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European, Asian Stocks Slide But US Futures Rebound As Tax Deal Fears Ease

Courtesy of ZeroHedge. View original post here.

U.S. equity index futures point to a higher open, having rebounded some 10 points off session lows with the VIX stuck on the edge between single and double digits, while European and Asian shares decline as investors assess central banks’ shift toward tighter monetary policy and concern over tax overhaul ahead of final plan. 

It has been a groggy end to what is still set to be a third week of gains for MSCI’s global stock index following more upbeat data and signs that central banks including the Federal Reserve will keep treading carefully with interest rate hikes.

On Thursday, US stocks closed 0.41% lower after Republican Senator Rubio said he intends to oppose the tax bill as written unless there was a larger child tax credit (currently $1,100). He said GOP leaders “found the money to lower the top (individual tax) rate”, but “can’t find a little bit” more to help working class parents raising children. However, later on, President Trump said he is “very sure” Mr Rubio will vote yes. So still lots of potential changes here before the bills gets voted by the Senate, potentially as soon as Monday, although on Friday, US equities appears sanguine about the risks and have faded most of Thuesday's weakness.

“The more the tax bill gets watered down, the less pronounced the effect will be on the dollar.” said Commerzbank currency strategist Esther Reichelt, in Frankfurt.

This morning in Asia, markets followed the negative US lead and are trading lower, with the MSCI Asia Pac Index and its ex-Japan couisn both down -0.4%. Australia's ASX 200 (-0.2%) closed negative as weakness in its top-weighted financials sector weighed, while Nikkei 225 (-0.5%) was pressured after a mixed Tankan survey but then rebounded amid reports the BoJ is to tweak its language due to dovish dissent. Shanghai Comp. (-0.6%) and Hang Seng (-0.9%) were subdued after the recent quasi-tightening in China and with President Xi also expected to stress the need to curb financial risks at next week’s annual Central Economic Work Conference.

European markets were all lower, with the Stoxx Europe 600 Index following benchmarks from Hong Kong to Tokyo and Sydney lower, and down 0.4%, impacted by utilities and financials stocks post the marginally dovish ECB meeting. On a sector breakdown, consumer discretionary names are seen lower in the wake of a profit warning from Salvatore Ferragamo (-8%) and H&M (-15%) delivering an uninspiring trading update. Retailers led the decline as Hennes & Mauritz AB plunged after reporting a slump in quarterly sales. Banks struggled too on a renewed dip in euro zone bond yields after Thursday’s message from the European Central Bank that it was sticking to its pledge to keep money pouring into the bloc’s economy for as long as needed.

In currencies, the dollar steadied, but was down at 112.21 against the yen and, despite having been at a one-month high earlier in the week, stuttering toward a 0.3% weekly drop against a basket of six rival currencies, while Treasuries declined as some tax cut jitters remained. South Africa’s rand gained even as volatility soared before the ruling African National Congress meets this weekend to elect a new leader.

Meanwhile, the euro headed for a weekly gain after the ECB remained cautious about the prospects of reaching its inflation goals, even as it reiterated a pledge to keep stimulus in place. The pound dropped and yields on U.K. gilts fell to the lowest since September amid speculation Brexit talks are about to get more difficult. Russia’s ruble fluctuated after the nation’s central bank cut rates more than expected. The New Zealand dollar was the biggest mover among major currencies, up 0.6 percent at a two-month high of after the country's Finance Minister Grant Robertson said he was comfortable with the currency's general trend.

And speaking of Brexit, PM Theresa May is expected to back down on Brexit date plan in order to avoid a second defeat in the commons next week, according to press reports. German Chancellor Merkel said EU leaders will move to Brexit phase 2 today, but added that a lot of work is still needed regarding migration. There were also reports that EU leaders warned UK Conservative Party rebels have made a no deal Brexit more likely.

Back in the US, uncertainty surrounding the fate of U.S. tax reform is threatening to sour what has been a stellar run for equities in 2017, as money managers dial back their appetite to take risk amid signs that the eight-year stock rally may not be far from its end. PIMCO sees the good times rolling on in 2018 as global economies grow in sync, but the bond giant warned investors to brace for a downturn as central banks from the U.S. to Europe gradually tighten policy.

“The theme is still one of gradual policy tightening,” said Societe Generale interest rates strategist Jason Simpson, who said the Bank of England had also sent a steady-as-you-go signal at its meeting the previous day. “Today is also going to be the last one (this year) of any real flow… so bond yields are just squeezing lower as any short positions are being covered.”

