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What German Political Turmoil? Global Markets BTFD, Don’t Look Back

Courtesy of ZeroHedge. View original post here.

US index futures are unchanged, having recovered virtually all overnight session losses alongside the EURUSD following Merkel's failure to form a government, while European shares rise despite Angela Merkel's failure to form a new government. In the span of just hours, the goalseeked "hot take" consensus was that Germany’s collapsed coalition talks aren’t expected be a deal breaker for European equities due to the "strength of the German economy."

As we pointed out earlier, the euro reversed losses as the London session unwound a sell-off in Asian time exacerbated by thin liquidity, while early strength in bunds was also faded. According to Citi, there were 3 possible reasons for the brief dip and subsequent strong rebound: 1. Merkel's failure was already discounted; 2. The market was positioned short ahead of the announcement; 3. There is too little clarity to trade.

The Bloomberg Dollar Spot Index shed gains and stood little changed as the pound found a steady bid amid optimism that the U.K. is willing to move toward EU demands on a Brexit divorce bill.

The Stoxx Europe 600 Index rose as Germany’s DAX rebounded from a seven-week low; the Stoxx 600 rose 0.3% while Germany’s benchmark DAX Index climbed 0.2%; DAX futures earlier were down nearly -1%, on concerns surrounding the failed coalition talks in the country. Among European stocks, Automakers and health-care shares outperform after Volkswagen raised sales forecasts, while insurers are worst decliners on the European gauge. European equity traders and analysts say that the political uncertainty in Germany will likely not serve as a trigger for a broader market correction.

Still, some were concerned: “You can imagine this will be bearish for the euro, at least in the tactical near-term, while the market comes to grips with what’s going on and will take a look at what her options are,” Kay Van-Petersen, global macro strategist at Saxo Capital Market, said in an interview with Bloomberg Television. “I’m fairly confident though that she’ll be able to come up with a different coalition at some point over the next few weeks.”

Asia began the week subdued following the losses on Wall St. last Friday and with focus on political uncertainty after Trump campaigners were subpoenaed and German coalition talks broke down. Japanese sentiment was dampened by a firmer JPY and a miss on trade data. Hang Seng (+0.3%) and Shanghai Comp. (+0.3%) were initially negative with underperformance in the mainland as Shenzhen stocks resumed Friday’s sell off and amid reports that China tightened asset management rules to curb risky lending. However, prices then recovered heading into the close as markets took a closer look at plans to curb shadow banking. Finally, 10yr JGBs were uneventful with prices flat, as demand from the dampened risk appetite in the region was counterbalanced by the absence of a BoJ Rinban announcement.

The recent pause in the relentless global rally which only cost central banks $2 trillion in liquidity in 2017 comes as investors gauge whether there are sufficient drivers to continue the march to historic highs. Solid earnings are offset by record valuations in virtually all markets, meanwhile red warning signs are being issued by the flattening U.S. yield curve: on Friday, the 2s10s again hit the tightest level in a decade, adding to concern about the pace of future economic growth.

On the domestic agenda where recent euphoria was boosted by the momentum of GOP tax reform, over the weekend, Treasury Secretary Steven Mnuchin said he can’t guarantee Congress would preserve tax cuts (let Congress pass them first before worrying about preserving them), while Senator Susan Collins said the Senate tax plan passed by Committee needs work.

In international geopolitics, German coalition talks broke down after FDP pulled out of discussions with German Chancellor Merkel's conservatives due to unrealistic differences. S&P affirmed Switzerland at AAA; Outlook Stable and affirmed Netherlands at AAA; Outlook Stable. UK Chancellor Hammond stated that UK is on the brink of serious progress in Brexit discussions, while he also stated the UK will finally begin to see a reduction in public debt and that they will seek to curb health service measures in a balanced way. Reports further suggested that Hammond has put PM May under pressure to promise more money for the Brexit “divorce bill” by suggesting an improved offer will be made to Brussels within three weeks; an offer that the Times believe will be unveiled today.

The dollar was steady, while West Texas oil held above $56 a barrel. Meanwhile, pound and gilts traders will focus on a potential downgrade to the U.K. growth outlook this week and the government’s efforts toward agreeing a Brexit divorce bill. Sterling was boosted on Monday by reports that the U.K. was preparing to make an enhanced divorce bill offer to the EU ahead of crucial talks starting next month.

