Via Zerohedge

Not even in his wildest dreams did BofA’s chief investment strategist Michael Hartnett expect the meltup to push the S&P500 to 3,333 before March 3. At the rate we are going, that bogey will be hit next week. World stocks set new record highs on Friday, with the world’s most valuable stock Apple leading the furious, euphoria meltup, while safe-haven assets such as gold and TSY dipped again as investors cheered – for a second day – an apparent de-escalation in U.S.-Iran tensions and looked instead to prospects of improved global growth.

Markets reversed the sharp falls seen at the start of the week after the United States killed Iran’s most senior general, believing it would not lead to a full-scale military confrontation that would rock investor confidence. S&P futures are up more than 100 points since then, and the Dow is set to rise above 29,000 for the first time ever.

The MSCI world equity index also quickly resumed its rally and added another 0.1% on Friday to hit a new record high. It is almost 1.5% above the lows seen on Monday.  Reassurance from Fed Vice Chairman Richard Clarida that the U.S. economy remains in a “good place” is adding to bullish sentiment after a rocky start to the year.

“Unless we have external shocks such as a resurgence of U.S.-China trade tensions or a war in the Middle East, it is hard to see the U.S. economy falling apart,” said Hiroshi Watanabe, senior economist at Sony Financial Holdings. “There could be a great rotation to stocks from bonds. Emerging markets are likely to benefit from investors’ bullish mood too,” he added, echoing the familiar bullish refrain that has failed to materialize for the past decade.

Unlike the S&P which remains a one-way meltup, European shares showed some hesitation at the open, with pan-European Euro Stoxx 50 dropping as much as 0.2% as banking and retailer shares declined, before rebounding, the German DAX up 0.06% and Britain’s FTSE 0.1% ahead. That followed record levels in the three major share indexes on Wall Street on Thursday. Stock markets have got off to a strong start in 2019 despite U.S. President Donald Trump’s decision to kill military commander Qassem Soleimani, the second most powerful figure in Iran, in a missile strike in Baghdad.

“In the space of a few days we appear to have swung full circle; with investors seemingly convinced that the problems in the Middle East appear to have settled down, at least for the time being,” said CMC Markets analyst Michael Hewson.

“Investors now have the opportunity to focus on the signing of the new U.S.-China phase one trade deal next week, as well as the health of the U.S. economy today, and in particular the labor market which has continued to look resilient,” he added, referring to today’s market moving payrolls report.

In addition to trade and world war “optimism”, investors also cheered news that sales of Apple’s iPhones in China in December jumped more than 18% on the year.

Investors digested the report as a prelude to the upcoming visit by China’s Vice Premier Liu He, head of the country’s negotiation team in Sino-U.S. trade talks, to Washington next week to sign a trade deal with the United States.

There were other signs of investors’ bullish mood too: MSCI’s emerging market currency index hit a one and a half year high on Thursday in what is likely to be its sixth straight week of gains as it has also benefited from three U.S. rate cuts last year.

“If growth recovers and even if inflation overshoots a little bit, the Fed is probably going to let it run, and that probably goes for other central banks, but if growth weakens they could cut again,” Patrik Schowitz, global strategist at JPMorgan Asset Management told Bloomberg Television. “You have this asymmetric set-up and that’s quite helpful for markets.”

Meanwhile, as noted above, safe haven assets extended their downward move: gold eased 0.1% to $1,550 per ounce from a seven-year high of $1,610.90 hit right after Iran’s missile attack on Wednesday. Against the Japanese yen, which investors often buy in times of uncertainty, the U.S. dollar strengthened to a two-week high of 109.61 yen. The dollar was little changed more broadly and against the euro it stood at $1.1108. The euro fell to $1.1091 on Thursday, its lowest in about two weeks.

In rates, government bond yields, which rose on Thursday as investors’ nerves about the situation in the Middle East eased, edged lower in early trading on Friday. The benchmark 10-year German bond yield fell 1 basis point to -0.236% but for the week remains up almost 5 basis points, in a strong signal of investors’ willingness to pull back from safe-haven government debt for riskier assets. The 10-year U.S. Treasury yield was unchanged at 1.8546% and remains up 7 basis points on the week.

