Global Stocks, Futures, Commodities, Dollar Fall Ahead Of Payrolls, Italy Vote

Did Jeff Gundlach do it again? Shortly after the DoubleLine manager told Reuters yesterday afternoon that the Trump rally is ending, that “stocks have peaked” and that it is “too late to buy the Trump trade”, US stocks tumbled to their sessions lows, and have continued to slide overnight, with S&P futures down 0.3%, alongside sliding Asian and European markets; oil and the dollar are also down with the only asset class catching a slight bid are 10Y bonds, whose yields are lower at 2.43% after reaching an 18 month high of 2.492% overnight ahead of today’s nonfarm payrolls report. The dollar was on course for its first weekly decline in four weeks as investors trimmed bets following recent gains.

However, the big risk event is not the job report, but Sunday’s Italian referendum, which has cast a blanket of concerns over Europe, and especially its banks, and has prompted financial markets to end the week the way they started, “overshadowed by caution as stocks fall with commodities, the yen advances and a selloff in Treasuries abates” in the words of Bloomberg.

“There is a great deal of trepidation among investors ahead of the
vote,” said Ken Odeluga, a market analyst at brokerage firm City Index
in London. “Even though we got a bounce yesterday after the OPEC
agreement, there is still a huge amount of interest on the bearish side
and shorts in place. It’s the focus for Europe, and we are going to see
more selling out of equities if we get a negative outcome. There is
certainly room for more volatility.”

Recent strong economic data from the U.S., including upbeat manufacturing activity and construction spending, have bolstered the view that the Fed will tighten monetary policy faster than expected to keep inflationary pressures in check. U.S. employers probably hired 179K workers in November, up from October, making it almost certain that the Federal Reserve will raise interest rates later this month. However, recent jitters that the ECB may announce a tapering of its own QE program next Thursday has become a bigger source of worry for markets than the Fed’s second rate hike in over a decade.

Today’s payroll number therefore comes at a very interesting time. The market consensus is for a 180k print which follows a 161k gain in October. The range though between economists is anywhere from 140k to 250k. Our US economists are at the lower end of the market and are forecasting a 150k reading which is below the 181k YTD and consistent with their view of a slower pace of economic activity in the current quarter. As always keep an eye on the other components of the report including the unemployment rate (consensus is for no change at 4.9%) and average hourly earnings (expected to rise +0.2% mom). The report is out at 8.30am.

The Stoxx Europe 600 Index extended its first weekly decline in a month and S&P 500 Index futures signaled further losses in U.S. equities as investors shift focus to a report on American payrolls. Oil led raw materials lower after climbing above $51 a barrel, Japan’s currency gained against all of its 16 major peers and gold rebounded from a 10-month low. While Treasuries edged higher, yields on 10-year notes are still near the highest since July 2015.

“Few investors want to have a strong position either way,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “Less risk is a good strategy.”

Global stocks are headed for their first weekly decline since Donald Trump’s election victory last month as investors turn more wary about the outlook for higher U.S. rates and potential for rising political risks in Europe. The rally in commodities following Trump’s victory and an OPEC deal this week to cut output has boosted inflation expectations and bets the Federal Reserve will hasten increases. Volatility in European stocks and its single currency has climbed ahead of Italy’s weekend referendum and Austria’s presidential vote.

European shares fell more than 1 percent, led by industrial and financial stocks. They have gained the most since Donald Trump won the U.S. presidential election last month. The Stoxx Europe 600 Index extended its first weekly decline in a month and S&P 500 Index futures signaled further losses in U.S. equities as investors shift focus to a report on American payrolls. Oil led raw materials lower after climbing above $51 a barrel, Japan’s currency gained against all of its 16 major peers and gold rebounded from a 10-month low. While Treasuries edged higher, yields on 10-year notes are still near the highest since July 2015.

The gap between Italian and German bond yields, which shot to a 2 1/2-year high of 188 basis points (bps) last week, fell to 167 bps on Friday. “I suspect on Monday it will be very difficult to have a definitive opinion on what could be the future government in Italy and the appetite for further reform,” said Franck Dixmier, global head of fixed income at AllianzGI, adding that the fund was ‘short’ Italian bonds.