In commodity markets, crude oil futures extended gains, after rising on Thursday as a pipeline outage in Britain continued to support prices despite forecasts showing a global crude surplus in the beginning of next year. U.S. crude added 0.3 percent, or 15 cents, to $57.19 a barrel, after gaining 0.8 percent overnight. Brent crude futures were up 0.2 percent, or 14 cents, at $63.45. Industrial metal copper CMCU3, headed for a 3 percent weekly gain after two weeks of hefty falls while gold edged away from a four month low hit earlier in week as it nudged up to $1,257 an ounce.

Bitcoin was on track for its smallest weekly move since October, having turned less volatile following the start of trading of Cboe Global Markets’ bitcoin futures. Rival CME Group will launch its own version on Sunday. The cryptocurrency was trading near a record high around $17,000 on the Bitstamp exchange, having climbed around 15 percent since Monday – the fifth straight week of gains.

Economic data include Empire State Manufacturing Survey and industrial production.

Overnight Bulletin Summary from RanSquawk

  • Last trading session of the week sees EU bourses slightly softer.
  • USD is under pressure again amid political headwinds over the tax plan
  • Looking ahead, highlights include US Industrial Production, Baker Hughes Rig Count and the Brussels Summit

Market Snapshot

  • S&P 500 futures up 0.15% to 2,660
  • STOXX Europe 600 down 0.3% to 387.86
  • MSCI Asia down 0.4% to 170.33
  • MSCI Asia ex Japan down 0.4% to 554.09
  • Nikkei down 0.6% to 22,553.22
  • Topix down 0.8% to 1,793.47
  • Hang Seng Index down 1.1% to 28,848.11
  • Shanghai Composite down 0.8% to 3,266.14
  • Sensex up 0.7% to 33,489.07
  • Australia S&P/ASX 200 down 0.2% to 5,996.97
  • Kospi up 0.5% to 2,482.07
  • German 10Y yield fell 1.3 bps to 0.303%
  • Euro up 0.1% to $1.1791
  • Italian 10Y yield fell 0.3 bps to 1.529%
  • Spanish 10Y yield fell 2.6 bps to 1.421%
  • Brent futures little changed at $63.29/bbl
  • Gold spot up 0.4% to $1,257.33
  • U.S. Dollar Index up 0.02% to 93.51

Top Overnight News

  • President Donald Trump said he’s “very sure” Marco Rubio will vote to pass tax legislation after senator threatened to vote against the bill unless negotiators boost the child tax credit.
  • Vice President Mike Pence’s Mideast trip shrinks after President Trump declared Jerusalem the capital of Israel
  • European Union leaders discuss the latest Brexit developments as May returns to Brussels after parliament defeat on Brexit legislation
  • Mystery, Suspense Mount as Final Plan Is Due: Tax Debate Update
  • H&M Plunges Most in 16 Years After Trouncing by Rival Zara
  • Mylan, Reckitt Are Said to Bid for Merck KGaA Consumer Unit
  • GM Squares Off With Old Detroit Foes in $90 Billion Pickup Fight
  • Central Banks Want World to Party On as Punch Bowl Removed
  • BOJ Is Said to Tweak Message as Dissenter Calls for More Easing
  • Deutsche Telekom Recharges Dutch Challenge With Tele2 Deal
  • New Africa Gas Comes at Right Time for Europe in Supply Woes
  • Brexit Talks Set to Get Messy as Unity Hits High-Water Mark
  • Alan Howard Reboots as Hedge Fund Is Said to Brace for Outflows
  • Amazon Plans to Tap Vietnam for Import, Export Business: News