South Korea spy agency says North Korea can conduct nuke test at anytime, although there is no sign of an imminent test according to reports in Yonhap, reports also suggest that the North conducted engine tests.

This week may see lower than normal volumes due to the Thanksgiving holiday in the U.S. Minutes from the Reserve Bank of Australia’s November meeting are due Tuesday, while those from the European Central Bank’s October meeting due out on Thursday could show dissent in the discussion about tapering. Federal Reserve Chair Janet Yellen gives a talk at New York University. Later in the week, reports on sales of previously owned homes and durable goods orders for October are due in the U.S. The minutes from the Fed’s latest policy meeting are out on Wednesday. Market participants will gauge Fed officials’ eagerness to boost the benchmark interest rate in December, which is widely expected by the market. On Wednesday, the U.K. announces its budget Wednesday; that could see a significant economic downgrade amid a continued impasse in its negotiations with the EU on Brexit.

Bulletin Headline Summary from RanSquawk

  • German concerns short – lived with EUR paring back losses seen in the wake of coalition talks breaking down
  • Weekend press reports in the UK suggest that UK PM May could be on the cusp of  promising more money to the  EU in order settle the "Brexit Bill"
  • Looking ahead, highlights include potential comments from ECB’s Lautenschlaeger, Draghi, Constancio and BoE’s Ramsden

Market Snapshot

  • S&P 500 futures down 0.1% to 2,572.25
  • MSCI Asia down 0.07% to 170.29
  • MSCI Asia ex Japan up 0.09% to 559.78
  • Nikkei down 0.6% to 22,261.76
  • Topix down 0.2% to 1,759.65
  • Hang Seng Index up 0.2% to 29,260.31
  • Shanghai Composite up 0.3% to 3,392.40
  • Sensex up 0.2% to 33,396.87
  • Australia S&P/ASX 200 down 0.2% to 5,945.67
  • Kospi down 0.3% to 2,527.67
  • STOXX Europe 600 up 0.01% to 383.85
  • German 10Y yield rose 0.4 bps to 0.365%
  • Euro up 0.08% to $1.1799
  • Italian 10Y yield fell 0.2 bps to 1.57%
  • Spanish 10Y yield fell 0.8 bps to 1.547%
  • Brent Futures down 0.4% to $62.46/bbl
  • Gold spot down 0.03% to $1,292.09
  • U.S. Dollar Index down 0.05% to 93.61

Top Overnight news

  • German Chancellor Angela Merkel declared failure in her bid to form a new government, throwing the future of Europe’s longest- serving leader into doubt and potentially pointing toward new elections
  • Possibilities now include setting up a minority government headed by her Christian Democratic-led bloc or asking President Frank-Walter Steinmeier to order a national election just months after the last one in September
  • Special Counsel Robert Mueller directed the Justice Department to turn over a broad array of documents, ABC reports; Mueller’s investigators seek emails related to firing of FBI Director James Comey and the decision of Attorney General Jeff Sessions to recuse himself from the entire matter
  • U.S. Treasury Secretary Steven Mnuchin says he doesn’t know whether Congress would extend individual tax cuts that would expire after 2025 in current tax proposal; White House chief economist Kevin Hassett argues that the tax overhaul will boost productivity
  • Chile’s presidential election is heading for a hotly contested second round after billionaire Sebastian Pinera took a smaller-than-expected lead in Sunday’s vote
  • The value of Japan’s exports rose 14% y/y (forecast +15.7%) in Oct.; imports increased 18.9% (forecast +20.2%); the trade surplus was 285.4b yen, less than the forecast of 330 billion yen
  • After nine years, two presidential decisions, multiple lawsuits and environmental protests, TransCanada Corp. is about to learn whether it will receive the final state permit needed to build the Keystone XL oil pipeline
  • The Republican tax-overhaul effort is in for a marathon debate on the Senate floor at the end of this month, with dozens of doomed Democratic amendments. But the real action will be elsewhere, behind closed doors
  • Global investment banking revenues may decline 9 percent this quarter on low volatility and a selloff of high-yield debt, analysts at JPMorgan Chase & Co. said
  • Marvell Technology Group Ltd., a chipmaker looking to build itself a future outside of a declining area of the market, agreed to buy Cavium Inc. for about $6 billion
  • President Robert Mugabe shocked Zimbabwe on Sunday night with a televised address that failed to announce his highly anticipated resignation, a dramatic twist that means the 93-year-old may face immediate impeachment hearings
  • The U.K. could be about to improve its financial offer to the European Union ahead of a crucial meeting of the bloc’s leaders in December
  • HNA CEO Casts Doubts on SkyBridge Deal Completion, WSJ Says
  • Novomet Purchase by Halliburton Said to Be Delayed: Kommersant
  • U.S. Businesswoman Said to Bid for Weinstein Co.: WSJ
  • Some Chrysler Pacifica Owners Complain of Engine Issues: NYT
  • ProSieben Is ‘Obvious’ M&A Target, Possibly for NBC: Liberum
  • Cellcom in Talks With Partner Comm to Deploy Fiber Network
  • Eurocastle Reports NPL Transaction, Reschedules Results Release
  • Goldman CEO Sees Frankfurt, Paris As His Bank’s EU Hubs: Figaro