In commodities, oil prices, which spiked earlier this week on worries that tensions with Iran would disrupt global supplies, retreated further. Brent crude fell 0.3% $65.20 a barrel, and was heading for its first decline in six weeks, down almost 5%. WTI crude dropped 0.4% to $59.33 a barrel and was also on track for its first weekly drop in six, falling 6% from last Friday’s close.

Looking at today’s calendar, the final U.S. jobs report for 2019, due later Friday, is forecast to show employers added 160,000 jobs in December. We’ll also get November industrial production releases in France and Italy along with the December Bank of France industrial sentiment reading. Out later today in the US is final November wholesale inventories revisions. Away from the data the BoE’s Tenreyro is scheduled to speak this morning on the labour market.

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Market Snapshot

  • S&P 500 futures up 0.2% to 3,282.00
  • STOXX Europe 600 up 0.09% to 420.03
  • MXAP up 0.5% to 172.89
  • MXAPJ up 0.5% to 563.69
  • Nikkei up 0.5% to 23,850.57
  • Topix up 0.4% to 1,735.16
  • Hang Seng Index up 0.3% to 28,638.20
  • Shanghai Composite down 0.08% to 3,092.29
  • Sensex up 0.3% to 41,588.03
  • Australia S&P/ASX 200 up 0.8% to 6,929.03
  • Kospi up 0.9% to 2,206.39
  • German 10Y yield fell 1.5 bps to -0.194%
  • Euro down 0.1% to $1.1095
  • Brent Futures down 0.5% to $65.07/bbl
  • Italian 10Y yield fell 3.5 bps to 1.208%
  • Spanish 10Y yield fell 1.5 bps to 0.436%
  • Brent Futures down 0.5% to $65.07/bbl
  • Gold spot down 0.2% to $1,549.72
  • U.S. Dollar Index up 0.06% to 97.51

Top Overnight News

  • Prime Minister Boris Johnson’s Brexit legislation cleared its final hurdle in the House of Commons, putting an end to the parliamentary gridlock that cost his predecessor Theresa May her job
  • The U.K. labor market received an election boost in December, with the number of people placed in permanent jobs rising for the first time in a year and business optimism surging. A survey for KPMG and the Recruitment and Employment Confederation found companies more willing to take on workers after Boris Johnson’s Conservative Party won a commanding parliamentary majority last month
  • Australians opened their wallets in November to take advantage of Black Friday sales, providing a much-needed boost for retailers that have struggled in an environment of record- high household debt and stagnant real wages
  • Oil headed for its first weekly loss since November as the prospect of a U.S.- Iranian war receded, easing fears of a potential supply disruption in the Middle East
  • Spending by Japanese households fell by a smaller amount in November, an indication that consumption is starting to recover from a sharp fall following October’s sale tax hike and a typhoon
  • Senate Republicans anticipate that President Trump’s impeachment trial will begin sometime next week, after House Speaker Nancy Pelosi said Thursday she will send the two articles of impeachment “soon,” according to Senator John Thune, the No. 2 GOP leader
  • The U.S. House of Representatives voted Thursday to limit President Donald Trump’s authority to strike Iran, a mostly symbolic move Democrats say defends Congress’s constitutional powers but Republicans say endangers national security
  • The prime ministers of Canada, the U.K. and Australia said that a Ukrainian jet that crashed Wednesday near Tehran was probably brought down by an Iranian missile and called for an international probe of the disaster
  • The final jobs report for 2019 is projected to show payrolls growth capped the year with a gain almost exactly in line with the average of the decade-long economic expansion, and continuing to moderate from the 2018 pace
  • A day after BOE Governor Mark Carney said policy makers are debating whether to add more stimulus, Silvana Tenreyro said she could be persuaded to join the two officials urging the Monetary Policy Committee to bring down the cost of borrowing
  • Iran called on Western governments to prove claims the Boeing Co. 737-800 passenger jet that crashed near Tehran on Wednesday was shot down, intensifying a standoff that could complicate an already difficult investigation fraught with geopolitical hurdles
  • Lawmakers expect House Speaker Nancy Pelosi will soon end her delay of President Donald Trump’s impeachment trial without any notable concessions from Senate Republicans, leaving her allies stumped about her strategy in the three-week standoff

