Markets: New Stories?

We no longer believe in Goldilocks and buying-the-dip. Markets have changed to another story, where only the self-reliant win – call it Hansel and Gretel. The sugar house of beguilement has been lower rates and the witches are the central bankers as they offer promises of stability but the present volatility is the oven and we seem clearly headed into it with temperatures rising even more.  The crumbs for finding the bull market home rest with earnings and the key is top-line and future outlooks for many of the 2018 high-flyers to hold so when they miss, its painful and scary. Positioning into month-end and expectations for a stronger US GDP in 3Q maybe key today as we look for stories to prevent a Black (or oven cooking) Friday.

Technicians are having a field day but the trend followers are suffering this month as the reversal hurts the long-term followers and the story shift seems abrupt. Perhaps the mid-term elections in the US will be key, perhaps more earnings, perhaps it will be a kind turn in US/China trade talk hopes – as some see the push by Abe and Xi to play nice as a driver, but trading on hope is expecting to be saved by crumbs more than reality.

The suspension of disbelief is needed to buy-the-dip here as many se it as catching a falling knife and filled with noise. The overnight news was light but important – with BOJ officials concerned about volatility– Bloomberg reported that some are pushing back on the talk of a creeping 0.2% 10Y break. This story didn’t do much to JPY, which still holds 112. The French and German consumer confidence stories are upbeat even as shares in both nations drop. The upticks will be watched against the US Michigan report later this morning. The contrast of mood stabilizing in a lower range in Europe while the US has a catch-up drop continues and with it is the divergence story that drove much of the 2018 price action. Risk in Europe is off, whether the US follows will rest on GDP and earnings. The USD is bid and seems set for a 97 breakout on the index, EM is in a world of hurt again with KRW over 1140 leading in Asia, CNY watching for a 6.96 stop-loss USD buying fest for 7 barrier break and 7.05, ERU back to 1.13 barrier watch. However, the FX barometer that is flashing red for risk-off to get worse is AUD/JPY again – 78.50 break brings 75 next. 

Question for the Day: Are economists too optimistic about Europe and too bearish about the US? The ECB 4Q professional forecasters survey is out this morning and it has 4Q HICP at 1.7% in 2018 and 1.7% in 2019 – unchanged from 3Q – but growth views are lower with 4Q 2018 2% from 2.2%, 2019 1.8% from 1.9%. The longer-term outlooks are unchanged with 1.9% for HICP and 1.6% for GDP.  

The key for markets maybe in the comparison to the US – with the Philadelphia Fed professional forecasters survey for 4Q not yet out, the 3Q version is the only basis for comparison. In 3Q the US forecasters raised 2019 views to 2.8% from 2.7% but cut the longer term- 2021 to 1.5% from 2.0%. This is the key point for markets and the USD, the turning point for the US/EU spread is 2020 and beyond with risk of FOMC cutting rates then while the ECB is still in normalization mode. The view of forecasters in the next 2-3 years is for more divergence not more convergence for global growth. 

What Happened?

• Japan October Tokyo core CPI rose 0.1% m/m, 1% y/y unchanged from September – more than 0.9% y/y expected. The Tokyo core-core CPI (ex food, energy) rose 0.1% m/m, 0.6% y/y after 0.7%. The overall headline CPI rose 0.1% m/m, 1.5% y/y after 1.3% y/y, For the month, Fuel and furniture and recreation all rose while clothing and eductation were flat. For the year, furniture is -1% y/y, housing up just 0.3% y/y, transport and communication up 0.4% y/y while fuel, electricity up 4.4%, food up 3%, culture and recreation up 1.8% y/y.
• PBOC Pan: Plans to stabilize FX expectations. The People's Bank of China will continue to use macro-control policies to stabilize market expectations for the yuan exchangerate, Pan Gongsheng, deputy governor of the PBOC said in a forum in Beijing today. Pan did not respond directly to a question as to whether the PBOC would take further measures to stop the yuan trading above 7 to the dollar. "China's economic fundamentals are stable and healthy, the macro leverage rate is basically stable, risks of fiscal finance are controllable, international balance of payment is overall balanced, forex reserves are abundant, which will provide support for the yuan to remain basically stable," Pan stressed.
• French September PPI rose 0.3% m/m, 3.5% y/y after 0.3% m/m, 3.6% y/y – as expected. This was the fifth monthly gain, with foreign market up PPI up 0.2% m/m, domestic up 0.3% m/m. Import prices rose 0.7% m/m, 4.5% y/y – mostly due to oil. Oil and products up 2.4% m/m, 33.5% y/y. Domestically - Mining/water rose 0.7% m/m, 5.2% y/y, Manufacturing up 0.2% m/m, 3.2% y/y. 

• French October Consumer Confidence rises to 95 from 94 – better than 94 expected  - but still below the 100 long-term average. Fears about unemployment 1-year forward fell to 5 from 17, prices rose to -15 from -16, major purchase intentions fell to -8 from -7, while financial situation outlook unchanged at -16.  
• German November GfK consumer morale seen flat at 10.6 – better than 10.5 expected. GfK continues to see private consumption up 1.5% y/y in real terms in Germany. The details for October were better up to 10.5 from 10.5. Economic and income expectations fell but propensity to buy rose. October economic outlook 19 from 27.1, income 54.4 from 57.9, buying plans 55.9 from 52.9 lifting the overall consumer climate 10.6 from 10.5 

Market Recap:

Equities: S&P500 futures are off 1.5% after gaining 1.86% yesterday. The focus was on after-the-bell topline misses from technology companies like Amazon. The Stoxx Europe 600 if off 1.7% - worst in 23-months – and the biggest drop in 2-weeks. The MSCI Asia Pacific also fell but less than the 1% yesterday with Korea and Hong Kong leading losses with tech and trade focus. The MSCI EM is off 1.2% - worst in 20-months. 

