US Futures Rise After Chinese Stocks Soar; Italian Bonds Boosted By Moody's

After some initial weakness early in the Monday session which pushed S&P futures as low as 2,750 on Sunday night, below their Thursday lows, animal spirits were rekindled and S&P futures rebounded by almost 30 points from session lows...

 

... with global stocks and futures generally a sea of green...

 

 

... after Chinese stocks extended the torrid Friday rally, soaring by 4.1% and jumping the most in three years after Beijing doubled down its pledge of support for the economy and companies which included promises of tax cuts and coordinated official statements of support for stock markets.

A barrage of verbal interventions on Friday from authorities culminated with Chinese President Xi Jinping vowing "unwavering” support for the country’s private sector, which sent the Shanghai Composite back over 2,600 after the index touched a 4 year low below 2,500 late last week.

 

Chinese consumer stocks were among the best performers after the government released a detailed draft plan for personal income tax cuts over the weekend. China’s draft plan for sweeping personal tax cuts, together with a recent rise in the tax threshold, is a big positive for growth, writes Chang Shu, the Chief Asia Economist for Bloomberg Economics, adding that the move could buttress an economy suffering from tight funding conditions and provide a boost as a trade war intensifies. The news sent consumer staples surging with Yonghui Superstores jumping as much as 7.7%, most this year; Jiangsu Yanghe Brewery gains as much as 6.7%; Inner Mongolia Yili +5.8%; Moutai +2.5%, and so on.

Renewed Chinese optimism helped other Asian markets enjoy healthy gains, with Japan’s Nikkei rising 0.4%, while the MSCI Asia ex Japan rose 0.8%.

European stocks also opened higher after Moody’s kept Italy’s sovereign rating stable on Friday instead of cutting it to negative.  The decision fueled a rally in Italian government bonds and boosted shares in the country’s banks. “Moody’s opens the door for a euro bounce, while Chinese verbal support for the economy and markets has given us a risk-friendly mood to start the week,” Societe Generale said in a note to clients.

Optimism over the avoidance of an imminent downgrade to junk also sent Italian 10Y yields to two week lows, at least temporarily, before fading all gains after Italy submitted its response to the EU's criticism of its 2019 budget proposal.

 

 

Specifically, Italy's Treasury said the government is conscious its budget policy is not in line with EU's stability pact and the decision was hard but necessary; adding it is committed to reducing structural deficit in direction of medium term objective from 2020. Rome said it would go off path of structural deficit adjustment in 2019 but does not intend to further expand deficit in the 2020-21 period, and added that its recognises different views with EU but will continue to have constructive and loyal talks with EU. Ultimately, if debt/GDP and deficit/GDP dies not evolve as planned, government is committed to take all intervene adopting all necessary measures; the response concluded that strengthening Italian economy is in the interest of the EU

Following the release of Italy’s response to the EU, BTPs pared gains in choppy trade prompting Bunds to touch a new session high. BTP futures drop to the low of the day at 120.77 before rallying after Italy says it’s ready to intervene to ensure that objectives are respected, while Finance Minister Tria says Italy is ready to act if debt and deficit ratios are not in line with goals.

Meanwhile, in European equities, the Stoxx Europe 600 was up only 0.1% after gaining as much as 0.7% in early trade, while Italy’s FTSE MIB pared gains to 0.6% after gaining as much as 2%. The FTSE Italia All-Share Banks Index was up 0.4% after surging 3.6%; as a reminder, the sector index hit its lowest since late 2016 on Friday, and is down about 35% since mid-May

Amid concerns of a renewed standoff between Italy and the EU, the euro gave up a gain and the dollar erased a drop, while the pound retreated as the U.K. blurred more red lines in the Brexit negotiations, heightening the danger to Prime Minister Theresa May.

Meanwhile, as Bloomberg notes, risks still abound across global markets, from tension surrounding the death of a Saudi journalist and the ongoing trade showdown between some of the world’s biggest economies to Italian budget fears and President Donald Trump’s ad hoc actions ahead of American midterm elections. Still, equities are attempting to bounce back after a miserable couple of weeks, and company results from the likes of Amazon, Alphabet, Microsoft and Intel as well as U.S. growth data may provide a welcome distraction in the coming days.

Indeed, this will be the busiest week for corporate profits this earnings season with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting. Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22% in the third quarter, according to consensus data.

“The season on an absolute basis will likely wind up being ‘strong’ and the vast majority of companies will exceed consensus expectations,” said analysts at JPMorgan in a note. “However, headwinds are building at the margin in the form of U.S. dollar strength, supply chain disruptions owing to all the trade uncertainty, and rising costs. Even the mere hint of a turn in profit fundamentals would have severe ramifications.” The outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists, who cautioned that the U.S.-China trade war and tightening financial conditions would trigger the next downturn.

In the latest Brexit news, Prime Minister Theresa May will tell parliament that 95% of Britain’s divorce deal has now been settled. But she will repeat her opposition to the EU’s proposal for the land border with Northern Ireland and many see the risk of a leadership challenge being mounted.

In FX markets, an early advance in the euro lost steam as Italian bonds pared gains. Euro-area periphery debt was still bid after Moody’s kept Italy’s rating above junk with stable outlook, while the pound fell before U.K. Prime Minister May’s speech to parliament. The dollar was little changed, as were Treasuries; U.S. bonds traded choppy through Asian hours, initially gaining on Donald Trump’s plan to exit an arms control treaty with Russia, only to pare gains as a rally in Chinese stocks supported a swing in risk sentiment. The yen swung to a loss as the risk-off move was curbed while the Australia’s dollar fell to a one-week low after a by- election on the weekend looked set to deprive the federal government of its one-seat majority in parliament

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