Markets: Stuffed

Thanksgiving holiday in the US comes but once a year but the practice of being thankful should be a daily routine. Markets today are not practicing such and the feeling of being stuffed with food, drink and too much news hangs over any joy from yesterday’s bounce. There is a bit of respite from the lower volumes with the US markets shut. There is also a feeling that the bears have been stuffed with enough price capitulation as to make the risk of much lower prices less obvious.

The usual headlines drive some hope with Italian BTPs bid again despite a lackluster sale today – Italy deputy PM Di Maio sees room for dialogue with EU, perhaps responding finally to the EU sanction risks.  UK is bid on the “good progress” seen on Brexit. These are insufficient to keep equities bid in Europe. What seems to be lacking in risk appetite maybe blamed on the inevitable switch to sell bounces rather than buy dips now for risk assets. The chart that maybe worth thinking about in the context of why November is different than the obvious risk-off October comes from AUD/JPY – which clearly broke in October and recovered sharply only now its been seeping slowly back down. While today maybe a write-off for traders, its still worth thinking through what we all should be thankful for in the world, and in our portfolios.

Question for the Day: Is lower oil good? Short-answer – yes. The lower oil prices has put inflation fears lower in the US and Europe and this leaves room for a policy reaction function from the ECB and FOMC to further financial instability – read as equities lower, volatility higher. This is the central hope that many analysts are pushing for 2019 with a FOMC moving from normalization to neutral skipping restrictive in the process. The first line of thinking about oil prices starts with the effect on margins for companies using energy and on consumers using gasoline. The second is the knock-down effect on nations that produce oil vs. those that use it.

The US story is in-between as the world’s largest user and producer. For emerging markets this divide is simple and its showing up with India and Turkey the biggest winners. The truth is that most EM is winning on this as the MSCI EM index is up 1.6% in November. The inflation concerns from weaker FX and other factors are easing a bit. The real issue for central bankers both in EM and DM will be on the expectations for how long oil prices are lower– are we going to be in the $55-$65 zone for the next 6 months? The Brent Contango is the key barometer to watch. 

What Happened?

• Australia October Westpac Leading index drops to +0.08% from +0.41% - weaker than the +0.1% expected. Over the period Oct 2017-Apr 2018 growth average 0.89%, now the 6M average is 0.19%. Westpac expects momentum to slow in the economy 2H2018 to 2.5% - slightly below trend.
• Japan October core CPI holds 1% y/y– as expected. The core-core CPI rose 0.4% y/y also as expected while the headline CPI rose 0.2% m/m, 1.4% y/y after 1.2% y/y – as expected. Food inflation is 0% m/m, 2.4% y/y, fuel, electricity up 0.8% m/m, 4.4% y/y, transport and communications up 0.5% m/m, 1.9% y/y and culture/recreation up 0.9% m/m, 1.4% y/y.  Furniture up 1% m/m, but off 1% y/y while housing 0% m/m, -0.2% y/y. Overall, goods CPI is up 0.5% m/m, 2.6% y/y while services is up 0.2% m/m, 0.2% y/y. 

• French November Business Climate holds 104 – as expected.Growth is above the long-term 100 average but employment is lower of 2 to 105 – back to 1Q 2017 levels. By sector – services and wholesale trade stable, manufacturing and construction up 1 while retail rose 2 points – all are above their long-term averages. 

Market Recap:

Equities: S&P500 futures off 0.2% after rising 0.3% yesterday. The Stoxx Europe 600 is off 0.6% while the MSCI Asia Pacific rose 0.4% - its best gain in a week. The MSCI EM index rose 0.1%. 

• Japan Nikkei up 0.65% to 21,646.55
• Korea Kospi off 0.32% to 2,069.95
• Hong Kong Hang Seng up 0.18% to 26,019.41
• China Shanghai Composite off 0.23% to 2,645.43
• Australia ASX up 0.84% to 5,770.30
• India NSE50 off 0.69% to 10,526.75
• UK FTSE so far off 1% to 6,977
• German DAX so far off 0.55% to 11,181
• French CAC40 so far off 0.45% to 4,952.
• Italian FTSE so far off 0.3% to 18,675

Fixed Income: Focus is on UK and Italy still with risk mood lower – German Bund 10-year yields off 1bps to 0.365%, France off 1.7bps to 0.745%, UK Gilts up 2bps to 1.415% while Italy off 3.5bps to 3.43%, Spain off 1bps to 1.62% and Portugal off 2.7bps to 1.925% with Greece off 5bps to 4.555%. 

