US equity futures and Asian stocks were unchanged while European stocks declined after touching the highest level in almost a year, as Italian and Spanish banks dragged indexes lower. The dollar eased back from 14-year highs as bond yields fell on Wednesday and oil extended its advance in increasingly thin trading.

Spanish banks fell after a ruling in the European Union’s top court that may result in them handing back billions of euros to mortgage customers. Bank shares tumbled by as much as 10%. Borrowers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors are entitled to a refund from their banks, judges at the EU Court of Justice ruled in Luxembourg Wednesday.

As Bloomberg reports, the court said that a proposed time limit on the refunds is illegal and customers shouldn’t be bound by such unfair terms. Banco Sabadell SA fell as much as 7.5 percent, while Banco Popular slipped as much as 10.5%, the largest decliner in Spain’s Ibex 35 benchmark.

“This comes as a surprise and in a bad moment for Spanish banks as most of them would have to make extra provisions to pay for this,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. “It will mean pressure on capital generation and profits in the fourth quarter.”

Meanwhile in Italy, Banca Monte dei Paschi di Siena SpA fell on concern it may fail in its efforts to raise €5 billion euros of funds and after it said its liquidity may turn negative in four months. Oil traded above $53.50 a barrel as data showed U.S. stockpiles declined last week. The yen strengthened and the dollar slid from the highest since 2003 versus the euro.

Looking at Bloomberg data, volumes are thinning and swings in global equities are muted, with European equity volatility dropping to the lowest since 2014. The Trumflation rally has proppelled the Dow Jones to all time highs just shy of 20,000 on prospects for increased government spending in the U.S. and while Ray Dalio offered praise for Trump’s policies, Mohamed El-Erian and his former colleagues at Pacific Investment Management Co. say now’s a good time to take advantage of the latest rallies in global financial markets and scale back from risk.

“It makes total sense to take some money off the table,” El-Erian, the chief economic adviser at Allianz SE said Tuesday. “We’ve priced in no policy mistakes. We’ve priced in no market accidents, and we’ve ignored all sorts of political issues,” he said on Bloomberg TV. In October, El-Erian said that he held about 30 percent of his own money in cash.

The MSCI index of Asia-Pacific shares ex-Japan inched up 0.1% after a string of losses. Tokyo’s Nikkei share average fell, pulling back from earlier one-year highs to close down 0.3 percent.

In Europe, the Stoxx Europe 600 Index fell 0.1 percent in early trading. The gauge closed at its highest level since December 2015 on Tuesday. European banks led declines, falling 0.5%. Futures on the S&P 500 Index were little changed The gauge rose 0.3 percent to 2,266.5 on Tuesday, a point below its all-time high. The Dow Jones Industrial Average closed at record 19,974.62.

Yields on 10-year Treasury notes fell less than one basis point to 2.55 percent, after gaining two basis points Tuesday. Germany’s 10-year bund yields dropped two basis points to 0.25%. Among lower-rated bonds.
Spanish 10-year yields fell to five-week lows and Italian
equivalents also fell on concerns over banks. The premium over Spain that Italy would pay to borrow in bond markets briefly topped 50 bps for the first time since just after a failed Dec. 4 referendum on constitutional reform triggered Italian premier Matteo Renzi’s resignation.

The Bloomberg Dollar Spot Index was little changed after climbing for two straight days. The measure’s gain for the quarter is 7.6 percent, heading for the biggest three-month advance since the third quarter of 2008. Many analysts still see the dollar rising further, possibly to parity with the euro.  “The euro is in a fight between short-covering pressure and political angst. Economics doesn’t come into it at all. If Dow 20,000 is just a number but a magnet all the same, euro parity with the dollar will be every bit as magnetic,” said Kit Juckes at Societe Generale. “We’ll get there and get over-excited before too long.”

“We are seeing quite a lot of volatility. It is driven by the direction of the U.S. dollar. (Gold) is just marking time before it makes its next big move. It is in a very, very strong down channel,” said Jeffrey Halley, senior market analyst at OANDA.

The Swedish crown hit a two-month high against the euro after the Riksbank kept interest rates on hold and expanded its asset-buying program.

Lack of more dollar strength pushed oil higher by 0.7% to $53.69 in New York. Crude inventories dropped by 4.15 million barrels according to API data, and ahead of the EIA weekly report today which is expected to show further inventory declines.