Asia began the week subdued following the losses on Wall St. last Friday and with focus on political uncertainty after Trump campaigners were subpoenaed and German coalition talks broke down. ASX 200 (-0.2%) and Nikkei 225 (-0.5%) were in the red although recent strength across commodities helped stem losses in Australia, while Japanese sentiment was dampened by a firmer JPY and a miss on trade data. Hang Seng (+0.3%) and Shanghai Comp. (+0.3%) were initially negative with underperformance in the mainland as Shenzhen stocks resumed Friday’s sell off and amid reports that China tightened asset management rules to curb risky lending. However, prices then recovered heading into the close. Finally, 10yr JGBs were  uneventful with prices flat, as demand from the dampened risk appetite in the region was counterbalanced by the absence of a BoJ Rinban announcement. PBoC injected CNY 70bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 10bln via 63-day reverse repos.  PBoC set CNY mid-point at 6.6271 (Prev. 6.6277). Chinese Property Prices (Oct) Y/Y 5.4% (Prev. 6.3%). Chinese Property Prices rose M/M in 50 out of 70 cities (Prev. 44) and rose Y/Y in 60 out of 70 cities (Prev. 67).  Japanese Exports (Oct) Y/Y 14.0% vs. Exp. 15.8% (Prev. 14.1%) Japanese Imports (Oct) Y/Y 18.9% vs. Exp. 20.2% (Prev. 12.0%)

Top Asian News

  • Soros’ Wang Said to Leave to Start Hedge Fund in Hong Kong
  • Thailand’s Economic Growth Beats Forecasts as Exports Rise
  • Barcelo Makes Offer for NH in Bid to Create Spanish Hotel Giant
  • Zarrab Case Aims to Implicate Turkish Leaders, Erdogan Aide Says
  • Alibaba Bets $2.9 Billion It Can Take on Wal-Mart in China
  • Asia Shares Fall as Investors Lock in Gain Amid U.S. Tax Wrangle
  • Toshiba’s Share Sale Plan Cheers Bond Market as Stocks Fall

European bourses have had a mixed start for the week, with the EuroStoxx 50 relatively flat amid the collapse of German government coalition talks, while on the corporate front, German Utilities RWE and Innogy are rising over divestiture speculation. Roche are among the best performing stocks this morning after the drugmaker announced a double dose of trial wins. No further political news or fundamental inputs to spark movement, but Bunds are back in the black and it looks like short term or intraday chart levels are impacting. Contacts were flagging 162.82 on the downside and that just held in to keep sellstops intact and the 10 year German bond has subsequently bounced towards 163.00 again. Back to the Government coalition impasse, the President will address the nation at 13.30GMT and could call another election given the failure of talks and Chancellor Merkel to form a new regime, but there is a train of thought that he might make a last ditch effort to get the parties back around the table. Meanwhile, Gilts continue to track moves elsewhere awaiting more concrete Brexit developments and Wednesday’s Budget, ticking back up to 124.65 from a 124.53 low. US Treasuries maintaining a firmer bias, and with the long bond outperforming yet again – so even more flattening.