Asia stocks were mostly lower as the downbeat tone rolled over from the US close, where sentiment was pressured on tax reform discord after Republican Senator Rubio said he would not vote for the GOP tax bill unless it expands the child tax credit. ASX 200 (-0.2%) closed negative as weakness in its top-weighted financials sector weighed, while Nikkei 225 (-0.5%) was pressured after a  mixed Tankan survey but then rebounded amid reports the BoJ is to tweak its language due to dovish dissent. Shanghai Comp. (-0.6%) and Hang Seng (-0.9%) were subdued after the recent quasi-tightening in China and with President Xi also expected to stress the need to curb financial risks at next week’s annual Central Economic Work Conference. Conversely, Indian markets  bucked the trend with gains of 0.9% after the country’s ruling BJP retained power in Gujarat with a clear majority and won  Himachal Pradesh from Congress in the state assembly elections. Finally, 10yr JGBs were relatively uneventful despite the  indecisive tone in Japan, while the BoJ Rinban announcement also failed to spur demand with the total amount at a reserved JPY 290bln in 10yr-25yr+ maturities. PBoC injected CNY 80bln via 7-day reverse repos and CNY 70bln via 28-day reverse repos, for a weekly net injection of CNY 80bln vs. last week's CNY 510bln net drain. PBoC set CNY mid-point at 6.6113 (Prev. 6.6033). BoJ reportedly is to tweak its message after dissenter calls for further easing, according to reports.

  • Japanese Tankan Large Manufacturing Index (Q4) 25 vs. Exp. 24 (Prev. 22).
  • Tankan Large Manufacturing Outlook (Q4) 19 vs. Exp. 22 (Prev. 19)
  • Tankan Large All Industry Capex (Q4) 7.4% vs. Exp. 7.5% (Prev. 7.7%)

Top Asian News

  • Noble Group Sees More Pain Ahead as Creditor Talks Progress
  • Sunac Shares Plunge 10% After Placement Prices Near Bottom End
  • Hong Kong Moves Toward Dual-Class Shares, Wooing Next Alibaba
  • Hong Kong Stocks Retreat as Volatility Climbs to One-Year High
  • Financials to Overshadow Drugmakers in India’s Revamped Sensex
  • Vietnam Coffee Trade Slows as Buyers Bet on Bigger Discounts
  • AirAsia Said in Talks on Sale of Leasing Arm to Everbright
  • After Overtaking Diageo, China’s Moutai Plans Three IPOs

European equities have kicked the final trading session of the week in muted fashion, and lacking in firm direction (Eurostoxx 50 -0.1%) with yesterday’s ECB decision/press conference seeing no follow through into today’s trade. On a sector breakdown, consumer discretionary names are seen lower in the wake of a profit warning from Salvatore Ferragamo (-8%) and H&M (-15%) delivering an uninspiring trading update. Consumer discretionary aside, individual movers have been relatively limited thus far. The extent of the opening/early bid on core EU bonds appeared somewhat excessive in the absence of something more supportive/bullish, and without much further follow-through buying, Bunds and Gilts have duly drifted back down. The 2 benchmarks are now middle and near the bottom of ranges respectively, with the 10 year UK debt future just off a new 125.33 low (+4 ticks vs +40 ticks at best, and seemingly unwinding some of Thursday’s marked outperformance). A degree of stability in stocks may have encouraged longs to book profits/pare positions, and trading volumes are relatively light after yesterday’s CB-inflated turnover, so price moves are exaggerated. Indeed, for many this could mark the last full week of the year before Xmas and the New Year. Elsewhere, USTs continue to bide time just a few ticks below parity, with IP data ahead.

Top European News

  • Brexit Talks Set to Get Messy as Unity Hits High-Water Mark
  • Bank of Russia to Rescue Third Major Lender in Four Months
  • Natixis Deal to Boost MiFID Pricing Power Says Oddo’s Beumer
  • Airbus Puts Helicopters Chief in Line for Top Job in Shakeup

In FX, the USD is under pressure again following concerns over Rubio’s commitment to the latest draft of the US tax bill . The Index is only just maintaining 93.500+ status and still looking vulnerable within the broader 94.000-93.000 recent range. JPY finding some resistance against latest safe-haven gains just above 112.00 vs the USD but sellers appear eager to short the headline pair ahead of 112.50 amidst talk that the BoJ may be listening to dovish dissenters and tweak guidance accordingly. Cable hugs the 1.3400 handle amidst ongoing Brexit uncertainty and conflicting headlines. AUD/CAD/NZD all firmer vs their US rival and not just because the Dollar is weaker across the board. EUR Still struggling to advance beyond 1.1800 vs the Greenback, but equally supported well before 1.1713 and with 2.9bln option interest at the big figure running off today. The Russian Federation Central bank unexpectedly cuts its key rate by 50bps to 7.75% vs. Exp. 8.00% (Prev. 8.25%).

