t a lot going on yesterday unless of course you were a Bitcoin trader. Markets are waiting for the central bank and inflation onslaught this week. Indeed this morning see the starts of this with CPI/RPI/PPI prints due in the UK before the PPI is due in the US. Ahead of this there was a big Gilts rally yesterday as 10y yields fell 7.7bp to a 3 month low, while USTs rose 1.2bp and Bunds fell 1.4bp back to levels last seen in late June.

The rally in Gilts partly reflects increased concerns on the Brexit deal from last week. In the UK, PM May told Parliament that the UK’s financial settlement offer is conditional on a successful post-Brexit trade deal and Brexit Secretary Davis noted the agreement was “much more a statement of intent than it was a legally enforceable thing”. Bloomberg also noted Foreign minister Johnson continues to press PM May for a “hard” Brexit. On the other side, the EU Commission called it a “gentlemen’s agreement”, but caveat that if the UK try to unpick what it was agreed, it will halt the next phase of talks. Elsewhere, Bloomberg reported that Ms Merkel told CDU/CSU caucus members that it’s likely the EU Summit this week will confirm Brexit talks can move onto trade, but the mandate will only be provided in February. Along with the Gilts rally, GBPUSD fell 0.37% yesterday.

Over in the US, there is a special general election in Alabama today to fill the US Senate seat which has been vacated by Republican Jeff Sessions. It was initially thought to be an easy win for the Republicans as no Democrat has won an election for the Senate in almost 20 years. However, the race has tightened with polls suggesting it is too close to call or showing conflicting results. For example, a Fox News poll released yesterday showed the Democrat candidate having a 10 point lead, but Politico noted most public surveys conducted last week showed the Republican candidate Roy Moore having a small lead instead.

Notably, a potential win by Democrats would reduce the Republican’s Senate majority to a thin margin of 51-49 (from 52-48). Given that the tax bill has been approved by Congress and is now in the reconciliation stage, it is less likely to scuttle this process, but a Democrat win could impact the prospects of future bills being passed. CNN noted that one in every 20 votes so far this year in the Senate would have had a different outcome if just one vote had flipped to the opposite side.

Over in commodities, Brent rose 2.03% to the highest since August 2015 as a key North Sea pipeline (Forties Pipeline system) was shut down after a crack was discovered. According to the operator, repairs are expected to take weeks. The boost to energy stocks along with a rebound in tech and telco shares helped the S&P edge +0.32% higher to a fresh high, while the Dow (+0.23%) and Nasdaq (+0.51%) also advanced. Back in Europe, equities trended slightly lower with the Stoxx 600 (-0.05%) and DAX (-0.23%) both down, but the FTSE100 bucked the trend to be up 0.80%, partly benefiting from the weaker Sterling and gains in mining stocks.

Moving along, the DB’s House View team published their latest report yesterday, with the title “Happy holidays”, which they think summarises the market mood at the moment. As always they recap the views from our economists and strategists across research. Click the link for our views into 2018 for global macro, central banks, political risk and key markets views by asset class. This morning in Asia, markets are trading modestly weaker. The Nikkei is down -0.28%, while other key bourses are down c0.5% as we type (Kospi -0.54%; Hang Seng -0.46%; China CSI 300 -0.61%). Now briefly recapping other markets performance from yesterday. The US dollar index firmed 0.06% while the Euro and Sterling fell 0.03% and 0.37% respectively. The NZDUSD jumped 0.95% following news that Adrian Orr has been appointed as the next Governor of New Zealand’s central bank. In commodities, precious metals softened (Gold -0.52%; Silver -0.97%) while other base metals advanced modestly (Copper +1.20%; Zinc +1.46%; Aluminium +0.56%). Elsewhere, The VIX fell for the fifth consecutive day to 9.34 and is now down c20% from last Monday.

Away from the markets and onto the ECB’s Nowotny comments. He noted the ECB should be “careful when unwinding low interest rates” but “thanks to the broad base economic expansion…growth prospects are looking up…in particular at the European level”. On Austria more specifically, he noted systemic risks from real estate lending remain subdued, but close supervisory monitoring is required.

Elsewhere, he touched on Bitcoin, noting it is “not a currency. It doesn’t fulfil the criteria” and based on its scope, “one should probably discuss whether regulatory steps are necessary here”.

Over in the US, President Trump’s infrastructure plans may be in focus early next year as the White House noted Trump had “a productive meeting” with Transportation and Infrastructure Committee Chairman Shuster where they discussed plans “for rebuilding America’s infrastructure”. Bloomberg had earlier noted that Trump may be releasing his infrastructure plans in January 2018. Elsewhere, according to a one page analysis by the US Treasury department, the Republican tax proposals would pay for themselves over the next 10 years, with the report expecting GDP to increase an average of 2.9%, which would lead to US$1.8trn in new revenue. The growth number will obviously be questioned.

Back in Germany, Ms Merkel seems to be providing support for France Macron’s proposed reforms for a tighter Europe. She noted "it would be better if Europe spoke with one voice” and that Europe “does not only need a stronger economic and monetary union but we must also have a Europe of security and the rule of law…” Elsewhere, she was confident that Germany would be able to ‘react

in a concrete way” to Macron’s proposed reforms and that reforms must make progress in 2018.

The latest ECB holdings were released yesterday. Net CSPP purchases last week were €1.1bn and Net PSPP purchases €16.2bn. This left the CSPP/PSPP ratio at a lowly 7% last week (12% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). The reduced CSPP/PSSP ratio partly reflects the seasonal lull and likely noise in these numbers during December. Overall, we believe relevant signals will start trickling in from January after net QE purchases have been halved. That said, we still think the ECB will likely keep CSPP relatively unscathed as part of this process.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the October JOLTS job openings was lower than expectations at 5,996 (vs. 6,135), but the quits rate remained at 2.2%. In France, the November Business industry sentiment index was broadly in line at 106 (vs. 107). Over in Italy, the October retail Sales fell more than expected, at -1% mom (vs. flat expected) and -2.1% yoy (vs. 3.1% previous). In the UK, the November Rightmove measure of home asking prices fell 2.6% mom (vs. -0.8% previous).

Over in Asia, Japan’s 4Q MoF/Cabinet Office Business Outlook Survey was reasonably upbeat. Large and medium sized firms in both the manufacturing and non-manufacturing sectors reported an improvement in business conditions and the survey also pointed to considerable optimism about the outlook for business conditions in 1Q18.

Looking to the day ahead, the CPI/RPI/PPI prints are due in the UK (CPI 0.2% mom and 2.7% yoy core expected), and November PPI due in the US. The December ZEW survey will also be released in Germany while the November NFIB small business optimism and November monthly budget statement data are also out in the US. Away from the data, ECB President Draghi is scheduled to speak in Frankfurt while in the US a special general election will be held in Alabama to fill the US Senate seat, which has been vacated by Attorney General Jeff Sessions.


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