Via Zerohedge

After a sharp selloff in FANG stocks in the last hour of trading on Tuesday dragged the S&P back under 3,000, subsequent earnings bombs by Texas Instruments last night and Caterpillar this morning did little to improve the mood, and futures slumped this morning…

… as European stocks tried (and failed) to stage a modest rally from early lows with miners and oil and gas sectors helping to stem the negative spillover from Asian hours, while the tech sector was lower by 1% after ugly Texas Instruments earnings. Indeed, Europe’s tech sector fell as much as 1.4% as STMicroelectronics, Dialog Semiconductor and Infineon all dropped after Texas Instruments slumped 10% in after-hours Wall Street trading.

Major Asian chipmakers, including Taiwan’s TSMC and South Korea’s SK Hynix, had fallen overnight too on worries the industry was being squeezed both by a downturn in global demand and by the U.S.-China trade war.  “When there are tensions in trade and obstacles to trade, what do businesses do? They become more cautious. And they pull back,” Rafael Lizardi, Texas Instruments’ chief financial officer, said after the company’s results.

It wasn’t just poor earnings, however, or the fear that analysts were overly optimistic about the future after CAT slashed its full year guidance: world stock markets also struggled as hopes faded that a Brexit deal would be wrapped by next week, although it was hard to pick which was weighing on sentiment more in European trading.  Adam Cole, a strategist at RBC Capital Markets, said Brexit was driving a “general risk-off tone.” Others pointed to the growing likelihood British Prime Minister Boris Johnson would now push for a snap election.

The pound was yanked down to $1.2850 from $1.30 after UK lawmakers put the brakes on the government’s Brexit plans again on Tuesday, just as expected following Goldman’s latest upgrade of cable. As a reminder, Goldman’s FX team is the Gartman of the currency market.

Meanwhile, any hopes for forgetting Texas’ woes were already dashed as industrial bellwether Caterpillar blamed a weak global construction market as it cut its profit forecast after a hefty 13.5% fall in third quarter profits. Dismal results from Boeing did not help either.

And with investors again scrambling into safe assets, the Japanese yen climbed to a one-week high of 108.25 per dollar and the Swiss franc gained early in Europe.

US Treasury yields predictably slumped too, dropping as low as 1.73% after reaching for 1.80% one session earlier. Bund futures reversed an early dip to trade around Asia’s best levels, with 10y yields 3.5bp lower as core and peripheral yield curves bull flatten. Gilts gaped higher at the open, as yields slid ~5bps across the curve focusing on Brexit extension developments and a potential general election.

While the pound tumbled amid the political chaos, receding worries about a no-deal Brexit also underpinned the euro at $1.1122, just below a two-month high of $1.1180, though it was also down to the dollar staying subdued before an expected third U.S. interest rate cut of the year next week. In a mirror image of the pound and euro, October is on course to see the biggest monthly fall in the dollar index since January 2018. It has only fallen for six of the months during that period too.

In commodity markets, oil prices fell after data showed U.S. crude inventories grew more than expected last week. But prices generally held firm after China signalled hopes for progress in upcoming trade talks with the United States and OPEC and its allies considered deeper cuts in production. Brent crude futures fell 0.52% to $59.39 a barrel. U.S. West Texas Intermediate crude lost 0.81% to $54.04 per barrel. Gold is firmer on the session and currently trades toward the day’s high. Elsewhere, copper prices are just above the USD 2.60/lb on the day thus far as sentiment keeps prices subdued; in specific newsflow, Antofagasta noted Q3 copper production of 197k tonnes, -14.5% YY.

