Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets advanced overnight, reflecting investor relief over easing tensions between the US and Iran. S&P 500 futures indicate a 0.4% gain at the open, which would build on yesterday’s strong gain and put the index above last Thursday’s record high. Overnight, equities in Asia and the EU posted similarly robust upside as risk appetite was buoyed by the de-escalatory actions by the US and Iran. Correspondingly, demand for safe haven assets like Treasuries and gold has ebbed, although the latter is retaining much of its gains over the past week. Yields on 10-year Treasuries have popped to 1.87% but remain within their multi-month range between 1.45% and 1.95%, while the dollar is continuing to climb above recent multi-month lows ahead of key US economic data (more below). Oil prices have reversed sharply amid the easing geopolitical tensions, with Brent crude between $65 and $66 per barrel after spiking to nearly $72 during the initial reports of Iranian missile attacks on Tuesday night.

Global Stocks Rally as Washington and Tehran Step Back 

After Iran’s reprisal attacks on US troops in Iraq on Tuesday evening resulted in no American casualties and were accompanied by balanced rhetoric on both sides, President Trump affirmed a cessation of hostilities yesterday, boosting investor sentiment. The past week’s events have induced moderate volatility across global markets but even at its peak, the degree of risk aversion was moderate relative to the scale of the geopolitical threat. Tuesday evening, global financial markets were roiled by reports of missile attacks on a number of Iraqi military installations housing US troops. Iran quickly took credit for the attacks, characterizing them specifically as a response to the US killing of Iranian General Soleimani late last week. S&P 500 futures were down nearly 2% and oil prices had spiked almost 5%, with Brent nearing $72 per barrel. Sentiment began to recover swiftly amid reports of no American casualties and Iran’s measured rhetoric regarding the attacks, which called them proportionate and promised no further action absent a US counterstrike. Later, President Trump tweeted “All is well” and Iraq’s Prime Minister stated that Iran provided advance warning of the strikes. Yesterday morning, President Trump stated that Iran was “standing down” and announced tighter sanctions but no new military action, thereby alleviating investor fears of all-out war. Among the safe haven asset classes that saw their demand spike in response to the heightened tensions, Treasuries, the yen, and oil have largely reverted to pre-strike levels, although gold prices are retaining a portion of their gains. The S&P 500 is set to vault to another record at the open. This investor equanimity in the face of still-elevated risks is supported by recent history, in which geostrategic flare-ups have mostly proven fleeting and immaterial to global financial markets.

 More Downbeat EU Data Contrasts with Solid US Labor Market Figures

Following yesterday’s disappointing reading of factory orders, Germany’s trade data relapsed to the downside this morning, as the euro nurses year-to-date losses. Data in Europe remains spotty as German exports and imports fell 2.3% month-on-month (m/m) and 0.5% m/m, respectively, in November, undershooting expectations of -0.9% and 0.1% as well as the prior month’s 1.5% and 0.5%. This comports with November’s weak German factory orders, which fell 1.3% m/m in November, well below estimates of a 0.3% rise. Meanwhile, the Euro area Business Climate Indicator fell by 0.04 points in December to -0.25, the lowest level since August 2013, and below market expectations of -0.16. This recent string of downbeat EU economic data has sent the euro 1.0% lower versus the dollar over the past week, with Friday’s US nonfarm payroll number potentially offering further support to the greenback in the event of an upside surprise, Yesterday, the ADP Employment Report showed that private businesses in the US added 202K workers in December, the most since April and well above expectations of 160K. The service sector added 173K jobs while the goods-producing sector added 29K jobs, as a 37K gain in construction jobs was enough to offset continued declines in manufacturing. Nonfarm Payrolls will be released on Friday and consensus estimates are for a 160K increase.

          Additional Themes

Fed Speakers on the Calendar – As analysts await Friday’s nonfarm payroll number, a bevy of Fed officials will weigh in on the economic outlook. Vice Chair Clarida, and regional Fed presidents Kashkari, Evans, Bullard, Williams, and Barkin will all deliver remarks today. Analysts expect little change in the prevailing “wait-and-see” policy posture, cautious optimism on US growth, and focus on soft inflation. Futures markets still reflect meaningful odds of another rate cut over the coming year but the Fed’s ongoing asset purchase program has taken some of the pressure off interest rate policy. A gauge of US financial conditions compiled by Goldman Sachs suggests that the monetary environment is near its loosest level in five years.

 US-China Trade Deal in Sight – Chinese Vice Premier Liu has confirmed that he will be coming to Washington next week for a signing ceremony of the Phase One trade deal on January 15^th.

