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S&P Futures Hit New Record High On “Trade Optimism” As Yuan Storms Past 7

Courtesy of ZeroHedge View original post here.

Despite a slight blip just around 6am ET, when Global Times editor Hu Xijin tweeted (and then deleted) that "China won't accept a phase 1 deal" in which the "US keeping all tariffs, only suspending new tariff threat, in exchange for  major concessions from China", futures climbed and European stocks edged higher amid, what else, even more optimism and investor confidence that America and China are inching toward a trade deal after the FT reported late on Monday that the US considers dropping some tariffs on China with the White House said to mull whether to roll back levies on $112BN of Chinese imports which were introduced at 15% on September 1st. Treasuries fell, while the yuan strengthened past 7 for the first time since August.

S&P futures pointed to a new all time high on Wall Street, following records for each major index on Monday spurred by mounting optimism the world’s two largest economies would sign the first phase of an agreement.

Europe's Stoxx 600 Index initially drifted sideways, as gains in energy names were mostly offset by losses in telecoms and the utilities, but it then levitated higher to Tuesday’s highest levels a day after the gauge advanced to a four-year high, with mining and energy the best-performing sectors, as traders continued to closely follow signs that the U.S. and China are advancing toward a trade deal. The Index rose 0.1% as of 10:52am in London, erasing a drop of as much as 0.2% earlier. The basic resources and oil & gas sector gauges were up 1.2% and 1%, respectively. At the opposite end, the STOXX Europe 600 Real Estate index drops 0.5%, more than any other sector.

Earlier in the session, Asian stocks climbed for a fourth day, led by communications firms, after a gauge for global developed markets rose to a fresh record amid signs of progress toward an initial China-U.S. trade deal. Most markets in the region were up, with Japan leading gains in a catch-up rally after Monday’s holiday break. The Topix advanced 1.7% to a one-year high, with electronic firms offering the biggest boosts. The Shanghai Composite Index closed 0.5% higher, supported by large insurers and banks. China’s central bank lowered the cost of loans that it offered to lenders Tuesday, cutting the so-called medium-term lending rate for the first time since 2016, easing concerns about tightening liquidity.

India’s Sensex retreated 0.2% from Monday’s record close, as Infosys and Reliance Industries weighed on the gauge.

On Tuesday, China's President Xi Jinping spoke at the opening of the second annual China International Import Expo, where he said the country would “open its doors only wider” to the world. He refrained from taking a swipe at his U.S. counterpart Donald Trump, as he’d done the previous year, and didn’t reference the prospective deal to defuse the tariff war. Instead, Xi stressed China’s commitment to the global trading order. "We must all put the common good of humanity first rather than place one’s own interests above the common interests of all," Xi said.

In emerging markets, stocks also rose for a fourth day to trade at a six-month peak, while an index for developing-nation currencies headed for the highest since July as risk sentiment remained buoyant amid signs the U.S. and China are inching toward a trade deal. South Africa’s rand and the yuan led gains against the greenback, with China’s currency strengthening past 7 per dollar for the first time since August. The mood was lifted after a report that China is reviewing locations in the U.S. where President Xi Jinping would be willing to meet with President Donald Trump to sign a pact. That’s the latest indication of progress in the trade war, which is alleviating one of the biggest headaches for investors as they approach year-end. “As equity markets reached new highs in the U.S., and EM sentiment has barely deteriorated, it is hard to not be optimistic,” said Credit Agricole strategist Guillaume Tresca.

As the market enters its latest melt up, investors have turned more bullish lately amid "signs of progress in the trade war", (the same signs we have observed for the past year, but let's ignore that) which is alleviating one of the biggest headaches for markets as they approach year-end. And despite mediocre earnings, rebounding growth expectations and a risk-on rotation, have added to the euphoria. In the latest trade news, China is reviewing locations in the U.S. where President Xi Jinping would be willing to meet with President Donald Trump to sign a pact, Bloomberg reported.

“The sweet spot for global equities looks even more pronounced,” Chris Weston, head of research at Pepperstone Group Ltd., said in a note Tuesday. “The current debate is not whether you are bullish, but whether there is too much short-term euphoria. At some stage valuation will matter, or at least cap the upside.” Just not yet.

In FX, the dollar rebounded from session lows, while the Chinese yuan strengthened past 7 for the first time since August, as the Australian and New Zealand dollars and Scandinavian currencies rallied.