In commodity markets, oil prices eased from the 16-month high they reached after the Organization of Petroleum Exporting Countries agreed to cut output for the first time since 2008. Russia also agreed to reduce production for the first time in 15 years. Brent crude futures eased 0.26 percent to $53.80 a barrel.

Bulletin Headline Summary From RanSquawk

  • As many look ahead to today’s nonfarm payroll report from the US, the European session has kicked off with equities firmly in the red
  • This morning saw flow back into the JPY, which has gained across the board — notably the EUR this morning after rejecting 122.00 key resistance
  • As well as US NFP report, Today’s highlights include Canadian Jobs figures, as well as comments from Fed’s Brainard and Tarullo

Market Snapshot

  • S&P 500 futures down 0.3% to 2186
  • Stoxx 600 down 1.1% to 337
  • FTSE 100 down 0.9% to 6692
  • DAX down 1% to 10426
  • German 10Yr yield down 3bps to 0.34%
  • Italian 10Yr yield down 6bps to 1.99%
  • Spanish 10Yr yield down 4bps to 1.57%
  • S&P GSCI Index down 0.3% to 383.5
  • MSCI Asia Pacific down 0.5% to 136
  • Nikkei 225 down 0.5% to 18426
  • Hang Seng down 1.4% to 22565
  • Shanghai Composite down 0.9% to 3244
  • S&P/ASX 200 down 1% to 5444
  • US 10-yr yield down 1bp to 2.43%
  • Dollar Index down 0.14% to 100.9
  • WTI Crude futures down 0.4% to $50.86
  • Brent Futures down 0.6% to $53.59
  • Gold spot up 0.3% to $1,175
  • Silver spot up 0.2% to $16.54

Top Headline News

  • Starbucks’ Schultz to Hand CEO Role to Lieutenant Kevin Johnson: 33-year veteran of tech industry starts in April
  • Exelon Gets $235 Million-a-Year Nuclear Lifeline in Illinois: Legislation secures payments for power from nuclear reactors
  • Goldman’s Gary Cohn Said to Meet With Trump’s Team This Weekend: A cabinet appointment is said to be unlikely as talks continue, some advisers are concerned about too many Goldman picks
  • Trump Says He’ll Appoint Mattis as Sec. of Defense; Trump Supports Completion of Dakota Access Pipeline: Reuters
  • Workday Falls After CEO Warns of Big Deal Delays on Uncertainty: CEO cites Brexit, elections among concerns of customers
  • Viacom’s Bakish Said to Be Interested in Buying Vice Stake: NYP
  • Apollo, FXI Said to Make Bid for Innocor: New York Post

Looking at Asian markets, stocks traded lower across the board following the mostly negative lead from US where tech names underperformed, with participants also tentative ahead of today’s key NFP. ASX 200 (-1.0%) and Nikkei 225 (-0.7%) declined from the open as investors booked profits, with the latter further weighed by JPY strength as USD/JPY pulled back below 114.00. In China, Hang Seng (-1.3%) and Shanghai Comp (-0.9%) conformed to the subdued tone amid higher money market rates in which despite the overnight SHIBOR snapping 16 consecutive daily increases, 14-day to 1-year term rates continued to rise and the 3-month HIBOR gained to its highest since May 2009. Finally, 10yr JGBs traded were supported amid the risk averse sentiment in the region, while the BoJ’s buying operations for a total JPY 1.23tr1 in maturities ranging from 1yr-10yr also underpinned. PBoC injected CNY 160bIn 7-day reverse repos, CNY 60bIn in 14-day reverse repos, CNY 25bn in 28-day reverse repos for a net weekly injection of CNY 70bIn vs. CNY 40bIn net injection last week.  PBoC set mid-point at 6.8794. South Korean opposition parties agreed to propose motion for the impeachment of President Park, with the vote on motion to be held on December 9th.

