World Stocks At All Time Highs After Nikkei’s Record Winning Streak; Euro Slides With Spain On Edge

In an otherwise quiet session, Sunday’s convincing election victory for Japanese Prime Minister Shinzo Abe’s ruling coalition, which gave it another constitution-changing super majority, pushed the Nikkei to the highest level since 1996, after a record 15 consecutive days of gains – the longest winning streak on record – and sent world stocks to new all-time highs on Monday.

Over the weekend, Japan’s Abe was re-elected and his coalition reinvigorated by an increased share of the vote. Common “hot takes” are that this means: further stimulus for Japan; Governor Kuroda is now more likely to serve another term at the BoJ; and therefore a weaker JPY. On the flip side, just as many argue that this is simply an extension of the status quo – USD/JPY is little changed so far, after rising briefly above 114.

That said, it appears that the BOJ’s relentless buying of anything that isn’t nailed down has started to trickle down: corporate Japan is having its best year for earnings since 2000, with the country getting the most EPS upgrades since 2010.

Meanwhile, in Europe an escalation of Spain’s constitutional crisis weighed on the country’s banks. S&P index futures are modestly green, and set for another record high in the cash index, while stocks in Asia and Europe were mixed after an early push higher, on concerns over the outcome of the Catalonia independence crackdown.

Still, it could be worse: “At this moment you’ve not got contagion from Spain to the broader European market. It’s seen as a national and localized issue,” said Pierre Bose, head of European equities strategy at Credit Suisse.

Among the other key developments over the weekend, Spanish PM Rajoy invoked article 155, in which he plans to dissolve Catalonia government and curb its authority, while he also seeking to call elections within 6-months. Voters in Italy’s Lombardi and Veneto regions overwhelmingly voted for more autonomy from Rome.  UK Brexit Sec Davis said on Friday that the UK doesn’t want a ‘no deal’ outcome on Brexit, but added that the UK will be ready if it occurs.  Markets are bracing for the European Central Bank to signal baby steps away from its ultra-easy monetary policy stance this week and for the U.S. Federal Reserve to hike rates in December.

“Now there’s a renewed mandate for quantitative easing, which means a weaker yen and stronger Japanese government bond prices. It also has a significant spillover for other developed markets,” said Peter Chatwell, head of euro rates strategy at Mizuho.

In macro, the dollar strengthened while 10-year Treasury yields hovered near 2.40% on optimism Trump is close to pulling off a tax overhaul and may announce the next Fed chief as soon as this week. The Bloomberg dollar index DXY extended gains from Friday when it closed above its 100-DMA for first time since March. Late last week, Trump said he’s considering Stanford University economist Taylor – the most hawkish candidate – and Governor Powell for top job at the Fed, while indicating Chair Yellen remains in the running.

“The U.S. dollar is finding fresh yield support on optimism over a deal to cut corporate taxes and the perception that John Taylor remains a strong contender for Fed chair,” Sean Callow, an FX strategist at Westpac told Bloomberg. “The 2.40 percent level remains critical for the 10-year Treasury note, so the dollar is not yet off to the races.”

The USD/JPY rose to a fresh 3-month high after Japan’s ruling coalition retained its two-thirds lower house majority in Sunday’s election, ensuring continuity of BOJ’s loose monetary policies; it traded above 114 in the early part of the session, before sellers stepped in to fill the gap. Meanwhile the euro weakened a second day as investors waited for the next big development in Spain, where Catalan separatists are planning their response after Prime Minister Mariano Rajoy moved to stamp his authority on the region.

Major Asia-Pac indices were mixed although Japan stocks rose again by 1%, after the blowout win by PM Abe’s ruling bloc at the snap election. Nikkei 225 (+1.1%) led the region after the ruling coalition gained a super majority at Sunday’s election, which keeps Abenomics firmly in place and paves the way for possible constitutional changes. Japan’s Topix index also climbed 0.8%, cementing a rally to the highest since mid 2007. Australia’s ASX 200 (-0.2%) failed to hold onto initial gains and a mixed tone was observed in Chinese markets, in which the Shanghai Composite (flat) ignored a significant liquidity operation by the PBoC; there were strong gains in consumer and healthcare firms although trading volumes remained thin as investors awaited policy cues from a party congress and fresh data showed growth in new home prices slowed to a crawl in September. The Hang Seng (-0.7%) underperformed on technical selling after it met resistance around 28,500. 

Stoxx 600 rose 0.4%, powered by the slumping Euroe even as the IBEX 15 once again lagged peers in early European trading, led lower by banking stocks after Spain moved to take full control of Catalonia over the weekend, while Catalan officials state that they will not follow orders from Madrid and meet Monday to prepare their reply to Rajoy. Elsewhere, major EU bourses have been oscillating between gains and losses amid quiet newsflow. The biggest losers are Spanish banks, with  BBVA down 1.8%, Sabadell down 1.4%, Bankia down 1.2%, CaixaBank down 1.1%. As Bloomberg notes, Sabadell is down 9% since Catalan referendum on Oct. 1, CaixaBank down 10%, IBEX down 2.1%; Stoxx 600 is up 0.5% over same period.

Concerns about Spain weighed on rates, with the yield on 10-year Treasuries was unchanged at 2.38 percent, after rising to 2.40%, the highest in more than 15 weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest fall in a week.

London copper traded steady after Chinese authorities reaffirmed that the country’s economy was on track to achieve the official growth target, while a firmer dollar nudged gold down 0.4 percent to $1,275.60 an ounce. Oil prices edged ahead on supply concerns in the Middle East and as the U.S. market showed further signs of tightening while demand in Asia keeps rising. West Texas Intermediate crude declined 0.1 percent to $51.79 a barrel. Gold decreased 0.4 percent to $1,275.31 an ounce, the weakest in more than two weeks.

This week is heavy on potential investor catalysts, from the election in Japan to the boiling Catalonia crisis and very different moves toward autonomy in parts of Italy. Away from politics central banks loom large, with a pivotal European Central Bank meeting due and the possible unveiling of President Donald Trump’s pick for Fed chair. Traders will also be watching U.S. growth data and Trump’s efforts to overhaul America’s tax code. U.K. Prime Minister Theresa May is likely to make a statement to Parliament on Monday on the progress of Brexit talks following the latest European Union summit. The U.S. economy probably expanded at about a 2.5 percent annualized pace in the third quarter, restrained in part by the effects of two hurricanes, economists forecast the government to report on Friday. The European Central Bank holds a policy meeting on Thursday at which it’s expected to announce its stimulus plan for 2018.