Top European News

  • Merkel’s Attempt to Form a New German Government Collapses
  • German Liberals Would Support a Merkel Minority Government: Bild
  • Michael Spencer’s NEX Group Picks Amsterdam as Post- Brexit Base
  • Vestas Shares Fall; Goldman Sees Margin Pressure in 2018
  • Jana Novotna, Former Wimbledon Champion, Dies at 49
  • Akbank’s Rota Is Said to Become Bank Audi’s Turkey Unit CEO

In FX, the EUR roundtriped as Germany’s FDP walks out of talks to form a 4-party Jamaican coalition after a month of negotiations, citing irretrievable differences. Chancellor Merkel must now inform the President of the situation and the risk is a snap election and failure to secure a 4th term in office. EUR/USD slumped to a 1.1723 base before recovering, with bids touted at 1.1710, while EUR/GBP held key support at 0.8871 (21 DMA) despite filling bids at 0.8875 before rebounding towards 0.8900. GBP: A firmer tone independent of the EUR’s travails on latest reports suggesting material progress in Brexit negotiations in the offing, while UK Chancellor Hammond is apparently encouraging PM May to up her divorce settlement offer to the EU. Cable back up near 1.3250. Benefiting from broad risk-off sentiment, with USD/JPY briefly/marginally below 112.00, but now pivoting the big figure and likely to be eyeing a spread of option expiries in nearby proximity (300 mn at 111.90, 901 mn at 112.00, 2.3 bn at 112.30 and 1 bn from 112.50-60).

In commodities, price action WTI and Brent has been relatively tepid with investors turning their attention to the bi-annual OPEC meeting, in which it is expect that the cartel will extend production cuts to cover the whole of next year. On Friday, the latest Baker Hughes showed that rig counts were unchanged in week to November 17th. WTI slightly off best levels having run into resistance just ahead of USD 57.

US Event Calendar

  • 10am: Leading Index, est. 0.7%, prior -0.2%

DB's Jim Reid concludes the overnight wrap

The most interesting thing to get your teeth stuck in to this week is likely to be the turkey on Thankgiving on Thursday. As such it'll likely be a quietish week unless we see a renewed bout of the Wednesday to Wednesday sell-off of last week. Things calmed down from the lows during Wednesday's session even if we closed out the week on Friday with a softer session for equities.

That said, things have already got to an interesting start as talks to form the next coalition German government have failed after a 12 hour negotiation session ended at around midnight last night, with the pro-market FDP walking out citing large differences with the environmentalist Green party. The head of the FDP Mr Lindner noted “it’s better not to govern than to govern badly”. If no compromise is eventually found, Germany may enter into unchartered territory, potentially involving a new election or even a minority led government. The Euro is  down c0.5% this morning.

This morning in Asia, markets are trading modestly lower. The Nikkei (-0.45%), Kospi (-0.01%) and Hang Seng (-0.07%) are weaker, while Chinese bourses have pared back bigger losses to be down c0.7% as we type, with the underperformance in part due to Chinese regulators announcing new measures to regulate asset management products from June 2019. The draft measures include: i) an end to short-term investment products with (implicit) guaranteed fixed rates of return and ii) uniform guidance for banks, trust, insurers and brokerages. Elsewhere, over the weekend, Reuters noted Chinese home prices rose in 50 of 70 cities in October (vs. 44 cities previous). The average price rise was stronger for the month at 0.3% mom (vs. 0.2% previous), but annual growth still slowed to 5.4% yoy (vs. 6.3% previous).

Back to the days ahead, in this holiday shortened week, the highlights will likely be the EU Foreign and European affairs ministers discussing Brexit today (with a Barnier briefing after), the UK budget on Wednesday (look out for looser fiscal policy), the flash European PMIs on Thursday and the first store sales numbers coming through on 'Black Friday' as we close out the week. These numbers are perhaps less relevant than they used to be as internet shopping increases but it’s always a focal point nonetheless.

Turning to US tax reforms, where a step change does not seem likely until the revised tax package goes to a full Senate chamber vote, potentially in the week after Thanksgiving (week from 27th Nov.). Before then, there was more rhetoric over the weekend. Republican Senator Collins said the tax package “needs work” and “want to see changes in that bill”, although she has not reached a conclusion on whether to vote for the current plans or not. One of the issues is the new provision to remove the individual mandate of the Obamacare care, which she noted was a “problem” and that “I don’t think that provision should be in the bill”. In response, Director of the Office of Management and budget Mr Mulvaney noted that the White House is “ok” in removing the mandate if it was an impediment to passing the Senate tax bill, although White House legislative Director Mr Short said “we like the fact that the Senate has included it”. As a reminder, the Republicans need >50 votes to pass the Senate bill and currently control 52 of the 100 seats in the Chamber.

