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Futures Slide After US-China APEC Clash, Apple Production Cuts

After a dramatic end to the APEC summit in Papua New Guniea which concluded in disarray, without agreement on a joint communique for the first time in its history amid the escalating rivalry between the United States and China, U.S. index futures initially traded sharply lower as investors digested signs that America-China trade tensions are set to persist, however they staged a modest rebound around the time Europe opened, and have traded mixed since amid subdued volumes as a holiday-shortened week begins in the US.

Last Friday, US stocks jumped after President Trump said that he might not impose more tariffs on Chinese goods after Beijing sent a list of measures it was willing to take to resolve trade tensions. However, tensions between the two superpowers were clearly on display at the APEC meeting over the weekend where Vice President Mike Pence said in a blunt speech that there would be no end to U.S. tariffs on $250 billion of Chinese goods until China changed its ways.
“The comments from Trump were seen as offering a glimmer of hope that further tariff action could be held in abeyance,” said NAB’s head of FX strategy, Ray Attrill. “The exchange of barbs between Pence and Chinese President Xi Jinping in PNG on the weekend continues to suggest this is unlikely.”
US Futures were also pressured following a report by the WSJ that Apple has cut iPhone production, creating turmoil for suppliers and sending AAPL stock 1.6% lower and pressuring Nasdaq futures.
Yet while early sentiment was downbeat following the APEC fiasco, US futures staged a rebound as shares in both Europe and Asia rose while Treasuries declined, the dollar faded an initial move higher as traders focused on the Fed’s new-found concerns over the global economy, and the pound advanced amid speculation that the worst may be over for Theresa May, since the potential for a vote of no confidence in May may be losing traction: the Sun reported that 42 lawmakers have sent letters of no confidence to Graham Brady, 6 more are needed to trigger a leadership challenge

Asia took a while to warm up but made a strong finish, with the Shanghai Composite closing 0.9% and Japan's Nikkei 0.7% higher, helping Europe start the week off strong too as a 1 percent jump in mining, tech and bank stocks helped traders shrug off last week’s Brexit woes. At the same time, stocks fell in Australia and New Zealand, where the Aussie and kiwi currencies dropped after U.S. Vice President Mike Pence attacked China at the weekend APEC summit.
Telecommunications and construction shares pushed Europe's Stoxx 600 Index higher, along with stocks in Italy, where Deputy Premier Luigi Di Maio said the government is ready for dialog with the European Commission over the country’s budget, which however seems just more semantics as Italy refused to concede to European budget demands.
Meanwhile, in addition to confusion over trade, the outlook for U.S. interest rates was also uncertain. While Federal Reserve policymakers are still signaling rate increases ahead, they also sounded more concerned about a potential global slowdown, leading markets to suspect the tightening cycle may not have much further to run and Morgan Stanley to write that "We Sense A Shift In Tone From The Fed."
Goldman Sachs also chimed in, saying it expected the pace of U.S. economic growth to slow toward the global average next year. The bank now sees a broad dollar decline next year, and revised its long-standing bearish view on the Japanese yen and tipped Latin American currencies, the Swedish krona, the Canadian, Australian and New Zealand dollars and the Israeli shekel to rise.
“We see several changes to the global economic backdrop which, combined with a few negative medium-run factors, point to more downside than upside to the broad dollar in 2019,” Goldman economists said in an outlook report. Goldman's bearish tilt will focus attention on an appearance by New York Fed President John Williams later on Monday to see if he echoes the same theme. As Reuters notes, investors have already cut odds of further hikes, with a December move now priced at 73%, down from over 90%. Futures imply rates around 2.74% for the end of next year, compared to 2.93% early this month.
As a result, yields on 10-year Treasurys declined to 3.08 percent, from a recent top of 3.25 percent while the currency market saw the dollar fade early gains while the pound rebounded from sharp losses last week as Theresa May prepared to appeal to business leaders to help deliver her Brexit deal as the premier fights almost insurmountable Parliamentary opposition.
May said on Sunday that toppling her would risk delaying Brexit as she faces the possibility of a leadership challenge from within her own party. With both pro-EU and pro-Brexit lawmakers unhappy with the draft agreement, it is not clear that she will be able to win the backing of parliament, increasing the risk that Britain will leave the EU without a deal.
Elsewhere, the Australian and New Zealand dollars held on to their declines after Mike Pence's attack on China this weekend fueled concern Sino-U.S. trade tensions will worsen; the yen neared a month-to-date high on the risk-aversion, onshore yuan weakened for the first time in five days.