Expected data include mortgage applications. Blackstone, Boeing, Caterpillar, Microsoft and Tesla are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.1% at 2,991.75
  • STOXX Europe 600 down 0.1% to 394.09
  • MXAP down 0.01% to 160.36
  • MXAPJ down 0.4% to 513.95
  • Nikkei up 0.3% to 22,625.38
  • Topix up 0.6% to 1,638.14
  • Hang Seng Index down 0.8% to 26,566.73
  • Shanghai Composite down 0.4% to 2,941.62
  • Sensex up 0.5% to 39,157.19
  • Australia S&P/ASX 200 up 0.01% to 6,673.09
  • Kospi down 0.4% to 2,080.62
  • German 10Y yield fell 3.5 bps to -0.403%
  • Euro down 0.04% to $1.1121
  • Italian 10Y yield fell 5.8 bps to 0.584%
  • Spanish 10Y yield fell 3.0 bps to 0.231%
  • Brent futures down 0.9% to $59.19/bbl
  • Gold spot up 0.5% to $1,494.48
  • U.S. Dollar Index little changed at 97.56

Top Overnight News

  • Boris Johnson looked set to try for an election after Parliament blocked his plan to rush his Brexit deal into U.K. law. An official in his office warned that if the EU agreed to a request from the British Parliament that Brexit be delayed until Jan. 31, then the prime minister would call an election instead. Meanwhile, European Council President Donald Tusk said he’d recommend the EU accept the U.K.’s request for a delay. A more flexible extension may also be possible.
  • Donald Trump’s top envoy to Ukraine became one of the biggest threats to his presidency.William Taylor, a career bureaucrat who took charge of the U.S. embassy in Ukraine in June, provided House investigators on Tuesday with a meticulously detailed 15-page statement, chronicling an “irregular policy channel” with Kyiv, in which Trump associates circumvented traditional diplomatic paths to pressure the country’s new president to investigate White House political rivals
  • European Central Bank President Mario Draghi has been the bond market’s best friend and investors aren’t expecting the same support from his successor Christine Lagarde. Since Draghi took the helm of the ECB eight years ago, Europe’s sovereign bonds have surged, with German debt returning 27% and that of Ireland almost 90%, Bloomberg Barclays indexes show
  • The Chinese government is drafting a plan to replace Hong Kong’s Carrie Lam with an “interim” chief executive, the Financial Times reported, citing unidentified people briefed on the deliberations
  • The Bank of Japan is considering lowering its forecasts for economic growth and inflation this year in a quarterly outlook report to be released at the end of a policy meeting on Oct. 31, according to people familiar with the matter
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Asian equity markets traded lacklustre as the region took its cue from the losses on Wall St where sentiment was dampened by further Brexit uncertainty. ASX 200 (U/C) was negative with the index dragged by weakness in defensives as well as the largest weighted financials sector, while the NZX 50 (-2.1%) slumped heavily amid weakness in energy stocks and with local investors spooked after reports Rio Tinto was mulling a strategic review of its smelter operations as it sees continued losses for its New Zealand assets. Nikkei 225 (+0.3%) struggled to maintain the holiday cheer on return from yesterday’s closure amid flows into the JPY with underperformance in SoftBank amid its bailout of WeWork including USD 5bln of new financing, although Eisai shares were indicated to surge over 18% and hit limit up with a glut of buy orders after aducanumab partner Biogen revived hope in its Alzheimer’s treatment and is to seek FDA approval next year. Hang Seng (-0.9%) and Shanghai Comp. (-0.4%) conformed to the overall downbeat tone with the former mired by political uncertainty as Beijing was said to draw up plans to replace Hong Kong Chief Executive Lam, although mainland losses were cushioned by another substantial PBoC liquidity effort. Finally, 10yr JGBs opened back above the 154.00 level as it tracked gains in T-notes and amid the predominantly risk-averse tone, but with upside limited as Japanese stocks just about stayed afloat and with the BoJ only in the market for Treasury Discount Bills.