In rates, benchmark Treasuries fell for a third day amid lower demand for haven assets, with the 10Y TSY yield rising to 1.82%. Bank of Japan Governor Haruhiko Kuroda suggested his nation could sell more super-long term bonds, reflecting a desire for a steeper yield curve.

In geopolitics, Iranian President Rouhani said the country will further reduce commitments to Nuclear deal by injecting gas into centrifuges at Fordow plant starting tomorrow. Meanwhile, Turkish President Erdogan said the US is still conducting joint patrols with Kurdish YPG inside Syria, this was not part of the agreement, adding the Kurdish YPG have not left Syria's Tel Rifaat and Manbij regions despite its agreement with US and Russia. Earlier, the Turkish President noted that Turkey will abide by its agreements with Russia and US as long as they keep their promises. Further, Erdogan says he will decide whether to visit Washington this month after a phone call with US President Trump

Market Snapshot

  • S&P 500 futures up 0.2% to 3,083.25
  • STOXX Europe 600 up 0.02% to 403.48
  • MXAP up 0.9% to 166.38
  • MXAPJ up 0.7% to 535.77
  • Nikkei up 1.8% to 23,251.99
  • Topix up 1.7% to 1,694.16
  • Hang Seng Index up 0.5% to 27,683.40
  • Shanghai Composite up 0.5% to 2,991.56
  • Sensex down 0.2% to 40,228.26
  • Australia S&P/ASX 200 up 0.2% to 6,697.12
  • Kospi up 0.6% to 2,142.64
  • German 10Y yield rose 3.3 bps to -0.318%
  • Euro up 0.03% to $1.1131
  • Italian 10Y yield rose 0.2 bps to 0.653%
  • Spanish 10Y yield rose 1.5 bps to 0.324%
  • Brent futures up 0.8% to $62.63/bbl
  • Gold spot down 0.4% to $1,504.42
  • U.S. Dollar Index little changed at 97.54

Top Overnight News

  • President Xi Jinping stressed China’s commitment to the global trading order as his trade negotiators wrangle with the U.S. over rolling back punitive tariffs ahead of a phase one deal. As Xi spoke in Shanghai, the nation’s central bank acted in Beijing to stem a sell-off in the debt market
  • Goldman Sachs Group Inc. CEO David Solomon suggested Europe’s experiment with negative interest rates is holding the region back and probably won’t look so good in the rear view mirror
  • U.K. Prime Minister Boris Johnson can count on hedge funds for support heading into the December elections. In a little over a year, Johnson raised more than 400,000 pounds ($516,000) for his own campaign fund from hedge fund executives, investors and bankers — a group that made up half of his donors, according to government figures
  • Labour leader Jeremy Corbyn could take power thanks to support from the Scottish National Party, if no party wins an overall majority in next month’s U.K. election. SNP leader Nicola Sturgeon dropped the hint in an interview on Tuesday, saying she would never help the Tories
  • Bank of Japan Governor Haruhiko Kuroda stepped into the global debate about whether governments need to do more heavy lifting to support their economies, saying that the ultra-low interest environment created by Japan’s central bank makes fiscal spending more powerful
  • India’s exit from RCEP regional trade talks appeared to leave China and Japan at odds over whether to press ahead with the remaining members, or to try to find a workaround that includes Prime Minister Narendra Modi’s government

Asian equity markets were higher as the region sustained the momentum from Wall St where all major US indices posted record highs on the continued US-China trade optimism, which was further exacerbated by reports the US is mulling rolling back the 15% tariffs on USD 112bln of Chinese imports that took effect from September 1st. ASX 200 (+0.2%) and Nikkei 225 (+1.9%) were positive but with gains in Australia limited by weakness in gold miners and a lack of fireworks from the RBA rate decision where the central bank kept rates unchanged as expected and largely reiterated its past statement, while the Japanese benchmark outperformed as it played catch up on return from the extended weekend and was boosted by a weaker currency. Elsewhere, Hang Seng (+0.6%) and Shanghai Comp. (+0.7%) were initially choppy despite the improved trade optimism as some were said to be doubtful on whether US President will sign off on the additional concessions and as participants digested mixed Caixin Services and Composite PMI data. Nonetheless, the risk sentiment eventually gained traction after encouraging comments from Chinese President Xi on opening up China’s markets which would likely further appease the US, and the PBoC also announced a larger Medium-term Lending Facility operation at a reduced rate of 3.25% from 3.30%. Finally, 10yr JGBs were lower following the bear steepening seen in USTs and with prices pressured by the outperformance of Tokyo stocks, while the BoJ’s Rinban announcement also failed to provide support as the central bank reduced its purchase amounts in 10yr-25yr maturities.