Treasuries slipped while European bonds were mixed, with core notes slipping and peripherals rising led by Italy. In the U.S., trading activity may be thinned before the Thanksgiving holiday later this week.
In commodity markets, gold found support from the drop in the dollar and held at $1,1220.19. Oil prices suffered their sixth straight week of losses last week, but climbed toward $57 a barrel in New York on Monday. Bitcoin dropped further below $6,000, at one point touching a one-year intraday low.

Market Snapshot
Top Overnight News from Bloomberg:
Asian equity markets began the week somewhat cautious on lingering trade concerns and after disunity at the APEC summit over the weekend which failed to agree on a joint communique for the first time in history due to US-China tensions. ASX 200 (-0.6%) and Nikkei 225 (+0.6%) traded mixed in which nearly all of Australia’s sectors were in the red aside from miners, while Nikkei 225 was positive as participants digested mixed trade data which showed a jump in imports. Elsewhere, Hang Seng (+0.7%) and Shanghai Comp (+0.9%) were choppy amid trade-related uncertainty following the verbal jabs between US and China in which Chinese President Xi warned that countries which embraced protectionism were doomed to fail and US Vice President Pence later commented the US could more than double the tariffs imposed on Chinese goods. Finally, 10yr JGBs futures rose to match the YTD high as they tracked the recent upside in T-notes and with the BoJ also present in the market for JPY 800bln of JGBs in the belly to the short-end of the curve. APEC summit ended without an agreement on a joint communique for the first time in its history after China refused to sign amid US-China tensions, while there had been comments from Chinese President Xi Jinping that countries which embraced protectionism were "doomed to failure" and US Vice President Pence later commented that he was prepared to "more than double" the tariffs imposed on Chinese goods.
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Major European indices are in the green, with the outperforming FTSE MIB (+1.1%) bolstered by news that Luigi Gubitosi has been appointed as the new CEO of Telecom Italia (+4.3%). The SMI (-0.2%) gave up initial gains and is lagging its peers, weighed on Swatch (-4.0%) and Richemont (-1.4%) following unfavourable price outlook for both by Bank of America Merill Lynch. Sectors are mostly all in the green, with outperformance in telecom names, while energy names are lower given pullback in oil prices in recent trade and consumer discretionary names are weighed on by Renault (-7.0%), with the company shares extending losses following reports that Nissan’s boss has been arrested in Japan regarding allegations of financial violations. Renault shares are hit given the Renault-Nissan-Mitsubishi alliance. Elsewhere, BPost (-5.7%) shares are hit following a downgrade at HSBC, while Tele2 (+1.8%), are near the top of the Stoxx 600 after being upgraded at Berenberg.
Top European News
In FX, the Greenback has regained some composure following its downturn at the end of last week amidst soft US data and cautious if not concerned or outright dovish Fed rhetoric (Clarida conscious about contagion from slower global growth, Kaplan envisaging headwinds from rising debt and Harker opposed to a December rate hike), but the DXY remains capped below a key Fib level (96.590) and the Dollar overall is mixed vs major counterparts.
In commodities, Brent (+0.5%) and WTI (+0.1%) are in positive territory, albeit off highs, following market expectations that Saudi Arabia will steer OPEC and Russia to cut oil supply. Meanwhile, Russian Energy Minister Novak said the country is planning to sign an output agreement with OPEC at their December 6th meeting in Vienna. Overnight gains in the complex were driven by reports that Saudi is said to want oil prices around USD 80.00/bbl. Elsewhere, Iranian President Rouhani emerged on state TV and stated that the US has failed to reduce Iran’s oil exports to zero and Iran will continue to sell their crude. Conversely, Gold (-0.2%) prices fell this morning, with traders citing profit taking from last week’s gains, while Palladium is nearing parity with gold as an all-time high of USD 1185.4/oz was hit on Friday. Separately, copper is lower following tension between the US and China at the APEC summit which ended without an agreement on a joint communique for the first time in its history.
It's a fairly quiet start to the week on Monday with the only data of note being the Euro Area and the November NAHB housing market index reading in the US. Away from that, the Fed's Williams is due to speak in the afternoon, while BoJ Governor Kuroda, Bank of France Governor Villeroy de Galhau and his predecessor, Noyer, will all speak at the Europlace Financial Forum. Euro Area finance ministers are also due to gather in Brussels to seek to make progress on Franco-German plans to shore up the currency union.
