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Global Stocks, US Futures Slide As Tax Bill Chaos Erupts In The Senate

Courtesy of ZeroHedge. View original post here.

Markets were thrown for a loop in the past 24 hours, with the Dow first soaring nearly 400 points on Thursday on expectations that tax reform was a done deal, when drama emerged just after the close when the Senate tax bill came this close to falling apart when the proposed "Trigger" was ruled as invalid, pushing a Thursday tax vote to this morning, and as of this moment the bill appears in limbo with the GOP scrambling to find ways to appease the sudden loud opposition among budget hawks. UBS economist Paul Donovan summarized it best this morning:

Tax cut plans were thrown into confusion by the realisation that the US Treasury Secretary repeating "tax cuts pay for themselves" does not, in fact, make it true. A tax increase trigger mechanism was also ruled out. Votes will take place today to attempt to strike a new compromise. Faced with this crisis, US President Trump has responded with swift and decisive leadership by publically saying "Merry Christmas". Like every other president has done.

On Friday morning, Trump continued the pep talk…

Republicans Senators are working hard to pass the biggest Tax Cuts in the history of our Country. The Bill is getting better and better. This is a once in a generation chance. Obstructionist Dems trying to block because they think it is too good and will not be given the credit!

— Donald J. Trump (@realDonaldTrump) December 1, 2017

… but this time the market wasn't falling for it, and overnight both US futures and global equity markets are notably lower on concerns over what the latest fireworks in the Senate tax bill mean.

For those who missed it, here's what happened: as reported last night, the Senate postponed a vote on the GOP tax bill on Thursday night with the debate to continue on Friday, in which US Senate Majority leader McConnell stated that the next floor votes will be 1100EST. in related news, US Senator Mike Rounds said the Senate is to adopt a USD 10K state-local tax deduction and Senator Cornyn said other trigger ideas are being vetted for tax reforms, while Senator Corker stated the bill is to include USD 350bln in tax increases. In other words, the tax cut somehow is now a tax hike.

As a result, first Asian, then European stocks dropped at the start of the last month of 2017 as the tech stock selloff resumed. The dollar was pressured by tax confusion, and Treasuries predictably gained.

The Stoxx Europe 600 Index fell to a two-week low, with all but one of the 19 industry sectors turning red. The price action in Europe began with DAX tripping through the 13k level and  yesterday’s low, while the November low resides at 12,847. In tandem with this, auto names had been leading the losses with Fiat Chrysler shares halted for trade, having fallen 5%. Tech stocks stumbled sharply for a third day, bringing their decline this week to almost 5%. The SX8P index was down 1.7% vs Stoxx 600’s 0.8% decline; the tech subindex extends this week’s decline to as much as 5.2%. Among the worst performers: Infineon -4.2%, Software AG -3.5%, STMicro -3.2%, Logitech -2.2%, SAP -1.9%, ASML -1.8%.

Sentiment in Asian markets was also subdued and Japanese stocks briefly gave up all their gains amid a pullback in USD/JPY, a miss on Chinese PMI data and after the Senate postponed a tax reform vote to Friday morning. Shanghai Comp. (Unch.) and Hang Seng (-0.4%) were indecisive in the wake the aforementioned data and after the PBoC skipped operations due to high liquidity, with Tencent also jittery following its fall out from the USD 500bln club. The Hang Seng Index fell 0.4% Friday, and down 2.7% on the week, to close out its worst week since December last year, with Tencent Holdings Ltd. and Ping An Insurance among the main drags on the benchmark. China large caps also have worst week of 2017, with CSI 300 Index declining 2.6%. Shenzhen Composite Index adds 0.8% Friday. Tencent tumbled 3.3% for weekly loss of 7.4%, though stock is still a top performer this year, with 103% gain.

The MSCI World Index slid 0.2%. Japan's Nikkei had finished 0.4% higher, while MSCI's broadest index of Asia-Pacific shares outside Japan was nearly flat on the day.

The dollar pared its weekly gains as U.S. tax overhaul stalled and Treasuries advanced; the euro met renewed demand from leveraged accounts and the loonie rose before the release of Canadian growth and labor data; the pound slipped below $1.35 as the Irish border question remained unanswered; core euro-area government bonds edged higher, while the S&P future index fell, suggesting U.S. stocks will track European equities’ weakness. Chinese bonds posted their first weekly gain since mid-September.