Top Asian News

  • Kuroda’s Economic Optimism Suggests Rates Not Locked and Loaded
  • Indonesia’s Steady Economic Growth Leaves Economists Puzzled
  • Erdogan Says He Told ‘New Friend’ at Central Bank to Cut Rates
  • Bain, KKR Said Among Bidders for Hong Kong Gaming Firm Leyou
  • Record Delhi Pollution Prompt Tourists to Head for the Hills

Major European bourses (Euro Stoxx 50 +0.2%) are mostly in positive territory, following on from a strong APAC session in which global sentiment was buoyed by positive rhetoric from Chinese President Xi and an FT article that hinted that the US is mulling rolling back tariffs on Chinese imports, albeit it was unclear if US President Trump will sign this off. Sectors are mixed; with energy (+1.1%) in the lead, and materials (+0.5%) and financials (+0.2%) also as curve steepening supports the latter. In terms of individual movers; strong earnings from Lundbeck (+5.4%), Hugo Boss (-2.2%), AB Foods (+4.7%) and Evonik (+4.5%) has seen their respective share prices advance. Meanwhile, soft earnings from Pandora (-15.1%) and Adecco (-1.1%) has seen their shares come under pressure, with the former cutting guidance amid unrest in Hong Kong. Finally, Air France (-5.7%) is lower after announcing that it targets a medium-term operating margin of 7-8% and a medium-term positive adjusted FCF.

Top European News

  • RBS Eyes Euro Bond as U.K. Bank Sales Rebound From Brexit Plunge
  • Germany Boosts Electric-Car Incentives to Stimulate Demand
  • Credit Agricole Upgrades Pound Forecasts as Brexit Fog Lifts
  • Polish Cuts to Judges’ Retirement Age Violate EU Law, Court Says
  • U.K. Services Stagnate Amid Persistent Brexit Uncertainty

In FX, the non-US Dollars are all benefiting from the general upturn in risk sentiment fuelled mainly by further signs that the US-China are moving closer towards Phase 1 of their trade pact, and with the Aussie also taking on board the latest RBA assertion that the domestic economy may be over the worst on the basis that there may be less pressure or reason for further easing in the near term. Aud/Usd has reclaimed 0.6900+ status in response and is pulling away from hefty option expiry interest at the big figure (1.5 bn), while Aud/Nzd is firmly back above 1.0750 even though the Kiwi is shadowing its Antipodean counterpart and the Yuan after a 5 bp MLF rate reduction from the PBoC. Nzd/Usd has rebounded through 0.6400 ahead of NZ jobs and labour cost data that follow the GDT auction, while Usd/Cnh trades sub-7.0000 vs a 7.0385 Usd/Cny mid-point fix overnight. Elsewhere, Usd/Cad is eyeing 1.3100 before the Loonie focuses of Canadian trade for some independent impetus.

  • CHF/JPY – In stark contrast to the above, more safe-haven unwinding has undermined the Franc and Yen, as Usd/Chf inches over 0.9900 and Usd/Jpy creeps further towards 109.00 and 200 DMA resistance just above (109.03).
  • GBP/EUR – Narrowly mixed vs the Greenback as the DXY straddles 97.500, with Cable keeping tabs on the 1.2900 handle where 1.5 bn expiries reside and Sterling deriving some support from another better than forecast UK PMI as the election preamble continues. However, the Pound is still biding time on Brexit uncertainty and meandering against the Euro between 0.8645-25 parameters, as Eur/Usd hovers above 1.1100 in a similarly tight band (1.1113-40) amidst little in the way of specific drivers for the single currency.
  • SEK/NOK – The aforementioned bullish/upbeat mood has also underpinned the Scandi Crowns and enabled the Swedish Krona to overlook disappointing data (ip and new manufacturing orders) plus pretty dovish or less hawkish Riksbank minutes on balance given a couple of reservations about telegraphing a repo hike in December. Indeed, Eur/Sek remains below 10.7000 and Eur/Nok is following suit amidst the backdrop of firm oil prices that helped the cross test 10.1350 ahead of decent technical support spanning 10.1300-10.1250.
  • EM – More post-CPI weakness for the Lira, as Turkish President Erdogan reiterates that the US is not complying with its side of the deal struck on Syria and piles pressure on the CBRT to slash rates again, with Usd/Try flirting with the 5.7500 level at one stage. Conversely, the Rand continues to bask in SA ratings relief rather than balk at ongoing Eskom power problems, as Usd/Zar probes 14.7000 to the downside.
  • RBA kept the Cash Rate unchanged at 0.75% as expected. RBA repeated its statement that rates are to remain low for an extended period and that it will ease policy if needed to support sustainable growth, while it also reiterated that a gentle turning point appears to have been reached. RBA added that its central scenario is for underlying inflation to be close to 2.00% in 2020 and 2021, while it sees economic growth at around 2.25% this year and to pick up gradually to around 3.00% in 2021.

