US equity futures continued their push higher overnight (ES +0.1%), and the VIX is 1.5% lower and back under 10, after yesterday’s blistering surge in US stocks which jumped 1%, the most since Sept. 11, following Powell’s deregulation promise, ahead of today’s 2nd estimate of U.S. Q3 GDP which is expected to be revised up. U.S. Senate Budget Committee sent the tax bull to the full chamber to vote, and on Wednesday Senators are expected to vote to begin debating the bill. The biggest mover of the session however was bitcoin, which topped $10,000 in a buying frenzy which saw it go from $9,000 to $10,000 in one day, and which is on its way to rising above $11,000.
In macro, the dollar steadies as interbank traders and hedge funds fade its rally this week; today’s major event will be testimony by outgoing Fed chair Janet Yellen after Powell said there is no sign of an overheating economy; the euro has rallied on strong German regional inflation while pound surges on Brexit bill deal news; yields on 10-year gilts climb amid broad bond weakness; stocks rise while commodities trade mixed.
In Asia, equity markets were mixed for a bulk of the session as the early euphoria from the rally in US somewhat petered out as China woes persisted (recovered in the latter stages of trade). ASX 200 (+0.5%) and Nikkei 225 (+0.5%) traded higher. Korea’s KOSPI was cautious following the missile launch from North Korea, while Shanghai Comp. (+0.1%) and Hang Seng (+-0.2%) initially remained dampened on continued deleveraging and regulatory concerns before paring losses into the latter stages of trade. Notably, China’s PPT emerged again with Chinese stock markets rallied in late trade, with the CSI 300 Index of mainly large-cap stocks paring a drop of as much as 1.3% to close 0.1% lower. The Shanghai Composite Index rose 0.1%, swinging up from a 0.8% loss, with property and materials companies among the biggest gainers on the mainland. The Shanghai Stock Exchange Property Index surged 3.8%, the most since August 2016. The Shenzhen Composite Index was little changed, after a 1.2% decline, while the ChiNext gauge retreated 0.4%, paring a 1.5% loss. In Hong Kong, the Hang Seng Index was little changed as of 3 p.m. local time, while the Hang Seng China Enterprises Index fell 0.3%Stocks in Europe gained, following equities from the U.S. to Asia higher as optimism over U.S. tax reform and euro-area economic growth overshadowed concerns about North Korea’s latest missile launch. The Stoxx 600 gained 0.8%, reaching a one-week high and testing its 50-DMA. Germany’s DAX, France’s CAC, Milan and Madrid were all up between 0.5 and 0.7% and MSCI’s all-country world index was at yet another record peak after all four major Wall Street indexes notched up new highs on Tuesday. “It seems to me markets are still trading on the theory that the glass is half full,” said fund manager Hermes’ chief economist Neil Williams.
Meanwhile the FTSE 100 fell 0.5%. The UK stock index typically has an inverse relationship with the pound as its members get 3/4 of their revenues from outside the country. As a reminder, the British pound surged on Tuesday after media reports that the UK cleared a major Brexit hurdle.
“Today’s gains will be vulnerable, and the market will keep a very close eye on anything about North Korea. There’s serious risk of escalation, and it could offset any positive news on the U.S. tax bill,” Benjamin Philippe, fund manager at Degroof Petercam Gestion, says by phone.
Some analysts, however, did warn of the risks of unintended consequences if the package was passed. “Tax cuts will mainly boost the demand side of the economy at a time when the economy has little spare capacity,” said Jeremy Lawson, chief economist at Standard Life Investments. “For that reason, the package will primarily bring forward activity with most of the stimulus eventually offset by the Federal Reserve lifting interest rates more quickly.”
Meanwhile, in the U.K., price action was driven in reaction to the news that a Brexit divorce payment had been agreed upon, with gilts dropping and sterling jumping to a two-month high as investors brought forward their expectations for the next interest-rate increase by the BoE to September 2018 after Brexit negotiators agreed to an outline divorce deal. The FTSE 100 stock index fell.
It was a busy geopolitical session, with North Korean leader Kim Jong Un saying his regime completed its nuclear program after firing a missile that put the entire U.S. in range. The launch shattered a two-month period of relative quiet in its first provocation since U.S. President Donald Trump’s decision this month to label the country a state sponsor of terrorism. Trump responded that “we will take care of that situation.”
North Korea said its missile program will not threaten any country as long as North Korea’s sovereign gains are not infringed, and confirmed it fired a new type of ICBM named Hwasong-15 which was ordered by leader Kim, adds launch was successful and could reach all of mainland US. President Trump and Japanese PM Abe agreed to strengthen deterrence capability against North Korea, also agreeing that China needs to play a greater role regarding North Korea. Additionally, South Korean President Moon said South Korea will strengthen its capabilities against North Korean provocation, while urging North Korea to stop reckless provocation and come to path of dialogue.
Meanwhile, back in the US, the Senate tax bill is headed for a marathon debate this week after the budget committee voted Tuesday along party lines to send the Republican plan to the floor. Republican holdouts, Bob Corker of Tennessee and Ron Johnson of Wisconsin, dropped their objections shortly before the vote.
Following yesterday’s confirmation hearing testimony by Fed chairman nominee Powell, who said the case for a December rate hike “is coming together” and suggested that Dodd Frank would be rolled back as a new wave of deregulation hits the market, today it’s Janet Yellen’s turn to speak on the Hill.
Euro zone government bond yields edged higher meanwhile as the first instalments of German state inflation data pointed to another uptick for Europe’s largest economy, which should bolster the ECB’s move to wind down its stimulus. “In recent months we have seen core inflation dropping, and that has been identified by the ECB as a key measure,” said ING strategist Martin van Vliet. It all helped the euro reassert its recent dominance over the dollar. The euro climbed up to $1.1870 and against a basket of currencies the dollar was down 0.2 percent at 93.075 .DXY and not far off a two-month trough touched on Monday. The dollar was steadier against the yen at 111.54 yen and away from a 10-week low of 110.85, while the pounds jump on a trade-weighted basis was 1.4 percent, its best since April.
In other rates markets, the yield on 10-year Treasuries gained one basis point to 2.34%, Germany’s 10-year Bunds rose two basis points to 0.34%, the biggest increase in almost three weeks, while Britain’s 10-year yield increased six basis points to 1.253 percent, the highest in more than two weeks on the largest increase in almost three weeks.
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