Top Asian News

  • Tencent Shares Risk Losing Support Level as Losses Accelerate
  • Malaysia Privately Discusses Goldman Penalty of Just $2 Billion
  • China Plans First Euro Bond Since 2004 as Borrowing Costs Slump
  • KKR-Backed PropertyGuru Shelves $260 Million IPO in Australia

Major European Bourses (Euro Stoxx 50 -0.1) are mixed, as indices recover off of Brexit related overnight lows, following on from a lacklustre AsiaPac session. With Sterling off recent highs as Brexit uncertainty lingers, the FTSE 100 (+0.5) has been the marked outperformer, breaking back above the 7200 mark and 50DMA at 7216. Looking ahead, a raft of US large cap earnings, including the likes of Boeing, Caterpillar, Thermo Fisher Scientific and Eli Lilly, will set the tone. So far this earnings season, analysts have described earnings as mostly better than expected, though noting that the bar was very low going in. However, Microsoft earnings tonight, the first of the trillion-dollar companies to report, could quickly shift this narrative. European sectors are mixed, with outperformance in energy (+0.6%), materials (+1.1%) and healthcare (+0.3%). Underperformance in tech is being driven by disappointing earnings last night from Texas Instruments, which has seen the likes of STMicroelectronics (+1.3%) under pressure. In terms of other individual movers; Swedbank (-6.3%) sunk after earnings disappointed and the co. revealed multiple US authorities are investigating the money laundering allegations although this could take years to conclude. Elsewhere, decent earnings from ABB (+3.9), Neste (+6.9%), Norsk Hydro (+5.0%) and Peugeot (+2.5%) saw them move higher, while poor earnings from Fresnillo (-2.9%) and Carrefour (+2.3%) saw their respective shares under pressure.

Top European News

  • Heineken Falls as 3Q Beer Volumes Disappoint, Guidance Reduced
  • Draghi’s Bond-Market Heroics Face Risk of Lagarde Reality Check
  • Bio-On Executive Arrested in Italy’s ‘Plastic Bubbles’ Probe
  • Osram’s Top Labor Leader Urges German Watchdog to Block AMS Bid

In FX, risk sentiment has been sullied somewhat by the latest UK Parliament votes on Brexit that were positive on the one hand, but then countered by subsequent rejection of the motion to push through legislation at breakneck speed for the original and still official Halloween deadline. Hence, another step forward-step back scenario, albeit with more likelihood of an election run effectively along the lines of a 2nd EU referendum, which in turn equates to greater uncertainty. The upshot, so called safe-havens, including Gold, are back in favour, with the DXY consolidating around 97.500 and supported technically after closing above a key chart level in the form of the 200 DMA (97.410).

