In an eventful overnight session which saw a historic transition in Saudi Arabia, an unexpected Republican victory in the Georgia Special Election, China's inclusion in the MSCI EM index and Travis Kalanick's resignation, S&P futures continued to fall, alongside stock markets in Asia and Europe, while oil prices extended their drop despite a larger than expected draw reported by API on Tuesday. The USDJPY continued its recent slide, dropping just shy of 111, while GBPUSD tumbled as low as 1.2589, the lowest since May announced the UK election, only to reverse and recover all gains ahead of the Queen's speech on Wednesday. Despite the much hyped inclusion of 222 mainland Chinese shares in the MSCI EM index starting May 2018, which will by only 0.73% to include Chinese A-shares, the Shanghai composite closed a modest 0.5% higher, as the initial euphoria fizzled following calculations that buying pressure from the MSCI shift would be muted. MSCI estimated the change, due around the middle of next year, would drive inflows of between $17 billion and $18 billion. China's market cap is roughly $7 trillion. The index provider also set out a laundry list of liberalization requirements before it would consider further expansion. "We suspect that it will be a long time before this happens," wrote analysts at Capital Economics in a note. While China's weighting in the MSCI Emerging Markets Index may ultimately rise to 40 percent or so, this rise is likely to be slow," they added. "The upshot is that any initial boost to equities is likely to be small"...
"Inclusion is unlikely to result in a significant shift in the underlying flow picture," Goldman Sachs economists led by MK Tang write in note. "While short-term sentiment could be favorable, over the longer term we continue to expect the CNY to move in a managed path, gravitating gradually towards a weaker level against the USD due to fundamental forces."
More notably perhaps, the offshore yuan dropped, shrugging off MSCI’s decision to include mainland shares in its benchmark stock indexes while China's Ten-year sovereign bonds fall, with the yield rising the most in 6 weeks after the PBOC drained CNY 40bn in liquidity, even as S&P said it sees a "real possibility" of a China downgrade, for one simple reason: China continues to drown in debt...
European shares fell for a second day as crude continued to edge lower. Haven demand spurred the yen and gold, which was poised to advance after five days of losses. For once oil’s woes had little impact in Saudi Arabia, where a palace reshuffle and good news from MSCI Inc. boosted equities. Shanghai stocks also advanced after the index provider added China’s domestic shares to its emerging-markets gauge.
Another key overnight development, was the Saudi Royal reshuffle in which King Salman stripped the current crown prince, his nephew Mohammed bin Nayer, of his post, and replaced him with his son, Mohammed bin Salman. While speculation remains on what was the cause for the historic shakeup, with the ongoing collapse in the price of oil and resulting sharp saudi deficits cited as the most likely one, the local market took it in stride, with the Saudi Tadawul All-Share index rallying 3.3% after the news...
Back to markets, Australia’s S&P/ASX 200 Index slumped 1.6%, erasing its gain for the year, as energy shares tumbled. BHP Billiton and Rio Tinto both slid at least 2.9 percent. While the SHCOMP eeked out modest gains, Hong Kong’s Hang Seng Index fell 0.6% perhaps due to rebalancing.
European shares fell for a second day as crude extended its drop further into a bear market. Safe haven demand spurred the yen and gold, which was poised to advance after five days of losses. The ongoing weakness in crude and other commodities threatens to crush arguments from US central bankers that weak inflation rates will be transitory, adding to concerns of a Fed policy error that could unintentionally crimp the global economic recovery, according to Bloomberg. The Stoxx Europe 600 lost 0.7% with bank stocks leading the way.
All eyes remained on oil, where signs of a growing glut of supply and rising Libyan output sent Brent crude futures skidding back to $45.50 as European trading gathered momentum. The slide in energy costs boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen.
"Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market," Rabobank analysts told clients in a reference to Brent crude futures, which have slid almost 10 percent this month, and over 20% since the recent highs. Oil had shed 2% on Tuesday, taking U.S. crude futures into a bear market, a red flag to investors who follow technical trends.
# The moves in rates were just as dramatic, with the spread between yields on U.S. five-year notes and 30-year bonds shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes. Thirty-year German debt yields bonds also tumbled back toward two-month lows, adding to a more than 20-basis-point drop over the past month and ahead of what will now be a closely watched sale of 30-year debt in Berlin later.