Asia-Pac equities traded cautiously as the region failed to fully follow suit from the positive lead from Wall Street – which saw the tech-giant Apple soar in excess of 2% to a record high, after Chinese government data showed an 18% rise in iPhones sales in December. ASX 200 (+0.8%) was propped up by healthy gains in its financial sector with the “Big Four” Aussie banks all firmly in positive territory. Nikkei 225 (+0.5%) was buoyed by its auto sector alongside other large-cap stocks post-earnings, albeit Fast Retailing shares slumped to the foot of the index after the Co. cut its FY outlook following dismal quarterly results. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp (U/C) were mixed with the former swinging between gains and losses whilst the latter lost momentum and gave up its mild opening gains before trading with little conviction. US President Trump said he thinks the US-China Phase One deal will be signed on January 15th or shortly after. China Global Times tweeted that a Phase Two trade deal after November is too far away and added that China’s willingness to start Phase Two negotiations depends on the implementation of the Phase One deal; citing an expert close to the Chinese Government. Furthermore, China is not in a rush to begin Phase Two talks if US President Trump criticises the country during his election campaign, according to Global Times citing the expert close to the Chinese government.

Top Asian News

  • Indonesia Hints Currency Intervention Unlikely; Rupiah Jumps
  • India Court Finds Indefinite Restrictions in Kashmir Illegal
  • Trump Sent Kim Jong Un a Birthday Greeting, South Korea Says
  • Prosus Expands Fintech Business in India With $185 Million Deal

European bourses are essentially flat, in what has been a fairly choppy session for the bourses; currently, there is no substantial under/outperformer amongst the European indexes. As newsflow this morning has slowed considerably, particularly on the geopolitical front, ahead of the US jobs report later in the session. In terms of sectors, the complex is mixed; notably, the banking sector is underperforming slightly (-0.4%) weighed on in particular by UK and Italian banks due to lower yields as Gilts and BTPs currently outperform their peers. Elsewhere, this morning other notable movers include Ryanair (+7.8%) after an update which saw them increase FY20 profit guidance; note, this update has bolstered the European travel and leisure sector to the top of the pile, as Ryanair accounts for 6.15% of the index. Just below Ryanair resides RWE (+5.0%) after, since confirmed, pre-market reports that the Co. may receive as much as EUR 2bln in compensation from their mandated exit of the coal-power business. At the other end of the spectrum price action is quieter with the likes of Uniper (-2.0%) and Travis Perkins (-1.7%) afflicted by broker action.

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Top European News

  • Ryanair Raises Profit Guidance After Christmas Travel Boom
  • Macron Government Seeks to Drive Pension Reform With Fresh Talks
  • Nordea Markets Chief Dealer FX Forwards Leaves After 25 Years
  • Northern Ireland May See Power Shared Again as Deal in Sight

In FX, there was more respite for the Aussie amidst the raging fires, as retail sales topped consensus overnight to overshadow a sub-50 AIG services PMI and maintain positive trade surplus momentum from Thursday. Hence, Aud/Usd is establishing a firmer base above 0.6850 and the 50 DMA (0.6860), while Aud/Nzd has rebounded a bit closer towards 1.0400, as the Kiwi struggles to keep hold of the 0.6600 handle vs its US peer.

