Global Central Bank-Driven Stock Rally Fizzles; Crude Rebounds On Saudi Oil Production Cut Report

Until several minutes ago, the rebound in global equities observed this week on the back of continued easy central bank policy, appeared to be running out of steam as oil retreated from a two-week high and a dollar slide ended. Sovereign bonds were headed for their biggest weekly gain since July, buoyed by central bank commitments to keep monetary policies loose.

However, as noted just around 6am, Reuters reported, citing as it usually does various “anonymous sources”, that in a radical departure from its long-held policy of not cutting production, Saudi Arabia was prepared to cut production on the condition that Iran freezes output, as a result of which oil promptly spiked, erasing all the day’s losses, and more importantly, providing a support to US equity futures just as they were rolling over.

According to UBS oil analyst Giovanni Staunovo; “The answer from Iran is still pending, so there is no agreement yet,” adding that “considering where Saudi production stands, it’s a smart move to say they’re willing to cut production.”

Until the Reuters rumor, the MSCI All Country World Index had declined for the first time this week, while gold fell for the first time this week. Crude had fallen below $46 a barrel with investors weighing prospects for major producers to agree output constraints at talks next week in Algiers, however it then promptly jumped in the mid-$46 range on the Saudi-Iran report. China’s 10-year bond yield fell to its low for the month, while Germany’s increased following its biggest drop since June.

OPEC troubles aside, it was all central banks in the drivers’ seat as stocks, bonds and commodities climbed this week and the dollar lost ground versus almost all of its major peers after the Fed scaled back plans for interest-rate increases in 2017 and beyond. Investor sentiment also got a lift as the Bank of Japan strengthened its commitment to reviving inflation, while Indonesia and Turkey cut interest rates as New Zealand’s central bank signaled further easing. 

“There’s a very bullish case for equities considering that the Fed is now expecting only two rate hikes in 2017,” said James Woods, a strategist at Rivkin Securities in Sydney. “There are uncertainties that could shake up some volatility in the market, including the U.S. elections in November.”

Ironically, the S&P was on the cusp of all time highs as earnings continue rolling over: “Given that macro surprises typically lead earnings revisions by 4 weeks, renewed downside is building. We think 2017 earnings expectations are particularly vulnerable. In Europe, consensus is still expecting 12.9% EPS growth for the Stoxx 600, which would be the highest growth rate since 2010, and materially above our forecast of 5.9%,” Deutsche Bank strategists, including Wolf von Rotberg and Sebastian Raedler, write in note.

In economic news, we got the latest Europen Flash Mfg and Services PMI data, which was mixed, with German services PMI sliding, offset by far stronger than expected French service service sentiment:

  • Eurozone Sept. Flash Composite PMI 52.6; Est. 52.8
  • Eurozone Sept. Flash Services PMI 52.1; Est. 52.8
  • Eurozone Sept. Flash Manufacturing PMI 52.6; Est. 51.5
  • Germany Sept. Flash Composite PMI 52.7; Est 53.6
  • Germany Sept. Flash Services PMI 50.6; Est 52.1
  • Germany Sept. Flash Manufacturing PMI 54.3; Est 53.1
  • French Economy Contracts 0.1% Q/q in 2Q; Prelim Unchanged Q/q
  • France Sept. Flash Composite PMI 53.3 Vs 51.9; Est 51.8
  • France Sept. Flash Services PMI 54.1; Est 52
  • France Sept. Flash Manufacturing PMI 49.5; Est 48.5

After last week’s bond rout, the rates complex continued to stabilize. The Bloomberg Global Developed Sovereign Bond Index rose 1.3% this week through Thursday, when Janus Capital Group’s Bill Gross said a bear market in government debt has been delayed by the actions of monetary authorities. Bonds advanced across most of Asia on Friday, with China’s 10-year yield dropping two basis points to 2.74 percent. In Europe, Germany’s yield rose two basis points to minus 0.08 percent following a 10 basis point slide in the last session. 10Y U.S. Treasuries yielded 1.62 percent, little changed from Thursday and down seven basis points from a week ago. American government debt has handed investors an average return of 4.9 percent so far this year as the Fed refrained from adding to December’s interest-rate increase and former Fed Chairman Alan Greenspan said he expects the rally to be derailed by an expected pickup in inflation.