Top Asian News

  • Singapore Sanctions Ex-Goldman Banker Leissner After Probe: Standard Chartered, Coutts fined combined S$7.6m
  • Rural China Banks With $4 Trillion Assets Facing Debt Test: Guiyang Rural sparked concern about risks at smaller lenders
  • PBOC Headache Worsens as New $50,000 Conversion Quota Looms: Central bank focus for yuan seen shifting as FX reserves bleed
  • Singapore Wealth Fund Prompts GLP to Start Strategic Review: No assurance any transaction will materialize, GLP says
  • Crown Prince Becomes First New Thai King in Seven Decades: New monarch inherits control of fortune worth tens of billions

As many look ahead to today’s nonfarm payroll report from the US, the European session has kicked off with equities firmly in the red. European stocks have followed on from their Asian counterparts, with profit taking seen in energy and material names after the recent OPEC inspired upside. Further to this, IT stocks are also among the worst performers today, moving in tandem to the recent downside seen in US IT names, with the NASDAQ vastly underperforming over the past 48 hours. Elsewhere, price action remains relatively tight — fixed income markets have seen Bunds close the opening gap and pare earlier downside, which comes in tandem with the exacerbation of risk off sentiment given the softness seen in stocks. From a European standpoint, many are looking ahead to the Italian referendum on Sunday, with the GE/IT spread tightening so far this morning

Top European News

  • Italian Banks Flirt With Disaster Again as Renzi Teeters: Markets have priced in impact of a ‘No’ vote in referendum
  • Hollande’s Exit Gives Valls Space to Seek French Presidency: Socialist Valls faces tough fight against Fillon and Le Pen
  • Aixtron Tumbles as Obama Said Poised to Block Chinese Takeover: Aixtron rejection would be second China deal stopped by Obama

In currencies, markets have been dominated by risk sentiment this morning, with equity markets coming off better levels on Wall Street in recent sessions and Asia sporting modest losses overnight. All of this has served to pull some flow back into the JPY, which has gained across the board — notably the EUR this morning after rejecting 122.00 key resistance. USD/JPY has also suffered as a result, though buyers still stepping in in anticipation of a strong US jobs report this afternoon, but there may be other areas to express USD strength as stocks could dominate. The Italian referendum this weekend will also prompt some risk pairing to some degree, despite some suggesting the negative impacts may be overstated in the run up. EUR/USD looks the obvious sell given the immediate focus, but as we have seen in the past week or so, there has been stubborn support coming in ahead of 1.0550 on each test lower amid continuous bouts of USD strength. GBP may have softened a little vs the USD, but against the EUR stays strong as the soft Brexit perceptions have been strengthened by EU comments regarding Britain’s access to the single market. Cable looks support into the mid to low 1.2500’s, while sellers in EUR/GBP resolute ahead of .8500. Commodity FX continues to favour the CAD; unsurprising given the OPEC deal this week. Outperformance vs the AUD and NZD in evidence, but all 3 could come unstuck vs both the USD and JPY if equity market losses start to accelerate. AUD a little more buoyant than NZD, courtesy of the better than expected Oct retail sales read. The Turkish Lira crashed to an all time low of 3.5935 after Erdogan called for lower interest rates.

In commodities, it has been a mixed market as base metals have been trading lower in recent sessions, while Oil has risen in the latter part of the week in the aftermath of the OPEC meeting. Gains here are now tailing off a little with risk sentiment souring, and in turn, has seen Gold recoup some ground as emerging market weakness and the upcoming Italian referendum divert some trade into the safe havens. Dampened interest for Copper out of China looks to have been the latest catalyst for USD29 drop in the 3m contract. WTI hit highs around USD51.80, but is a little over a cent
down on these levels this morning. Gold hit USD1160.0 or so, but was up USD20.0 earlier this morning.

Looking at the day ahead, the main focus for markets today will be the November employment report in the US including the nonfarm payrolls number. Also due to be released is the ISM NY print for last month. Away from the data the BoE’s Haldane is scheduled to speak around lunchtime while the Fed’s Brainard and Tarullo are also on the cards for today. Meanwhile, along with obvious focus on the Italy referendum, a reminder also to keep an eye on the results of the Austrian presidential election re-run. Voting ends at 4pm GMT on Sunday with initial projections expected soon after.