US Event Calendar
DB's Jim Reid concludes the overnight wrap
Brexit was left in a bit of phoney war this weekend. We’re no closer to a leadership contest for Mrs May but it could still happen at any point. The Sun -citing their “extensive investigation” - has concluded that 42 lawmakers have sent letters of no-confidence in the PM (48 needed). Overall though more Conservative MPs are disliking the deal - and will vote against it - than will ask for a leadership battle in our opinion. The consensus that is forming amongst the Conservative MPs who dislike the Withdrawal Agreement is that it can be improved upon. This time next week we will have just had the Sunday EU summit to sign off their side of the deal but its not clear how meaningful tweaks could be made before this and before the agreement goes before UK Parliament in the next 2-3 weeks. The only thing that could be fleshed out is more on the future relationship between the UK and Europe as Mrs May travels to Brussels this week to try to progress on this. That might appease some MPs but likely not enough to help the vote pass. As such my personal view is that May stays on as leader, the EU offer no concession, the vote doesn’t get through Parliament and then the fun and games start. The UK may go back to Europe and ask for specific concessions at this point or we may end up with a path towards a hard Brexit or a second referendum. Quite binary options. For the EU maybe the gamble is to offer nothing and assume the UK Parliament eventually offers a second referendum and voters eventually decide to stay. This increases the risk of a cliff-edge hard Brexit but also one where no Brexit happens at all. This story has a lot of legs left in it.
There was lots in the press this weekend about Brexit but interestingly for me as a credit strategist by day, there was also a fair bit of negative press about credit with some of the more sensational articles suggesting that credit could soon blow up financial markets due to (amongst other things) the weight of US BBBs about to swamp the HY market, record levels of Cov-lite issuance and due to record high US corporate leverage. For us there needs to some perspective. We have been on the underweight side of credit all year, more weighted to a US underweight of late but that’s been more of a valuation play than over too much concerns about immediate credit quality. The US economy remains strong and credit deterioration is likely to remain idiosyncratic until it rolls over. At that point we will have big problems though and last week’s activity made us more confident liquidity will be bad when the cycle turns as we moved a fairly large amount on nervousness as much as anything else. GE, PG&E, plunging oil and the factors discussed above provided a jolt but we don’t think this is enough for now to impact the economy so credit will probably stabilise. However once there is actual broad economic weakness, this last week will be a dress rehearsal for the problems ahead and there will be little two-way activity with spreads gapping wider. However that’s for further down the cycle. For now credit’s main problem
has been it hadn’t responded enough to the pick up in vol. The good news is that this is starting to catch-up and correct. Last week, EU non-fin. IG spread widened by 13bps and HY by 45bps while those on US IG by 14bps and HY by 49bps. Big moves relative to a small down week in equities.
Looking ahead to the highlights for this week, I’d imagine if you’re in the US this will revolve around family, friends and perhaps Turkey as you sit down for Thanksgiving on Thursday. Outside of that we get the flash PMIs around the globe on Friday which in a period of nervousness about the global growth outlook will be scrutinised in thin post holiday trading. Black Friday will also mark the start of Xmas shopping season for retailers. Also worth noting is the European Commission's opinions on the budget plans of the Euro Area countries on Wednesday. While the EC formally has three weeks to provide an opinion on Italy's new fiscal plan following their budget resubmission last week, it's possible that they will issue this for Italy alongside this and thus kick starting the EDP process.
This morning in Asia, markets have kicked off the week on a positive note with the Nikkei (+0.48%), Hang Seng (+0.40%) and Shanghai Comp (+0.22%) all up along with most Asian markets. Elsewhere, futures on S&P 500 (-0.33%) are pointing towards a weaker start. In terms of overnight data releases, the UK Rightmove house prices index fell -0.2% yoy (-1.7% mom), first dip since 2011, led by declines in London (-2.4% yoy). Japan’s October adjusted trade balance stood at –JPY 302.7bn (vs. –JPY 48.3bn) as growth in imports (+19.9% yoy vs. +14.1% yoy expected) outpaced the growth in exports (+8.2% yoy vs. +8.9% yoy expected).