  • USD – Aussie outperformance aside, the Greenback is still outpacing the rest of the G10, with the DXY back over 96.500 and yesterday’s 97.562 high at 97.586 heading in to NFP. Note, headline payrolls are forecast to rise 164k compared to the bumper 266k tally last time, but could well surprise to the upside given mostly upbeat jobs proxies and a particularly strong ADP survey, so the Dollar and index may be able to extend their advances if the BLS report is bullish.
  • GBP – The Pound is holding up relatively well circa 1.3055 and 0.8490 in Cable and Eur/Gbp cross terms in the face of another dovish blast from the BoE, as Tenreyro shows tendencies towards backing a rate cut if the UK economy falters in line with Governor Carney on Thursday, and given downside risks amidst no further tightening in the labour market.
  • JPY/EUR/CAD/CHF – All on the defensive against the Buck pre-US jobs data, with the Yen slipping closer to December lows through 109.50 and bereft of any real option expiry interest to offer support until 110.20, while the Euro is back below 1.1100 to test the resolve of bids around 1.1090 that saved the single currency from deeper declines yesterday. Like Usd/Jpy, no decent downside expiries into the NY cut, but 1.1 bn in Eur/Gbp at the 0.8500 strike could buffer the Euro. Elsewhere, the Loonie has recovered some poise after sliding under 1.3100 following latest BoC commentary via Governor Poloz who contends that strike action and adverse weather are partly to blame for the recent run of poor data, but the impending labour update will be key in wake of the huge headline drop in November. Meanwhile, the Franc has retreated towards 0.9760, but faring better vs the Euro close to 1.0800.

In commodities, a markedly quieter session in terms of geopolitical developments to end the week, with much of the focus now residing on whether the Boeing 737-800 crashed due to a Iranian missile; a possibility which Iran has firmly pushed back on but a number of nations, including US and Canada, regard this as a potential explanation as the investigation continues. Oil prices this morning are somewhat subdued, as the geo-political premium in the crude complex continues to unwind; overall, the moves are relatively small in magnitude as market focus switches to the US jobs report (full preview available on the Newsquawk research suite). Looking back on the week, WTI has printed a range of around USD 7.0/bbl thus far, with a similar range seen in Brent. PVM posit that yesterday’s price action, where the lack of attempt in oil markets to move higher implies that a ‘new status quo’ has taken over; which does tilts risks for price action to the downside. Turning to metals, where spot gold is down by around USD 4/oz and remains below the USD 1500/oz mark which was briefly reclaimed last night. Middle-East tensions aside, UBS highlight that physical demand for the precious metal is ‘tepid’, particularly from the world’s second largest importer India; although, overall they note the metals outlook is positive with the potential for a test of recent highs shortly.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 160,000, prior 266,000
    • Change in Private Payrolls, est. 152,500, prior 254,000
    • Change in Manufact. Payrolls, est. 5,000, prior 54,000
  • 8:30am: Unemployment Rate, est. 3.5%, prior 3.5%
    • Labor Force Participation Rate, prior 63.2%
    • Underemployment Rate, prior 6.9%
  • 8:30am: Average Hourly Earnings YoY, est. 3.1%, prior 3.1%
    • Average Hourly Earnings MoM, est. 0.3%, prior 0.2%
  • 8:30am: Average Weekly Hours All Employees, est. 34.4, prior 34.4
  • 9:45am: Bloomberg Jan. United States Economic Survey
  • 10am: Wholesale Inventories MoM, est. 0.0%, prior 0.0%; Wholesale Trade Sales MoM, est. 0.2%, prior -0.7%

DB’s Jim Reid concludes the overnight wrap

With risk appetite showing little sign of abating following another resurgent 24 hours in markets, the next potential hurdle to jump is the first payrolls Friday of the new decade. Indeed this afternoon we’ve got the December employment report scheduled for release where, on the back of that bumper 266k payrolls print in November, the consensus expects a 160k reading for last month. Our US economists make the point that the November data was boosted by returning GM workers so they also expect some payback and forecast 155k. In light of the strong ADP report this week they also nudged their private payrolls forecast slightly higher, to 145k. As for the other details, our colleagues expect the unemployment rate to hold steady at 3.5%, hours worked to also hold steady at 34.4 and average hourly earnings to rise +0.3% mom – all of which is in line with the wider consensus. The report is due out at 1.30pm GMT/8.30am EST.

