European, Asian stocks fall and U.S. equity-index futures traded mixed on Monday with fresh memories of the Dow Jones rising to under 1 point of 20,000 on Friday. The dollar has rebounded on fresh geopolitical concerns, while the pound extends its decline from Friday and has slide to 10 week lows on a Sunday interview from Theresa May which suggested a “Hard Brexit” may be in the cards. Oil dropped below $54 a barrel on Iran supply concerns, while gold rose 0.6% to $1,180.

Top stories include potential candidates to head the Federal Reserve in 2018 suggest they would pursue tighter policy; McDonald’s selling control of China business to Citic, Carlyle; Air Products looking to buy China’s top industrial gas maker.

A key focus for the week will be a news conference on Wednesday at which Donald Trump may give more details of his policies before his Jan. 20 inauguration. Expectations of more economic stimulus from a Trump administration have helped push U.S, stocks and bond yields higher since his victory in the Nov. 8 election.

Political risks have emerged as the week begins, rippling across FX markets with the pound, Turkish lira and South Korean won leading declines, while gold rose on haven demand and Chinese buying.

The dollar edged higher on Monday, boosted by robust U.S. wage growth data strengthening the case for more Federal Reserve interest rate increases, while Britain’s pound fell on Prime Minister Theresa May’s hint at no membership of the EU’s single market. Still, Britain’s blue-chip FTSE 100 index nonetheless hit a record high, continuing its streak of all time highs, as the first full trading week of 2017 on London markets began. The pan-European STOXX 600 index dropped 0.4% in early deals.

Sterling dropped to a 10-week low after the Prime Minister Theresa May indicated she prioritized regaining control of immigration during Brexit negotiations, while tensions between North and South Korea and debates on constitutional changes in Turkey put an index of developing currencies on track for the steepest drop in three weeks. Telecoms and real estate were among the biggest losers in European shares, while oil dropped for the first time in four days. Gold rose as investor holdings posted the first back-to-back increase since the U.S. election.

“The rise in the FTSE is really down to the weakness in sterling, but the Brexit news is not great so I don’t see the FTSE gaining too much,” said Ipek Ozkardeskaya, market strategist at London Capital Group.

The Turkish lira dropped to new record lows after a warning from Moody’s about the country’s bad loan situation, while deputy PM Canikli blamed an “unacceptable campaign” to move interest rates higher.

As Bloomberg notes, currencies, not bonds, have emerged as the preferred way for investors to express displeasure with political developments, because “they are seen as less vulnerable to intervention”, which may be true in most places except China where after this weekend’s report that Chinese reserves dropped by another $41 billion, all eyes are on how Beijing responds to the relentless capital flight. The offshore yuan was down 0.4 percent following Friday’s 0.9 percent retreat. The central bank set the onshore yuan reference rate 0.9 percent weaker against the dollar, though still stronger than some bank models predicted.

Meanwhile, British PM May said Sunday that negotiations on Brexit will be about “getting the right relationship, not about keeping bits of membership.”  A so-called hard Brexit may push the Bank of England to keep rates lower for longer, while weakening the pound and supporting foreign-focused companies in the main stock index, Bloomberg added. As a result, the pound fell to $1.2159, the lowest since Oct. 31, at 11:04 a.m. in London.

“Since October it’s become clear that sterling has a very binary relationship with political news, and anything which suggests a ‘hard Brexit’ sends sterling down, and anything that suggests a ‘soft Brexit’ sends sterling up. That’s been the case since the party conference in October,” said Rabobank currency strategist Jane Foley.

“Politics is a much more important factor these days for currency markets than it used to be,” said Adam Cole, head of global foreign-exchange strategy in London at Royal Bank of Canada. “There is a lot more political uncertainty now.”

In light of the geopolitical uncertainty, after dipping in initial trade, the Bloomberg Dollar Spot Index rebounded from an earlier loss and was up 0.2%.