 

Summary and Price Action Rundown

Global risk assets were mixed overnight as investors grappled with risks of an escalating US-Iran conflict following last evening’s missile attacks on Iraqi military sites housing US troops, but risk appetite is steadying this morning on measured rhetoric from Washington and Tehran. S&P 500 futures point to a 0.2% gain at the open, which would nearly retrace yesterday’s moderate loss and keep the index within 0.5% of last Thursday’s record high. Overnight, equities in Asia underperformed amid the uncertainty while stocks in the EU are rebounding ahead of President Trump’s statement on the attacks, which is expected later this morning. The market mood remains cautious, however, with safe haven assets like Treasuries and gold retaining some gains while oil prices, which have been reflecting an increasing geopolitical risk premium, continue to move higher as well. Yields on 10-year Treasuries are hovering at 1.80%, within their multi-month range between 1.45% and 1.95%, while the dollar is edging above multi-month lows ahead of key US economic data (more below). Oil prices are fluctuating near multi-month highs, with Brent crude between $68 and $69 per barrel.

US Response to Iranian Missile Strike Awaited

Investor sentiment remains cautious after Iran’s reprisal attacks targeting US troops in Iraq last evening but the lack of American casualties, limited nature of the strikes, and hints of de-escalatory intent on both sides are supporting optimism for cessation of hostilities. Last evening, global financial markets were roiled by reports of missile attacks on a number of Iraqi military installations housing US troops. Iran quickly took credit for the direct attacks, characterizing them specifically as a response to the US killing of Iranian General Soleimani late last week. Amid conflicting reports about US casualties and additional hostilities, S&P 500 futures were down nearly 2% and oil prices had spiked almost 5%, with Brent nearing $72 per barrel. For context, this price action was significant but far from extreme, and trading conditions remained orderly throughout. Sentiment began to recover later in the evening on reports of no American casualties and Iran’s measured rhetoric regarding the attacks, which characterized them as proportionate and implied that no further action would be taken in the absence of a US counterstrike. President Trump further shored up investor sentiment last evening by tweeting “All is well” and “So far, so good” regarding the damage assessment and refraining from threats of any further escalation. This morning, analysts are noting that Iraq’s Prime Minister stated that Iran pre-warned of the strikes, presumably in an effort to limit casualties. President Trump is set to make a statement this morning and investors will be highly sensitive to any indication that the White House is declining the opportunity to de-escalate and preparing a military response to last evening’s strikes, which would rekindle fears of all-out war.

 Muddled Global Growth Figures Ahead of Key US Jobs Report

Yesterday’s upside surprise in US service sector activity and a narrowing trade deficit are helping support the dollar versus the euro following weak German factory data. Last month, the ISM non-manufacturing purchasing managers’ index (PMI) for the US increased to a four-month high of 55 from 53.9 in November and slightly beat market forecasts of 54.5. However, new orders, new export orders and employment slowed. Companies are positive about the potential Phase One resolution with China and reduction of tariffs, while noting that capacity constraints have eased, although a tight labor market remains a headwind. Meanwhile, the US trade deficit narrowed to $43.1 billion in November 2019 from a downwardly revised $46.9 billion gap in October and market expectations of a $43.8 billion shortfall. This is third straight month of narrowing, bringing the trade deficit to its lowest level since October 2016. This latest data put the US economy on track to grow around 2% in the 4^th quarter, well above estimates over the summer of little to no growth. The dollar is advancing from roughly multi-month lows following the data, while Treasury yields bounced moderately as well. Meanwhile, German factory orders for November significantly undershot expectations, weighing on the euro.

          Additional Themes

Boeing Shares Fall After Crash – In what may be a disquieting coincidence, a Boeing 737 crashed shortly after taking off from Tehran last evening for Ukraine leaving no survivors. For context, this plane is the predecessor to the troubled 737 Max. Shares of the beleaguered US airline giant are down 1.7% in pre-market trading and are languishing near a two-year low.

 EU Pessimism on Brexit Hits the Pound – The pound is descending further below its recent one-year highs versus the dollar after a key EU official downplayed the likelihood of a comprehensive UK-EU trade deal in the timeframe targeted by Prime Minister Johnson. Newly-minted European Commission President von der Leyen stated that a full deal is impossible before the December 31, 2020 deadline that Johnson is imposing on the process, suggesting instead that a limited accord on key issues would be the more optimal approach.