In commodities, gold remains supported by aforementioned tax concerns while copper and aluminium prices outperformed their peers during Asia-Pac trade with some attributing the price action to recent Chinese industrial output data. In the energy complex, WTI and Brent crude futures continue to remain firmer in the wake of ongoing supply disruptions from the Forties pipeline with the latest reports suggesting that repairs could take several weeks. The Nigerian Pengassan white-collar oil and gas workers union is in discussions with the government about cancelling their intended Dec 18th strike. Chinese finance ministry are to remove export duties on steel products.

Looking at the day ahead, the conclusion of the EU Council summit will be the main focus for markets on Friday with leaders expected to endorse Brexit talks moving to the next stage. Away from that it should be fairly quiet with October trade data for the Euro area, along with the December empire manufacturing and November industrial production prints in the US the only data due.

US Event Calendar

  • 8:30am: Empire Manufacturing, est. 18.7, prior 19.4
  • 9:15am: Industrial Production MoM, est. 0.3%, prior 0.9%
  • 9:15am: Capacity Utilization, est. 77.2%, prior 77.0%
  • 9:15am: Manufacturing (SIC) Production, est. 0.3%, prior 1.3%
  • 4pm: Total Net TIC Flows, prior $51.3b deficit
  • 4pm: Net Long-term TIC Flows, prior $80.9b

DB's Jim Reid concludes the overnight wrap

I wonder whether with all the central bank meetings out of the way now and with today’s continuation of the EU summit likely to be a non-event, activity will now grind to a halt. To be fair, we still have the potential conclusion to the tax reform story next week and the regional elections in Catalonia, but outside of these it feels like that could be pretty much it for the worthwhile 2017 newsflow.

On central banks, according to DB’s Mark Wall the buzzword from the ECB yesterday was “Confidence”. Rising optimism was signalled in the much larger-than-expected upward revisions to the staff GDP forecasts and the “significant” reduction in slack creating grounds for “greater confidence” in the normalisation of inflation. However, the ECB is in no rush to change the policy stance according to Mark. The language on the stance was resolutely unchanged. The ECB still needs to see the recovery in inflation to take action. Indeed they’ve revised down the core inflation forecasts from 1.3% to 1.1% in 2018 even if the headline rate has gone up with energy prices. Our economists are more confident a turning point has been reached in the inflation cycle, but recent inflation disappointments and the euro’s appreciation this year mean the next step-up in core inflation is later in 2018. With regards to the BoE, our economists felt it was a slightly hawkish set of minutes but the reality is that the outlook in very Brexit driven and thus highly uncertain and changeable. Our economists thinks rates are unlikely to rise before 2019 though. See their report on both meetings.

Away from central banks, the big data focus yesterday was another round of super strong flash PMIs in Europe. The December manufacturing print for the Euro area came in better than expected 60.6 (vs. 59.7 expected), up from 60.1 the month prior. That is the highest reading on record since 1997. The services reading also jumped a bit more than expected to 56.5 (vs. 56.0 expected) from 56.2, which in turn helped the composite jump 0.5pts to 58.0 and the highest since February 2011. That data is consistent with a fairly incredible +0.8% qoq or +3.75% annualised GDP growth rate for the Euro area.

At the country level it was the data in Germany which really stood out with the manufacturing reading surging 1.1pts to 63.3 (vs. 62.0 expected) and the highest on record. The composite rose 1.4pts to 58.7 (vs. 57.2 expected) and to the highest in 80 months. In France the manufacturing print jumped to 59.3 (from 57.7; 57.2 expected) although a slightly weaker services reading saw the composite edge down to 60.0 from 60.3. The data for the core implies a slight decline on average for the data in the periphery, mostly due to manufacturing. So while the data implies a very strong growth picture, it’s worth noting that the prices data was a little softer at the margin. The composite output prices reading for the Euro area declined 0.4pts to 53.0 for example, while input prices were also down slightly, albeit from still elevated levels. So not quite the same read through for inflation just yet.

Onto US equities which fluctuated and then closed 0.3%-0.4% lower, partly due to increased uncertainty on tax reforms. Yesterday afternoon, Republican Senator Rubio noted he intends to oppose the tax bill as written unless there was a larger child tax credit (currently $1,100). He said GOP leaders “found the money to lower the top (individual tax) rate”, but “can’t find a little bit” more to help working class parents raising children. Although later on, President Trump said he is “very sure” Mr Rubio will vote yes. So still lots bubbling along before the bills gets voted by the Senate, potentially as soon as Monday.