Overnight Bulletin Summary from RanSquawk

• European equities trade mostly lower with peripheral banks once again under pressure as concerns continue to mount over the future of Banca Monte dei Paschi
• The standout theme today has been GBP, with losses against the EUR widely acknowledged to be front-loaded Dec buying out of Europe
• Looking ahead, highlights include Riksbank rate decision, US existing home sales and DoE crude oil inventories

Market Snapshot

• S&P 500 futures little changed at 2267.4
• Stoxx Europe 600 down 0.2% to 360.77
• MSCI Asia Pacific little changed at 135.31
• US 10Yr yield little changed at 2.56%
• Dollar index down 0.1% to 103.22
• WTI oil futures up 0.7% to $53.69/bbl
• Gold spot up 0.1% to $1133.26/oz

Top Market News

• TDK Corp. agreed to buy InvenSense Inc. in a deal that values the supplier of sensors to Apple Inc. and other smartphone makers at about $1.3b
• Coca-Cola Co. will pay $3.15b to buy Anheuser-Busch InBev NV out of an African bottling joint venture after the Budweiser brewer’s takeover of the U.S. beverage company’s partner in the region.
• Paschi plunged to a record low amid mounting concern it will fail in its effort to raise 5 billion euros ($5.2b) of funds from money managers and individuals
• A lifeline for China’s local junk bonds is about to get cut, threatening financing for weaker companies already grappling with mounting defaults
• Trudeau Joins Obama in Freezing Arctic Offshore Oil Drilling
• Swedish Central Bank Expands Stimulus as Record Easing Nears End
• Twitter CTO Messinger to Exit, Further Depleting Executive Ranks
• Calpers Staff Says Pension Should Lower Return Target to 7%
• Tesla Boosts Credit Lines Again to Aid Elon Musk Expansion
• Spanish Banks Lose EU Case Over Mortgage Interest Repayments
• Stanley to Sell Door-Locks Unit to Dormakaba for $725 Million
• FedEx Profit Disappoints as Spending Rises on Ground Delivery
• Nike Earnings Top Estimates, Easing Concerns About Slowdown
• Pandora Says Chief Operating Officer Sara Clemens Resigned
• Arizona Reduces Solar Incentive for Consumer Rooftop Systems
• Amazon Sells Out of Echo Speakers in Midst of Holiday Rush

Looking at Asian markets, stocks traded mostly higher following the positive lead from Wall St where financials outperformed and DJIA posted a fresh record high to close near 20,000. ASX 200 (+0.4%) was led higher by the materials sector after iron ore rose 2%, while Nikkei 225 (-0.1%) swung between gains and losses with cautiousness driven by a pullback in USD/JPY. Shanghai Comp (+1.2%) and Hang Seng (+0.6%) traded with an upbeat tone despite a further 6 Hong Kong banks increasing CNH deposit rates due to tight liquidity, as the PBoC conducted another firm liquidity injection and there were also reports China is to relax limits on stock index futures soon. 10yr JGBs saw quiet overnight trade with mild gains seen after sentiment in Japanese stocks began to sour and after today’s enhanced liquidity auction printed a higher b/c than previous. PBoC injected CNY 110bIn in 7-day reverse repos, CNY 70bIn in 14-day reverse repos, CNY 30bIn in 28-day reverse repos. PBoC set the mid-point at 6.9489, virtually unchanged from the last print of 6.9468.

In Europe bourses trade mixed (EUROSTOXX 50 -0.2%) this morning with Spanish and Italian banks underperforming. Spanish banks trade at session lows amid reports that banks have lost EU case on mortgage interest repayments and will face an extra bill and as such, CaixaBank are currently trading lower by 4.7%. Once again, Banca Monte dei Paschi are feeling the squeeze after trading at YTD lows with the latest reports suggesting the bank may only have 4 months of liquidity left (Prey. view was for 11 months) Elsewhere in equities, Volkswagen / Porsche have reached a new deal in which they will recall 83,000 vehicles over emission cheating with the estimated value of the agreement in the region of USD lbln. Fixed income markets are suffering from thin volumes with the only story of note coming from Greece, with the country are struggling to meet their payments to creditors in July 2017.

Top European News

• Spanish Banks Lose EU Case Over Mortgage Interest Repayments
• Italy Bank Rescue Won’t Fill $54 Billion Hole on Balance Sheets
• Meggitt Sells Meggitt Target Systems to QinetiQ Group

In currencies, the Bloomberg Dollar Spot Index was little changed after climbing for two straight days. The measure’s gain for the quarter is 7.6 percent, heading for the biggest three-month advance since the third quarter of 2008. The yen gained 0.3 percent to 117.56, after falling 0.7 percent on Tuesday. The euro added 0.1 percent to $1.0403, after touching an almost 14-year low of $1.0352 yesterday. The standout theme today has been GBP, with losses against the EUR widely acknowledged to be front-loaded Dec buying out of Europe. Cable has been pressed lower as a result, but this is also down to the pressure seen on EUR/USD, which is struggling to post any sort of recovery through 1.0400 as USD dips are consistently paid up. Some moderation in the AUD as Iron Ore prices rose 2%. Spot trade tight on .7250 today, while NZD/USD gains back above .6900 look temporary at best. USD/CAD buyers seen in the mid 1.3300’s, as yield sentiment overrules the Oil price relationship.