In other news, the US Vice President Pence delivered some sharp rhetoric on China over the weekend where he called upon countries to avoid taking debt from China as that would leave them indebted to China. He also added that the US wasn’t in a rush to end the trade war and would “not change course until China changes its ways.” Elsewhere, the APEC summit ended in disarray on Sunday after the US and China failed to agree on a joint statement, reflecting tensions due to the ongoing trade war. This is the first time since the summit began in 1993 that no joint statement was issued.
Looking back briefly now to last week before we focus on the full day-byday week ahead. Friday was an eventful day for market-moving rhetoric from policymakers, highlighted by Fed Vice Chair Clarida and President Trump. First, the dollar shed -0.52% after Clarida discussed the global economy and said there “is some evidence it’s slowing.” Two-year treasury yields rallied -3.8bps (-11.0bps on the week) and the market removed 6bps of Fed hikes through the end of next year (priced out a total of 16bps on the week). This came despite Clarida’s other remarks, which emphasised the strong US economy and his support for moving policy to a “neutral” level, consistent with the FOMC’s projections. Later in the session, Chicago Fed President Evans said that he too wants to move policy to neutral, and then another 50bps or so beyond that level.
Later on Friday, President Trump injected optimism on the trade policy front by telling reporters that China wants to make a deal and that he may not institute further tariffs. China has apparently offered a list of potential concessions, which could prove to be the basis of a trade deal at the 30 November G20 summit. Even though unnamed White House sources subsequently tried to soften expectations, the market rallied with the S&P 500 up +0.22% (-1.31% on the week). The DOW and Russell 2000 closed -2.22% and -1.42% on the week, though they both rallied on the President’s comments as well (+0.22% and +0.49% on Friday, respectively). After Pence’s weekend comments we should probably discount some of the above optimism.
Other markets were already closed when President Trump’s comments boosted sentiment. The STOXX 600 closed the week -2.20% (-0.20% on Friday), while UK equities outperformed marginally, with the FTSE 100 shedding only -1.29% on the week (-0.34% Friday). This reflected the weaker pound, which retreated -1.13% versus the dollar (+0.41% Friday) and -1.83% versus the euro (its worst such week since July 2017, and -0.38% on Friday). Asian equities were mixed, with the Shanghai Composite advancing +3.09% (+0.41% Friday) on trade optimism and the Nikkei down -2.56% (-0.57% Friday). German Bunds rallied -4.0bps last week, while peripheral spreads widened slightly with Italy leading the way. BTPs sold off +8.8bps (flat on Friday) as the government continued to escalate its confrontation with the European Commission.
It's a fairly quiet start to the week on Monday with the only data of note being September construction output data for the Euro Area and the November NAHB housing market index reading in the US. Away from that, the Fed's Williams is due to speak in the afternoon, while BoJ Governor Kuroda, Bank of France Governor Villeroy de Galhau and his predecessor, Noyer, will all speak at the Europlace Financial Forum. Euro Area finance ministers are also due to gather in Brussels to seek to make progress on Franco-German plans to shore up the currency union.
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Global Markets Rebound On Renewed Trade Hopes, Oil Slides For Record 12th Day

After Monday's vicious Veteran's Day selloff, which took place with the cash bond market closed, world markets have regained their footing as European stocks and S&P 500 futures modestly higher, recovering some of the previous session’s losses on renewed hopes (how many times have we heard this already) for progress in the U.S.-China trade dispute following a report that China's vice premier Liu He is meeting Steven Mnuchin in DC, even as Asian shares dropped overall, led by Japan's 2.1% drop as tech stocks were hit on iPhone demand fears.

Europe's Stoxx 600 Index rose for the first time in three days, with telecoms leading the way after Vodafone announced better than expected quarterly results, although the index was off its earlier highs. Contracts on the Dow, Nasdaq and S&P 500 were all firmer, and after sliding as low as 2,720 on Monday, S&P futures were 0.6% higher.

Focusing on Europe, today is the day the Italians will resubmit their budget after the EC requested a new fiscal plan. No material changes are expected. According to Deutsche Bank, the commission will continue to adopt a tough stance on Italy. It seems inevitable they will recommend an Excessive Deficit Procedure (EDP) in the next few weeks. So for now any grand bargain is far away.
Earlier, the Shanghai Comp. (+0.9%) and Hang Seng (+0.6%) both opened lower although gradually recovered amid hopes for an improvement in US-China trade relations amid reports that US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He spoke by phone on Friday about a deal that could ease trade tensions and with some US officials reportedly expecting China to make a trade offer ahead of the Trump-Xi meeting.