• Spain sold E1.007bn of 14Y 2.35% Jul 2033 Bonds at 2.116% with 1.45 cover. Also sold E1.305bn of 10Y 1.4% 2028 bonds at 1.607% with 1.57 cover and E0.831bn of 4Y 0.45% 2022 bonds at 0.31% with 4.63 cover. 
• France sold E987mn of linked bonds with 2.38 cover – reasonable sale– E407mn of 5Y 0.25% I/L at -109% with 2.3 cover, E360mn of 10Y 0.1% IL at -0.48% with 2.21 cover and E220mn of 12Y 0.7% IL at -0.45% with 2.82 cover.  France also sold E2.41bn of 5Y 0% BTAN at 0.06% with 2.37 cover and E2.55bn of 4Y 0% BTAN at -0.13% with 2.06 cover. 
• Italy sold E2.16bn of BTP Italia at 1.45%- with E1.3bn in institutional orders – very modest interest. 
• US Bonds closed for holiday
• Japan JGBs sold after weaker liquidity sale. 2Y up 0.4bps to -0.148%, 5Y up 0.2bps to -0.108%, 10Y up 0.3bps to 0.086%, 30Y off 0.2bps to 0.813%. The 5-15.5Y MOF enhanced liquidity sale saw bid/cover drop to 2.59 from 2.93 in October. 
• Australian bonds rally in catch up to US, curve flatter – 3Y off 1bps to 2.065%, 10Y off 3bps to 2.665%. 
• China PBOC skips open market operations again, keeps liquidity neutral. 

Foreign Exchange: The US dollar index is off 0.25% to 96.45 with range 96.31-96.71 with focus still on 96.30 and 95.90 support against 97 and 97.20 resistance. Emerging Markets is USD offered– EMEA: ZAR up 0.45% to 13.844, TRY up 0.45% to 5.285, RUB up 0.25% to 65.56 while ASIA: TWD flat at 30.897, KRW up 0.2% to 1129, INR up 1% to 70.695.  

• EUR: 1.1410 up 0.2%. Range 1.1382-1.1434 with focus on ECB and rates vs. Oil, growth. 
• JPY: 112.95 off 0.1%. Range 112.89-113.22 with EUR/JPY 128.90 up 0.1% - treading water with Friday holiday 112-114 stuck
• GBP: 1.2865 up 0.65%. Range 1.2771-1.2927 with EUR/GBP .8870 off 0.45% - all about EU/UK Brexit deal with 1.28-1.30 guideposts.
• AUD: .7255 of 0.1%. Range .7234-.7268 with focus on crosses, equities, commodities - .7150-.7320 consolidation
• CAD: 1.3225 flat. Range 1.3219-1.3245 – waiting for more data and BOC – 1.3180-1.3320 in play.
• CHF: .9950 flat.  Range .9922-.9953 with EUR/CHF 1.1350 up 0.25% - all about UK and Italy with .9880 and 1.0020 in play. 
• CNY: 6.9391 fixed 0.1% stronger from 6.9449 yesterday, off 0.1% to 6.9330 with 6.9199-.6.9404 range.

Commodities: Iron Ore rebounds from =3.2% yesterday to up 1% to $73.60 today. 

• Oil: $53.99 off 1.2%. Range $53.52-$54.82. Brent off 0.9% to $62.92. The EIA and API reports helped support the market yesterday but technical selling pressures return today.  
• Gold: $1228.35 up 0.2%. Range $1225-$1229 with USD one factor, risk worries the other, watching $1215-$1236. Silver up 0.1% to $14.52 with $14.35-$14.75. Platinum up 0.2% to $848 and Palladium off 0.1% to $1150.75. 

Economic Calendar: US markets are closed but EU news continues.

• 0730 am ECB meeting accounts  - here is the link.
• 0800 am South Africa interest rate decision– no change from 6.5% expected
• 0945 am BOC Wilkins on Canada Mortgage Panel
• 1000 am Eurozone Nov consumer confidence -2.7p -3.0e