In commodities, crude markets are on the front foot this morning as yesterday’s pre-settlement losses are steadily unwound amid the broader market risk appetite. WTI Dec’ 19 and Brent Jan’ 20 futures are well off of USD 56.30/bbl and USD 61.88/bbl lows, with the latter briefly eclipsing yesterday’s USD 62.79/bbl high (which is also the 200 DMA). In terms of oil price forecasts; UBS expects oil prices to weaken in H1 2020, with Brent prices testing USD 55/bbl by mid-2020 on account of strong supply growth in non-OPEC states. They do, however, expect a price recovery in H2 2020 with prices reaching USD 60/bbl by end-2020. In terms of newsflow; comments from Iranian President Rouhani suggesting a further reduction in nuclear commitments failed to spoke the market – yesterday the head of Iran's Energy Authority said that the operation of 30 new centrifuges is underway. Elsewhere, OPEC released its world oil outlook; OPEC increased its mid-term outlook for non-OPEC supply growth and forecasted that oil demand in OECD countries is expected to move away from growth to a declining trend after 2020. Looking ahead, barring unexpected US/China trade updates, US ISM Non-manufacturing is likely the main demand side driver of sentiment, while traders will also be eyeing this evening’s API Inventory Data. In terms of the metals; gold is slightly lower on improved risk appetite with prices still holding above 1500/oz for now. Copper prices have advanced amid the constructive trade reports via the FT with the red metal eyeing 2.7/lb to the upside.

US Event Calendar

  • 8:30am: Trade Balance, est. $52.4b deficit, prior $54.9b deficit
  • 9:45am: Markit US Services PMI, est. 51, prior 51
  • 9:45am: Markit US Composite PMI, prior 51.2
  • 10am: JOLTS Job Openings, est. 7,063, prior 7,051
  • 10am: ISM Non-Manufacturing Index, est. 53.5, prior 52.6

DB's Jim Reid concludes the overnight wrap

A new week but a familiar story with another new record high for US stock markets even if they did pare gains towards the end of the session. In fact, you can take your pick this morning with the S&P 500, DOW, NASDAQ and Philly Semiconductor indices all at new highs. That follows respective gains of +0.37%, +0.42%, +0.56% and +2.19% yesterday with the DOW at a new record high for the first time since July while for the S&P that marks an impressive +7.78% return from the October 3rd intraday lows.

The reality is that it was actually a pretty quiet day for news with the talking points all centring around trade and specifically Wilbur Ross’s comments that we noted this time yesterday about optimism on reaching a “Phase One” trade deal with China and Huawei licenses coming “very shortly”. We also got the news from Politico later in the session that as part of the “Phase One” deal China wanted not just the December tariffs to be taken off the table, but also the removal of September’s tariffs as well. An FT story also suggested that President Trump’s administration is debating whether to remove some existing tariffs “as a concession to seal a partial deal that would pause the trade war with Beijing as early as this month”.

In any case, Ross’s positive comments on auto tariffs also helped European markets where the STOXX 600 jumped +1.00% to its highest level since August 2015. The auto sector unsurprisingly led the way with the STOXX automobiles and parts index up +2.92% and at its highest since April, putting the index up an impressive +18.23% since the October 8th intraday lows. The moves for equities did come with a small tick up in volatility though with the VIX closing up +0.53pts to 12.83. However, that still compares with the 15.8 average for the VIX this year and recent peak of 20.6 in October. So these are still very low levels of vol. Similarly the MOVE index of Treasury vol is around the lowest since early August while FX vol is also well below the recent peaks and in fact not far off the year to date lows. So, vol has notably collapsed in recent weeks.