Other Asian indexes fared less well, and slid with Apple suppliers under pressure after the iPhone maker fell on signs of a deteriorating sales outlook. Meanwhile, underwhelming Chinese new loan data, ongoing Brexit concerns and Italian jitters have tempered enthusiasm. Germany's DAX outperforms peers this morning, while Italy's FTSE MIB traded mixed ahead of today's budget proposal deadline while local Italian banks are managing small gains.
Even as risk assets enjoyed a modest rebound, the commodity rout continued as WTI fell for a twelfth day, the longest losing streak on record after Trump criticized top OPEC producer Saudi Arabia’s plan to cut output, and was headed for its lowest close of 2018.

Treasuries climbed even as the Bloomberg Dollar Spot Index fell from an 18-month high as traders took profit on the greenback. The yen reversed to a loss as risk appetite slowly grew. The Britain’s pound pared some losses from the past three days after Prime Minister Theresa May said talks with the European Union were in the “endgame” and data showing U.K. wage growth accelerated.
Elsewhere, the euro recovered from its weakest against the dollar since June 2017, with Italy due to resubmit its budget. The country’s bonds pared some losses after a debt auction. Emerging market equities and currencies were steady.
In a curious development overnight, major state-owned Chinese banks were seen selling dollars at around 6.97 per dollar in the onshore spot foreign exchange market in early trade on Tuesday, traders told Bloomberg in the latest attempt by Beijing to arrest sharp losses in the local currency. The onshore spot market opened at 6.9681 per dollar, weakening to a low of 6.9703 at one point in early deals. “Big banks were selling (dollars) to defend the yuan,” said one of the traders. Traders suspect the authorities are keen to prevent the yuan from weakening too sharply before U.S. President Donald Trump and his Chinese counterpart President Xi Jinping’s meeting later this month.

So is the selling over for now? With trade worries hanging over markets for months and clouding the economic outlook, the Liu He came at an appropriate time, while comments from Chinese Premier Li Keqiang in Singapore Tuesday hinted at a more optimistic outlook; even so sentiment remains fragile as the Fed prepares to hike rates in just over a month.
“We always talk about that proverbial wall of worry and that wall right now is pretty high,” David Kudla, chief executive officer of Mainstay Capital Management, said on Bloomberg TV. “We have the issues in China with the growth concerns there, we have the issues in Europe with the battle between Italy and the EU, the U.K. getting ready for Brexit. There is some guidance lower on earnings, and a Federal Reserve that is going to raise rates.”
In other news, Bloomberg reported that the US Commerce Department submitted a draft recommendation on potential auto tariffs to the White House which are undergoing interagency review and are sign of US administration's increasing frustration at EU and Japan over lack of progress on auto trade issues, while the Section 232 recommendations will be discussed at White House trade meeting on Tuesday.
In the latest Brexit news, PM May said Brexit talks are now reaching their "endgame" and that both sides working hard to reach an agreement but added that significant issues still remain and that the government will not accept a deal at any cost. Furthermore, there were reports that UK PM May had rejected the latest draft Brexit deal with the EU as it didn’t provide a clear exit from the customs union if the EU began acting in bad faith in discussions regarding a future trade agreement.
Expected data include NFIB Small Business Optimism and monthly budget statement. Home Depot and Tyson are among companies reporting earnings.
Market Snapshot
Top Overnight News from Bloomberg
Major Asian equity markets mostly followed suit to the sell-off on Wall Street where tech led the declines after Apple shares dropped 5% following an outlook cut by supplier Lumentum Holdings and with energy names hit again after oil posted an 11th consecutive decline. ASX 200 (-1.8%) and Nikkei 225 (-2.1%) weakened from the open with the tech sector the underperformer in the region as another Apple supplier Japan Display reported a loss for H1 and downgraded its outlook. Furthermore, Japanese exporters suffered from recent flows into the JPY and large automakers were pressured after the US Commerce Department submitted a draft recommendation on potential auto tariffs to the White House. Elsewhere, Shanghai Comp. (+0.9%) and Hang Seng (+0.6%) both opened lower although gradually recovered amid hopes for an improvement in US-China trade relations amid reports that US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He spoke by phone on Friday about a deal that could ease trade tensions and with some US officials reportedly expecting China to make a trade offer ahead of the Trump-Xi meeting. Finally, 10yr JGBs were initially supported as the broad risk averse tone spurred a flight to safety, but then failed to hold on to the marginal gains as prices mirrored a pullback in T-notes despite stronger 30yr auction results.
