Category: Briefings

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”

Summary and Price Action Rundown

Global risk assets are fluctuating around yesterday’s highs this morning as investors pause to consolidate gains after the recent string of upside catalysts and note lingering uncertainties on US-China trade, the global economy, and Brexit for 2020. S&P 500 futures indicate a flat open, which would keep the index at yesterday’s record peak and retain year-to-date gains of around 27%.

Continue reading “Morning Markets Brief 12-17-2019”

Summary and Price Action Rundown

Global risk assets are advancing this morning as relief over completion of the Phase One US-China trade deal continues to percolate and firming Chinese economic data adds to the upbeat market mood. S&P 500 futures point to a 0.4% higher open, which would set a new record peak for the index and propel year-to-date gains to nearly 27%.

Continue reading “Morning Markets Brief 12-16-2019”

Summary and Price Action Rundown

Global risk assets posted robust gains overnight as headlines indicate impending resolution of the Phase One US-China trade deal and the decisive Conservative win in yesterday’s UK election cleared the path for an orderly Brexit. S&P 500 futures point to a 0.4% higher open, which would add to yesterday’s 0.9% gain and set a new record peak for the index.

Continue reading “Morning Markets Brief 12-13-2019”