U.S. stock-index futures also declined. 10Y TSY yields dropped back below 2.4%, down 2bps – the largest dip in more than a week – after climbing eight basis points in the previous two days. The euro pared an advance even after manufacturing data underscored the region’s economic resilience. The latest Markit PMI showed Euro zone factories had their busiest month for over 17 years in November. Of course, ISM and PMIs are nothing but "fake news" as UBS also explained:hr

Assorted manufacturing sentiment opinion polls are due out. 1) This is not the real world, and calling a rising PMI or ISM "stronger output" is fake news. 2) People lie on surveys, answer questions inaccurately, or answer a different question to the one asked. 3) This is why the correlation of sentiment surveys with economic reality is so low.

"We have a two-faced market. Wall Street continues to run on hopes of fiscal reform while in Europe, the renewed strength of the euro is hurting the DAX which in turn is dragging all the other bourses to the downside," said Carlo Alberto De Casa, Chief Market Analyst at ActivTrades.

The gap between German 10-year and 30-year borrowing costs was at its tightest level since late August as a worse-than-expected euro zone inflation number on Thursday pushed back prospects for monetary policy tightening well into the future. The dollar index against a basket of six major currencies was 0.1% lower at 92.95 but poised to eke out some gains for the week, supported by oil prices, after OPEC and other major producers agreed to extend production curbs.

In commodities, crude futures were up 28 cents, or 0.5%, at $57.67 a barrel. Brent added 37 cents or 0.6% to $63.01 a barrel. Brent rose for a third consecutive month in November. “This outcome was widely expected, but its confirmation has removed a clear near-term downside risk to prices,” said Gordon Gray, head of oil and gas equity research at HSBC. Gold edged higher as the dollar eased but was still trading near the 3-1/2-week low touched in the previous session, with investors flocking to riskier assets. Spot gold was up 0.2 percent at $1,277.82 an ounce. Copper advanced 0.5 percent to $3.08 a pound, the first advance in a week.

Expected economic data include manufacturing PMIs and construction spending. National Bank of Canada and Big Lots are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.3% to 2640.5
  • Stoxx 600 down 0.6% to 384
  • MSCI Asia Pacific down 0.1% to 170
  • Nikkei 225 up 0.4% to 22819
  • Hang Seng down 0.4% to 29074
  • Shanghai Composite up less than 0.1% to 3318
  • S&P/ASX 200 up 0.3% to 5990
  • FTSE 100 down 0.2% to 7311
  • DAX down 0.9% to 12910
  • German 10Yr yield down 3bps to 0.34%
  • Italian 10Yr yield down 1bp to 1.74%
  • Spanish 10Yr yield down less than 1bp to 1.44%
  • Brent Futures up 1% to $63.25
  • Gold spot up 0.2% to $1,277.34
  • Dollar Index little changed

Top Overnight News from BBG

  • Time is quickly running out for U.S. Secretary of State Rex Tillerson. The White House is weighing a plan to replace him with CIA Director Mike Pompeo, three administration officials said.
  • The U.S. dropped tentative plans to visit Britain soon after President Donald Trump re-tweeted anti-Muslim videos from a British right-wing activist then criticized Theresa May for rebuking him, the Telegraph reported. U.K. Prime Minister May said the close alliance between the two countries will endure.
  • The Northern Irish party that props up May’s government threatened to bring her down if she makes anything like the concessions that Europe is demanding. The move risks May’s Brexit breakthrough deal with the European Union.
  • A second daily surge in Europe’s overnight benchmark rate sparked widespread speculation among traders about the trigger, though there were no signs of wider funding stress
  • Some traders attributed the jump in the Eonia rate to possible year-end funding squeeze at some lenders, while others pinned it down to demand related to Greece’s just-concluded bond swap
  • The breakthrough in Brexit talks that Theresa May has been working to clinch next week was at risk Friday as the Northern Irish party that props up her government threatened to bring her down if she makes anything like the concessions that Europe is demanding
  • Oil extended gains after a third monthly advance as OPEC agreed to prolong production cuts through to the end of 2018 in an effort to drain a global glut. Goldman Sachs Group Inc. says oil markets are overly jittery and there’s a reduced risk of both unexpected increases in supply as well as excess draws in stockpiles
  • The Senate tax bill is headed for a marathon debate this week after Republican leaders brought the measure to the floor Wednesday with the goal of holding a final vote by the end of the week
  • Federal Reserve Bank of Cleveland President Loretta Mester brushed aside concerns over a flattening yield curve while expressing some worry over elevated stock market valuations, saying both were reasons for continued interest rate hikes
  • Short sellers may be aggravating China’s biggest bond selloff in four years. While the nation’s debt market has no official measure of short sales, analysts say a surge in bond lending has been partially fueled by rising bearish bets