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All major European indices are in the green, with the DAX (+0.6%) out in front, led by the likes of Lufthansa (+2.4%) who are benefiting from lower oil prices and Bayer (+0.3%) who presented an increase in earnings and confirmed their outlook. FTSE MIB (-0.3%) is lagging its peers weighed on by Telecom Italia (-1.4%) who removed their CEO to the dismay of Vivendi (23.9% shareholder). Italian financial names are also softer ahead of today’s budget re-submission deadline. Sectors are predominantly higher with outperformance in Telecoms post-earnings from Vodafone (+9.0%). Energy names lag, in-fitting with price action in the complex. Regarding individual equities, BTG (+9.2%) are leading the Euro Stoxx 600 after presenting an increase in half year revenue and operating profit. Elior Group (+8.0%) are off best levels but remain supported by news that they have hired advisors to initiate the sale of their catering business. Babcock (-2.5%) are under scrutiny from the Ministry of Defence over their handling of a contract relating to the UK’s Trident Submarines.
Top European News
In FX, An almost clear and defining line between the ‘so called’ risk or high beta/yield currencies vs safer-havens, as US-China trade tensions ease somewhat amidst reports of constructive discussions between key officials, while the YUAN also pares some losses with the aid of intervention via local banks overnight (said to have been defending 6.9700 vs the Usd). Hence, the DXY and broad Dollar are off Monday’s peaks, with the latter only maintaining gains/positive momentum vs the JPY above 114.00 and CHF (to a lesser degree) over 1.0100. However, the index remains underpinned around the 97.500 mark and still poised to build on yesterday’s new ytd high at 97.704 given high levels of ongoing uncertainty and global risks, with only one major chart hurdle seen ahead of 98.000 (97.871 Fib resistance). NZD/AUD - Outperforming on the aforementioned US-China ‘understanding’, with the Kiwi staying within striking distance of 0.6750 and the latter not far from 0.7200, but perhaps capped by mega option expiry interest at the strike (1.6 bn), while still feeling the adverse effects of bearish cross-positioning as Aud/Nzd inches further below 1.0700. GBP/EUCAD - All holding up relatively well, or at least consolidating off worst levels, with the Pound retesting 1.2900 vs the Greenback and 0.8700 vs the single currency on hopes if not high expectations of a Brexit breakthrough in time before tomorrow’s deadline. Note, some independent support from Sterling via firm UK wage data, but limited. The Eur is just keeping its head above 1.1200 vs the Usd awaiting Italy’s budget resubmission to the EU that is widely expected to reveal a concession or compromise, but no white flag. Option barriers at the big figure are underpinning the headline pair, though by the same token 1 bn expiry interest at 1.1250 are also keeping upside attempts in check. Looking at the Loonie, only fleeting intraday recoveries in oil prices are keeping the commodity unit pressured and it is struggling to stem losses beyond 1.3250.
In commodities, WTI (-2.2%) and Brent (-2.1%) are in the red after a failed intervention by US President Trump who tweeted that oil prices should be lower, and he hopes Saudi and OPEC do not cut oil production. Note, the monthly OPEC report to be published today at 1115GMT. Gold (+0.1%) is marginally up after reaching 16-month highs yesterday. Of note, traders are gathering in Shanghai for Asia Copper Week, as copper prices have fallen by approximately 17% this year, on track for their worst year since 2015. Intra-day, copper and other metals have moved higher following reports that Liu He, China’s top trade negotiator, may visit Washington in preparation for Trump Xi talks. OPEC monthly report: OPEC crude production rose 127k bpd in October to average 32.9mln bpd, according to secondary sources. Crude oil output increased mostly in the UAE, Saudi Arabia, Libya and Angola, while production declined in IR Iran, Venezuela, Kuwait and Nigeria. In 2018, oil demand growth is anticipated to increase by 1.5mln bpd, a downward revision of 40k bpd from last month’s projection. For 2019, world oil demand is forecast to grow by 1.29mln bpd, a minor downward adjustment of 70k bpd from the previous month’s assessment.
In terms of the day ahead, the November ZEW survey in Germany follows before we get the October NFIB small business optimism reading in the US and the October monthly budget statement. Away from that it’s a busy day at the ECB with Praet and Lautenschlaeger speaking this morning, before de Guindos speaks this evening. The Fed’s Kashkari, Brainard and Harker are also due to speak at various stages today. Today also marks the deadline set by the EU for Italy to revise its budget, so expect to see headlines around this.