  • JPY/CHF – The Yen and Franc are both benefiting from the aforementioned meek or selective risk appetite, with Usd/Jpy back below 108.50 and capped by reported CTA offers overnight, while Usd/Chf is holding just shy of 0.9900 and Eur/Chf straddles 1.1000 within very tight confines. Reports that the BoJ may downgrade growth and inflation forecasts next week are hardly surprising, but add to the general global economic slowdown vibe.
  • AUD/NZD/GBP – Among the major underperformers on a combination of bearish factors, as the Aussie retreats a bit further vs its US counterpart and remains heavy in cross terms against the Kiwi, with Aud/Usd under 0.6850 and Aud/Nzd unable to regain a foothold above 1.0700 even though Nzd/Usd has lost momentum on the 0.6400 handle. Note, little reaction to NZ trade data, but comments from Australia’s Treasury Secretary Kennedy kicking back against calls for more fiscal stimulus may also be weighing on the Aud. Elsewhere, Sterling is still fixated on Brexit developments for obvious reasons, with Cable retesting recent lows circa 1.2840 and Eur/Gbp back up around 0.8650 awaiting PM Johnson’s next move in response to the EU extension decision (expected as soon as tonight) and any further developments along the line of a snap poll, vote of no confidence in the Government or even a 2nd attempt to get the Programme Motion through the HoC.
  • CAD/EUR/SEK/NOK – All rather rangy and bereft of independent inspiration/direction, as the Loonie looks toward Canadian wholesale trade following mixed inputs on Tuesday via retail sales, the BoC’s BOS and election results handing victory to Trudeau again, but with less power. Usd/Cad continues to pivot 1.3100, while Eur/Usd sits just above 1.1100 and decent option expiry interest at the strike (1.1 bn) ahead of Thursday’s ECB policy meeting that could well be more validatory rather the revelatory given the extent of the stimulus delivered in September and the fact that President Draghi bids farewell following his eventful term at the helm. Similarly, the Scandi Crowns are largely going through the motions awaiting tomorrow’s Riksbank and Norges Bank convenes, though with potentially more to win or lose depending on guidance. Eur/Sek is meandering from 10.7565 to 10.7190 and Eur/Nok flitting either side of 10.2000 against the backdrop of soft crude prices.
  • EM – Contrasting fortunes for the likes of the Lira and Rand after lock-step trade of late, as Usd/Try revisits sub-5.8000 territory on the back of Turkey’s decision to hold fire in Syria despite the elapse of 120 hours inaction arranged with the US, and perhaps acknowledging an improvement in consumer sentiment rather than the consensus for more CBRT easing on Thursday. However, Usd/Zar has rebounded towards 14.6950+ highs after a knee-jerk dip in wake of softer than expected SA CPI that undermines the SARB’s on hold stance, and as investors remain cautious ahead of the end October budget that will outline aid for Eskom.
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In commodities, WTI and Brent prices have been subdued for much of the morning as sentiment remains dampened following yesterday’s Brexit votes and ahead of a number of notable US earnings today. Yesterday’s APIs printed a larger than expected build at 4.45mln vs. Exp. 2.2mln, adding to the pull back in both WTI and Brent yesterday. Currently, Crude prices trade with losses just shy of USD 1/bbl, although they did catch a small bid earlier in the session in-line with equity futures broadly; however, comments from Russian Energy Minister Novak that he has no information regarding discussions on deeper oil cuts at the December OPEC+ meeting halted the mild upside. The comments from Novak are in contrast to the recent source reports noting that OPEC were looking into deeper cuts due to weaker demand outlook. Elsewhere, the Turkey situation has, on the face of it, stabilised somewhat with Turkey noting there is no need to restart the Syria offensive after the ceasefire expires. Although, reports earlier in the session noted that Russian and Turkey are in discussions regarding additional S-400 deliveries, which may prompt a US backlash given their objection to the initial purchases. In terms of metals newsflow, gold is firmer on the session and currently trades toward the day’s high although this is still circa. USD 5.0/oz below the USD 1500/oz mark. Elsewhere, copper prices are just above the USD 2.60/lb on the day thus far as sentiment keeps prices subdued; in specific newsflow, Antofagasta noted Q3 copper production of 197k tonnes, -14.5% YY.

US Event Calendar

  • Oct. 23-Oct. 25: Monthly Budget Statement, est. $83.0b, prior $119.1b
  • 7am: MBA Mortgage Applications, prior 0.5%
  • 9am: FHFA House Price Index MoM, est. 0.3%, prior 0.4%

DB’s Jim Reid concludes the overnight wrap

I got home last night to everyone in the house wearing a new delivery of Xmas jumpers. You can’t imagine how excited 2 year old boys were with jumpers that lit up and flashed. It’s going to hard to keep them under wraps again for the next couple of months. Their bed time was delayed by the big Brexit votes that captivated the nation last night. The highlight for me was the football style analysis of the House of Commons for signs as to who voted for what and how happy each person looked to try to assess which way the votes had gone. There was even a giant magnifying glass on the screen scanning the chamber for emotions.

If any of that was meant to bring clarity it sadly didn’t and what last night told me is that the batteries on the lights of the family Xmas jumpers will likely run out now before we resolve Brexit. There is only a narrow way that Brexit now gets resolved soon after the already twice revised October 31st deadline and that is if the EU grants only a brief extension and Mr Johnson decides to resurrect the bill over the next week – albeit with a longer timetable of scrutiny to appease MPs who defeated the government last night on the crucial programme motion (essentially the fast tracked timetable).

