end

S&P Futures Rise Propelled By Stronger Dollar; Europe At 1 Year High As Yen, Bonds Drop

It appears nothing can stop the upward moment of equities heading into the year end, and as has been the case for the past few weeks, US traders walk in with futures higher, propelled by European stocks which climbed to their highest in almost a year, while the dollar rose and bonds and gold fell, failing again to respond to a series of geopolitical shocks following terrorist attacks in Ankara, Berlin and Zurich. The yen tumbled after the Bank of Japan maintained its stimulus plan even as the central bank touted improving economic prospects for the Japanese economy.

“There was no particular surprise from the policy meeting, but investors are happy that the economy’s fundamentals are finally rising after the BOJ expressed an upbeat view,” said Takuya Takahashi, a strategist at Daiwa Securities.

In an amusing interlude during today’s Kuroda press conference, in which the BOJ head said the BOJ is far from its target, Kuroda said that the BOJ continues to target 10 Year yield at “about 0%” and then added that it is meaningless to try to discuss “what about 0%” is, hinting to markets that as long as US yields keep rising, the Yen will keep falling.

European shares were steady with unease over the attacks balanced by gains by bank shares and the Milan market after Italy’s government said it wanted approval for up to €20 billion to rescue troubled lenders. The Stoxx Europe 600 Index rose 0.1% to 360, pushed higher by deal activity in media and credit card services. Treasuries and gold reversed gains from Monday following a probable terror attack in Berlin, while Turkey’s lira pared losses sustained after the killing of Russia’s envoy to the country. The yen approached the weakest since February, rising above 118 versus the dollar after the central bank closed a tumultuous year for monetary policy by keeping its yield-curve and asset-purchase programs unchanged.

The dollar and rising bond yields again dominated, after Janet Yellen flagged the strength of the U.S. jobs market in a speech to students on Monday. That sent the greenback bouncing towards last week’s 14-year high and it was at 103.40 on the index that measures it against other leading currencies, just short of its recent peak of 103.56.

“The biggest impact you see from the attacks in Berlin and Istanbul is the Swiss franc/euro,” said Societe Generale FX strategist Alvin Tan. “But apart from that the dollar continues to be strong after we had some rather positive comments from Janet Yellen,”

China’s CSI 300 index slid 0.6 percent, on Beijing’s move to tighten supervision of shadow banking activities and on liquidity concerns, while Japan’s Nikkei .N225 closed up 0.5 percent after the BOJ meeting.

U.S. stock-index futures were also fractionally higher following a rally that sent equities to record levels. S&P 500 futures expiring in March up 0.1 percent to 2,263 at 6:03 a.m. in New York, while those on the Dow rise 24 points to 19,861. VIX dropped for fourth day, set for lowest close since August.

Energy markets were trading at session highs, with Brent rising above $55/bbl before U.S. stockpiles data due Tuesday, Wednesday. DOE inventories data to be published on Wednesday are forecast to show 5th week of reductions. January WTI near $52/bbl before expiry.  “We’re moving sideways as a whole, liquidity is lower at the moment,” said Giovanni Staunovo, commodity analyst at UBS in Zurich. “It’s range-trading still.”

The yield on U.S. 10-year Treasuries climbed four basis points to 2.58 percent, while gold slid 0.5 percent.

The most notable feature of overnight trading, according to Bloomberg, is the remarkable immunity demonstrated by markets to terror incidents this year, with initial knee-jerk reactions to buy haven assets after attacks fading quickly.

“The market response to each new terror event is less and less pronounced,” said Mike van Dulken, head of research at Accendo Markets. The move in European stocks “confirms ever-thickening investor skin.”

That said, with trading volumes decreasing before December holidays and year-end, investors may be loath to veer too far from the underlying market trends that have prevailed since the election of Donald Trump in November, namely favoring stocks and shunning bonds.