"The plunge in oil prices ignited a bull flattening on the German and U.S. curve," analysts at UniCredit said in a note adding that it suggested "reflation trades are finally deflated."
The recent setback for crude and commodity prices as well some equity markets is partly over doubts of Trump's promised multi-trillion dollar stimulus program, which had raised hopes of boosted inflation and growth, and has been a huge disappointment instead.
In currency markets, the flight from oil and into long-dated government bond benefited the safe-have yen which climbed to 111.120 per dollar. The U.S. currency was holding its own elsewhere though - oil and the greenback often move inversely. Against a basket of currencies, it was steady at 97.736 having touched a five-week peak overnight.
The euro stood at $1.1146 after hitting a three-week low, while the dollar eased a touch on the yen to 111.17. Sterling was still in the firing line initially sliding back under $1.26 but since rebounding sharply and recoupong all losses. It took a spill after Bank of England Governor Mark Carney hosed down speculation that he might soon back higher interest rates, saying he first wanted to see how the economy coped with Brexit talks.
Oracle scheduled to report earnings later on Wednesday, while numbers on existing home sales will be published on the macro side.
*) Market Snapshot;
- S&P 500 futures down 0.3% to 2,431.00
- STOXX Europe 600 down 0.8% to 386.28
- Nikkei down 0.5% to 20,138.79
- Topix down 0.4% to 1,611.56
- Hang Seng Index down 0.6% to 25,694.58
- Shanghai Composite up 0.5% to 3,156.21
- German 10Y yield fell 1.4 bps to 0.248%
- Euro down 0.04% to 1.1130 per US$
- Italian 10Y yield fell 4.4 bps to 1.62%
- Spanish 10Y yield fell 2.2 bps to 1.363%
- Brent Futures down 0.6% to $45.76/bbl
- Gold spot up 0.2% to $1,246.00
- U.S. Dollar Index up 0.01% to 97.77
*) Top Overnight News from BBG;
- Theresa May will make her first attempt to engage with Britain’s new political landscape as she publishes a legislative program heavy on Brexit and likely to be light on anything controversial
- U.K. first secretary of state Damian Green tells BBC radio there’s still every possibility of Conservative Party deal with DUP; government currently lacks overall majority in parliament with legislative program due later on Wednesday in Queen’s Speech
- Saudi Arabia’s Deputy Crown Prince Mohammed Bin Salman was named to replace his cousin as heir to the throne in a shake-up that consolidates the 31-year-old leader’s power in the world’s biggest oil exporter
- Emmanuel Macron’s justice and European affairs ministers quit, bringing to four the number of members of his cabinet who have left in recent days amid various ethics investigations
- Chinese stocks were little moved by their addition to MSCI Inc.’s benchmark indexes as investors weighed the symbolic importance of inclusion against the limited impact on short-term inflows
- Republican Wins U.S. House Seat in Georgia After Close Race
- Oil Slide Hits Stocks; MSCI China Impact Is Muted
- Housing Finance Overhaul May Come Before Dodd-Frank, Warner Says
- Saudi Crown Prince Seen Keeping Oil Policy Aimed at Higher Price
- Uber CEO Travis Kalanick Quits Under Pressure From Investors
- BMC Software, CA Said to Weigh Deal to Combine, Take CA Private
- Sears Canada Is Said to Prepare to Seek Creditor Protection
- Sinopec, JD.com Discuss Cooperation on Logistics, Finance
- Sharp Says FY 2016 Sales to Apple Fell 18.8% Y/y to 542.1b Yen
- Mithra Completes Recruitment for Added Estelle® Safety Study
*) Asia equity markets traded mostly negative following the downbeat Wall St. close, where energy lagged after WTI crude briefly slipped below USD 43/bbl to hit a 9-month low. ASX 200 (-1.6%) underperformed with the index dragged by weakness across commodities, while Nikkei 225 (-0.4%) was dampened by a firmer JPY. Shanghai Comp. (+0.2%) and Hang Seng (-0.6%) were mixed with the mainland bourse kept afloat following MSCI's inclusion of China A-shares in its Emerging Market index, which in turn also dampened stocks in South Korea due to expected outflows from the decision. 10yr JGBs are mildly higher with mild demand seen amid weakness in stocks, while the BoJ were also in the market for JPY 1.03fin of JGBs ranging from 1yr-10yr maturities.