In commodities, oil climbed 0.7 percent to $53.69 in New York. Crude inventories dropped by 4.15 million barrels, the American Petroleum Institute was said to report. Data from the Energy Information Administration on Wednesday is also forecast to show supplies shrank. Gold rose 0.2 percent to $1,135.55 an ounce, after closing near a 10-month low Tuesday. As the Christmas break nears, activity slowly grinds to a halt, and nowhere more so than in commodities. Gold saw a minor upturn as the USD gives up some of its better levels, but the prospects of further downside look likely given 2017 projections for the greenback and stocks still very much on the front foot. Base metals are supported as a consequence, as are Oil prices, further bolstered by the API drawdown reported last night. Front month WTI highs seen just shy of USD53.80 so far today.

US Event Calendar

With Chinese liquidity markets turmoiling, bonds crashing, and gold premiums soaring, it appears growing concerns over capital controls tightening has sent Chinese fleeing into Bitcoin as a way to escape the mainland restrictions. Bitcoin is up over $30 today to its hghest since Dec 2013…

We first warned of this ‘outlet’ for Chinese capital in September 2015 when Bitcoin was trading around $200… its just topped $830…

As we noted recently, according to Bloomberg sources, Chinese officials are
considering policies including restricting domestic bitcoin exchanges
from moving the cryptocurrency to platforms outside the nation and
imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were “just a little behind the curve”, they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them
offshore, evading rules on foreign exchange and cross-border fund flows,
the report further reveals.

A quick look at the uncanny correlation between the decline in the
Yuan and the rise in the bitcoin, confirms that the digital currency has
indeed been largely used to evade capital controls.

And it appears pushing into Bitcoin is cleaner (for now) than precious metals as an alternative to the Yuan…

Note we saw this pattern in Nov/Dec last year also (as capital control fears grew) and that was followed by a surge back into gold.

end

In early European trading, shares of Italy’s third largest and most troubled bank were halted after crashing 17%, dropping to fresh all time lows, after the bank warned it is not only insolvent, but its liquidity could run out far sooner than expected.

BMPS shares initially dropped following yesterday’s news that the €5 billion private sector rescue plan appeared to be a dead end, after only €500 million in new capital was said to have been lined up, coming far short of the targeted bogey. An analysis by Swedbank said that adverse reports about Paschi’s efforts to find private capital are “quite discouraging” and added that “it seems as if a government intervention comes closer by the day.” It also noted that that government intervention that also abides by BRRD (Bank Recovery and Resolution Directive) rules will punish equity and junior bond holders, which is a major concern.

This was, however, compounded after Monte Paschi warned it expects to burn through around €11 billion euros of liquidity more quickly than previously forecast, according to a revised prospectus on the bank’s website.

The world’s oldest bank said it now expected its net liquidity position, currently standing at €10.6 billion, to turn negative after four months. This was a sharp deterioration from the most recent liquidity update just three days prior, when on Sunday the bank had forecast that a current net liquidity position would turn negative after 11 months under a number of assumptions. It said on Wednesday the position would be negative for 15 million euros on the 5th month and could worsen further to minus 740 million euros by the 12th month. This compares with the minus 100 million-euro level it forecast on Sunday for the 12th month.

The bank also noted that it had lost 11%, or €14 billion, of its total deposits from January to September 2016, and added that its liquidity levels would fall under the required level should it suffer another €10bn of deposit outflows under a “stress” scenario calculated by the European Central Bank. From the prospectus, as quoted by the FT:

The situation of the liquidity of the bank had progressively deteriorated until it reached, following the constitutional referendum of December 4, a time horizon of 29 days before which the bank would not be able to meet its liquidity requirements without seeking help from new interventions. That time horizon was calculated applying a stress situation where the bank saw an outflow of €10.3bn in a month.

However, just as the situation appeared terminally grim for the twice-bailed out bank, its shares soared briefly recovering all losses when moments ago Italy’s upper house of parliament approved a government request to borrow up to €20 billion in new public debt to underwrite bailouts of the country’s various troubled banks. The vote came just minutes after the lower house had also given its authorization for a hike in the national debt to cover an eventual intervention.

The twin votes clear the way for government action, possibly this week, and the result was a bout of optimism that Italy may just have kicked the can one more time, on expectations Monte Paschi would quickly request state funds to prevent it from collapse.

Amusingly, earlier in the day, Italy’s Finance Minister Padon told lawmakers that the “Italian banking system was solid.” Maybe it is for the next few months, and all it will cost taxpayers is another €20 billion in public debt.

We now await Germany’s statement on what appears to be yet another government bailout of insolvent European banks.