 

Summary and Price Action Rundown

Global risk assets generally advanced overnight, mirroring yesterday’s rebound for the S&P 500, as investor sentiment steadies amid a lull in US-Iran hostilities despite bellicose rhetoric from Teheran. S&P 500 futures indicate a 0.1% gain at the open, which would build on yesterday’s moderate upside and take the index nearly back to last Thursday’s record high. Overnight, equities in Asia and the EU rallied, taking a bullish cue from yesterday’s steady recovery for the S&P 500 as investors continue to assess the geopolitical outlook. Improving risk appetite has in turn eased demand for safe haven assets, slowing the rallies in Treasuries, gold, and the yen this morning. Yields on 10-year Treasuries are hovering at 1.80% after rising as high as 1.95% in December, and remain well above September’s trough of 1.46%. The dollar is treading water near multi-month lows ahead of key US economic data (more below). Amid the calmer tone in markets, oil prices are pulling back from multi-month highs, with international benchmark Brent crude below $69 per barrel and US benchmark WTI under $63.

US-Iran Tensions Remain in Focus but Fears Ease

Investors continue to ponder heightened geopolitical risks but the lack of immediate and direct retaliation from Iran has supported hopes that further escalation will be limited. Overnight, the leader of Iran’s national security council stated that thirteen different options for retaliation were being considered following the US airstrike that killed a top Iranian general in Baghdad late last week, warning that any of them would be a “historic nightmare” for the US. This threat registered briefly in markets, with S&P 500 futures ceding their gains but subsequently rebounding. This was followed by a statement from Iran’s Foreign Minister calling the US action as “state terrorism” to which Iran will “respond proportionately.” Additionally, analysts note that the dozens of fatalities and injuries due to a stampede at General Soleimani’s funeral could further fuel Iranian desires for retribution against the US. Meanwhile, speculation continues over US troop movements amid intrigue over a purported withdrawal letter for US military in Iraq, which circulated in the media yesterday. For context, Iraq’s Parliament passed a non-binding resolution to expel US troops from the country earlier this week, prompting President Trump to warn that US withdrawal would be costly for Baghdad, demanding reimbursements and threatening sanctions. Defense Secretary Esper indicated that no decision had been made regarding the US military presence in Iraq. Despite heightened risks, investor sentiment has proven resilient, with the S&P 500 resuming its uptrend yesterday, led by more defensive sectors and energy companies, which benefit from higher oil prices. The S&P 500 finished yesterday’s session less than 0.4% below last Thursday’s record high.

 Global Growth Data Remains Mixed Ahead of Key US Jobs Report

Despite uneven worldwide economic figures, expectations for a lasting US-China tariff truce and 2019’s monetary easing campaigns by global central banks continue to support hopes of a medium-term worldwide growth rebound. Recent indicators have been mixed but suggest modest improvement, most notably in the EU. This morning’s release of EU retail sales figures for November was encouraging, showing a year-on-year (y/y) acceleration to 2.2%, topping the 1.5% estimate as well as October’s upwardly revised 1.7%. Meanwhile, December consumer price inflation figures for the region reflected stable price pressures, although at a weak level, with the 1.3% y/y pace for both headline and core gauges matching estimates. This follows yesterday’s modest upside surprise for the EU’s December composite purchasing managers’ index (PMI), which combines both manufacturing and service sector readings. Although the euro’s ongoing rally is pausing today, it remains near its strongest level versus the dollar since August. In the US, recent data has been somewhat mixed. The major upside surprise in US payrolls data for November further boosted optimism, but that month’s retail sales were disappointing and the US manufacturing gauge for December undershot estimates. Analysts await a reading of US December service sector activity this morning and jobs data on Friday.

          Additional Themes

Stronger Renminbi Ahead of Trade Deal Signing – The renminbi has advanced to its strongest level versus the dollar since August ahead of next week’s planned Chinese delegation to the US, which is set to conclude with a signing ceremony for the Phase One US-China trade deal on January 15. The renminbi has appreciated 3.3% since bottoming against the dollar in early September and is now beyond the closely-watched 7 renminbi-per-dollar threshold. Although the US Treasury labeled China a currency manipulator over the summer, its official Foreign Exchange Report for the second half of 2019 has not been published and it is unclear if China will be relieved of this designation following the Phase One trade deal signing.

 Orderly Brexit in Sight – The pound is dipping from one-year highs as traders ponder the outlook for fiscal expansion after what is expected to be a clean exit from the EU this month.

