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Global Stocks Decline On Samsung Woes; Rising Dollar Pressures Oil

Global markets and US equity futures fell on Samsung Galaxy Note 7 contagion concern, while the dollar rose to its strongest level in 11 weeks and U.S. bonds declined as investors boosted wagers that the Federal Reserve will raise interest rates this year.

The dollar continued its recent rise against all of its 16 major counterparts after Chicago Fed President Evans said policy “may well be changing soon,” even as he argued for keeping interest rates low until core inflation moves higher. Treasury two-year note yields jumped to the highest in more than four months. The rand tumbled the most since June after Finance Minister Pravin Gordhan was summoned to appear in court. Samsung Electronics Co. led Asian stocks lower after the company told retail partners to stop sales and exchanges of its Galaxy Note 7 smartphone. U.S. crude oil retreated from its highest price in 15 months.

The uSD has been supported by increasing speculation that the U.S. economy will be sufficiently strong to withstand higher borrowing costs even after last week’s jobs report came in below economists’ predictions, and even as the NY Fed expects Q4 GDP to rise a paltry 1.2%. Markets await more clues on Fed thinking on Wednesday with the release of the minutes of the Federal Open Market Committee’s Sept. 20-21 meeting. A government report Thursday will show retail sales rebounded in September, according to a Bloomberg survey of economists. Investors will also get a chance to assess the health of U.S. companies, with Alcoa Inc. unofficially kicking off the U.S. reporting season on Tuesday.

“Futures are increasingly pricing in a December hike and that itself is driving the dollar higher,” even after data on Friday showed that U.S. non-farm payrolls climbed less than economists forecast, said Mitul Kotecha, head of Asia currency and rates strategy at Barclays Plc in Singapore. “The general backdrop of a firmer dollar is weighing on Asian currencies.”

Sue Trinh, head of Asia foreign-exchange strategy for RBC in Hong Kong confirmed that dollar gains are “entirely linked to the fact that the market has been upwardly rerating expectations of a December rate hike,” said . “Three weeks ago, the implied probability of a December hike discounted by fed funds futures was under 50 percent, today it is close to 70 percent.”

Asian stocks were shaken by the troubles at Samsung, which after announcing it would cut sales of its flammable Note 7 smartphone, subsequently confirmed this morning it would cease production altogether. The MSCI Asia Pacific index slides 0.6% as 7 out of 10 sectors fall; infotechm financials underperform while energy, telcos outperformed.

The Stoxx Europe 600 Index slipped less than 0.1 percent in London. Gains in luxury-goods companies tempered declines; LVMH Moet Hennessy Louis Vuitton SE rose 4.9 percent after reporting sales that topped analysts’ estimates. Christian Dior SE and Burberry Group Plc advanced at least 1.8 percent. Banks and health-care shares led declines among Stoxx 600 groups. Deutsche Bank AG dropped 0.8 percent, for the worst performance on Germany’s benchmark DAX Index. 13 of 19 Stoxx 600 sectors fall with technology, banks underperforming and personal & household, utilities outperforming; 54% of Stoxx 600 members decline, 44% gain

S&P 500 Index futures declined 0.2%, after the S&P500 closed up 0.5% on Monday as surging oil boosted energy producers.

Much attention continues to be focused on Oil, which yesetrday kicked off in the red, but WTI rallied back from late morning to close +3.09% higher at $51.35/bbl. It’s fractionally lower this morning and you have to go back to July 2015 to find the last time WTI closed higher. Prices were initially under upward pressure after the Saudi Arabia’s energy minister said that he was optimistic that a deal between major producers would be reached by November 30th. However that was then overshadowed by comments from Russia President Vladimir Putin. He said that ‘in the current situation we think that (an oil output) freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector’ and that ‘Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join’. Those comments also sent Brent up +2.33% and above $53/bbl (at $53.14/bbl) for the first time in a little over a year. It also means that Brent is now up an extraordinary +90% from the lows of mid-January.

However, with the USD continuing to rise, many traders ask themselves how long before the old USD-Crude correlation reasserts itself. As the following chart from Deutsche Bank shows, crude is now 30% overpreiced relative to the Trade-Weighted Dollar.

