Markets: Budgets

Winners and losers dominate the headlines with the Boston Red Sox in baseball and Bolsonaro in Brazil the winners. Merkel and Xi appear to be losing so far today and Mexico maybe the EM pain trade to watch as voters there reject the $13bn airport redevelopment. China shares back as the headline spook on global risk with CSI 300 down over 3% below the Oct 19 lows likely adding to Chinese spending plans ahead to bolster the economy and confidence in the midst of the US trade tariffs. Asia overall weaker but Europe bounces with Italian BTPs leading the rally after the relief from S&P ratings holding at BBB but with outlook downgraded to negative on Friday. The budget conflict with the EU remains, but fears about ECB and reinvestment options in 2019 dissipates. UK Autumn Budget today adds to GBP excitement on the day and highlights the focus on politics in globally, not just for Europe. There are plenty of other political/financial budget stories beyond the Italian one. Austria cancels its last two auctions for 2018 as it’s ahead of its financing needs. For the EUR mixed fears - Germany’s Merkel – according to Speigel and Bild– will not run for CDU party head again after another bruising defeat in Hesse elections. She speaks at noon ET in Berlin with the race to replace starting in earnest. The party conference is in December and her role as Chancellor will be in despite her desire to serve out her term until 2021. While the EUR has the volatility so far this morning, its about GBP this afternoon, with 1.25 still more likely than 1.30 opening the US markets to further USD buying and more US equity doubts. 

Question for the Day:Has the US economy peaked? The selling of shares in the US and world last week had a number of key drivers beyond the usual blame from FOMC rate hikes and Trump trade tariffs. The biggest set of concerns was about peak earnings and peak US growth. The WSJ pushes this story today- 

The GDP outlook for the US is lower for 2019 and the tax reform effects on business spending and investment a key part of that story. The focus for the week will be on US ISM and Jobs but the 4Q outlooks tied to 3Q earnings calls remains very much in play as well. There are 139 companies reporting in the week ahead. Price action around earnings surprises is clearly different this season and will beg explanation. FactSet notes with 48% of the S&P500 reporting 77% have beaten EPS –better than the 5Y average of 71% - and earning have also been better by 6.5% - also over the 5Y average of 4.6%. The earnings growth for 3Q now 22.5% from 19.3% that started the season on Sep 30. 

What Happened?

 

• Japan September retail sales -0.2% m/m, +2.1% y/y after +0.9% m/m, 2.7% y/y – better than 1.6% y/y expected but first monthly drop in 4-months. Sales were led by gasoline prices along with machine tools, food and beverages while car sales and on-line retailing fell. 
• Italy September PPI  rose 0.4% m/m, 4.7% y/y after 0.4% m/m, 4.4% y/y – more than the 0.3%, 3.8% y/y expected.  Domestics PPI rose 0.4% m/m, 5.6% y/y while foreign rose 0.1% m/m, 2.0% y/y. Construction prices fell 0.1% m/m, up 1.6% y/y. . 

• UK September mortgage approvals 65,269 after 66,101 – better than 64,750 expected.  The Consumer Credit net rose just 0.785bn after GBP1.215bn – less than GBP1.20bn expected – up just 7/7% y/y the slowest since June 2015. Car financing blamed for driving credit to 6-month lows. Mortgage lending rose to GBP3.892bn after GBP3.101bn.  Overall, M4 ex financials was 0% m/m, 1.1% 3M y/y. 

Market Recap:

Equities: The S&P500 futures are up 0.4% after losing 1.73% on Friday. The Stoxx Europe 600 is up 1.1% to 356.20 best gain in 2-weeks led by Italy. The MSCI Asia Pacific fell 0.2% - worst level in 18-months. The MSCI EM is up 0.2% with its first gain in a week. 

• Japan Nikkei off 0.16% to 21,149.80
• Korea Kospi off 1.53% to 1,996.05
• Hong Kong Hang Seng up 0.38% to 24,812.04
• China Shanghai Composite off 2.18% to 2,542.10
• Australia ASX up 0.94% to 5,813.80
• India NSE50 up 2.40% to 10,270.60
• UK FTSE so far up 1.30% to 7,030
• German DAX so far up 1.30% to 11,343
• French CAC40 so far up 0.25% to 4,980
• Italian FTSE so far up 2.30% to 19,125

Fixed Income: Risk-off then on in equities driving global bonds first, politics second and economic data third so far today. The BTP rally notable story and its hitting safe-havens hard. German 10-year Bund yields are up 4bps to 0.39%, French OATs up 1.5bps to 0.752% and UK Gilts up 2bps to 1.40% into the UK Autumn Budget.  Periphery rally extends – Italy off 13bps to 3.31%, Spain off 3.5bps to 1.53%, Portugal off 3bps to 1.865% and Greece off bps to 4.19%. 