Everyone’s attention was on Japan however, where the 30-year bonds rose, against the BOJ’s desire for a steeper curve, pushing their yield down by five basis points to 0.47 percent. The move comes two days after the BOJ said it would shift the focus of monetary policy to shaping the yield curve, an adjustment that was seen driving long-term rates higher. “People may fear the BOJ cannot control the yield curve,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has about $66 billion in assets. “I believe the BOJ desires a steeper yield curve, but they can’t guarantee it.”

Market Snapshot

  • S&P 500 futures down 0.1% to 2166
  • Stoxx 600 down 0.7% to 345
  • FTSE 100 down 0.3% to 6894
  • DAX down 0.3% to 10644
  • German 10Yr yield up less than 1bp to -0.09%
  • Italian 10Yr yield up 1bp to 1.2%
  • Spanish 10Yr yield up 2bps to 0.94%
  • S&P GSCI Index down 1% to 355.4
  • MSCI Asia Pacific down 0.2% to 142
  • Nikkei 225 down 0.3% to 16754
  • Hang Seng down 0.3% to 23686
  • Shanghai Composite down 0.3% to 3034
  • S&P/ASX 200 up 1.1% to 5431
  • U.S. 10-yr yield down less than 1bp to 1.61%
  • Dollar Index up 0.05% to 95.49
  • WTI Crude futures up 0.2% to $46.53
  • Brent Futures up 1.3% to $48.13
  • Gold spot down 0.1% to $1,335
  • Silver spot down 1% to $19.80

Global Headline News

  • Erdogan to Turkey’s Central Bank: Nice Rate Cut, Do More Please: Turkey’s President speaks in interview; Erdogan Doesn’t Care at All If Turkey Gets Downgraded to Junk: Turkish president says credit ratings are based on politics
  • Brexit Haunts EU Trade Plans as Nations Push to Save Pacts: EU govts meet in Bratislava today to discuss the bloc’s flagging trade deals
  • EU Opposes Key Plank of Basel’s Global Bank Capital-Rule Revamp: 28-nation bloc objects to capital floors in risk measurement
  • Bank Regulators Join Investigation Into JPMorgan’s China Hiring: Fed said to seek as much as $62m in possible settlement
  • Yahoo Tipped Off to Hack by Report of Data Dump on Dark Web: Attacker was a ‘state-sponsored actor,’ co. says
  • Facebook Says It Gave Advertisers Inflated Video Metrics: co. says error has been fixed
  • CBOE Said in Talks to Buy Exchange Operator Bats Global: Deal would push CBOE beyond the niche business of options
  • RWE Innogy IPO Range Values Green Energy Unit at $22b: Capital increase to raise up to EU2b for Innogy
  • Nets Starts Trading as IPO Values Payment Firm at $4.5b: stock started trading in Copenhagen after an offer period to buy shares ended early
  • LSE CEO Sees Incentives for Euro Clearing in Single Location: Rolet says clearing complexity makes change difficult, few financial centers can accommodate clearing business

Looking at regional markets, we start in Asia where stocks traded mixed to end a tumultuous central bank-driven week on a quiet note. The region’s bourses opened mostly higher following the firm lead from Wall St. where stocks extended on the FOMC-inspired gains and the NASDAQ finished at a fresh-record closing high, although upside was capped amid a lack of catalyst to spur further price action. Nikkei 225 (-0.3%) underperformed on return from holiday amid a firmer JPY, with USD/JPY having declined nearly 2 points since the last cash close in Tokyo. However, the index then rebounded from its lows as USD/JPY recovered, while some analysts also noted cautiousness as the BoJ reshuffles its ETF buying program in favour of funds that track the TOPIX rather than those that track the Nikkei 225. ASX 200 (+1.0%) took the impetus from Wall St gains, while Shanghai Comp (-0.3%) and Hang Seng (-0.3%) were indecisive despite the PBoC injecting a net CNY 670bn in to the interbank market for the week, as the ample liquidity dampened some hopes for more meaningful policy adjustments. 10yr JGBs saw subdued trade for the session with demand dampened amid an enhanced-liquidity auction for 10yr, 20yr and 30yr JGBs, in which the b/c declined from last month.