In Asia, MSCI’s ex-Japan Asia-Pacific shares index was flat on the day, having risen as much as 0.5 percent after posting a rare loss in the previous session. Australia’s S&P/ASX200 rose 0.9 percent while Hong Kong shares rose 0.2%. Trading was light because Japan is shut for a holiday.

In Europe, the Stoxx Europe 600 Index fell 0.5%, on course for its biggest decline in almost four weeks. The main outperformer was the U.K. market, with the FTSE 100 Index heading for a 10th consecutive daily increase, as stronger economic data combined with a declining pound spurred buying.

• Deutsche Lufthansa AG tumbled as much as 5.6 percent after analysts were underwhelmed by the airline’s guidance update.
• Swedish bank Svenska Handelsbanken AB dropped after a downgrade at Credit Suisse Group AG.

The S&P 500 futures were little changed. The underlying gauge rose 0.4 percent to a record close of 2,276.98 on Friday in New York.

In rates, German 10-year government bond yields last traded at 0.29%, down 0.5 basis points on the day. It earlier rose close to 0.33 percent, its highest since Dec. 19, after data showed German exports rose 3.9 percent in November, their strongest monthly gain since May 2012 and far ahead of forecast.

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Market Snapshot

• S&P 500 futures down less than 0.1% to 2271
• Stoxx 600 down 0.4% to 364
• FTSE 100 up 0.2% to 7228
• DAX down 0.4% to 11555
• German 10Yr yield down less than 1bp to 0.29%
• Italian 10Yr yield down 6bps to 1.9%
• Spanish 10Yr yield down 6bps to 1.48%
• S&P GSCI Index down 0.8% to 395.1
• MSCI Asia Pacific down 0.2% to 138
• Hang Seng up 0.2% to 22559
• Shanghai Composite up 0.5% to 3171
• S&P/ASX 200 up 0.9% to 5807
• US 10-yr yield down 2bps to 2.4%
• Dollar Index up 0.23% to 102.45
• WTI Crude futures down 1.7% to $53.06
• Brent Futures down 1.7% to $56.11
• Gold spot up 0.3% to $1,176
• Silver spot down less than 0.1% to $16.49

Top Headline News

• Potential Fed Chairs Suggest They Would Pursue Tighter Policy: potential candidates to head the Fed in 2018 suggested that monetary policy would be tighter if they were in charge
• McDonald’s Sells Control of China Business to Citic, Carlyle: McDonald’s in agreement to sell 80% of its operations in China and Hong Kong to a consortium including Citic and Carlyle Group
• Air Products Looks to Buy China’s Top Industrial Gas Maker: target shares jump in Hong Kong trading after intent letter
• Morgan Stanley, UBS Said to Plan Boosting China JV Stakes: banks plan to boost holdings to regulatory threshold of 49%
• Frozen in Detroit: Trump Stumps Builders of Cars in Age of SUVs
• Fiat Chrysler Spends $1 Billion on U.S. Amid Trump Squeeze
• VW Taps Hippie Heritage With Electric Microbus Amid Revamp
• Volvo Cars Plans to Export Half of South Carolina Plant’s Output
• FBI Said to Have Arrested Ex-VW Exec on Conspiracy Charges: NYT
• ‘Rogue One’ Cruises to Fourth Weekend Atop Box Office

Asian equity markets traded higher after a strong close in the US on Friday, where all 3 major US equities posted gains and DJIA came within 0.37 points of the 20,000 level. ASX 200 (+0.9%) outperformed to trade in the green for the fifth consecutive day, with the IT sector taking the impetus from its US counterparts to lift the index higher after a flat open. However, gains were capped as a slightly stronger AUD, and lower government iron ore demand predictions weighed on mining names. KOSPI (flat) lagged amid uncertainty in the country as the parliamentary committee held its last hearing for the case surrounding impeached President Park, with South Korean heavyweight SK Hynix shares trading higher by over 3% to help keep the index afloat. In China, markets were mixed with Shanghai Comp (+0.5%) boosted by a relatively firmer liquidity operation by the PBoC and Hang Seng (+0.3%) choppy initially as China’s CSRC stated it will increase the importance of risk prevention in the stock market this year, however rallied as the session progressed to conform to the upbeat tone. Nikkei 225 was closed due to the Coming of Age Holiday.