US Event Calendar
DB's Jim Reid concludes the overnight wrap
In this morning’s FT, DB’s Head of Research and Chief Economist David Folkerts-Landau has penned a hard hitting op-ed on Italy. The crux of the argument is that Europe must cut a grand bargain with Italy and that another costly sovereign debt crisis is inevitable unless the confrontational approach of the EC gives way to greater co-operation. Italy has actually been a frugal member of the single currency with a cumulative primary surplus every year outside of the GFC. However, these surpluses have simply helped finance the interest on the legacy debt and debt/GDP has still climbed. Meanwhile, the associated spending cuts and austerity required to run a primary surplus have lowered the standard of living for the population and led us to the political situation we find ourselves at today.
To cut a long story short the grand bargain is in effect the ESM firepower helping to substantially lower Italy’s funding costs, allow for more public expenditure (e.g. infrastructure) in return for Italy undergoing structural reforms. A copy of the unabridged op-ed can be found here or in today’s FT.
Interestingly, today is the day the Italians will resubmit their budget after the EC requested a new fiscal plan. We expect no material changes. Our economists yesterday published a piece ( link ) looking at the next steps and conclude that, as contagion has been limited for now, the commission will continue to adopt a tough stance on Italy. It seems inevitable they will recommend an Excessive Deficit Procedure (EDP) in the next few weeks. So for now we’re far away from the grand bargain our Chief Economist thinks will eventually be needed.
As well as Italy it feels like there’s a lot to report today, which is not usually the case after a US holiday. Indeed those handful of Monday US holidays each year are usually an excuse for us to have an extra 10-15 minutes lie in the morning safe in the knowledge that not much will have happened the day before. However, the alarm clock was actually set a bit earlier this morning after a difficult start to the week, including a further slump for the once biggest company in the world, and a continuation of the recent under-performance in many of the current largest companies in the world within the tech sector.
To recap, Veteran’s Day thin equity trading saw the NASDAQ (-2.78%) and NYSE FANG (-4.11%) indices leading the declines followed closely by the S&P 500 (-1.97%), DOW (-2.32%) and Russell 2000 (-1.98%). Amazingly that is the 9th time this year the big 3 bourses (NASDAQ, S&P 500 and DOW) have fallen at least -1.90% on the same day. It didn’t happen in 2017, and only happened 11 times in 2015 and 2016 combined. The VIX also climbed just over 3pts yesterday to edge back above 20. The tech sector was clearly at the heart of yesterday’s selloff with a -5.04% decline for Apple, sparked by big falls for the company’s suppliers on the back of demand concerns. Apple’s share price is now back below $200 after spending 72 consecutive trading days above that level.
That move for Apple resulted in the small matter of $49bn of value being wiped from the company. By comparison General Electric lost just over $5bn yesterday but it was arguably the bigger headline grabber. Indeed the shares slumped -6.88% (-10.02% at the lows) after the company’s CEO, in an interview with CNBC yesterday, failed to reassure market fears about a weakening financial position. The CEO suggested that the company will now urgently sell assets to address leverage. Shares hit levels first seen in 1995 yesterday and have only been lower since, very briefly, during the financial crisis.
For a bit of perspective, the market cap of GE now is $69.5bn and it’s the 80th largest company in the S&P 500. Go back to August 2003 and it was the largest company in the index (and regularly the world between 1993-2005) at a market cap of $296bn, with $12bn of daylight to Microsoft in second place. The tech giant has since grown to be a $826bn company well over 10 times the size. GE’s market cap actually peaked in August 2000 at $594bn before tumbling first in the tech crash and then the GFC.
In credit GE is a top 15 issuer in both the US and EU indices. It’s recently been downgraded into the BBB bucket but as recently as September was trading 20bps inside BBB- bonds. However they crossed over at the end of that month and now trade up to 50bps wide to the average of the weakest notch of IG. This problem for GE has come at an interesting time as much discussion in recent months has been about BBBs as a % of the size of the HY market. According to Nick Burns in my team, post the downgrades of the automakers in 2005, US BBBs fell to 99% of the size of the HY market from a peak of 170% in 2001.