Bulletin headline summary from RanSquawk

In a similar fashion to yesterday, European equities trade with little in the way of firm direction as newsflow remains light after the BoJ kept policy on hold
Very quiet in the FX markets today, but the USD has received yet another push as North American players responded to comments from Fed chair Yellen
Looking ahead, highlights include Turkish Rate Decision, Fonterra GDT auction as well as earnings from Nike and General Mills
Markets Snapshot

S&P 500 futures up 0.1% to 2263
Stoxx Europe 600 up 0.1% to 360.0
MSCI Asia Pacific down 0.5% to 135.27
Nikkei 225 up 0.5% to 19,494.53
US 10Yr yield up 4 bps to 2.58%
Dollar index up 0.2% to 103.38
WTI oil futures up 0.1% to $52.17/bbl
Brent crude up 0.1% to $54.99/bbl
Gold spot down 0.4% to $1133.69/oz
German 10yr yield up 3bps to 0.28%
Portuguese 10yr yield up 5bps to 3.81%
Italian 10yr yield up 6bps to 1.88%
iTraxx Main down 0.3bps to 70.88
iTraxx Crossover up 0.5bps to 290.36
Euro spot down 0.17% to 1.0384
Yen spot -0.7% to 117.90
Copper down 0.06% to $5492/MT
Looking at Asian stocks, markets traded mixed despite a positive lead from Wall St where telecoms outperformed and sentiment was supported by hopes a Santa rally would push the Dow above 20,000. ASX 200 (+0.5%) took the impetus from US and was underpinned higher by miners after gold recouped some of the 2% declines it suffered last week. Nikkei 225 (+0.5%) shrugged-off early cautiousness as a weaker JPY post-BoJ kept the index afloat, while Hang Seng (-0.5%) and Shanghai Comp. (-0.5%) traded subdued as a firm CNY 250b1n liquidity injection by the PBoC was overshadowed by reports that China may tighten licensing procedures for insurance firms and could also increase financial and asset requirements for shareholders. 10yr JGBs traded higher with support seen following the BoJ policy decision to maintain the 10yr JGB yield target at around 0% as this raises speculation the BoJ could continue restricting rapid advances in yields as seen last week. However, prices then pulled back, while the yield curve also steepened amid underperformance in the super-long end.

The BOJ kept its bank rate unchanged at -0.1% as expected and maintained its target for the 10yr JGB yield at around 0%. The decision to maintain policy was conducted by 7-2 vote with Sato and Kiuchi as the dissenters, while the BoJ also raised its economic assessment for the 1st time in 18 months as it stated that the economy is likely to turn to a moderate expansion. RBA minutes from December 6th meeting stated that reducing rates further could carry risks for debt that outweighed any economic benefit but also added that domestic data has not been that encouraging.

In Europe, equities continue to trade flat on the session with muted price action across the board. On a sector specific basis, defensive sectors outperform in the form of Healthcare names while materials are the notable laggards. Mediaset (17%) continue their recent ramp, with Vivendi continuing to grow their stake in the Co. and stating they are looking to increase to 30%. Fixed income markets have seen similarly muted trade, with bunds marginally lower on the day, however remaining above the 163.00 level. Periphery spreads are marginally wider against the German benchmark for the most part amid the thin liquidity, with Italy continuing to remain in focus after the government took the first step for a bailout of their banking system.

In currencies, FX markets are very quiet but the USD has received yet another push as North American players responded to comments from Fed chair Yellen on the strength of the US labour market. USD/JPY has recovered back onto a 118.00 handle, but along with EUR/USD under 1.0400, we are seeing a severe lack of momentum in the market. This is not deterring USD bulls, who remain vulnerable to a short squeeze, but against GBP, we are seeing another push on the mid 1.2300’s as EUR/GBP gets a fresh bid through .8400. Into year end, we have to expect some Euro based buying here. The commodity currencies are also under pressure against the greenback, with AUD looking to .7200, NZD sub .6900 and USD/CAD shaping up for a retest on the resilient 1.3500-1.3600 area. Only one trade in town at the moment and that is to buy USD dips, but proving strained at the present time despite the offered tone in USTs.

Looking at the day ahead, this morning in Europe we kicked off with German November PPI data came in at 0.1%, hotter than the -0.2% expected, and well above the -0.4% print in October. There’s no data due out in the US although later today though we are due to get China’s Conference Board leading economic index for November. It’s fairly quiet away from the data too although it’ll be worth keeping an eye on events in the UK where PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her plans for leaving the EU, amongst other things

* *  *

DB concludes the overnight wrap

Sadly our final recap of the year is tainted by the sombre events in Germany, Turkey and Switzerland yesterday. The news of the assassination of Russia’s ambassador in Ankara came as Turkey and Russia were striving to rebuild their relationship over the conflict in Syria however the incident will now have the potential to reignite tensions again in the region. Meanwhile in Germany investigations are underway after a truck drove into a number of innocent bystanders at a Christmas market in Berlin. In Zurich three men have also been seriously injured following a shooting in an Islamic centre near the city’s main station. These events come after geopolitical concerns were already coming back into the spotlight following the seizure of a US drone in the South China Sea last week.