# Top Asian News;
- Toshiba Picks Bain-Japan Group as Preferred Chip Unit Buyers
- Freeport Indonesia Workers to Extend Strike for Third Month
- Australia Law to See Online Retailers Pay More Sales Tax
- Vanke’s Wang Exits After Tussle Over China’s No. 1 Developer
- China Stocks Win MSCI Entry as $6.9 Trillion Market Goes Global
- MSCI Sees $17b of China Inflows Under Current Inclusion Plan
- Singapore June COE Second Open Tender: Summary (Table)
- Allianz Seeks to Bulk Up in Asia in Wait for China Permit
- China Steel Rebar Extends Drop as ‘Off-Season’ Demand Takes Toll
*) EU markets trade in the red, a continuation from yesterday's US session. Energy continues to struggle, with WTI futures looking to once again attack the USD 43.00/bbl level. Financials lead the downside however, not helped by earnings downgrades this morning, with prudential (-16%) the clear laggard in FTSE 100. Fixed Income markets are evident of the risk off sentiment — Gilts and Bunds continue to tick higher as global uncertainties continue. Spreads to the Bund have been mixed, with the lOy Spain trading well, 0.50bps tighter to Bunds, contrasting with a 0.50bps widening for BTPs. UK PM May stated that the Brexit needs to be delivered in a way the commands maximum public support, while May added they will work with parliament, businesses and devolved governments to ensure a smooth and orderly exit.
30 UK Conservative MPs are reported to have told PM May they will not accept a Brexit without a deal. The DUP was reported to have threatened to walk away from talks with the Conservative party over forming a government. Last night there was speculation that the Conservatives could even open talks with the Liberal Democrats' 12 MPs about supporting the Tory Government if the DUP talks fail.
# Top European News;
- Gecina to Buy Eurosic for $2.8 Billion to Add Paris Offices
- Provident Financial Falls 20% After Warning on Consumer Credit
- Credit Suisse to Bolster Leveraged Finance Business: FT
- Australian Regulator Postpones Decision Date on Bayer, Monsanto
- Novo Nordisk’s Victoza Heart Benefit Claim Backed by FDA Panel
- May Faces New Political Reality With Brexit-Heavy Program
- Macron Loses Two More French Ministers as Bayrou, Sarnez Quit
- U.K. Budget Deficit Narrows in Fiscal Boost for Hammond
- Italy’s Gentiloni: U.K. Not Very Strong at Start of Brexit Talks
# In currencies, FX markets again influence by the political mess in the UK, where we have a minority government scrambling for seats. The DUP have threatened to walk away from talks according to the media, but insiders suggest talks are ongoing, so earlier speculation that Theresa May and her band of not-so merry men will turn to the LibDems is premature. Nevertheless, GBP remains under pressure, as yesterday's catalyst of gov Carney's distancing from hawkish sentiment at the MPC has seen 1.2600 relinquished, but all too briefly as yet. EUR/GBP grinds higher to test 0.8850, but has stopped short of this level by some 5 ticks or so as yet. Elsewhere, we have seen a modest pullback in the USD in line with the Treasury curve, where the key 10yr rate is now just under 2.15%. USD/JPY is testing moderate support ahead of 111.00, but this is all inside familiar territory and suggests a period of range bound trade ahead. This goes for EUR/USD also, but we sense the demand in EUR/GBP is adding an artificial bid here as the lead EUR rate looks prime for a deeper setback after the sold resistance seen ahead of 1.1300, and now at 1.1200. EUR/CHF heavy in the mid 1.0800's supports this view.
# In commodities, West Texas oil fell 0.2 percent to $43.41. Futures tumbled more than 2 percent on Tuesday, touching the lowest since August. Gold rose 0.2 percent to $1,245.98 an ounce after falling for five straight days. Oil had shed 2 percent on Tuesday, taking U.S. crude futures 20 percent off recent highs and thus into official bear territory, a red flag to investors who follow technical trends. "Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market," Rabobank analysts told clients in a reference to Brent crude futures, which have slid almost 10 percent this month. The weakness in crude and other commodities threatens to dent arguments from U.S. central bankers that weak inflation rates will be transitory, adding to concerns of a Fed policy error that could unintentionally crimp the global economic recovery.
# Looking at the day ahead, it's a quiet day for data with only US existing home sales for May out this afternoon. Away from the data the BoE Chief Economist Andy Haldane is scheduled to speak at midday today while the Queen’s speech will be the other big focus....