Top Asian News

• North Korean Nukes Seen Hurting Trump Re-Election Prospects: nation will probably claim with credibility within four years that it can hit U.S. with a nuclear weapon
• Singapore Demands Hong Kong Return Seized Military Vehicles: City-state yet to open direct dialog with China on carriers
• Rubber Prices Climb as Deadly Floods Damage Thai Plantations: Inundation set to affect rubber supplies in weeks ahead

European equities (-0.4%) trade broadly lower this morning, with the energy sector the most notable laggard. In terms of a stock specific basis, Volkswagen (+4%) are the best performer in the DAX after reporting FY 2016 brand sales +2.8%. Elsewhere, the FTSE 100 bucks the trend to trade in positive territory (+0.1%), with exporters benefitting from the softness in GBP, with some also talking about whether more monetary easing may be necessary after Theresa May indicated over the weekend that single market membership may not be achievable in Brexit talks.

European Econ data

• German Nov. Ind. Production Rises 0.4% M/m; Est. +0.6% M/m
• German November Exports +3.9% M/m; Est. +0.5% M/m
• Bank of France December Business Sentiment Rises to 102 vs 101
• Italy Unemployment Rate Rose to 11.9% in November; Est. 11.6%
• Eurozone January Sentix Investor Confidence 18.2 vs Est. 12.8
• Eurozone Nov. Unemployment Rate 9.8%; Est. 9.8%

Top European News

• German Industrial Output Climbs in Sign of Economic Strength: output gained 0.4% in November vs estimated 0.6% increase; Economy Ministry sees solid output growth in winter half
• May Signals U.K. to Quit Single Market to Curb Immigration: May denies “muddled” thinking, pledges Brexit details in weeks; Pound weakens as May’s comments indicate hard Brexit
• Christmas Sports Bets Bring Tough End to Year for William Hill: profit will be about 20 million pounds less then expected
• Euro-Area Unemployment Holds at 7-Year Low as Growth Strengthens: joblessness remains at 9.8%, in line with estimate; unemployment lowest in Germany, highest in Greece and Spain
• Italian Unemployment Rate Rises to Highest Since June 2015
• Lufthansa Forecasts ‘Clearly Negative’ Trend in Yields for 2017: shares decline; outlook underwhelming, analysts say
• Fresenius Medical Care Shares Slump After Patient-Aid Subpoena: shares down the most in almost 2 months
• Italy Clears Hurdle in Monte Paschi Rescue Without Even Trying: European Commission has to approve application for state aid

In currencies, the pound fell to a 10-week low, or $1.2159, the lowest since Oct. 31, at 11:04 a.m. in London. The Bloomberg Dollar Spot Index rebounded from an earlier loss and was up 0.2 percent. The offshore yuan was down 0.4 percent following Friday’s 0.9 percent retreat. The central bank set the onshore yuan reference rate 0.9 percent weaker against the dollar, though still stronger than some bank models predicted.  The won fell 1.3 percent and the lira 2.2 percent, dragging the MSCI Emerging Markets Currency Index 0.4 percent lower for the biggest drop since Dec. 15. The yen fell 0.2 percent to 117.28 per dollar and the won slid 1.3 percent, the most in two months.

In commodities, West Texas Intermediate crude oil dropped 1.5 percent to $53.16, halting its advance below $54 a barrel as an increase in U.S. drilling offset signs OPEC members are sticking to planned output cuts. Adding to the pressure was the Friday report of a surge in Iranian exports and selling from its offshore inventory, as well as the addition of more rige by US producers.  Gold rose 0.4 percent to $1,176.7 an ounce.