The biggest impact in markets from the events was in FX where the Turkish Lira (-0.75%) in particular underperformed, along with a number of other EM currencies. The MSCI EM equity index also closed -0.62% and so declining for the fourth consecutive session. In developed markets the feeling was generally cautious but resilient. The Stoxx 600 (-0.12%) closed a touch lower while the S&P 500 (+0.20%) edged slightly higher although unsurprisingly on seasonally thin trading volumes. The most interesting price action continues to be in sovereign bond markets. 10y Bund yields closed 6.9bps lower yesterday at 0.241% and have now moved up or down by at least 3.3bps for each of the last six sessions. 10y Treasury yields also dipped 5.3bps lower to close at 2.539%. While there was some suggestion that the moves reflected safe haven flows it appears that the blame was more last minute position clearing into year-end than anything else.

Before we go any further, this morning in Asia the focus has turned over to the BoJ meeting outcome. As expected there were no last minute holiday season surprises with the various policy measures all kept as is. Significantly, that also means that the BoJ will continue with its yield curve control policy which means targeting 10y JGB yields around zero percent. Where the BoJ was a bit more upbeat however was on its assessment of the economy. The BoJ now expects Japan’s economy to “turn to a moderate expansion” following a pickup in exports, improved domestic demand and business sentiment. Inflation forecasts are however expected to continue to be benign while the BoJ also pointed towards the risks to the outlook as including developments in EM and commodity exporting economics, developments in the US economy, Brexit and geopolitical risks. Governor Kuroda is scheduled to speak just after we go to print.

The Yen has weakened -0.40% following that while Japanese equity markets have rebounded following early modest losses. The Nikkei and Topix are currently +0.46% and +0.14% respectively. 10y JGB yields are also 0.6bps lower at 0.061% after touching a high of 0.090% last week. As we’ve highlighted a few times, it’ll be interesting to see how much the yield cap gets tested by the market next year. Elsewhere in Asia it’s a bit more mixed. The Hang Seng (-0.32%) and Shanghai Comp (-0.52%) are both in the red although the Kospi (+0.23%) and ASX (+0.43%) have both edged higher. US equity index futures are little changed meanwhile along with Gold and most of the commodity complex.

Moving on. The Italian banking sector was also back in the spotlight again yesterday following the news that the Italian government has asked Parliament to authorise up to €20bn through increasing public debt to rescue the nation’s ailing banks. Expect this story to rumble on today.

Elsewhere, Fed Chair Yellen also spoke yesterday at the University of Baltimore. However, as we were expecting there wasn’t a huge amount of new information. Speaking primarily on the labour market, Yellen said that “after years of a slow economic recovery, you are entering the strongest job market in nearly a decade” and that “there are also indicators that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years”.

There was also a bit of data to highlight yesterday. In the US we got the flash services PMI for December which came in weaker than expected at 53.4 (vs. 55.2 expected and 54.6 in the month prior). Combined with the manufacturing print from last week, that leaves the flash composite reading at 53.7 which is down 1.2pts from November. Elsewhere, in Germany the December IFO business climate index printed at 111.0 (vs. 110.6 expected) which is up 0.6pts from last month. The current assessment reading was reported as rising 1pt to 116.6 while the expectations component was little changed around 105.6.

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where the November PPI data will be released followed thereafter by the UK’s CBI distributive trends survey for this month. There’s no data due out in the US although later this afternoon we are due to get China’s Conference Board leading economic index for November. It’s fairly quiet away from the data too although it’ll be worth keeping an eye on events in the UK where PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her plans for leaving the EU, amongst other things.

3a)THAILAND/SOUTH KOREA/:

none today

b) REPORT ON JAPAN

Bank Of Japan Leaves Policy Unchanged, Upgrades Economic Outlook

c) REPORT ON CHINA

China Blinks: Beijing Returns Seized Underwater Drone

China has blinked.