Yields on 2Y Treasuries increased three basis points to 0.86%, the highest since June. 2. Ten-year note yields rose six basis points to 1.77%. Trading resumed after the Columbus Day bond-market holiday on Monday. The decline in Treasuries is also being driven by the willingness of Saudi Arabia and Russia to cooperate on an oil output deal, said John Gorman, head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. Higher oil prices tend to boost inflation, which erodes the value of the fixed payments on bonds. European government bonds were little changed, with the yield on benchmark German 10-year bunds at 0.05 percent. The yield on similar-dated U.K. gilts fell three basis points to 0.99 percent. Asian government debt dropped, with yields on 10-year Australian bonds up six basis points to 2.25 percent. Yields on similar maturity notes in Japan climbed by 1.5 basis points and those in South Korea jumped seven basis points.

With the Alcoa Q3 reports after the close, investors will turn their attention to earnings for indications of the health of corporate America. Analysts forecast a 1.6 percent contraction in three-month profit for S&P 500 members, which would be a sixth straight quarterly drop.

Market Snapshot

• S&P 500 futures down 0.3% to 2152
• Stoxx 600 down 0.1% to 341
• FTSE 100 up less than 0.1% to 7099
• DAX down 0.1% to 10613
• German 10Yr yield down less than 1bp to 0.05%
• Italian 10Yr yield down less than 1bp to 1.39%
• Spanish 10Yr yield down less than 1bp to 1.02%
• S&P GSCI Index down 0.5% to 376.6
• MSCI Asia Pacific down 0.6% to 140
• Nikkei 225 up 1% to 17025
• Hang Seng down 1.3% to 23550
• Shanghai Composite up 0.6% to 3065
• S&P/ASX 200 up less than 0.1% to 5480
• US 10-yr yield up 5bps to 1.77%
• Dollar Index up 0.29% to 97.21
• WTI Crude futures down 0.8% to $50.95
• Brent Futures down 0.8% to $52.69
• Gold spot down 0.2% to $1,258
• Silver spot down less than 0.1% to $17.64

Global Headline News

• Republicans split over Trump after Ryan backs away, even as he stops short of rescinding endorsement of Trump; campaign reeling after release of vulgar audiotape
• Sex and the C-Suite: Donald Trump says he wants to run America like a business. But if America were a public company, he probably would be ousted as CEO after his recent vulgar remarks about women caught on tape.
• As Trump falters, a few hedge funds win big on Mexican peso bets; currency posted worst loss among peers last month as Trump gained, is world’s best in October as Clinton advances
• Pimco sees two to three hikes by end of 2017 as treasuries fall; Treasuries are world’s worst-performing government securities; U.S. bonds falls as Russia, Saudi Arabia willing to cooperate to limit global oil production
• Amazon said to limit warehouse access to new merchants; restricting the service signals concerns about capacity issues.
• Goldman warns China’s outflows may be worse than they look; yuan cross-border payments surged to $27.7 billion in August; Goldman says market factors can’t explain such large moves.
• Samsung market value plummets $17 billion on Note 7 sales halt; Samsung asks consumers to stop using the ones they’ve already purchased
• Crude oil near 15-month high buoys energy stocks; dollar climbs
• Dollar climbs on Fed odds; Europe shares fall after Asian slide

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Looking at regional markets, we start in Asia where stocks traded mostly higher as they took the impetus from the positive lead from Wall Street where gains in oil prices and an increase in Clinton’s lead in the polls supported sentiment, while markets in Japan also played catch-up to yesterday’s gains. ASX 200 (+0.1%) was led by commodity names after WTI crude rose above USD 51.00/bbl and Brent crude printed a 1-year high on reports Russia backed a production freeze deal. Nikkei 225 (+1.0%) outperformed on a weaker JPY as the index also made up for lost ground after yesterday’s holiday closure. Shanghai Comp. (+0.6%) and Hang Seng (-1.5%) initially conformed to the positive tone although gains were capped following a weak liquidity injection by the PBoC and weakness in the property sector after reports China was to tighten control of funds into the sector, while KOSPI (-1.3%) was the laggard amid losses in index heavyweight Samsung after the Co. told its partners to halt sales and exchanges of the Note 7. 10yr JGBs were lower amid gains in riskier assets, while demand was also dampened after the BoJ refrained from entering the market under its bond-buying program and with participants side-lined ahead of tomorrow’s 30-year auction. Chinese Premier Li says global economic recovery is slow and that protectionism is increasing. Premier Li also stated China’s economy showed positive changes in Q3 but added that the economy still faces downward pressure.