Summary and Price Action Rundown

Global risk assets remain under pressure this morning, although price action remains orderly, amid heightened US-Iran tensions and investor fears of further escalation, while oil prices approach multi-month highs. S&P 500 futures point to a 0.6% decline at the open, which would extend Friday’s 0.7% loss from Thursday’s latest record high for the index. Overnight, equities in Asia and the EU moved lower as well, although mainland Chinese markets outperformed. Increasing demand for safe haven assets has been evident since last Thursday’s US airstrike that killed a key Iranian general in Baghdad, with Treasuries, gold, and the yen rallying over the past two sessions, although the moves thus far have remained moderate. Yields on 10-year Treasuries are back to 1.78% after rising as high as 1.95% in December, but remain well above September’s trough of 1.46%. The dollar, meanwhile, is finding little support from the rising risk aversion and is fluctuating near multi-month lows amid mixed US economic data. Oil prices are continuing higher on fears of supply disruptions, as international benchmark Brent crude approaches $70 per barrel and US benchmark WTI rises to nearly $64 (more below).

Rising US-Iran Tensions Spur Market Volatility

Investors are grappling with the risks and ramifications of last week’s US airstrike, which killed a key Iranian military leader and a number of his deputies near the Baghdad airport following a series of assaults on US personnel and installations in the country. Trump administration officials indicate that Iranian General Soleimani was arriving in Baghdad to plan an escalation of the offensive against US interests in the region, although various news reports question the strength of the intelligence. Iran’s leaders have vowed to strike back while the White House has indicated that any such retaliation will be met with further US airstrikes. Specifically, President Trump stated that 52 locations within Iran, including cultural heritage sites, would be targeted “perhaps in a disproportionate” response to any Iranian reprisals. Meanwhile, Iraq’s Parliament has voted in a non-binding resolution to expel US troops from the country, prompting President Trump to warn that US withdrawal would be conditional on Iraq’s government reimbursing the US for its billions of dollars in military expenditures to protect the country, and threatening sanctions as a countermeasure. House Democrats are said to be preparing a resolution to attempt to limit the Trump administration’s leeway to act militarily in the region absent consent from Congress. The enflamed geopolitical tensions have dented investor risk appetite, weighing on global equities over the last two sessions, although losses remain modest and many indexes, such as the S&P 500 are less than 1% below record highs. Oil prices are unsurprisingly higher amid the rising Middle East turmoil, but upside thus far has been moderate and prices remain below 12-month highs (more below).

 Oil Markets in the Spotlight

With crude prices reflecting an increasing geopolitical risk premium, analysts are debating the degree of upside risk amid complex crosscurrents in oil markets. Brent crude prices have reacted sharply to events in the Middle East over the past two sessions, rising 5.1% to hover around $70 per barrel, as investors ponder the potential for Iran to choke off shipping through the Straits of Hormuz or again attack Saudi or other regional oil production infrastructure, in a repeat of September’s surprising attacks. However, for context, this jump in prices remains shy of the surge in September after Saudi Aramco’s facilities were hit by Iranian missiles and drone, which brought prices to $72. And this was shy of 2019’s April peak of $75, which was spurred by fundamental factors, as investors anticipated recovering global demand and questioned the prospects for US shale oil production growth. With OPEC, particularly Iran’s regional rival Saudi Arabia, restraining its production over the past year in an effort to support prices, analysts note that any significant rallies in oil would likely be met with a swift supply response, thereby limiting upside potential.

          Additional Themes

Mixed Global Growth Readings – The euro is rallying 0.4% today versus the dollar and is trading at its highest level since August after the final composite reading of EU manufacturing and service purchasing managers’ indexes (PMIs) showed a moderately accelerating expansion after nearly falling into contraction in September. Specifically, the composite PMI for December registered 50.9, bettering the prior estimate of 50.6. For context, PMI readings over 50 denote expansion of activity. The EU December manufacturing PMI remained in contractionary territory at 46.3 but this represented an improvement over the preliminary reading and worse levels in September and October. The US manufacturing gauge for December, however, undershot estimates and analysts await readings of service sector activity for last month.

 US-China Trade Deal Ready for Signing – A Chinese delegation is set to arrive in Washington on January 13 for a signing ceremony of the Phase One US-China trade deal on January 15.

 

Summary and Price Action Rundown

The S&P 500 is retreating from yesterday’s new record high, although declines remain orderly and moderate, as geopolitical concerns in the Middle East halt the ongoing rally in stocks, lift oil prices, and drive demand for safe haven assets. US equities are down but have rebounded from the lows of the morning as investors ponder the ramifications of the significant escalation of US-Iran tensions. For context, one of Iran’s top military leaders and a number of his deputies were killed by a US airstrike in Iraq last evening following a series of attacks on US personnel and facilities in the country by Iranian proxies. US officials indicate that General Soleimani was arriving in Baghdad to plan an escalation of the offensive. S&P 500 futures had been down over 1.6% overnight as fears of retaliation or even outright war weighed on sentiment. Nevertheless, risk appetite has steadied amid a lull in hostilities. Treasury yields are down as investors seek safe haven assets, while gold prices are up 1.3% and trading near multi-year highs. The dollar is slightly lower, however, while the yen is up 0.6%. Brent crude prices have jumped above $68 per barrel but remain well shy of April’s 2019 high of $75. Analysts are pondering the potential for Iran to attack Saudi oil infrastructure, as occurred in September, or even attempt to close the Straits of Hormuz, through which around 20% of global oil exports pass. For context, recent geopolitical incidents in the Middle East have resulted in only fleeting increases in oil prices.