This morning in Asia, markets have followed the negative US lead and are trading lower. The Nikkei (-0.10%), China’s CSI (-0.73%) and Hang Seng (-0.98%) are all down while the Kospi is up 0.62% as we type. Now recapping other market performance from yesterday. The S&P fell 0.41%, with consumer discretionary the only sector in the green following the retail sales beat, while losses were led by materials and health care stocks. European markets were all lower, with the Stoxx 600 down 0.46%, impacted by utilities and financials stocks post the marginally dovish ECB meeting. Across the region, the DAX (-0.44%), FTSE (-0.65%) and CAC (-0.78%) all fell modestly.

Government bond yields were little changed (UST 10y +0.7bp; Bunds -0.2bp) but Gilts outperformed with yields down 4.2bp to the lowest since mid-September after the BOE retained a cautious economic outlook. Turning to currencies, the US dollar index and Sterling firmed 0.21% and 0.08% respectively, while Euro fell 0.41% post the ECB meeting. In commodities, WTI oil was up 1.01% despite IEA forecasts that new supply may grow faster than demand next year. Elsewhere, precious metals weakened and broadly reversed the prior day’s gains (Gold -0.20%; Silver -1.11%) while other base metals modestly increased (Copper +0.53%; Zinc +0.60%; Aluminium +0.95%).

Away from the markets, we round out other central bank actions from yesterday. In Switzerland, the SNB made no change to cash rates but did lift its inflation forecast and now expects it to reach its target in late 2020 mainly due to the Franc’s depreciation. However, the SNB President Jordan said “it’s still early, very early, to talk about (rate) normalization……there’s no risk of inflation, also inflation expectations are very well anchored at a much lower level.” Over in Norway, Norges Bank also left its rates unchanged, but the improved growth and inflation forecasts allowed the bank to bring forward its projected first rate hike, which is now expected to be in late 2018. The Krone rose 0.69% versus Euro yesterday.

Over in France, the central bank now projects GDP growth of 1.8% this year and 1.7% in 2018. The ECB’s Villeroy noted the French economic recovery is “significant and sustainable” but the problem is we’re hitting up against “structural limits” and need reforms to materially increase growth. He also added to the Bitcoin debate, noting it is “clearly not a currency, even a virtual one” and that it’s a "speculative asset" and those who invest in it do it at their own risks.

Ahead of the Catalonia elections on 21 December, the latest Metroscopia polls shows the anti-independence groups leading with a combined 44.9% support versus the separatists at 43.8%.  Elsewhere, Spain’s Supreme Court refused a request from Catalan separatist Jordi Sanchez that he be freed from jail to participate in the election.

In Germany, our economists have just published their outlook piece. They expect the economic boom to continue in 2018 with GDP growth of 2.3% again, which would represent an above-potential rate for the fifth consecutive year. They expect the boom to be driven by investment activity, fuelled by rising export demand and considerably higher capacity utilisation and ongoing strong employment growth. On inflation, due to the base effects from energy prices, inflation may slow down temporarily at the beginning of the year. For more detail, please refer to their note.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the November retail sales ex-auto number was above market at 1% mom (vs. 0.6% expected) even with favourable revisions to the prior month. Following this solid report, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth has increased to 3.3% saar versus 2.9% previously. The weekly initial jobless claims (225k vs. 236k expected) and continuing claims (1,886k vs. 1,900k) were slightly lower than expectations. Elsewhere, the December manufacturing US PMI was above market (55 vs. 53.9 expected), but services (52.4 vs. 54.7 expected) and the composite PMIs were both below (53 vs. 54.5 previous). Finally, headline import prices rose 3.1% yoy, but excluding fuel, growth was 1.4% yoy.

The UK’s November retail sales (ex-fuel) was well above expectations and rose 1.2% mom (vs. 0.4% expected) to the highest in seven months – with the strength partly due to the Black Friday discounts. Elsewhere, France’s final reading of the November CPI was revised lower to 1.2% yoy (vs. 1.3% expected), while Italy’s final CPI reading was in line at 1.1% yoy.

Looking at the day ahead, the conclusion of the EU Council summit will be the main focus for markets on Friday with leaders expected to endorse Brexit talks moving to the next stage. Away from that it should be fairly quiet with October trade data for the Euro area, along with the December empire manufacturing and November industrial production prints in the US the only data due.


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