Top Asian News

• Singapore, Swiss Regulators Slam Falcon Bank Over 1MDB Breaches: Falcon linked to $3.8b of 1MDB fund flows, Swiss Finma says.
• Samsung Market Value Plummets $17 Billion on Note 7 Sales Halt: U.S. agency says to turn off original and replacement devices.
• BYD Gets $8.9 Billion in Bank Financing for Monorail Development: China Development Bank said to extend loan in BYD partnership.
• China’s Li Says Debt Risk Controllable, Growth Goal in Reach: Premier confident that no systemic financial risk will occur.
• Goldman Warns China’s Outflows May Be Worse Than They Look: Yuan cross-border payments surged to $27.7b in August.

European equity markets have failed to kick on from the positive close on Wall Street and Asia and have opened in tentative fashion. The FTSE has seen slight out performance against its major counterparts (+0.25%) and trades close to all-time highs, assisted by continued poor performance in GBP, after posting its second highest close in 32 years. Despite the marginal downside seen in Europe; luxury names shine, as brands follow LVMH after posting a strong beat on earnings estimates. Energy names also trade higher even though oil markets do reside in mildly negative territory (albeit in close proximity to yesterday’s highs with price action somewhat choppy amid thin conditions), with focus remaining on the WEC with Russian Energy minister Novak set to meet with Saudi Energy Minister AL-Falih later today. Fixed income markets have seen mild movement in early morning trade despite Europe seeing a flurry of corporate issuance. The UK remains in the spotlight as many investors have had Gilts under the microscope with UK paper pausing for breath after recent continued declines. EZ periphery yields are trading down between 1-3bps with Greece still benefitting from yesterday’s loan disbursement

Top European News

• EU Banks May Face Capital Hit in Basel Revamp, Dijsselbloem Says
• U.K. Court to Decide How Soon Brexit Can Actually Mean Brexit
• LVMH Gains as Bag Maker Shows There’s Still Growth in Luxury
• Carney Takes BOE on Tour Out of London to Pursue Bigger Fan Base
• World-Beating FTSE 100 Is Seen Struggling to Hold Record Levels

In FX, the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose 0.3% in early trading, set for its highest closing level since July 26. The index has gained in six of the past seven trading days as wagers on higher rates become more entrenched. The greenback advanced for a second day versus the euro, appreciating 0.2 percent to $1.1113, and was 0.4 percent firmer at 103.95 yen. The rand dropped more than 3 percent and was at 14.2176 per dollar, as Gordhan confirmed police had delivered a summons to his home. Eye Witness News reported earlier that the minister would be charged with fraud relating to his time as head of the nation’s tax authority. The pound fell for a fourth day, with the its precipitous slide prompting strategists from ING Groep NV, JPMorgan & Chase Co. and Julius Baer Group Ltd. to revise down their longer-term predictions. Sterling has been hurt as investors await clarity from Prime Minister Theresa May’s government on how the nation will manage its exit from the European Union. The pound dropped 0.5 percent to $1.2298. Sweden’s krona slumped as a report showed the nation’s annual inflation rate unexpectedly dropped in September, pushing the currency down 0.6 percent to 9.7005 per euro, the weakest level since December 2014. It fell 0.8 percent to 8.7259 per dollar.
China’s yuan fell 0.04 percent offshore, taking its eight-day loss to 0.7 percent. The currency joined the International Monetary Fund’s reserves basket on Oct. 1. Onshore, the yuan fell to a six-year low.

In commodities, West Texas Intermediate crude slipped 0.5% to $51.09 a barrel after jumping 3.1% last session to its highest closing price since July 2015. Brent fell 0.9 percent to $52.67 per barrel. Oil has gained almost 15 percent since the Organization of Petroleum Exporting Countries provisionally agreed last month to cut production for the first time in eight years. The group’s members meet this week in Istanbul for talks on implementing the deal and Saudi Arabian Energy Minister Khalid Al-Falih said it’s not unthinkable prices will rise to $60 a barrel by the end of this year. Zinc led industrial metals lower, falling 1.8 percent to $2,287 per metric ton. Tin slid 0.5 percent.

Looking at the day ahead, there is some tier 2 data to get through in the form of the NFIB small business optimism reading for September, along with last month’s labour market conditions index print. Away from the data EU finance ministers are due to hold a meeting in Luxembourg today, while the BoE’s Saunders and Kashyap are scheduled to speak this morning along with the Fed’s Kashkari and ECB’s Mersch this afternoon. The other focus for markets today will be the unofficial commencement of Q3 earnings season in the US when Alcoa reports prior to the opening bell.