US Event Calendar

  • 8:30am: Change in Non-farm Payrolls, Nov., est. 180k (prior 161k); Unemployment Rate, Nov., est. 4.9% (prior 4.9%)
  • 9:45am: ISM New York, Nov. (prior 49.2)
  • 12:30pm: Fed’s Tarullo speaks in Washington
  • 1pm: Baker Hughes rig count

DB’s Jim Reid concludes the overnight wtap

Bond markets must feel like my knee at the moment. Attacked from all directions. After a two-day +15.7bps rise in US 10yr yields and a +12.89% rise in WTI Oil over the same period, today’s payroll number therefore comes at a very interesting time. The market consensus is for a 180k print which follows a 161k gain in October. The range though between economists is anywhere from 140k to 250k. Our US economists are at the lower end of the market and are forecasting a 150k reading which is below the 181k YTD and consistent with their view of a slower pace of economic activity in the current quarter. As always keep an eye on the other components of the report including the unemployment rate (consensus is for no change at 4.9%) and average hourly earnings (expected to rise +0.2% mom). The report is out at 1.30pm GMT.

That move in rates yesterday actually saw 10y Treasury yields look at 2.5% at one stage (reaching a high of 2.492% intraday) before then settling into the end of the session to close at 2.448% (and +6.7bps on the day). Still, that’s the highest closing yield since July 2015. 2y Treasury yields were also up a little more than 3bps at 1.149% while 30y yields broke past 3.10% to close up nearly 8bps higher at 3.109%. There were similar moves also in Europe where 10y Bund yields in particular sold off 9.2bps to 0.364%. That was actually the biggest move higher for Bund yields since December 2015. BTP’s outperformed again in relative terms (10y +6.2bps to 2.046%) while EM had a day to forget with hard-currency bond yields in Brazil, Argentina and Columbia +20.1bps, +22.8bps and +11.6bps higher respectively.

A few factors seemed to be in play yesterday contributing to the moves. Clearly the sharp move higher again for Oil continues to challenge markets’ outlook for inflation, while some better than expected manufacturing data in the US also helped at the margin. The ISM manufacturing print rose to 53.2 (vs. 52.5 expected) in November from 51.9 in October with the new orders component also rising, while the final manufacturing PMI was revised up from 53.9 to 54.1 – a level last matched in October last year. A bumper day for corporate issuance across the pond was also said to have been a factor although much of chatter was about another ECB article on Reuters. The article suggested that the ECB will extend bond purchases beyond March but at the same time ‘consider sending a formal signal after its policy meeting next Thursday that the program will eventually end’. The suggestion was that much of the prep staff work has focused on a six-month extension at the continued 80bn purchase rate but that some have indicated that they would favour an extension at lower volumes. The article quoted ‘senior sources’ which raises the usual validity question about such a story. In any case it seemed to have some impact on markets.

Meanwhile in equity land there was a bit of a déjà-vu feeling for US equities in particular where another decent day for energy and financials stocks – reflecting the moves for Oil and rates – was more than offset by weakness across rate sensitive and defensive sectors and to a great extent, the tech sector with the Nasdaq (-1.36%) suffering its worst one-day fall since October 11th with the sector seemingly plagued by continued sector rotation post the US election. In Europe the Stoxx 600 closed -0.33% but the FTSE MIB (+0.99%) rallied for the third successive day, in which time it is up more than 5%. Like the moves for bonds, EM equities also struggled with bourses in Brazil, Mexico and Argentina down -3.88%, -0.95% and -1.97% respectively.

Alongside payrolls, Italy will continue to attract attention with the referendum being held on Sunday. In terms of timing, we’re expecting to get provisional turnout results from 7pm GMT with exit polls then expected around 10pm GMT on Sunday night (although these have proved unreliable in the past) with the first projections by Italian pollsters based on counted votes at around 10.45pm GMT. The final result could come in around 2am on Monday and we’ll have a full wrap up of it in Monday’s EMR.