Asia equity markets were choppy as the region counterbalanced the momentum from the record highs in the US with disappointing Chinese Caixin Manufacturing PMI data. ASX 200 (+0.3%) and Nikkei 225 (+0.4%) took impetus from the rally in  US where tax optimism fuelled advances in S&P 500 and Dow to fresh all-time highs, in which the latter also surmounted the 24,000 level for the first time. However, sentiment was brought down a notch and Japanese stocks briefly gave up all their gains amid a pullback in USD/JPY, miss on Chinese data and after the Senate postponed a tax reform vote to Friday morning. Shanghai Comp. (Unch.) and Hang Seng (-0.4%) were indecisive in the wake the aforementioned data and after the PBoC skipped operations due to high liquidity, with Tencent also jittery following its fall out from the USD 500bln club. Finally, 10yr JGBs eventually found mild support from an indecisive risk tone and the BoJ’s Rinban operation for nearly JPY 1tln of  JGBs in 1yr-10yr maturities, which underpinned prices to above 151.00. Chinese Caixin Manufacturing PMI Final (Nov) 50.8 vs. Exp. 50.9 (Prev. 51.0). PBoC skipped open market operations for a net weekly drain of CNY 40bln vs. last week's CNY 150bln net injection. PBoC sets CNY mid-point at 6.6067 (Prev. 6.6034) Japanese CPI (Oct) Y/Y 0.2% vs. Exp. 0.2% (Prev. 0.7%). Japanese CPI Ex. Fresh Food (Oct) Y/Y 0.8% vs. Exp. 0.8% (Prev. 0.7%)

Top Asian News

  • Short Sellers Seen Fueling Worst China Bond Rout Since 2013
  • Japan’s Economy Is Still Outrunning Its Potential Growth Rate
  • Central Banks Find Post-Crisis Bubble Tool Is Doing the Job
  • Hang Seng Index Has Worst Week This Year as Tencent Weighs
  • China’s Iron Ore Port Stockpiles Jump to Record on Winter Curbs

European stocks are beginning the final trading month of the year on the backfoot with the Euro Stoxx 50 trading with losses of over 1%. The price action in EU bourses began with DAX tripping through the 13k level and yesterday’s low, while the November low resides at 12,847. In tandem with this, auto names had been leading the losses with Fiat Chrysler shares halted for trade, having fallen 5%. Additionally, sentiment has not been helped after a delayed vote on the US tax reform bill, which has dented trading. Several potential catalysts and some bullish factors that are guaranteed to have propelled bonds to their highs. Bunds took a while to challenge 162.96 near term technical resistance, but once through there was little psychological opposition to gains through 163.00 before a pause at yesterday’s 163.10 Eurex session peak. However, with the Dax dumping for no obvious reason other than charts turning bearish once it breached Thursday’s low,  13k and the late November base, the core 10 year bond advanced further to almost hit highs made during the countdown to month end (163.26, so far). Interestingly and perhaps tellingly, Gilts have not been unduly ruffled by stronger than forecast UK manufacturing PMI, and remain above 124.00 within a 123.57-124.08 range (so almost ½ point ahead at best), so it seems that some kind of asset-reallocation has occurred, legged in and by default if not designed or as a specific trade. Back to the abrupt about turn down in the German index and other EU cash bourses, there is talk of algo/chart selling, maybe a basket of equities and even an erroneous sale in a big auto that dragged other car names down with it.

Top European News

  • Brexit Risks Leaving Banks on the Hook for Impossible Contracts
  • Morgan Stanley Is Right to Fear My Party, Labour’s Corbyn Says
  • Eonia Mystery Deepens Despite No Sign of Wider Funding Stress
  • Turkey’s Success Selling Junk Yen Bonds Shows Hunger for Yield
  • Poland’s Goldilocks Economy Faces Inflation Wake-Up Call

In FX, the USD-index appears unable to sustain recovery gains above 93.000, with the delayed Senate vote on US tax reforms undermining Dollar sentiment, while Sterling and other major currency counterparts continue to thrive on bullish independent factors. GBP failed to benefit from firmer than expected manufacturing PMI from the UK (58.2 vs. Exp. 56.5) as markets pause for breath in the wake of recent gains and potential weekend risk ahead of PM May’s meeting with Barnier and Juncker on Monday with the Norther Ireland border issue also seemingly unresolved. EUR is maintaining 1.1900+ status vs the Greenback, but only just and capped by offers between 1.1940-50 before key chart resistance at 1.1961. JPY holding within a new broad 112.00- 113.00 range vs the Usd, eyeing JGB/UST yield differentials and of course the passage of US tax reform proposals/bills. Decent option expiries between 112.65-70 (1 bn).