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US Event Calendar

• 6am: NFIB Small Business Optimism, Sept., est 95 (prior 94.4)
• 8:55am: Redbook weekly sales
• 10am: Labor Market Conditions Index Change, Sept. est. 1.5 (prior -0.7)
• 11am: Fed’s Kashkari speaks in Arden Hill, Minn.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade in a relatively tentative fashion with participants awaiting any further updates from the OPEC/non-OPEC discussions in Istanbul
• Another quiet morning in FX, but the clear theme is to buy USD’s, with the EUR getting pressed into size bids from 1.1100.
• Looking ahead, highlights include Fed’s Kashkari and Alcoa kick off earnings season
• Fed’s Evans said the U.S. central bank’s refrain from rate increases “may well be changing soon” and “a December move could be fine”
• Rand plunges after Finance Minister Gordhan was summoned to appear in court, raising concern about fiscal policy
• S. Africa’s Gordhan says police came to house to issue summons
• German ZEW Oct. investor expectations at 6.2 vs est. 4.0
• Saudi Arabia and Russia, the world’s two largest crude oil producers, said they’re ready to cooperate to limit output

DB’s

By snoozing off late in the US session I didn’t miss much given the Columbus Day holiday, but there were still a few interesting developments over the course of the day to highlight. The fallout from the Presidential Election debate late on Sunday night made for some early talking points and generally dominated the wires, while some big moves in Oil as well as European government bonds also caught the attention.

Starting with Oil, having initially kicked off in the red, WTI rallied back from late morning to close +3.09% higher at $51.35/bbl. It’s hovering around that level this morning and you have to go back to July 2015 to find the last time WTI closed higher. Prices were initially under upward pressure after the Saudi Arabia’s energy minister said that he was optimistic that a deal between major producers would be reached by November 30th. However that was then overshadowed by comments from Russia President Vladimir Putin. He said that ‘in the current situation we think that (an oil output) freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector’ and that ‘Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join’.
Those comments also sent Brent up +2.33% and above $53/bbl (at $53.14/bbl) for the first time in a little over a year. It also means that Brent is now up an extraordinary +90% from the lows of mid-January. Unsurprisingly then it was the energy sector which led the majority of equity markets higher yesterday. Despite thin volumes the S&P 500 closed up +0.46% (with the energy sector up +1.51%) while in Europe the Stoxx 600 finished +0.69%.

As we’ve highlighted previously we still need to see if OPEC follow through on their word though and there are still the all important country level quota details to hammer out which could have the potential to be a sticking point. That said the renewed optimism is proving to be an opportunistic time for bond issuers. Yesterday Saudi Arabia announced that they would start bond investor meetings in a bid to raise as much as $15bn across multiple maturities according to Bloomberg.

The window for issuers into the US election also remains open although the four week countdown starts today. As the dust settled yesterday following the second debate the overall feeling was that Clinton again came out the victor (somewhat validated by the +1.93% rally for Mexican Peso) but that it was still too early to completely write off Trump’s chances. The big news since however and in a damaging blow to the Republican candidate’s chances was the announcement from House Speaker Paul Ryan (the top elected Republican in Washington) that he would no longer campaign or defend Trump. A spokeswoman for Ryan said the House Speaker would instead ‘spend the next month focused entirely on protecting our congressional majorities’. It’ll be interesting to see what the latest polls now say following this news.

In bond markets the move higher for Gilt yields once again dominated. Yesterday 10y Gilt yields finished just over 5bps higher at 1.020%. Gilts still aren’t back to pre-Brexit levels yet but it is the first time yields have gone back above 1% on an intraday basis since July 21st. Yields have also moved higher for five consecutive sessions now and in that time the 10y yield is 29bps higher. Weakness in Sterling has more than played its part. Yesterday the Pound dropped -0.58% to $1.236 after that -4.15% tumble last week. It’s down another -0.34% in the early going this morning. There was no real new news yesterday and rather it just continues to reflect the aftershock of Friday’s flash crash and the Conservative party conference last week. The feed through to inflation expectations has been unsurprisingly huge with the 5y5y inflation forward now up to 3.570% (and the highest since 2014) from a low of 2.907% in July. Despite the collapse in Sterling and the spectacular rise in breakevens, our FX colleagues think that the chances of a material shift in policy is limited. They note that firstly a tighter monetary policy stance based on expectations of easier fiscal policy and structurally higher inflation due to tariffs and shrinking labor force growth would be politically pre-emptive. Secondly, it would be counterproductive as a tightening in monetary conditions would amplify any shock caused by the triggering of Article 50 in March. Thirdly, valuations are not at extremes in their view and that on a FEER, or sustainable current account basis, Sterling is still close to 10% overvalued.