• Italy sold E6bn of new 6-month April 30, 2019 BOT at 0.159% with 1.6 cover– previously 0.206% with 1.64 cover. 
• US Bonds are lower with focus on data, Nov refunding, Fed speakers – 2Y up 1.6bps to 2.822%, 5Y up 2.2bps to 2.929%, 10Y up 1.7bps to 3.092% and 30Y up 1.2bps to 3.322%. 
• Japan JGBs bid on equities, waiting for BOJ, with talk of changing buying plans – the week brings 10Y sale Thursday and BOJ meeting. 2Y up 0.1bps to -0.13%, 5Y off 0.4bps to -0.096%, 10Y off 0.3bps to +0.096%, 30Y off 0.6bps to 0.844%. 
• Australian bonds rally on China equities, focus next on PMI, CPI– 3Y off 2bps to 1.97% and 10Y off 2.5bps to 2.565%. 
• China PBOC skips open market operations, net drains CNY120bn. 7-day rates rose 5bps to 2.63% early on.  Bond yields fell with 2Y off 3bps to 3.04%, 5Y off 2.5bps to 3.31% and 10Y off 3bps to 3.53%. 

Foreign Exchange: The US dollar index is flat at 96.38 was 0.2% to 96.67 on Merkel headlines.  In EM FX, USD offered – EMEA USD offered– ZAR up 1% to 14.455, TRY up 1.1% to 5.53, RUB flat at 65.57 – while ASIA USD flat– TWD flat at 30.98, INR flat at 73.45, KRW flat at 1141. 

• EUR: 1.1405 up 0.1%.Range 1.1361-1.1417 – Merkel vs. risk-on in equities and Italy fears changing. 1.1350-1.15 keys.
• JPY: 112.20 up 0.3%.Range 111.78-112.26 with focus on equities first, BOJ second, US rates third. EUR/JPY 128.00 up 0.3% - watching 127-129 now. 
• GBP: 1.2835 up 0.1%.Range 1.2806-1.2843 with EUR/GBP .8885 flat – watching Budget and politics still with 1.2750-1.2950 keys.
• AUD: .7095 up 0.1%.Range .7082-.7120 with focus on NZD driving and metals / EU risk-on mood.  NZD up 0.3% to 0.6545 with 0.6580 key. 
• CAD: 1.3085 off 0.15%.Range 1.3077-1.3115 with focus on US rates, 1.3050 pivot and data ahead with trade/jobs key Friday.
• CHF: .9995 up 0.2%.Range .9968-1.0009 with EUR/CHF 1.1390 up 0.15% - less fear about Merkel more joy about Italy – leaves 1.00 tent with focus on 1.1450 retest with equities. 
• CNY: 6.9377 fixed 0.22% stronger from 6.9510 Friday. Trades off 0.2% to 6.9565 with range 6.9644-6.9384 and break out to 7.00 very much in play with equities. The RMB weekly index rose 0.18% to 92.32 last week – back to September 28 levels. 

Commodities: Oil lower, Gold lower, Copper up 0.2% to $2.8115. 

• Oil: $67.19 off 0.6%.Range $66.93-$67.95 with focus on 55-day resistance at $69.46 against 200-day base at $65.30. Brent $77.29 off 0.4% with focus on $75 base with 200-day behind at $73.90 against $80 resistance then $81.10 20-day ma. Oil watching Germany release strategic supply due to drought hitting Rhine shipments and Iran is reportedly shipping oil via private companies as it tries to counter US sanctions. 
• Gold: Gold $1229 off 0.4%.Range $1228-$1334 – watching $1220 Oct 22 lows and 55-day at $1203.70 against $1236, $1250 resistance. Silver $14.62 off 0.5% - watching $14.80 trendline resistance against $14.454 the Oct 18 lows. Platinum up 0.3% to $835 and Palladium up 0.25% to $1108.45. 

Economic Calendar:

• 0830 am US Sep personal income (m/m) 0.3%p 0.3%e / spending 0.3%p 0.4%e / core PCE 0%p 0.1%e
• 0945 am Chicago Fed Evans speech
• 1030 am Dallas Fed Oct Manufacturing Index 28.1p 25.1e
• 1130 UK Autumn Budget
• 0200 pm Fed Senior Loan Officer survey * may release this week