On Tuesday, Beijing has returned a U.S. underwater drone taken by one of its naval vessels in the disputed South China Sea last week after what it said were friendly talks with the United States, which reiterated its criticism of the “unlawful” seizure. The move could diffuse tensions after protests from the White House and critical tweets from President-elect Donald Trump.

China’s defense ministry said in a brief statement the drone had been given back to the United States on Tuesday. “After friendly consultations between the Chinese and U.S. sides, the handover work for the U.S. underwater drone was smoothly completed in relevant waters in the South China Sea at midday,” the ministry said. When prompted by Reuters, the defense ministry declined to give more details about the handover.

Chinese foreign ministry spokeswoman Hua Chunying referred questions about the handover and other details of the case to the defense ministry. “The handling of this incident shows that the Chinese and U.S. militaries have quite smooth communication channels. We think that this communication channel is beneficial to timely communication and the handling of sudden incidents and prevention of miscalculations and misunderstandings,” she said.

“As to what the U.S. defense department said, I have to verify it with the military. But I think what they said is unreasonable as we have always said that for a long time the U.S. military has regularly sent ships and aircraft to carry out close up surveillance and military surveys in waters facing China, which threatens China’s sovereignty and security,” Hua told reporters.

“China is resolutely opposed to this and has always demanded the U.S. end these kinds of activities. I think this is the cause of this or similar incidents.”

A Pentagon spokesman later said the transfer took place near where the vehicle was “unlawfully seized,” about 50 nautical miles northwest of the Philippines’s Subic Bay. The unmanned glider had completed a pre-programmed military oceanographic survey route when it was snatched, Pentagon Press Secretary Peter Cook said. “This incident was inconsistent with both international law and standards of professionalism for conduct between navies at sea,” Cook said. The U.S. “will continue to fly, sail, and operate in the South China Sea wherever international law allows, in the same way that we operate everywhere else around the world.”

The confiscation of the unmanned underwater vehicle in international waters near the Philippines triggered a diplomatic protest and speculation about whether it would strengthen U.S. President-elect Donald Trump’s hand as he seeks a tougher line with China. A Chinese naval ship took the drone, which the Pentagon says uses unclassified, commercially available technology to collect oceanographic data, on Thursday about 50 nautical miles northwest of Subic Bay in the Philippines.

As Reuters observed, the seizure has added to U.S. concern about China’s growing military presence and aggressive posture in the disputed South China Sea, including its militarization of maritime outposts. China is deeply suspicious of any U.S. military activity in the resource-rich South China Sea, with state media and experts saying the use of the drone was likely part of U.S. surveillance efforts in the disputed waterway.

The U.S. Navy has about 130 such underwater drones, made by Teledyne Webb, each weighing about 60 kg (130 lb) and able to stay underwater for up to five months. They are used around the world to collect unclassified data about oceans, including temperature and depth.

It is not clear how many are used in the South China Sea; it is also not clear if Beijing managed to reverse engineer any of the “secret” technology contained in the drone as some US politicians had claimed.

4 EUROPEAN AFFAIRS

Germany

Berlin Police Says It Arrested “The Wrong Man”: Truck Attacker Is “Armed, Still At Large”

In the latest gaffe for German authorities, one which could further impact Merkel adversely if confirmed – something the Euro confirmed when it just tumbled to fresh 13 years lows –  moments ago Die Welt reported that according to German police, the man from Pakistan who was arrested as a suspect in the attack on a Berlin Christmas market that killed 12 people on Monday was not the actual perpetrator.

Police in the German capital questioned a suspect arrested near the scene who they believed was the driver of the truck that rammed into crowds on a square in the heart of west Berlin. The individual denied any involvement and the investigation by Germany’s federal prosecutor, who steps in on terror cases or other major crimes targeting state security, is ongoing, according to Interior Minister Thomas de Maiziere

“We have the wrong man,” said a senior police chief. “And therefore a new situation. The true perpetrator is still armed, at large and can cause fresh damage,” the paper quoted the source as saying.

The source said that all police and special forces units in Berlin have been informed and put on high alert.

Police urged Berlin residents “not to follow dangerous developments on your own,” asking them to report any suspicious activity to law enforcement officers.

Shortly after, Berlin police chief Klaus Kandt admitted the mistake, saying the suspect apprehended in truck attack on Berlin Christmas market may not have been the driver.