The moves in Gilts, amplified by the Oil price move, also saw 10y Bund yields (+3.7bps) edge further into positive territory at 0.053%. The exception to the bond sell off yesterday however was Portugal. 10y yields rallied 14bps and the most since June after Portugal’s finance minister said that the rating agency DBRS had a positive assessment of the country’s fiscal efforts. DBRS is due to conclude its review on October 21st and as a reminder S&P, Moody’s and Fitch all rate the company sub-investment grade. DBRS is the lone agency to still rate Portugal IG.

Switching over to the latest in Asia this morning where despite the broadly positive tone on Wall Street, bourses in Asia are a bit more mixed. The Nikkei (+1.16%) is leading gains, helped by a slight weakening for the Yen and also a near 3% rally for the energy sector, while the Shanghai Comp (+0.35)% and ASX (+0.10%) are also slightly higher. On the other hand the Hang Seng (-0.48%) and Kospi (-1.17%) are struggling this morning with the latter being dragged down by a big plummet for the tech sector after Samsung (-6.25%) was reported as requesting retailers to stop sales of its Galaxy 7 smartphones following those concerns of overheating handsets. Elsewhere yields are higher across the board in bond markets. Having reopened this morning, 10y Treasuries are nearly 5bps higher in yield at 1.766%.

Staying with the higher yield environment, yesterday our European equity strategists published a note highlighting that the sell-off in rates has led to some intriguing overshoots in the equity market: with investors rushing out of the defensive bond proxies, these are now priced for a further 40bps rise in German bond yields (twice the move we have seen so far). Our strategists believe the move in rates is due to the rise in the oil price, some better US survey data and investors’ belief in a policy shift from monetary to fiscal stimulus. Yet, with the oil price now 30% above the fair-value level suggested by the US dollar, most data still consistent with a further slowing in US growth, and both Draghi and Kuroda reaffirming their commitment to monetary stimulus over the weekend, our strategists see little further upside to bond yields. Hence, they believe the sell-off in the bond proxies has gone too far.

Yesterday also saw the latest ECB CSPP numbers where they now hold €31.962bn of corporates implying €2.24bn purchases last week at an average daily run rate of €448mn vs. €376mn since the program started in early June. Last week’s volume puts it into the top 5 with many of the largest weeks coming since early September. The ECB is certainly using the increase in primary to increase its holdings.

Before we look at today’s calendar, a quick recap of the small amount of data that was released yesterday. In Germany we learned that exports jumped an impressive +5.4% mom in August (vs. +2.2% expected) while imports (+3.0% mom vs. +0.7% expected) were also higher than expected. For exports that was the largest monthly increase since March 2010 and the data helped to widen the trade surplus to €20bn from €19.5bn. In France the Bank of France business sentiment reading in September was unchanged at 98, while the latest Euro area Sentix investor confidence reading jumped 2.9pts to 8.5 (vs. 6.0 expected).

Looking at the day ahead, this morning we’re kicking off in Germany where the October ZEW survey will be released. The market is expecting a slight pickup in both the headline current situation index (to 55.5 from 55.1) and also the expectations index (to 4.0 from 0.5). This afternoon in the US there is some tier 2 data to get through in the form of the NFIB small business optimism reading for September, along with last month’s labour market conditions index print. Away from the data EU finance ministers are due to hold a meeting in Luxembourg today, while the BoE’s Saunders and Kashyap are scheduled to speak this morning along with the Fed’s Kashkari and ECB’s Mersch this afternoon. The other focus for markets today will be the unofficial commencement of Q3 earnings season in the US when Alcoa reports prior to the opening bell.

3a)NORTH KOREA:

none today

China has a huge housing bubble as home prices rise exponentially in tier 1 cities. Over 71% of all new Chinese loans go to fund mortgages on homes. Chinese debt to GDP is over 300%  (approx. 31 trillion USA) and a huge proportion of debt is non performing and debt holders cannot even pay interest on their debt.

(courtesy zero hedge0

A bail in is likely now as DB’s CEO returns home empty handed after failing to reach a deal with the dept of Justice.

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the pound crashes today:

Turkey and Russian finally sign the very strategic Turkish steam gas pipeline which will run under the Black Sea.  This is a death blow to the Qatar-Saudi Arabia- pipeline proposal.  The uSA are not happy campers with this.

FRANCE/RUSSIA

I do not know about you, but I think the following is quite alarming;  The Russian government has told Russian students studying abroad to immediately return to Russia:

That news should cause gold to fall a little more. Not alarming enough

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