US Government:

• Senate in session, plans consideration of budget resolution; House in session and could consider bills related to regulations and investing in startups
• 10am: Supreme Court hears oral arguments
• 11:30am: HUD Sec. Julian Castro delivers remarks on housing market and protections for HUD-assisted residents

US Event Calendar

• 9am: Fed’s Rosengren Speaks in Hartford, Connecticut
• 2pm: Fed’s Lockhart Speaks to the Rotary Club of Atlanta
• 3pm: Consumer Credit, Nov., est. $18.400b (prior $16.018b)

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DB’s Jim Reid concludes the overnight wrap

As my year starts I wanted to recap for my own benefit the key early moves seen so far in 2017. The most significant have probably been those in rates and FX. 10y Treasury yields are 2.5bps lower compared to where we finished 2016 at 2.420% although that masks what has been an 18.4bps intraday high-to-low range over the week. At 0.294%, 10y Bund yields on the other hand are 9.3bps higher while in the periphery 10y yields in Italy, Spain and Portugal are 14.8bps, 15.7bps and 28.5bps higher respectively. In fact the latter crept over 4% for the first time since last February after the latest ECB PSPP holdings data revealed a much slower than expected rate of purchases in Portugal last month relative to its implied capital key. With the ECB tapering discussion clearly still topical last week’s European data and in particular the inflation numbers were all fairly supportive too. In fact our European economists noted that their SIREN-Momentum and SIREN-Surprise indicators are currently above 85% and 90% of their respective readings over the past decade. Their combined reading stands close to the top two percent of historical observations.

Meanwhile in FX the USD index ended the week pretty much unchanged but again with a notable 2.43% range. Indeed there were fairly sizeable daily moves as investors balanced the FOMC minutes with Trump’s appointments and tweets and also the big move for the Chinese Renminbi which saw the offshore currency rally +1.81% last week. More on that shortly. EM currencies on the whole had a fairly decent week (Russian Ruble and Colombia Peso stand out after rallying nearly 3% each) while the MSCI EM equity index returned +2.18% as commodities – and in particular metals – started the year by building on recent highs. Elsewhere credit markets have started positively. In the US CDX IG is 3bps tighter at 64.7bps and close to the recent tights while in Europe the iTraxx Main is 4bps tighter at 69bps with that index also creeping in on last year’s tights.

Financials have also gotten off to a decent start with the iTraxx senior and sub fins indices 7bps and 23bps tighter respectively. The big news in credit though has been the incredible start for primary markets. Indeed the US IG market stands out in particular with total issuance of over $60bn last week, making it one of the biggest weeks on record. Even more impressive is the fact that there was no one or two bumper offerings, unlike other record weeks. Finally, where it’s been a bit quieter is equity markets. That said it’s still been a decent start with the S&P 500 (+1.70%) and Dow (+1.02%) both up (the latter within a whisker of the 20,000 level) following further gains on Friday while the Stoxx 600 turned in a +1.12% return last week. European Banks also rallied to the tune of +3.79%.

The highlight of the upcoming first full week of 2017 might well be President-elect Trump’s first news conference on Wednesday since his election win. His tweets continue to be market moving events for the stocks and sectors it influences and very soon there will be more and more macro consequences of his musings and actual policy decisions. So watch out for things to hot up after Wednesday. Remember also that the inauguration is a week on Friday and we’ll soon be into the well watched first 100 days.

China won’t be far from Mr Trump’s crosshairs in 2017 and as mentioned earlier the big story here so far this year has been the +1.81% strengthening of the offshore RMB last week. At one stage on Friday the currency was as much as +2.78% stronger in 2017 before it gave back some of those gains on Friday. It’s given back another -0.48% this morning too with offshore lending rates also notably lower (CNH Hibor down to a still elevated 14% from 69% on Friday) and in fact it’s now on course for the biggest two-slide since June last year. So China is ruffling a few feathers again at the start of a New Year. It’s worth also noting that the weekend data showed that China’s foreign reserves fell for a six month in a row in December and to a five-year low of $3.01tn, albeit pretty much bang on consensus.