This morning we’ve had some data out of China with the Caixin services PMI printing in line with consensus at 51.1 – down 0.2pts from the month prior – which means the composite has nudged up 0.1pts to 52.0. In other news the PBoC reduced the cost of one-year funds to banks for the first time since 2016 to 3.25% from 3.3%. On the back of that and the moves on Wall Street last night Asian markets are stronger this morning following Wall Street’s lead with the Nikkei (+1.96%) leading the way having been closed on Monday, with strong gains also for Chinese bourses including the Shanghai Comp (+0.99%) and CSI 300 (+1.18%). The Hang Seng and Kospi are also up +0.64% and +0.44% respectively.

Overnight we’ve also heard from BoJ governor Kuroda who suggested that the latest policy guidance showed the BoJ was tilted toward taking easing action. Kuroda also said that the BoJ had other stimulus options besides the negative rate. Speaking of which, the BoJ reduced its buying of bonds due in 10-25 years overnight in a likely bid to steepen the yield curve. As a result, yields on 10y JGBs are up +3.9bps this morning at -0.155%. Elsewhere, Chinese President Xi Jinping said in keynote speech at the China International Import Expo in Shanghai that China will further open up its market and pursue “higher-level” opening up while referring to tariffs on all trade. He also said that China will continue to cut tariffs and reduce transaction costs to boost imports while adding that China will strengthen intellectual-property protections, improving the legal framework and stepping up law enforcement.

Back to yesterday, where there were a few comments out of the Fed. Minneapolis Fed President Neel Kashkari said that “I still think the balance of risks are somewhat to the downside, and I think the cost of cutting unnecessarily is much lower than the cost of not cutting, if we in fact need to”. San Francisco Fed President Daly said “it would take a material change in the outlook for me to think that further accommodation would be required”. Treasuries ended the day +6.7bps higher in yield while the 2s10s curve steepened by +3.7bps. Staying with the Fed, a date worth flagging is November 13th when Chair Powell will address the congressional Joint Economic Committee in Washington.

As for the data that was out yesterday, in the US the final September core capital goods orders data were revised down one-tenth to -0.6% mom. Durable goods ex transportation were also revised down to -0.4% mom while headline factory orders were confirmed at -0.6% mom. Also of interest was the Fed’s senior loan officer survey, which showed that C&I lending standards tightened in Q4 by the most since 2016 while demand for C&I loans by large and medium firms was the weakest since 2010. Also, banks’ willingness to lend to consumer was near the lowest level this cycle with net tightening of standards for everything except autos.

Meanwhile in Europe we got confirmation of the final October manufacturing PMIs. For the Euro Area the data was revised up 0.2pts from the flash to 45.9, which therefore also confirms a 0.2pt improvement from the September reading. Both Germany and France also improved 0.2pts from their respective flash readings to 42.1 and 50.7, respectively, while Italy was in line at 47.7 but Spain weaker than expected at 46.8 (vs. 47.5 expected). Our economists made an interesting point that the new orders-to-inventories gap, which tends to lead manufacturing output PMI by 2-3 months, moved to its least negative since June 2018 and for the first time in at least a couple of years is signalling an improvement in manufacturing output. Some green shots of optimism perhaps.

Here in the UK, the October construction PMI nudged up 0.9pts to 44.2 and 0.1pts ahead of expectations. That being said, the text did cite that “business optimism towards the year-ahead outlook for construction work remained among the weakest seen since 2012. Some construction firms noted that contract awards related to large-scale civil engineering projects had the potential to boost workloads in the next 12 months, although political uncertainty continued to cloud the outlook." Sterling weakened -0.48%. Ahead of the general election on December 12, we also got a poll from ICM yesterday, which had the Conservatives leading Labour by 38%-31%, a narrower lead for the Tories than the 8-16pt leads that the weekend polls were showing.

To the day ahead now, which this morning includes the remaining October PMIs in the UK (services and composite) and September PPI for the Euro Area. This afternoon in the US the focus will be on the aOctober ISM non-manufacturing while the final October services and composite PMI revisions, September trade balance and September JOLTS report are also released. Away from the data the ECB’s Villeroy is due to speak before the Fed’s Barkin, Kaplan and Kashkari all make comments. We’ll also get OPEC’s latest world oil outlook, while in the US, gubernatorial elections are taking place in Kentucky and Mississippi.

 

 


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