Moving onto Brexit, there appears to be more signs that the UK may be willing to concede to an improved Brexit settlement offer to kick start the Brexit talks. The FT has reported that PM May could get cabinet approval today to as much as double her prior settlement offer of EUR$20bln. Elsewhere, Chancellor Hammond noted “we’ve always been clear it won’t be easy to work out that number, but whatever is due, we will pay” and that “we will make our proposals to the EU in time for the council (meeting in c3 weeks). I’m sure about that”. On the other side, the EC President Tusk was firm when he met with PM May last Friday, as he noted “I made it clear to PM May that this progress needs to happen at the beginning of December at the latest” and that “if there is no sufficient progress, I will not be in a position to propose new guidelines on transition (and trade talks)”. Elsewhere, in a preview to the UK budget this week, Chancellor Hammond has noted the government will announce a plan to increase house building by c40% to 300k new homes being built each year.

Now quickly recapping market performance on Friday. Ahead of the quieter Thanksgiving week, US bourses weakened. The S&P (-0.26%), Dow (-0.43%) and Nasdaq (-0.15%) all down modestly. Within the S&P, modest gains in the telco and discretionary consumer sectors were more than offset by losses from utilities and tech stocks. European markets also trended lower, with Stoxx 600 (-0.29%), DAX (-0.41%) and FTSE (-0.08%) all down slightly.

Over in government bonds, core yields were 1-3bp lower (UST 10y -3.2bp; Bunds -1.6bp; Gilts -1.4bp) while peripherals were little changed. Turning to currencies, the US dollar index weakened 0.29% while Sterling and the Euro gained 0.15% and 0.17% respectively. In commodities, WTI oil rose 2.56% following Saudi Arabia reaffirmed its willingness to extend oil cuts at the November 30 OPEC meeting. Elsewhere, precious metals gained c1% (Gold +1.08%; Silver +1.29%) and other base metals also advanced slightly (Copper +0.13%; Zinc 1.06%; Aluminium flat).

Now onto a fascinating story of our times namely Bitcoin. The crypto currency has not only recovered from recent losses, it has now moved to a fresh all-time high of cUS$8,007 a piece this morning. To put this in context, Bitcoin is up c23% over the last week and up 136% since its recent lows back in mid-September.  Going back further, it is up c8.4x YTD and up 679x from 5 years ago.

Away from the markets now and onto central bankers’ commentaries back on Friday. The ECB’s Draghi noted that “as the labour market tightens and uncertainty falls, the relationship between slack and wage growth should begin reasserting itself. But we have to remain patient.” Elsewhere, the ECB’s Weidmann echoed those sentiments, noting “domestic price pressure will gradually increase in keeping with a path towards our definition of price stability”.

Turning to Catalonia, the latest opinion poll by GAD3 suggests voter participation could be a record high of 82% for the upcoming regional election on 21st December but the pro-independence coalition may only win 66-69 of the seats, falling short of a clear majority which requires 68 seats.

Staying with polls, the latest Ifop poll suggest France President Macron’s popularity has improved 4ppt to 46% – the highest in four months, in part as Bloomberg noted voters are crediting their President with keeping some of his campaign promises.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the November Kansas Fed manufacturing activity was below expectations at 16 (vs. 21), but is still reasonably solid. The Atlanta Fed’s GDPNow model estimate of 4Q GDP growth ended the week at 3.4% (+0.2pps following the strong IP data). The October housing starts were above expectations at 13.7% mom (vs. 5.6% expected), with increases seen in all major regions with the exception of the West. Housing permits were slightly lower at 1,250k (vs. 1,297k expected). Elsewhere, 3Q mortgage delinquencies rose from the post-GFC low in 2Q to 4.88% (vs. 4.24% previous), while foreclosure rate continues to trend down, now to a new post-GFC low of 1.23%.

In the Eurozone, the September current account surplus widened to 37.8bln (vs. 33.3bln previous). Elsewhere, Canada’s headline October inflation measure was in line at 0.1% mom and 1.4% yoy, while the core median reading was slightly lower at 1.7% yoy (vs. 1.8% previous).

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