On a related topic, over the weekend our China economists published a report discussing their view of the Dec-31 Decree issued by the PBoC stipulating new reporting regulations regarding large/suspicious financial transactions. They highlight that the Decree could potentially pose a severe hit to “capital flight without cross-border fund flows”. They also note that the Decree is an “infrastructure building” effort with regulatory implications far beyond capital control. Better tracing of large/suspicious financial transactions will not only serve for anti money laundry, but also help with, for instance, regulation of shadow banking activities.

Elsewhere this morning equity markets in Asia are generally off to a decent start to the week. The Shanghai Comp (+0.56%), ASX (+0.93%), Hang Seng (+0.04%) and Kospi (+0.12%) have all edged higher while markets in Japan are closed for a public holiday. There’s been some interesting corporate news too with the announcement that McDonald’s is to sell 80% of its China franchise for about $2bn with Chinese state-backed conglomerate Citic Group to take a 52% stake. Meanwhile Sterling (-0.38%) has weakened following a Sky News interview yesterday with UK PM Theresa May in which she said the eventual exit of the UK from the EU will be about “getting the right relationship” and “not about keeping bits of membership”. May also played down Ivan Rogers’ comments last week when he criticised the government’s “muddled thinking”, while May added that the government “will be setting out some more details in coming weeks as we look ahead to triggering Article 50”.

Moving on. For those that missed it, Friday was all about the final US employment report of 2016. While headline nonfarm payrolls may have appeared a touch disappointing at first glance having come in slightly below consensus (156k vs. 175k expected), there was also a cumulative 19k of net positive revisions to the prior two months. That was a similar story for private payrolls (144k vs. 170k expected) where the November reading in particular was revised up to 198k from 156k at the first reading. Meanwhile the rest of the report was generally supportive. The U-3 unemployment rate ticked up as expected to 4.7% although the broader U-6 rate dropped one-tenth to 9.2% and in doing so hit a new postfinancial crisis low. The labor force participation rate nudged up one-tenth to 62.7% while average weekly hours held steady at 34.3hrs. The report might however be best remembered for the +0.4% mom gain in average hourly earnings (vs. +0.3% expected) which has helped the YoY rate to accelerate to +2.9%  from +2.5% – the highest since June 2009.

As noted earlier US equities took heart from the report, helping the S&P 500 to rise +0.35% while 10y Treasury yields reversed a decent part of the moves in the previous two days to close 7.5bps higher. The  USD index (+0.69%) also rallied back while Gold (-0.63%) nudged lower. The other data in the US on Friday didn’t offer too much to the debate. The November trade balance revealed a further widening in the deficit to $45.2bn from $42.4bn. Finally factory orders weakened a little bit more than expected in November (-2.4% mom vs. -2.3% expected). Following all that the Atlanta Fed left their Q4 GDP forecast unchanged at 2.9% while the NY Fed raised their growth forecast to 1.9% from 1.8%.

There was also some Fedspeak to take stock of on Friday. The Philadelphia Fed’s Harker said that “I’m pencilled in for 3 rate increases” this year. The Dallas Fed’s Kaplan confirmed that the December SEP, which had a median projection of 3 rate hikes this year “gives you a sense of my views” but that the Fed needs to be nimble to revise forecasts as events unfold. Finally the usually dovish Chicago Fed’s Evans confirmed that 2 hikes this year is “not an unreasonable expectation” and that 3 hikes is “not implausible”.

Before we look at the week ahead, for completeness in Germany on Friday the hard data was a little bit disappointing with both November factory orders (-2.5% mom vs. -2.4% expected) and retail sales (-1.8% mom vs. -0.9% expected) declining more than expected. The European Commission’s index of economic sentiment was however reported as rising 1.2pts in December to 107.8 and more than expected.