It is worth noting that geopolitical risks are notoriously difficult for investors to price into risk assets, and global security issues have been generally discounted by market participants in recent years. Price action is likely to remain reactive to events in the near term.

Holiday Schedule – Markets Policy Partners will be publishing on a limited basis over the holiday period, with full service resuming on January 6^th. In the meantime, please check out our upgraded website (https://marketspolicy.com/) and latest podcasts (https://podcasts.apple.com/us/podcast/hps-macrocast/id1465322002). Here’s wishing all our readers a bright and healthy 2020!

 

 

Summary and Price Action Rundown

Global risk assets are steady in placid pre-holiday trading this morning, while the recent uptrend in sovereign yields is pausing after some mixed US economic data. The S&P 500 is edging below yesterday’s new record peak as investors consolidate year-to-date gains of nearly 29% for the index. Equities in Asia and the EU were mostly higher overnight. Amid the brighter outlook for global trade, ultra-easy policy settings by major central banks, and relatively steady economic data, market participants are expecting an uneventful holiday trading period and an upbeat start to the new year. The uptrend in sovereign yields over the past few weeks has been one area of clear directionality in markets, with the 10-year Treasury yield breaking above its multi-month range but its momentum has stalled around 1.92%. Meanwhile, the dollar continues to tread water in the middle of its 2019 range while the pound has stabilized after its recent swoon, which was due to renewed Brexit risks and poor UK economic data. Oil prices are turning higher again to return to nearly six-month highs, around $67 per barrel for Brent crude.

Barring market volatility, our next brief will be on Monday, December 30^th – Happy Holidays!

Mixed US Data Caps Upside for Treasury Yields

Though longer-dated Treasury yields reached their highest levels since mid-year last week amid expectations for building economic momentum into next year, the uptrend has stalled this week following some softer US economic readings. This morning’s December reading of the Richmond Fed’s regional manufacturing gauge posted a downside surprise, relapsing to -5, its weakest level since September, instead of improving to 1 from -1 in November as forecast. This follows yesterday’s mixed US economic readings, which helped cap the recent rise in Treasury yields. US Durable Goods Orders dropped 2.0% month-on-month (m/m) in November, dramatically undershooting expectations of a 1.5% increase. New Home Sales were more upbeat, rising 1.3% m/m to a seasonally adjusted annual rate of 719K in November 2019, bouncing back from a 2.7% drop in October and easily beating market expectations of a 0.3% fall. Year-on-year (y/y), sales jumped 16.9%. Housing experts are citing lower mortgage rates for the recent strength in the overall housing market. For context, the recent uptrend in yields stalled on Friday despite solid November data, including upside surprises for Personal Income, Personal Spending and Core Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred measure of inflation with a 2% target. Year-on-year, Core PCE rose 1.6%, easing from 1.7% in October and just beating market expectations of 1.5%. US economic data will remain in the spotlight this week with Thursdays releases of mortgage application totals, jobless claims data, and a consumer confidence gauge.

 Positive Trade News Supports Sentiment

Although trade developments are more of a backburner issue for investors now that a US-China Phase One agreement is ostensibly complete, President Trump’s upbeat assessment of the deal and China’s unilateral reduction of certain tariffs are keeping market spirits high into the holidays. President Trump today said that the Phase One deal is “done” and noted that a signing ceremony is being planned. This follows reports over the weekend indicating that Beijing is set to reduce duties on imported pork, some tech devices, and various other items. For context, investors expect US-China trade friction to ease meaningfully in the coming year, with the finalization of the interim trade agreement and slow-moving Phase Two negotiations, which is a primary factor supporting broad optimism for an impending global growth rebound. News on Friday that President Xi is skipping the World Economic Forum in late January doused hopes that Davos would be the venue for a trade deal signing summit with President Trump, but markets exhibited no adverse reaction. Treasury Secretary Mnuchin indicated last week that the text of the deal is undergoing final legal review on both sides and will be disclosed to the public and signed in early January.