In commodities, crude prices marginally firmer, following last night’s decision by OPEC and Non-OPEC to extend production cuts for 9-months which was widely expected. The more interesting development had come out from the EIA, who stated that US production rose around 300k bpd. Elsewhere, the metals complex has been relatively uneventful with both gold and copper sideways throughout Asia hours

Looking at the day ahead, the final November PMIs in Europe are due, while in the US, the November ISM manufacturing print and November vehicle sales data is due. Also worth noting is the various Fedspeak with Bullard, Kaplan and Harker all due.

US Event Calendar

  • 9:05am: Fed’s Bullard Speaks in Little Rock, Arkansas
  • 9:30am: Fed’s Kaplan Addresses Symposium in  McAllen, Texas
  • 9:45am: Markit US Services PMI, est. 54, prior 53.8
  • 10am: ISM Manufacturing, est. 58.3, prior 58.7
  • 10am: Construction Spending m/m, est. 0.5%, prior 0.3%
  • 10:15am: Fed’s Harker Speaks on Inclusive Economic Growth

DB's Jim Reid concludes the overnight wrap

I arrived back to London yesterday to snow, albeit for a few minutes and consisting of a few dozen snow flakes. However my twitter and Facebook feed is full of pictures and videos recording this monumental occasion. London has had a lot to deal with this year – first Brexit and now a nanometer of snow sending the capital flocking to buy shovels and tinned food. Wherever you are around the world please think of us Londoners trying to navigate through this deluge as we commute to work today. The transport system typically doesn’t respond well to such disruption.

Anyway welcome to December. My wife officially marks this as the start of Xmas and I will most likely be greeted tonight at home as I come through the door with the Michael Buble’s Christmas Album which I always moan at but secretly quite like. In markets it's beginning to look a lot like a new record for the S&P 500 as yesterday's +0.82% climb cemented the 13th successive month of positive total returns in the index. We’ve never had such a run with data going back over 90 years. We've also never seen each month of a calendar year with a positive return so can December mark another landmark in this pretty incredible equity bull market?

The month ended with the FANG and wider technology stocks regaining some of their mojo after a difficult day on Wednesday. The NASDAQ (+2.2%) and FANGs (+1.5%) recovered but with the DOW powering on and crossing 24,000 for the first time ever (30 business days after first crossing 23,000) and the S&P 500 hitting a new record high.

Onto the US tax reform, momentum had been strong during the day, particularly after Senator McCain has decided to support the bill. However, later in the evening, there was a setback with three Senators (Mr Corker, Flake and Lankford) wanting to tie their votes to a triggering mechanism into the bill which would increase taxes down the track if revenue targets are not met. This seemed

to prevent any chance of a late night Thursday vote. Looking ahead, the timing of the full Chamber vote is evolving. The wires (eg Bloomberg) are potentially suggesting this morning (11am US time) at the earliest. As a reminder, there are currently five undecided GOP Senators, with three of them required to pass the bill in the Senate (GOP control 52 seats and need 50 yes votes).

One of the highlight yesterday was that not only did equities rise but US bond yields sold off quite sharply late in the Euro session. At one point we were up c5.5bp before closing +2.1bp to 2.41%, partly being bumped around by the tax developments and before that the solid core PCE data. European bond markets were firmer after weaker regional CPI data, with core yields down 1-3bp (Gilts -1bp; Bunds -1.7bp; OATs -2.8bp) while peripherals fell 4-6bp, with the outperformance led by Portugal where its yields are now the lowest since April 2015.

Staying in Europe, the economy is currently flying and latest surveys suggest it will likely continue. However, it’s precisely because of this strong growth impulse that DB’s Mark Wall feels the recent spell of unusually low macro volatility will inevitably change in 2018. He takes a closer look at the potential sources of change, including economic trends, Brexit, France’s Macron pivot, the Italy election and ECB tapering. Refer to his note for more details.

This morning in Asia, markets are mixed but little changed. The Nikkei (+0.62%) and Kospi (+0.13%) are up modestly, while the Hang Seng (-0.28%) and China’s CSI 300 (-0.24%) are slightly lower as we type. Elsewhere, China’s November Caixin manufacturing PMI was softer than expectations at 50.8 (vs. 50.9), while Japan’s Nikkei manufacturing PMI was slightly lower than last month (53.6 vs. 53.8 previous) but core October CPI was in line at 0.8% yoy.

Now briefly recapping other markets performance from yesterday. European markets were broadly lower, not responding to the positive boost from US tax reforms and the rebound in tech stocks. The Stoxx 600 and DAX were both down c0.3% while the FTSE fell 0.9%, impacted by the stronger Sterling.