• Japan Nikkei off 0.4% to 21,184.60
• Korea Kospi off 1.75% to 2,027.15
• Hong Kong Hang Seng off 1.11% to 24,717.63
• China Shanghai Composite off 0.19% to 2,598.85
• Australia ASX flat at 5,759.60
• India NSE50 off 0.94% to 10,030.00
• UK FTSE so far off 1.5% to 6,898
• German DAX so far off 1.7% to 11,112
• French CAC40 so far off 2.2% to 4,921
• Italian FTSE so far off 1.7% to 18,509

Fixed Income: Another risk-off turn lifts EU bonds from the start, biggest winners are in the safe-havens after ECB held course on rate hikes/tapering yesterday. ECB Draghi has some chance to fix tape with another speech later this morning. German 10-year Bund yields off 5bps to 0.345% with focus back on 0.25% base. French OATs off 3bps to 0.735%, UK Gilts off 5.5bps to 1.385%. Periphery soggy with supply and usual political worries – Italy up 3.5bps to 3.525%, Spain flat at 1.58%, Portugal flat at 1.93% and Greece up 4.5bps to 4.235%. 

• Italy sold E3bn of new 2Y 0% Nov 2020 CTZ at 1.626% and 1.82 cover. Italy also sold E0.996bn of 10Y 1.3% May 2028 BTPei linkers at 2.34% with 1.38 cover – worse than previous 1.55% with 1.64 cover.
• US Bonds rally with equity focus, relief after auctions– 2Y off 5bps to 2.798%, 5Y off 5bps to 2.91%, 10Y off 3.7bps to 3.08% and 30Y off 3bps to 3.133%. 
• Japan JGBs jump higher with risk-off focus on equities, curve flatterdespite Bloomberg BOJ story– 2Y up 0.7bps to -0.131%, 5Y off 0.7bps to -0.092%, 10Y off 0.6bps to 0.099%, 30Y off 0.2bps to 0.85%. 
• Australian bonds leg higher tracking global equities, China doubts– 3Y off 0.3bps to 1.988%, 10Y off 1.5bps to 2.591%. 
• China PBOC skips open market operations, ending 5-days of injections, net drains CNY30bn on the day, but still net added CNY460bn for the week. 7-day rates fell 2bps to 2.575% while O/N fell 16bps to 2.026%. 10-year bond yields flat at 3.54%. 

Foreign Exchange: The US dollar index is up 0.1% to 96.75 with 96.75-96.56 range. The focus is on 97 and expectations for a run to 98.50 again. Emerging Markets are USD bid– EMEA: ZAR off 0.5% to 14.70, RUB off 0.35% to 65.85, TRY up 0.4% to 5.6125; ASIA: TWD flat at 90.99, KRW off 0.35% to 1142, INR off 0.25% to 73.47.

• EUR: 1.1345 off 0.25%. Range 1.134-1.1384 with ECB Draghi speech key along with GDP today but 1.13 risk is growing and 1.1050 follows. 
• JPY: 112.05 off 0.3%.Range 111.87-112.44 with EUR/JPY 127.15 off 0.6% - risk is 125.50 and 110.50 again.
• GBP: 1.2795 off 0.15%.Range 1.2784-1.2826 with EUR/GBP off 0.1% to .8865 with Brexit less important than EUR and 1.2750 key then 1.2550. 
• AUD: .7035 off 0.65%.Range .7021-.7082 with .70 the big watch and risk as metals and China hurt and other crosses. NZD off 0.75% to .6475 with breakdown a catch up trade and .6420 next. 
• CAD: 1.3135 up 0.5%.Range 1.3070-1.3154 the BOC hawkish tilt isn’t enough to save C$ from 1.3250 again with oil, growth and stocks driving
• CHF: 1.0020 up 0.3%. Range .99822-1.0020 with EUR/CHF 1.1370 flat. JPY more than CHF the focus for safe-havens despite Italy/Brexit and EUR risks? 1.00 break opens 1.0080 then 1.02. 
• CNY: 6.9510 fixed 0.16% weaker– lowest since Jan 2017 – from 6.9409, trades better to 6.9460 at the London open from 6.9498 close yesterday. Trades flat at 6.9450 with 6.9682-6.9332 range.

Commodities: Oil lower, gold higher, copper off 1.7% to $2.7820.

• Oil: $66.31 off 1.5%. Range $66.20-$67.04 lower with global growth doubts again tracking equities. Technical signals point to gradual grind to 200-day at $65.26 then $63.48 Aug 16 lows against 55-day at $69.42. Brent off 1.2% to $75.98 with $75.77 lows. More pain to risk here with 200-ay at $72.48 and $75 the key pivot against $80 resistance. 
• Gold: $1236.50 up 0.35%.Range $1232-$1238 – despite USD bid, its about risk-off mood and safe-haven status. Gold watching $1266 July 9 for confirmation of breakout and 200-day at $1273. Silver up 0.3% to $14.69 with $14.80 downtrend line key. Platnium off 0.15% to $826 while Palladium off 1.25% to $1090.35. 

Economic Calendar:

• 08:30 am US 3Q preliminary GDP 4.2%p 3.3%e / PCE prices 2%p 2%e
• 10:00 am US Oct final Michigan Consumer Sentiment 100.1p 99e
• 10:00 am ECB Draghi Speech
• 10:15 am ECB Coure Speech
• 11:00 am Canada Aug budget balance C$0.14bn p –C$0.97bn e