          Additional Themes

Oil Prices Resume Uptrend – Yesterday’s news that the Saudi and Kuwaiti governments are nearing an agreement that would allow production to restart in a neutral area between the two countries only weighed on prices briefly yesterday. Today, crude prices are back around multi-month highs as industry estimates suggest a drawdown in US oil stockpiles this week. Hopes of a global economic rebound and expectations for slower gains in US shale oil production next year have helped buoy oil prices in recent weeks.

 Mixed Signals from US Funding Markets – Yesterday’s liquidity offering (or “repo operation”) by the Federal Reserve was undersubscribed, suggesting that efforts to combat tightness in funding markets are meeting their goals. Analysts note, however, that some short-term funding rates still remain elevated and express lingering concerns over the potential for a year-end bout of liquidity disruption.

Summary and Price Action Rundown

Global risk assets remain buoyant in quiet pre-holiday trading this morning, while the recent uptrend in sovereign yields is pausing after some mixed US economic data. The S&P 500 is slightly higher bringing the index to a new record peak with year-to-date gains of nearly 29%. Equities in Asia and the EU were mixed overnight, with mainland Chinese stocks underperforming as analysts cite reports that a state-linked investment fund is cutting its stake in tech local tech companies. Additionally, Boeing stock is up 2.6% after the announcement of a change of the company’s CEO. An uptrend in sovereign yields has been one area of clear directionality in markets this month, with the 10-year Treasury yield breaking above its multi-month range and now hovering at 1.91%. Still, the dollar is finding little support from the rising rates, while the pound is extending its losses amid reemergent concerns over Brexit and a string of dismal UK growth indicators. Oil prices are dipping further below six-month highs, around $66 per barrel for Brent crude.

Barring market volatility, our next brief will be midday tomorrow – Happy Holidays!

Mixed US Data Caps Upside for Treasury Yields

Though longer-dated Treasury yields reached their highest levels since mid-year last week amid expectations for building economic momentum into next year, the uptrend has remained stalled today amid some softer US economic readings. US Durable Goods Orders dropped 2.0% month-on-month (m/m) in November, dramatically undershooting expectations of a 1.5% increase. Demand for transportation equipment led the miss, falling 5.9%, led by both defense (down 72.7%) and civilian aircraft (down 1.8%). Orders for non-defense capital goods excluding aircraft, a closely watched indicator for future business spending plans, gained 0.1% m/m. Excluding transportation, new orders were unchanged and excluding defense, new orders advanced 0.8%. New Home Sales were more upbeat, rising 1.3% m/m to a seasonally adjusted annual rate of 719K in November 2019, bouncing back from a 2.7% drop in October and easily beating market expectations of a 0.3% fall. Year-on-year (y/y), sales jumped 16.9%. Housing experts are citing lower mortgage rates for the recent strength in the overall housing market. Amid the mixed data, Treasury yields are struggling to find direction. For context, the recent uptrend in yields stalled on Friday despite solid November data, including upside surprises for Personal Income, Personal Spending and Core Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred measure of inflation with a 2% target. Year-on-year, Core PCE rose 1.6%, easing from 1.7% in October and just beating market expectations of 1.5%.

 Additional Trade Concessions Support Sentiment

Although trade developments are more of a backburner issue for investors now that a US-China Phase One deal is ostensibly complete, headlines over the weekend that China is unilaterally reducing more tariffs on various imports are said to be underpinning the ongoing year-end rally. Reports over the weekend indicated that Beijing is set to reduce duties on imported pork, some tech devices, and various other items. For context, investors expect US-China trade friction to ease meaningfully in the coming year, with the finalization of the interim trade agreement and slow-moving Phase Two negotiations, which is a primary factor supporting broad optimism for an impending global growth rebound. News on Friday that President Xi is skipping the World Economic Forum in late January doused hopes that Davos would be the venue for a trade deal signing summit with President Trump, but markets exhibited no adverse reaction. Treasury Secretary Mnuchin indicated last week that the text of the deal is undergoing final legal review on both sides and will be disclosed to the public and signed in early January. Also, the House of Representatives passed the US-Mexico-Canada (USMCA) trade agreement Thursday afternoon, as was widely expected, eliciting no discernable asset price reaction.

          Additional Themes

Oil Prices Pressured by Saudi/Kuwait Compromise – News that the Saudi and Kuwaiti governments are nearing an agreement that would allow production to restart in a neutral area between the two countries is weighing on crude prices today. The potential supply from the region, which has been restricted due to disagreements between the two countries, is estimated at up to 500k barrels per day. For context, Brent crude is trading near a six-month high after additional OPEC production cuts were announced earlier this month and improving global growth expectations have brightened traders’ outlook for oil demand.