Turning to currencies, the US dollar index fell 0.17% while the Euro and Sterling gained 0.50% and 0.88%, with the latter boosted by increased signs of a potential Brexit deal. In commodities, WTI oil edged up 0.17% after OPEC members agreed to extend production cuts to the end of 2018, note that Libya and Nigeria have accepted their output caps for the first time.

Away from markets, our US economists take a closer look at what new Fed nominee Marvin Goodfriend could mean for the Fed. They note that Mr Goodfriend is a respected monetary economist with considerable experience both inside and outside the Federal Reserve system. He has previous experience in Washington, having served on Ronald Reagan’s Council of Economic Advisers. In their view, his appointment will add much needed expertise on macroeconomics and monetary policymaking to a Board that has lost Stanley Fischer. Overall, they believe Goodfriend “leans hawkish, but is not a strident hawk”.

Staying with central bankers, firstly on bitcoin. The Fed’s regulation chief Mr Quarles noted “while these digital currencies may not pose major concerns at their current level of use, more serious financial stability issues may result” if they’re adopted widely. The ECB’s Mersch also noted “I can’t call the assets currencies and sooner or later….there will be a price paid for having excessive speculation”. Turning back to the traditional economy, the ECB’s Praet noted the breadth of economic expansion in the Euro area is “notable” and that monetary policy still plays an important role in sustaining recovery, but “it is not the only game in town”. Elsewhere, the Fed’s Kaplan noted one of the Fed’s big concern is labour participation, which could fall below 61%. On tax reforms, he believes reforming the corporate tax code “could be beneficial”, but some elements of the overall tax plans will create “a short term (economic) bump…but when it’s over, we’ll be more highly leveraged” than before.

Back in the UK, there seems to be little progress on the issue of Irish borders. Northern Island’s Democratic Unionists lawmaker Mr Wilson noted “it they (PM May) stop defending the union, we stop voting for them…it’s as simple as that”. Looking ahead, PM May is expected to meet with EC President Juncker on 4th December to discuss the next steps.

Over in Germany, Ms Merkel has held initial talks with the SPD to potentially form the next coalition government. Little specific details were released but the SPD Premier of the State of Lower Saxony Mr Weil noted “I expect that we would wrap up coalition talks before February as a best case scenario”. Before then, the SPD will hold their party conference on 7-9 December.

Finally, the NY times and then Bloomberg and Reuters have reported that the White House may be planning to replace Secretary of State Mr Tillerson with CIA Director Mike Pompeo, in part due to a slow pace of hiring and differences with President Trump. As per the administration officials, no official decision has been made, but if true, it could be a negative signal on the stability of Trump’s administration. Notably, the Guardian has reported that the White House has since denied such reports.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the October PCE core was in line at 0.2% mom and  1.4% yoy, but note the prior reading was revised up 0.1ppt and recent momentum looks stronger with the 3-month annualized rate now at 1.9%. The October personal income growth was above market at 0.4% mom (vs. 0.3% expected), but spending was in line at 0.3% mom. Elsewhere, the November Chicago PMI was above expectations at 63.9 (vs. 63 expected), while the weekly initial jobless claims (238k vs. 240k expected) was in line but continuing claims were slightly above (1,957k. vs. 1,890k expected).

In Europe, the November inflation data ranged from slightly below to in line. The Eurozone core CPI was below market at 0.9% yoy (vs. 1.0% expected). In Italy, CPI was also below at 1.1% yoy (vs. 1.2% expected). However, France’s CPI was in line at 0.1% mom but higher on an annual basis at 1.3% yoy (vs. 1.2% expected).

For October unemployment stats, the Eurozone was slightly lower at 8.8% (vs. 8.9% expected) but Germany and Italy were both in line at 5.6% and 11.1%, respectively. In terms of the October PPI, Italy was slightly above the prior reading at 2.2% yoy (vs. 2.0% previous), but France was below at 1.5% yoy (vs. 2.0% previous). Elsewhere, Germany’s October retail sales were below market at -1.4% yoy (vs. 2.8% expected). Finally, in the UK, the November GfK consumer confidence was weaker than expectations at -12 (vs. -11) – back to its post- Brexit vote low. The Nationwide house price index was also below market at 2.5% yoy (vs. 2.7% expected).

Looking at the day ahead, the final November PMIs in Europe are due, while in the US, the November ISM manufacturing print and November vehicle sales data is due. Also worth noting is the various Fedspeak with Bullard, Kaplan and Harker all due.

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