Top Asian News

  • Watch Next Friday’s BOJ Statement to Gauge Its Yield-Curve Plans: New tools mean officials can buy at any time, in any amount
  • Bond Bulls Curb Their Enthusiasm in China’s Leverage Crackdown: Central bank tweaks to money markets boosting funding costs
  • Yuan Cost Spike Spreads Onshore as Shibor at Seven-Month High: Borrowing costs climb before week-long mainland holidays
  • Whale Ignored as Japan Stock Fund Inflows Fall to 2012 Low: Mutual funds are least loved since before Abe came to power
  • Biggest India Central Bank Overhaul to Ease Ties With State: New monetary policy panel marks biggest reform in RBI history
  • China’s Xi Puts His Stamp on Communist Party With Promotions: Provincial posts key to rising in upcoming party reshuffle
  • China Minsheng Banking Said Planning ~$1.5B Preferred Shrs Issue: Co. plans to sell ~$1.5b of preferred shares in Hong Kong as early as next month

In Europem it has been a quiet morning with the major indices residing in minor negative territory, although when considering the gains seen yesterday, these are relatively small moves. Financials underperform by some margin, with Deutsche Bank down nearly 2% on reports that lawmakers in the country are growing concerned about the company’s troubles. The thin conditions in markets is seen in Fixed income, the Bund higher by a mere 3 ticks Given the light news flow data has taken extra focus, with PMI’s from across the continent showing Eurozone nations in varying degrees of health. Firstly, the French data beat on expectations across the board. PMIs from neighbouring Germany were more mixed however, with a strong reading in manufacturing whilst printing misses on both composite and services. The data in Germany reflected that of the continent as whole and the mixed readings led to a lack of direction being provided to European asset classes.

Top European News

  • Deutsche Bank’s Woes Said to Rouse German Concern Over Finances: Social Democrat lawmakers said to discuss bank’s finances
  • Lundbeck Falls After Alzheimer’s Drug Fails in Late-Stage Study: co.’s experimental Alzheimer’s drug failed to meet targets in a final-stage patient trial
  • Sports Direct’s Founder Ashley Named CEO After His ‘Right Arm’ Quits: Ashley replaces CEO Dave Forsey, who quit yday
  • Commerzbank May Cut as Many as 5,000 Jobs, Boersen-Zeitung Says: Lender may merge some corporate units with investment bank
  • Maersk Ends Mega-Ship Building Era With New Acquisition Plans: Chairman prefers to buy rivals instead of ordering new ships
  • Anglo American Hires Fortescue’s Debt Slashing Finance Chief: co. named Stephen Pearce its new finance director

In FX, the Bloomberg Dollar Spot Index was little changed, headed for a 0.8 percent weekly loss. The yen was down 0.1 percent, trimming its weekly advance to 1.4 percent, after officials signaled they may intervene to counter appreciation and Goldman Sachs Group Inc. reiterated its view that the currency will fall. Japan’s Chief Cabinet Secretary Yoshihide Suga said Friday that moves in the foreign-exchange market have been very sensitive and policy makers are ready to react if the situation continues. A day earlier, the top currency official said speculative moves were undesirable and market activity was being closely monitored. The kiwi dropped 0.5 percent amid growing expectations that New Zealand’s central bank will cut interest rates at its next policy meeting in November.

In commodities, The Bloomberg Commodity Index fell 0.4 percent, its first decline in more than a week. Crude oil slipped as much as 1.2 percent to $45.76 a barrel in New York, before rebounding into the mid $46 range on a Reuters report that Saudi Arabia was prepared to cut production if Iran agrees to a supply freeze. Even if the Reuters report is confirmed to again be bogus, crude is still up more than 6% for the week before major producers meet Sept. 28 in Algiers to discuss ways to stabilize prices. The two nations’ rivalry derailed an oil supply accord earlier this year and Iraq’s OPEC representative said crude prices are unlikely to climb above $50 unless the group cuts production. “If there is an agreement, it’ll probably be a token deal where nations agree to a production cap near the upper limit of capacity,” said Ric Spooner, an analyst at CMC Markets in Sydney. “The market is still in surplus and hasn’t yet arrived at a balance.”

Looking at the day ahead, in the US the only data due out is the flash manufacturing PMI which the market consensus expects to stay unchanged at 52.0. Away from the data it’s a reasonably busy day for Fedspeak which should keep the market interested. Harker, Mester and Lockhart are all due to take part in a panel discussion at a conference, while Kaplan will also speak. The ECB’s Weidmann is also scheduled to speak this afternoon.