 Pound Extends Weakness – The pound remains under pressure, now posting losses of 3.1% versus the dollar since the day after the UK general election amid the resurgence of “hard” Brexit risk at the end of next year and a series of dismal economic readings. The announcement of Governor Carney’s successor at the Bank of England did little to change policy expectations.

Summary and Price Action Rundown

Global risk assets are continuing this week’s gentle ascent in quiet pre-holiday trading this morning, while upward movements in sovereign yields are extending as investors await key US data and ponder the likelihood of a global economic rebound in 2020. S&P 500 futures point to a flat open, which would hold the index at yesterday’s record peak with year-to-date gains of nearly 28%. Equities in Asia and the EU were mixed overnight. With US-China trade on the backburner for now, major central banks largely on hold, and global economic data showing selective improvement, investors are expecting placid markets into year-end (more below). An uptrend in sovereign yields has been one area of clear directionality in markets this week, with the 10-year Treasury yield breaking above its multi-month range at 1.94%. With EU, Japanese, and other sovereign yields moving up in tandem, the dollar is finding little support from the rising rates, while the pound has stabilized after being impacted by reemergent concerns over Brexit and dismal growth data this week. Oil prices are dipping below six-month highs.

                 Sovereign Yields Edge to Multi-Month Highs Ahead of US Data

Ahead of today’s US growth and inflation figures, expectations of a 2020 global economic recovery, alongside highly accommodative policy settings by major central banks, are continuing to support longer-dated sovereign yields near their highest levels since mid-year. Yields on 10-year bonds in the US, Germany, the UK, and Japan are all continuing higher today, although the uptrend paused yesterday following a set of soft US economic figures. Specifically, US existing home sales fell 1.7% month-on-month (m/m) in November to a seasonally-adjusted annual rate of 5.35 million units in November of 2019, widely missing market expectations of a 0.2% drop, as a shortage of properties for sale is negatively effecting the real estate market. Initial unemployment claims were also disappointing, with 234K claims filed in the week ending on December 14^th, compared with expectations of 225K. Additionally, the Philadelphia Fed Manufacturing index dropped by 10.1 points from the previous month to 0.3 in December, its lowest reading since June and well below the forecast of 8.0. US and global economic data earlier in the week, however, had generally been encouraging (with dismal readings from the UK the notable exception) and had helped spur sovereign yields higher. Later this morning, readings of US personal spending and income data for November, as well as core personal consumption expenditure prices (core PCE), the Fed’s preferred measure of inflation, could spur Treasury yields even higher. For context, the 10-year Treasury yield is at 1.94% and has not traded above 2.00% since late July after posting its 2019 high of 2.78% back in January.

 Markets Unmoved by Trade News

Although the ebbs and flows of US trade policy, particularly in relation to China, were a primary market catalyst throughout 2019, trade developments are a backburner issue for investors now that a US-China Phase One deal is complete. News this morning that President Xi is skipping the World Economic Forum in late January has doused hopes that Davos would be the venue for a trade deal signing summit with President Trump. Nevertheless, markets are exhibiting no reaction as investors mostly view the timing of finalization as a formality. Treasury Secretary Mnuchin indicated yesterday that the text of the deal is undergoing final legal review on both sides and will be disclosed to the public and signed in early January. Although there continues to be speculation among analysts over the feasibility of China’s purported US agricultural purchase commitments, investors are generally eager to move beyond this issue and are not expecting Phase Two deal talks to produce anything close to the drama and risks associated with this year’s brinksmanship negotiation tactics. Also, investors noted that the House of Representatives passed the US-Mexico-Canada (USMCA) trade agreement yesterday afternoon, as was widely expected, eliciting no discernable asset price reaction.

          Additional Themes

Markets Look Past US Political Drama – President Trump’s impeachment by the House of Representatives on Wednesday is still having no discernable impact on financial markets, despite reports that the Senate trial may be delayed by House Democrats. Analysts remain focused on the President’s continued support in the Senate. Investors are also parsing the latest Democratic debate, but no asset price reaction is evident.

 Bank of England Succession – Andrew Bailey has been announced as the successor to Governor Mark Carney when his term concludes at the end of January. Analysts consider this a choice for continuity of policy and futures markets reflect scant change in the policy outlook for next year, with roughly 50/50 odds of rate cut before year end. Meanwhile, the pound is steady this morning after extending its week-to-date losses versus the dollar to 2.4% yesterday following another disappointing economic reading, with headline retail sales for November significantly undershooting expectations, printing 1.0% year-on-year versus a forecast of 2.1%.