Moving now to this week’s calendar. We’re kicking off the week in Europe this morning with Germany where the latest industrial production and trade data is due. Business sentiment data in France follows along with the latest house price data in the UK, before we get then get the Sentix investor confidence reading for the Euro area and also the November unemployment rate reading. Over in the US we’ve got the usual post-payrolls lull but the November consumer credit reading will be out this evening. We’re kicking off Tuesday in China where the December CPI and PPI prints will be due. In Europe the only data due out is the latest industrial production numbers in France while in the US the NFIB small business optimism reading is due for last month, along with the November wholesale inventories and trade sales report and also the November JOLTS job openings report. Wednesday kicks off in the UK with the November trade data and also industrial and manufacturing production prints. There’s no data of note in the US on Wednesday. Japan gets things going on Thursday with November trade data. During the European session we’ve got inflation data in France, GDP in Germany and industrial production data for the Euro area all due. Over in the US the data includes initial jobless claims, import price index and the December monthly budget statement. During the Asia session on Friday the highlight is likely the December trade report in China. It’s a quiet end to the week in Europe with no notable releases due. In the US we finish the week with the December PPI report and retail sales, November business inventories and finally a first look at the January University of Michigan consumer sentiment reading.

Away from the data the Fedspeak this week consists of Rosengren and Lockhart today, Harker, Evans, Bullard and Kaplan on Thursday and Fed Chair Yellen early on Friday morning when she is due to host a town hall meeting with educators from across the country. Q&A is however expected. The ECB will also release the minutes from the December policy meeting on Thursday. Meanwhile, this week earnings season will start to kick into gear with JP Morgan, BofA and Wells Fargo all reporting on Friday. Perhaps the most hotly anticipated event this week however will be President-elect Trump’s aforementioned general news conference on Wednesday, the first since his election victory. That will also come one day after President Obama’s televised farewell speech from Chicago.

Following earlier speculation, and concerns over conflicts of interest, NBC News’ Peter Alexander has confirmed that Jared Kushner, President-elect Donald Trump’s son-in-law, will be named senior adviser to the president.

As Forbes details,

Jared Kushner plans to step down from his role at Kushner Cos, the firm he took over from his father, as he prepares to be one of the key figures in Donald Trump’s White House.

 

Kushner has been the president-elect’s point man on foreign policy, even acting as the go-between for the outgoing administration to Trump on matters around the globe, the New York Times reports. Kushner and his wife, Ivanka Trump, bought a house in Washington, DC, close to the Obamas’ post-presidency home.

 

The Times also reported that Kushner has been taking meetings with Anbang Insurance Group — the Chinese giant that paid a record price for the Waldorf Astoria Hotel and has been on a major global buying spree — about selling some Kushner assets, including 666 Fifth Ave, the most high-profile property in the company’s expansive portfolio.

 

Trump’s transition team had previously requested security clearance for Kushner, and Trump has publicly identified Kushner, an Orthodox Jew, as someone who would be heavily involved in Middle East diplomacy. Despite Kushner’s personal political pivot, his company remains active, most recently as part of a partnership that paid $345M for a development site in Dumbo, Brooklyn, according to The New York Times.

For a full background on Kushner, see here.

While mainstream media clung to The White House spin of record monthly streak of jobs gains after Friday’s payrolls, The Fed’s own Labor Market Conditions Index (LMCI) paints a very different picture of the health of the American job market. With a 0.3% drop in December, the LMCI is now down 5.8% year-over-year, the biggest plunge since Jan 2010.

We are sure The Fed wishes it never created this index…

As we noted previously, that’s only the eighth time in nearly 40 years the index was down on a year-over-year basis, Deutsche Bank Chief U.S. Economist Joseph LaVorgna wrote in a note to clients today. Of the seven previous occasions, LaVorgna wrote, “four were soon followed by recession.”

(In the three other cases, two were false alarms, in 1986-87 and 1995-96, and in 1981 the recession began shortly before the annual change in the LMCI turned negative.)

LaVorgna said the weakness in the LMCI indicates a rising possibility of recession.

“The upshot is that the economic outlook remains fragile despite the ostensible robustness of the labor market,” he wrote.

One look at the historical revisions (notably the last few months) and it’s clear, however, every effort is being made to improve this data…

Perhaps the economy being handed to Donald Trump is not as ‘awesome’ as some would suggest?