* * *

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, Sept. P, est. 52 (prior 52)
  • 12:00am: Fed’s Harker, Mester and Lockhart speak in Philadelphia

Bulletin Headline Summary From RanSquawk and Bloomberg

  • European equities trade modestly lower in what has been a quiet session thus far with energy names lower ahead of next week’s Algiers meeting
  • This morning’s slew of Eurozone PMI data did little to instigate price action with the data showing a mixed picture of the region’s health
  • Looking ahead, highlights include Highlights Include US Manufacturing PMI, Canadian CPI and Retail sales and Fed’s Harker, Lockhart and Mester all speak
  • Treasuries little changed in overnight trading while global stocks drop along with oil and gold and USD rises versus most G-10 peers.
  • Deutsche Bank’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities
  • Junior bonds of Banca Monte dei Paschi di Siena SpA fell to an eight-month low after a media report said the troubled Italian bank may require state support
  • One-hundred thousand jobs would be at risk if clearing leaves the U.K., said London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet
  • Commerzbank AG is preparing to cut as many as 5,000 jobs under a new strategy by Chief Executive Officer Martin Zielke to boost profitability, Boersen-Zeitung reported, without saying where it obtained the information
  • The European Union, home to nearly half of the world’s biggest banks, rejects a central plank of the global capital-rule overhaul under debate in the Basel Committee on Banking Supervision, according to an EU official
  • The euro-area economy saw its pace of growth dip to a 20- month low at the end of the third quarter, highlighting the challenge facing policy makers to build momentum
  • Turkish President Recep Tayyip Erdogan said that any followers of the Gulen religious movement must be removed from the central bank, one of the only major Turkish institutions that hasn’t publicized widespread purges since a failed coup in July

* * *

DB’s Jim Reid concludes the overnight wrap

The toughest thing over the last 24 hours has been finding an asset that has gone down. Post the FOMC conclusion we’ve seen global equities rally in unison, bond yields fall sharply, credit tighten, EM rejoice and commodities stride confidently on. If you’re really looking for weakness then the following is the (small) list of assets we found that have fallen post-FOMC, not including the obvious decline for the Dollar: Egyptian, Slovakian and Macedonian equities, Corn, Natural Gas, Taiwanese Dollar, Kiwi Dollar and the Chile 2y bond. On another day that might look like a reasonably diversified portfolio!

The ‘everything’ rally seems to have been sparked by a relief that the uncertainty of the Fed is now out the way and markets feel they have a window to exploit carry. Yesterday the S&P 500 closed +0.65% and at one stage traded to within half a percent of its all time highs. It also takes the post FOMC rally to +1.53% for the S&P with real estate names leading the way. European equities were earlier playing catch up with the Stoxx 600 (+1.58%) and DAX (+2.28%) rising steeply. The vast majority of emerging markets have also had a bumper last 35 hours or so. Bourses in Mexico, South Africa, Argentina and Brazil are all up 2-3%. It’s much the same in credit too. CDX IG was another 2.5bps tighter yesterday and is now 5bps tighter in the same time frame, while the iTraxx Main and Crossover indices rallied 3bps and 14bps respectively yesterday. Oil has also been firm with WTI now +1.10% since the FOMC despite dropping this morning in Asia. The VIX has also fallen back to a two-week low following a 20% or so drop.

The bond market has also responded as though it’s been giving the green light for the next few months. The Treasury curve flattened for a second consecutive day. 2y yields were fairly unchanged at 0.772%, but 10y yields were down another 3.3bps to 1.619% and 30y yields finished down closer to 4bps at 2.336%. 10y Treasury yields are now down some 8bps or so in yield post the FOMC but even more impressive have been the moves in European bond markets. 10y Bunds have in fact been one of the biggest outperformers after yields tumbled 9.8bps yesterday to -0.099% – the strongest day since the immediate post-Brexit reaction on June 24th. Other sovereign bond yields in Europe closed 6-10bps lower yesterday.

So as we move slightly away from focusing as much on central banks, we’ll slowly now build to the US elections as the next major observable macro test. Monday’s first debate between the candidates will mark the start of the serious battle ahead. At a micro level earnings season in the US is also just around the corner so that’ll be another important upcoming period.