 

                                         Summary and Price Action Rundown

Global risk assets were mostly becalmed overnight in quiet pre-holiday trading although upward movements in sovereign yields continue as investors ponder the likelihood of a broad economic rebound in 2020 and global central banks generally maintain their ultra-easy policy settings. S&P 500 futures point to a flat open, which would hold the index around Tuesday’s record peak with year-to-date gains of over 27%. Equities in Asia and the EU were gently mixed overnight. With US-China trade on the backburner for now, global central banks largely on hold, and global economic data showing selective improvement, investors are expecting placid markets into year-end (more below). An upward drift in sovereign yields has been one area of clear directionality in markets this week, with the 10-year Treasury yield breaking above its multi-month range at 1.95%. With EU, Japanese, and other sovereign yields moving up in tandem, the dollar is finding little support from the rising rates, while the pound has stabilized after reversing some of its recent upside this week amid reemergent concerns over Brexit and dismal growth data. Oil prices are holding near six-month highs after bullish US inventory data.

                   Multiple Factors Drive Sovereign Yields to Multi-Month Highs

Expectations of a 2020 global growth recovery, which have been fueled by some recent improvements in economic data, alongside highly accommodative policy settings by major central banks and an increasing emphasis on fiscal stimulus, are pushing longer-dated sovereign yields to their highest levels since mid-year. Analysts are noting a confluence of current factors that support rising longer-duration developed market sovereign yields, including global growth data recently surprising to the upside, major central banks on hold but highly accommodative, and diminished safe haven demand as trade and Brexit risks recede. Yields on 10-year bonds in the US, Germany, the UK, and Japan are all at their highest level since mid-summer or before. Traders also note upward impetus on rates from anticipation of a moderate global economic rebound in 2020, as well as an increasing focus on the potential for fiscal stimulus to play a greater role in supporting worldwide growth next year. Additionally, analysts suggest that diminishing enthusiasm for negative interest rates among global central bankers and other economic officials is putting a floor under sovereign yields. Earlier today Sweden’s central bank, the Riksbank, hiked rates 25 basis points to bring its policy rate out of negative territory and a senior Japanese government official criticized the effectiveness of the Bank of Japan’s negative interest rate policy, while calling for greater coordination between fiscal and monetary policy. The Bank of Japan retained its current ultra-accommodative policy settings at its meeting today, as did the Bank of England. Later this week, upbeat readings of US personal spending and income data for November, as well as core personal consumption expenditure prices (core PCE), the Fed’s preferred measure of inflation, could spur Treasury yields higher.

                      More Dismal UK Data but Bank of England Holds the Line

Disappointing retails sales figures for November are the latest in a series of worryingly poor UK economic readings, but the Bank of England held policy steady today, shoring up the pound for now. The pound is pausing its week-to-date slide this morning, but is still nursing losses of 1.8% versus the dollar since Monday, after the Bank of England (BoE) held rates steady as expected but conveyed a slightly more upbeat assessment of the economic outlook than traders had been anticipating. Contrasting with the BoE’s cautious optimism, headline retail sales for November significantly undershot expectations, printing 1.0% year-on-year versus a forecast of 2.1% and the prior month’s 3.1%. Meanwhile, Tuesday’s readings of UK job vacancies and wage growth were softer than expected while Monday’s releases of preliminary December purchasing managers’ indexes for both the manufacturing and service sectors surprised to the downside and reflected a deepening contraction in activity. This deteriorating economic picture comes alongside the abrupt reemergence of “hard” Brexit risk earlier this week, as Prime Minister Johnson proposed legislation that would set a deadline for the transition period, during which a new EU/UK trade agreement is to be hammered out, at the end of next year regardless of the state of negotiations. Futures markets assign a 50/50 chance of a rate cut by the Bank of England by next summer, but the choice of Governor Carney’s successor, who will take the helm in February next year, could alter those odds.

                                                            Additional Themes

Markets Still Unmoved by US Impeachment – President Trump’s impeachment by the Democrat-led House of Representatives last evening is having no discernable impact on financial markets today, with analysts focused on his continued support in the Senate.

 Italian Political Risk – Italian sovereign bonds are underperforming today as investors focus on rising risks of an early election in spring that ends the tenure of the moderate ruling coalition. Nevertheless, with the 10-year yield at 1.41%, the overall level remains very favorable.

 

 

Summary and Price Action Rundown

Global risk assets were mixed overnight as investors consolidate stellar 2019 gains before year-end while monitoring incoming signals on global growth, Brexit, and US politics. S&P 500 futures point to a slightly lower open, which would put the index just below yesterday’s record peak with year-to-date gains of over 27%.

Continue reading “Morning Markets Brief 12-18-2019”