Indeed MPs voted by 322-308 to reject it. Discontent had arisen as MPs were unhappy that the government wanted the House of Commons to have just 3 days to examine the bill. Some of this was genuine, but with most of those voting against it from camps that wouldn’t have voted for the bill even if they had a much longer period to decide. After this defeat the government decided to pause the bill and move to other business in Parliament over the next few days while they await the response from the EU. The suspicion is that if the EU hold to the request of the Benn Act of a delay to January 31st 2020 then the Government would prefer elections to fighting on. As discussed above if the EU grant a short extension then maybe the Government try again but the EU are unlikely to want to get too political in their decision making. The European Council President Tusk tweeted that he would recommend that leaders grant the full extension. On the other hand, overnight reports suggested that the French government, perhaps the most hawkish, is against a longer extension. The most likely outcome is probably still that they all follow Mr Tusk’s recommendations, so Mr. Johnson will likely again try to find the path to an election.

However, there were positives for the Government from yesterday’s action. First, MPs had actually voted in favour of a Brexit bill progressing for the first time in numerous attempts over the last several months. The bill passed at the second reading by 329-299. That’s a relatively strong majority of 30 votes, especially when you consider that the last Brexit vote resulted in a defeat by 57 votes and the Government technically has a majority of -44!

If you think the government are acting very strangely by not trying to pursue this win and cracking on, albeit with a short delay past October 31st, I’d imagine they have had to weigh up how much it would be amended and whether the better political move might be to try fight an election ASAP on the fact that Parliament thwarted them again. A gamble but a calculated one. It’s still not clear that opposition parties will allow an election but it is increasingly difficult for them to not sanction it if a no-deal Brexit is off the table until the end of January. So over to the EU.

The pound weakened -0.49% to 1.290 after hitting $1.30 again immediately after the first vote was won and then slumping a percent after the second vote loss. Given that any election would still be most likely fought around a deal (the Tory’s), a second referendum, remaining or a softer Brexit then the pound’s set back should be manageable. There is still upside but it may be take longer now to come through. In Asia Sterling has traded as low as $1.284 but is now around $1.286 as we type.

Over to markets, where US equities retraced earlier gains to end lower in tandem with the more negative Brexit news. The S&P 500 ended -0.35%, while the DOW fell -0.15%. That partially reflects some reversion after the latter underperformed in each of the last three sessions due to Boeing news. In terms of earnings, Biogen saw the biggest rise in the index, up +26.1%, as they said they would ask regulators to approve experimental Alzheimer’s therapy, following new analysis from a trial showed there was a statistically significant benefit of the drug to those with the highest doses. Procter & Gamble also advanced, up +2.60% after the company raised the upper end of its organic revenue growth outlook, and saw organic revenue growth beat estimates to rise by +7% in the first fiscal quarter. However, McDonald’s was down -5.02% after the company saw US sales growth miss estimates, in spite of its global sales growth at +5.9% (vs. +5.7% expected). Texas instruments also issued forecast revenue for the fourth quarter with the guidance missing the lowest analyst estimate. Shares traded as much as c. -10% in after hours trading.

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Energy shares (+1.31%) led gains for the second consecutive session, boosted by higher oil prices (+1.59%) after OPEC sources suggested that they are considering a deeper cut to production for their December meeting. In Europe, equities saw very small gains with the STOXX 600 up +0.09% eking out fresh 17-month high, while the DAX (+0.05%), CAC 40 (+0.17%) and the FTSE 100 (+0.71%) made further gains.

In fixed income, 10yr Treasuries snapped a run of 3 successive declines to end the session -3.0bps, while the 2s10s curve flattened by -1.1bps. Sovereign bonds advanced across Europe as well, with 10yr bunds (-2.6bps), OATs (-2.3bps) and gilts (-3.9bps) all up, while in the periphery Greek 10yr yields fell -3.6bps to a record low and the spread of Italian BTPs over 10yr bunds fell by -3.5bps to 129bps, its lowest level since May 2018.