Switching over to the latest in Asia this morning where Japan is open again following a public holiday yesterday. After initially falling half a percent or so at the open, the Nikkei (-0.12%) has pared most of the early decline, while the Topix is currently -0.26%. The reports of an undersea earthquake 250km from Japan’s coast is perhaps to blame and it’s resulted in the Yen (-0.34%) weakening a bit more this morning. There was good news on the data front though with Japan’s flash manufacturing PMI rising 0.8pts to 50.3 in September. Elsewhere it’s a bit more mixed. The Shanghai Comp (-0.10%) and CSI 300 (-0.28%) are both in the red, while the Hang Seng (+0.07%), Kospi (+0.11%) and ASX (+0.62%) have climbed. Sovereign bond markets have continued to rally. 10y JGB’s are 2bps lower at -0.056% while yields in the rest of Asia are generally 1-8bps lower.

Moving on. The economic data yesterday was largely focused on the US, although it was mainly second tier releases. Perhaps the most significant was the existing home sales reading in August which declined unexpectedly (-0.9% mom vs. +1.1% expected), mirroring the soft pending home sales report. The conference board’s leading index (-0.2% mom vs. 0.0% expected) was also soft for last month, although we did see a one-tenth upward revision to July’s print. On the positive side initial jobless claims were down 8k last week to 252k, while in the manufacturing sector the Kansas City Fed’s manufacturing survey was up a bumper 10pts to +6 (vs. -3 expected) this month, the strongest reading since December 2014. The associated text showed that ‘for the second time in four months we had a positive reading on our composite index’ and that ‘this followed 15 straight months of contraction and suggests regional factory activity may be stabilizing’.

Meanwhile, in Europe confidence indicators in France generally nudged up this month, while in the UK the CBI’s industrial trends survey for September showed no change in total orders at -5, but a 11pt rebound in the volume of output expectations for the next three months to +22 and so taking it back to pre Brexit levels. On that subject, there was a bit of focus over at the BoE yesterday with MPC member Kristin Forbes speaking to Bloomberg News. Forbes said that ‘we may be over-counting the effects’ of uncertainty following the Brexit outcome and that ‘I’ve worried a bit in our forecast that we control for many of the measures that simultaneously control for uncertainty, and then we put in uncertainty effects, so we’re putting them in twice’. Forbes also suggested that there could be some upward revisions to growth forecasts and that ‘at this point I don’t see the case for additional stimulus’. It’s worth noting here that Forbes is considered one of the more hawkish BoE committee members. Sterling was up +0.35% yesterday following those comments.

In one last mention of Brexit, today marks the first full quarter anniversary since the referendum. As a bit of fun, we’ve taken a look at the performance of various assets in that time and included two charts in the PDF today for you to look at. As the charts show, while not quite the biggest underperformer in our sample, the impact on Sterling (-12%) has been clearly evident. It’s actually Corn (-13%) which has been the worst performer although we’d imagine for reasons completely unrelated to Brexit. As a result of the move in the Pound though, looking at Sterling assets there are huge swings between performance in local currency terms and USD hedged terms. Indeed in local currency terms the FTSE 100 and Gilts have done well, returning an impressive +10% and +9% respectively. However this translates into losses of -3% and -5% respectively in US Dollar terms, and so underperforming the likes of the S&P 500 (+4%), EM Equities (+11%), Treasuries (+1%) and US credit (+2% to +4%). The top of the leaderboard, in local terms, is topped by the Hang Seng (+15%), Silver (+15%) and Brazilian Equities (+14%). The same three occupy the top spots in USD terms, albeit in a different order. The bottom of the leaderboard also shows that Oil (-8%) has struggled, while Italian Equities (-7%) and European Banks (-4%) have also weakened. Overall though, in local currency terms 32 out of 42 asset sample have seen positive returns, while 27 assets have seen positive returns in USD terms.

Looking at the day ahead, this morning in Europe we’ll first of all kick off with the final revisions to Q2 GDP in France (no change from the 0.0% qoq reading expected). After that it’s all about the PMI’s with the flash September numbers due out for the Euro area, Germany and France. The market is expecting a very modest deterioration in the composite for the Euro area (52.8 vs. 52.9 previously) led by the manufacturing sector. In the US this afternoon the only data due out is the flash manufacturing PMI which the market consensus expects to stay unchanged at 52.0. Away from the data it’s a reasonably busy day for Fedspeak which should keep the market interested. Harker, Mester and Lockhart are all due to take part in a panel discussion at a conference this evening at 5pm BST, while Kaplan will speak shortly after at 5.30pm BST. The ECB’s Weidmann is also scheduled to speak this afternoon.


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Author: Tyler Durden

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