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In the meantime and as mentioned at the top, with US-Iran re-escalation concerns now seemingly in the rear view mirror for now, the lack of any other headwinds or obstacles helped the S&P 500 (+0.67%), NASDAQ (+0.81%) and DOW (+0.74%) to reach new record highs by the close of play last night. The more cyclical sectors led the charge once more with tech, financials and energy the biggest gainers sector wise for the S&P. In Europe the STOXX 600 also closed +0.31% while oil remained steady, with Brent crude hovering around $65/bbl, still below its pre-Soleimani levels of last week. Gold (-0.26%) also fell for a second consecutive session. Amazingly November 25th was the last time that happened. Over in sovereign bond markets, 10yr Treasury yields closed down -1.9bps, though this was in contrast to Europe, where yields on 10yr bunds (+2.9bps), OATs(+1.6bps) and gilts (+0.3bps) all moved higher.

This morning in Asia we’ve seen further gains for the likes of the Nikkei (+0.38%), Hang Seng (+0.06%) and Kospi (+0.54%). Bourses in China have bucked the trend, however, with both the Shanghai Comp (-0.26%) and CSI 300 (-0.18%) running out of steam somewhat. Meanwhile futures in the US are up around +0.20% and it’s worth noting also that Boeing shares are up +0.30% overnight after closing +1.47% yesterday following comments from Canadian PM Trudeau that intelligence shows the Ukrainian jet that crashed on Wednesday in Iran “was shot down by an Iranian surface-to-air missile”.

Back to yesterday now, and things have been a bit quieter on the trade front lately since the announcement of a Phase One US-China trade deal, which is due to be signed next week, but we did find out from President Trump yesterday that the Phase Two negotiations would begin “right away”. However, he added, “I think, I might want to wait to finish it until after the election because by doing that I think we can actually make a little bit better deal, maybe a lot better deal,” so clearly it could also be some time before we see a full agreement.

Staying with the US, Vice-Chair Clarida’s comments yesterday didn’t end up moving the dial particularly. He said that policy is in a “good place” and will respond to “material changes”. He also said that “global disinflationary forces are powerful” and that policy has to take that into account. As for the rest of the Fedspeak, we also had New York Fed President Williams, who said that “If inflation continues to underrun target levels similar to the past six years, the downward trend in inflation expectations will likely continue”, while Chicago Fed President Evans, though not a voter in 2020, said that “I would like to see inflation go to 2% sustainably and in fact go above 2%”.

In other news, yesterday’s data was a small talking point in the US with continuing claims jumping 75k to 1,803k. That is in fact the highest since April 2018 with the 4.3% jump the highest since November 2012. It’s worth noting, however, that initial claims were a lot steadier at 214k (versus 223k in the week prior) so there wasn’t too much concern with year-end cited as a potential factor. Over in Europe, the Euro Area unemployment rate held steady at 7.5% as expected in November, staying at its joint-lowest since June 2008. Meanwhile in Germany November’s industrial production was slightly stronger than expected at +1.1% mom (vs. +0.8% expected), bringing the yoy decline down to -2.6%, which is actually the smallest yoy contraction since March.

Here in the UK there was some focus on comments from BoE Governor Carney, with sterling weakening back towards $1.30 (though it recovered later in the session slightly) after he said that “there is a debate at the MPC over the relative merits of near-term stimulus to reinforce the expected recovery in UK growth and inflation”. The full speech also saw Mr. Carney say that “evidence is increasing that the entrenched uncertainties in recent years may have weighed more heavily on supply growth than previously anticipated”. A sign perhaps that there is some active debate on the MPC as to whether to cut rates later this month. Also in the UK, the House of Commons gave its final approval to the Withdrawal Agreement Bill yesterday, which is the legislation that implements the Brexit deal into UK law. The bill passed by a decisive 330-231 margin among MPs, showing that with a government majority of 80 seats in the Commons, the days of tight parliamentary votes are behind us for the time being. The bill now moves on to the House of Lords, with the UK due to leave the EU on the 31st January.

To the day ahead now, where the focus is undoubtedly this afternoon with the December employment report in the US. Prior to that, this morning we’ll get November industrial production releases in France and Italy along with the December Bank of France industrial sentiment reading. Out later today in the US is final November wholesale inventories revisions. Away from the data the BoE’s Tenreyro is scheduled to speak this morning on the labour market.