Overnight Bloomberg is reporting that Chinese buyers are back in the market for US soybeans after a new round of tariff waivers. Earlier, the White House economic adviser Larry Kudlow said of the trade negotiations that “what the President is calling phase one is moving ahead very nicely” while adding that if the initial deal works well “there will be opportunities” for some tariffs to get pulled back before year end but “It’s the president’s decision.” Elsewhere, US Vice President will be speaking on China at 11am (Washington time) on Thursday with the topic likely to be the future of the relationship between the United States and China. So one to watch, especially as the speeches postponed earlier this year were expected to be hawkish.

Asian markets are trading lower this morning with the Nikkei (-0.04% ), Hang Seng (-0.94%), Shanghai Comp (-0.31%) and Kospi (-0.45% ) all down. Elsewhere futures on the S&P 500 are down -0.20%.

In other overnight news, the FT reported that the Chinese government is drafting a plan to replace Hong Kong’s Carrie Lam with an “interim” chief executive. The report further added that Lam’s successor would be installed by March, covering the remainder of her term should Chinese President Xi Jinping decide to carry out the plan.

In terms of impeachment proceedings at the US Congress, Bloomberg reported overnight that William Taylor, a career bureaucrat who took charge of the US embassy in Ukraine in June, provided House investigators yesterday a meticulously detailed 15-page statement, chronicling an “irregular policy channel” with Kyiv, in which Trump associates circumvented traditional diplomatic paths to pressure the country’s new president to investigate White House political rivals. The report further added that the US envoy testified that a senior diplomat told him in early September that President Donald Trump made U.S. security aid to Ukraine entirely dependent on a public promise to investigate former Vice President Joe Biden and the 2016 election.

Back to yesterday and US Treasury Secretary Mnuchin said at a House of Representatives hearing that he told Facebook their Libra launch plans were premature, sending the company’s share price down -3.91%. Mnuchin said that there were concerns that it could be used to get round anti-money laundering rules. Facebook’s CEO and Chairman Mark Zuckerberg will be testifying in front of the House Financial Services Committee today, in a hearing entitled “An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors”. It’s expected that Zuckerberg will be questioned on the company’s cryptocurrency plans.

In terms of yesterday’s data releases, existing home sales in the US fell by -2.2% in September (vs. -0.7% expected) to 5.38m in September, with the Midwest leading the declines, down -3.1% mom. However, the Richmond Fed’s manufacturing survey rose to +8 (vs. -7 expected), the highest reading in 6 months and the sharpest one-month increase since 2016. Meanwhile the Canadian dollar weakened after disappointing retail sales data from Canada showed a fall of -0.1% in August (vs. +0.4% expected), before recovering after the Bank of Canada’s business outlook survey showed a “slight improvement in overall business sentiment”, with the Bank’s business outlook survey indicator rising to +0.4 (vs. -0.1 previously).

Meanwhile from Europe, in what was a mild positive, the ECB’s Q3 bank lending survey said that credit standards in Q3 “eased slightly … for loans to enterprises and loans to households for house purchase, also supported by more favourable funding conditions.” However they “continued to tighten” for consumer credit. Things were less positive in the UK however, with public finance data showing the government borrowed £9.4bn (vs. £9.7bn expected) in September, a £0.6bn increase on the same month a year ago, and the first time that year-on-year borrowing had increased in September for 5 years. Meanwhile the CBI survey of manufacturing orders fell to -37 (vs. -30 expected) in October, the lowest reading since March 2010, and the business optimism reading fell to -44 (vs. -30 expected), the lowest since July 2016.

Looking at the day ahead, there are a number of big earnings releases to watch out for, including Microsoft, Boeing, PayPal, Caterpillar and Ford. We’ll also see Facebook’s Mark Zuckerberg testify before the House Financial Services Committee. In terms of data, there’ll be the advance reading of October’s consumer confidence for the Euro Area, along with French business and manufacturing confidence for October. From the US, there’ll be weekly MBA mortgage applications along with August’s FHFA house price index, while Canada’s wholesale trade sales for August will also be released. Finally on the politics, there’s the aforementioned debate on the Brexit deal legislation continuing in the UK, while an election will be taking place in Botswana.