Since 2005, BBBs have been steadily rising as a percentage of HY climbing back above the previous peak in 2014 (175%) before extending that growth to a current level of 274%. It’s more difficult to compare EU BBBs to HY given the infancy of the EUR HY market pre-2004. But from a low of 219% BBBs have grown to 340% of EUR HY. So large BBB companies with a deteriorating credit story are prone to additional widening pressure as investors fear the risks of an eventual downgrade to HY and a swamping of paper into that market. This isn’t helping GE at the moment and may be a dress rehearsal for what happens for weaker and large BBB issuers in the next recession.
Brexit headlines were slightly overshadowed but make no mistake, we are getting to the point when binary outcomes are coming closer. Up until the end of last week I thought we’d get a deal agreed this week and then Parliament would be 50/50 as to whether they’d vote in favour of it. However, since last Friday if you've read all the relevant UK press articles its been hard to find much enthusiasm for the expected deal from anyone on any side of the debate within Parliament. At this stage I’m not sure I know what plan B is? Will this be a repeat of TARP back in 2008 and Parliament requires two goes at it? Problem with this is that it’s not clear that the EU is going to offer anything different on a second run at it. In terms of trading, the pound originally pared losses in the early afternoon yesterday as the EU’s Barnier confirmed yesterday that although an agreement had still not been reached the main elements of an exit treaty are ready to present to the UK cabinet according to the FT. Sterling gave up the Barnier related gains on the below Buzzfeed news and fell -0.93% on the day.
This news was that Brexit secretary Raab is leading some cabinet ministers towards telling Mrs May that the EU offer on the table is unacceptable. Mrs May herself last night said talks were “in the endgame”. The general view is that unless we have a deal by the end of tomorrow, the November EU summit is unlikely. As we know a deal is pretty much on the table however the issue remains whether or not the UK can run with it first based on whether the cabinet will accept it and secondly whether Parliament can. At the moment we are struggling to get past the first hurdle let alone the second. There was supposed to be a cabinet meeting on Brexit today but its status has been played down.
This morning in Asia, markets outside of China/HK are weak but off the lows of the session. The Nikkei (-2.19%), and Kospi (-0.46%) are all down along with most Asian markets but after opening equally weak the Shanghai Comp (+0.86%) and Hang Seng (+0.33%) are rallying hard from the lows. More positive trade noises from US VP Pence and Chinese officials in the last hour have helped. Sentiment didn’t start well though as last night Bloomberg reported that the White House is circulating a draft report by the US Commerce Department over whether to impose tariffs on automobile imports to protect national security while adding that the President Trump is scheduled to meet with senior members of his trade team today to discuss how to proceed on potential tariffs.
Elsewhere, futures on the S&P 500 (+0.44%) are pointing towards a more positive start and as an interesting aside the BoJ’s asset holding are now (JPY 553.6 tn) greater than Japan’s nominal GDP (JPY 552.8tn as of end June). To put this in perspective the Fed’s assets are about 20% of US GDP, while the ECB’s holdings are equal to around 40% of the euro-zone economy.
This US and Asian weakness follows on from earlier yesterday where Europe also struggled. The STOXX 600 ended the day down -1.01% with the tech sector sinking -3.66%. The DAX (-1.77%) fell even more and it’s amazing that it’s ahead of the FTSE MIB for one of the biggest total return declines in Europe this year of the main bourses (-12.33% vs. -10.37% respectively). Remarkable given that they are probably at the extreme ends economically within Europe. Even oil couldn’t eke out a gain after being up after Asia closed post the Saudi production cut story from Sunday. President Trump’s tweet criticising Saudi Arabia’s planned production cut weighed on prices late in the US session. By the close a near -3% fall had added to what is now an 11-day successive slump, extending the record run we discussed yesterday with data back to 1983. Elsewhere bond markets in Europe (Treasuries were closed for Veterans Day) were quiet with Bunds -0.9bps lower in yield and BTPs +3.5bps higher.
In terms of the day ahead, shortly after this hits your emails we’ll get the final October CPI revisions in Germany. Soon after that we’ll get the preliminary Q3 wages data in France before the focus turns to here in the UK with the September and October employment stats. The November ZEW survey in Germany follows before we get the October NFIB small business optimism reading in the US and the October monthly budget statement. Away from that it’s a busy day at the ECB with Praet and Lautenschlaeger speaking this morning, before de Guindos speaks this evening. The Fed’s Kashkari, Brainard and Harker are also due to speak at various stages today. As noted above, today also marks the deadline set by the EU for Italy to revise its budget, so expect to see headlines around this.
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