Ahead of this, our European equity strategists have published a note this morning suggesting that a rebound in the Italian equity market should be largely restricted to financial stocks in case of a “Yes” vote. Although the FTSE MIB is trading at a 15% discount relative to its 10-year average vs. Europe, valuations look substantially less attractive once banks are excluded from the index. The relative P/E of the FTSE MIB ex banks is trading in line with its long-term average vs. Europe ex banks. Several Italian sectors are even trading at a premium vs. their European peers, showing no signs yet of a spillover of banking sector risks.

Over now to a recently forgotten theme – namely Brexit. Remember that? Yesterday Brexit secretary David Davies and Chancellor Hammond suggested that Britain may be prepared to pay into the EU budget for access to the single market. This is the first time such a view has been expressed in official channels. Obviously it’s still fairly early stages and also hypothetical but the UK government is seemingly becoming increasingly pragmatic from the hard line stance that was taken at the Conservative party conference back in October. Whether Europe has any interest in also being pragmatic is a debate for another day but overall the development certainly aided Sterling which climbed +0.68% vs. the Dollar to $1.2591 albeit well off the intraday high of $1.2696.

While we’re on the theme of politics, last night we also heard the slightly surprising announcement that French President Hollande will not run for re-election next year. The Socialist party will now choose its candidate through a two-round primary on the 22ndand 29th of January. The suggestion is that the door is now open for Prime Minister Valls to be in the running, as well as ex-economy minister Montebourg. It’s worth noting that the polls aren’t giving much of a chance for any Socialist candidate qualifying for the second round of the Presidential election and it appears extremely challenging for the centre-left to prevent a Fillon-Le Pen play-off in the second round and final round.

Refreshing our screens now where markets in Asia this morning are largely following the lead from the losses in Europe and on Wall Street yesterday. The Nikkei (-0.47%), Hang Seng (-0.98%), Shanghai Comp (-0.30%), Kospi (-0.75%) and ASX (-0.70%) are all currently in the red, while sovereign bond yields in the antipodeans are 7-8bps higher and a few basis higher in Asia. Oil (-0.30%) has edged a touch lower while US equity index futures are also modestly lower.

A quick wrap up of the remaining data yesterday. In the US the other data out included construction spending which rose a tad less than expected (+0.5% mom vs. +0.6% expected) but did include material upward revisions to prior months. In fact it was enough to see the Atlanta Fed revise up their Q4 GDP forecast to 2.9% from 2.4%. Initial jobless claims were reported as rising 17k last week to 268k while finally total vehicles sales in November fell as expected to an annualized rate of 17.8m from 17.9m.

Meanwhile in Europe the final manufacturing PMI’s for November didn’t throw up any real surprises. There was no change to the Euro area print at 53.7, while a 0.1pt downward revision for Germany to 54.3 was somewhat offset by a 0.2pt increase in France to 51.7. The non-core was where most interest lay though and as expected the data was reasonably strong. Italy rose 1.3pts to 52.2 (vs. 51.3 expected) and Spain rose 1.2pts to 54.5 (vs. 53.7 expected). The UK was a little more disappointing after printing at 53.4 (vs. 54.4 expected), down from 54.2 in the month prior. The final data to mention is the Euro area unemployment rate print which came in at 9.8% and a new post-financial crisis low.

Looking at the day ahead now. It’s a pretty quiet end to the week in Europe today with the sole release being the October PPI print for the Euro area. As mentioned earlier the main focus for markets today will of course be the November employment report in the US including the nonfarm payrolls number. Also due to be released is the ISM NY print for last month. Away from the data the BoE’s Haldane is scheduled to speak around lunchtime while the Fed’s Brainard (at 1.45pm GMT) and Tarullo (at 6pm GMT) are also on the cards for today. Meanwhile, along with obvious focus on the Italy referendum, a reminder also to keep an eye on the results of the Austrian presidential election re-run. Voting ends at 4pm GMT on Sunday with initial projections expected soon after.


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Author: Tyler Durden

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