“It’s not yet certain whether this is really the driver,” Kandt tells reporters in Berlin Kandt says if suspect isn’t implicated, police will pursue an assailant “who might still be at large.”
Follow
PolizeiBerlinEinsatz
✔@PolizeiBerlin_E
The temporary arrested suspect denies the offense.
Therefore we are particulary alert.
Please be also alert.#Breitscheidplatz

7:28 AM – 20 Dec 2016

Bloomberg adds that the prospect of a terrorist suspect still at large puts further pressure on Chancellor Angela Merkel to do more to guarantee the German public’s security. As reported earlier, in a nationally televised statement in Berlin earlier Tuesday, Merkel said that people across Germany were mourning after the “horrific and unimaginable” deaths and injuries sustained, and pledged to use the full force of German law to bring the perpetrators to justice.

Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings TUESDAY morning 10:00 am

Euro/USA   1.0462 DOWN .0039/REACTING TO  + huge Deutsche bank problems + USA election:/TRUMP WINS THE ELECTION/USA READY TO GO ON A SPENDING BINGE WITH THE TRUMP VICTORY/ITALIAN REFERENDUM DEFEAT/AND NOW ECB TAPERING BOND PURCHASES/USA RAISING RATES

USA/JAPAN YEN 118.19  UP 1.180(Abe’s new negative interest rate (NIRP), a total DISASTER/SIGNALS U TURN WITH INCREASED NEGATIVITY IN NIRP/JAPAN OUT OF WEAPONS TO FIGHT ECONOMIC DISASTER/KURODA:  HELICOPTER MONEY  ON THE TABLE AND DECISION ON SEPT 21 DISAPPOINTS WITH STIMULUS/OPERATION REVERSE TWIST

GBP/USA 1.2343 DOWN .0042 (Brexit by March 201/UK government loses case/parliament must vote)

USA/CAN 1.3411 UP .0008 (CANADA WORRIED ABOUT TRADE WITH THE USA WITH TRUMP ELECTION/ITALIAN EXIT FROM EU)

Early THIS TUESDAY morning in Europe, the Euro FELL by 39 basis points, trading now WELL BELOW the important 1.08 level FALLING to 1.0432; Europe is still reacting to Gr Britain BREXIT,deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, Nysmark and the Ukraine, along with rising peripheral bond yield further stimulation as the EU is moving more into NIRP, and now the Italian referendum defeat AND NOW THE ECB TAPERING OF ITS PURCHASES/ THE USA’S NON tightening by FAILING TO RAISE THEIR INTEREST RATE AND NOW THE HUGE PROBLEMS FACING TOO BIG TO FAIL DEUTSCHE BANK + THE ELECTION OF TRUMP IN THE USA / Last night the Shanghai composite CLOSED DOWN 15.20 0r 0.48%     / Hang Sang  CLOSED DOWN 103.62 POINTS OR 0.47%   /AUSTRALIA IS HIGHER BY 0.49% / EUROPEAN BOURSES ALL IN THE GREEN

We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;

1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.

2, the Nikkei average vs gold carry trade ( NIKKEI blowing up and the yen carry trade HAS BLOWN up/and now NIRP)

3. Short Swiss franc/long assets blew up ( Eastern European housing/Nikkei etc.

These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>

The NIKKEI: this TUESDAY morning CLOSED UP 102.93 POINTS OR 0.53%

Trading from Europe and Asia:
1. Europe stocks MOSTLY IN THE GREEN 

2/ CHINESE BOURSES / : Hang Sang CLOSED DOWN 103.62 OR 0.47%   Shanghai CLOSED DOWN 15.20 POINTS OR 0.48%   / Australia BOURSE IN THE GREEN /Nikkei (Japan)CLOSED UP 102.93 POINTS OR 0.53%/  INDIA’S SENSEX IN THE RED

Gold very early morning trading: $1129.20

silver:$15.73

Early TUESDAY morning USA 10 year bond yield: 2.568% !!! UP 2 IN POINTS from MONDAY night in basis points and it is trading JUST BELOW resistance at 2.27-2.32%. THE RISE IN YIELD WITH THIS SPEED IS FRIGHTENING

 The 30 yr bond yield  3.140, UP 2 IN BASIS POINTS  from MONDAY night.

USA dollar index early TUESDAY morning: 103.58 UP 45 CENT(S) from MONDAY’s close.

This ends early morning numbers TUESDAY MORNING

And now your closing TUESDAY NUMBERS