U.S. stocks extended records with an eighth straight gain, the dollar rose to a two-month high and Treasuries dipped as a batch of U.S. data and hawkish Fed speakers strengthened the case for higher rates.
The S&P 500 Index capped its longest winning streak since July 2013, with tech shares pacing gains as the prospect for faster economic growth got a lift from better-than-forecast factory orders. The CBOE Volatility Index closed at a record low in data going back to 1990. U.S. 10-year note yields edged higher, and the dollar pushed its gain in the past month to 2 percent as comments by regional Fed President John Williams reinforced optimism in the economy. The U.S. government releases September jobs data Friday.
In Asian markets, holidays this week across the region and a lack of major economic data may curb trading. The Japanese yen was little changed after Bank of Japan Deputy Governor Hiroshi Nakaso commented on inflation during a speech in London.
“The data we’ve had has been pretty good and again hawkish — better than the inflation data we got with the PCE data last week,” Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC, said by phone. “There’s more re-pricing necessary in bonds, especially considering we’re seeing pretty good economic data that’s definitely going to keep the Fed on course.”
European markets firmed Thursday after reports that Catalans were stalling their push for independence from Spain. That sent the nation’s bond yields and equities higher. Minutes from the European Central Bank released showed members discussed how to adjust monetary stimulus next year as policy makers raised concern about the rapid appreciation of the euro.
Terminal subscribers can read more in our Markets Live blog.
Financial markets showed signs of stabilizing after a fresh trigger from North Korea had sent money into haven assets, with focus returning to comments from central bank policy makers.
Stocks in Asia fell, though declines were modest, as gains in gold and the yen petered out. North Korea had injected a note of caution to markets on Monday after its foreign minister declared that the nation can shoot down U.S. warplanes. Focus remains on Chinese property developers, as one of the world’s most extreme stock rallies gets a reality check.
North Korean Foreign Minister Ri Yong Ho described President Donald Trump’s recent comments as tantamount to a declaration of war. The White House denied it has declared war on Pyongyang, while China’s ambassador to the UN told Reuters the situation is "getting too dangerous."
“This does represent a significant escalation in rhetoric and raises the risk of a tactical misstep,” said Tapas Strickland, a Sydney-based economist at National Australia Bank Ltd.
A speech by Federal Reserve Chair Janet Yellen on Tuesday will be parsed as policy makers continue to disagree on whether to raise U.S. interest rates again this year. New York Fed President William Dudley argued the U.S. central bank should stick with its strategy of gradual monetary policy tightening, a view echoed by Yellen. Meanwhile, Chicago Fed President Charles Evans urged caution as did Minneapolis Fed President Neel Kashkari. Investors see a roughly 60 percent chance that rates will be increased again in December following moves in March and June.
Terminal subscribers can read more in our Markets Live blog.
What to watch out for this week:
Later in the week, Bank of England Governor Mark Carney speaks, as does soon-to-depart Fed Vice Chairman Stanley Fischer.
European Union chief Brexit negotiator Michel Barnier and U.K. counterpart David Davis begin their next round of negotiations.
Household spending last month in the U.S. probably posted the smallest gain since February as motor-vehicle sales shifted into a lower gear, economists forecast government figures to show.
The euro-area inflation rate may have accelerated a touch to 1.6 percent in September from 1.5 percent but the core will probably remain at 1.2 percent when data is out on Friday.
Here are the main moves in markets:
Japan’s Topix index was slightly lower as of 11:05 a.m. in Tokyo. South Korea’s Kospi index fell and Australia’s S&P/ASX 200 Index were little changed.
Hong Kong’s Hang Seng Index was down 0.1 percent after slumping 1.4 percent on Monday as Chinese property developers tumbled on fresh mainland home curbs.
Futures on the S&P 500 Index fell 0.1 percent. The underlying gauge lost 0.2 percent, while the Nasdaq Composite Index declined 0.9 percent following a selloff in technology stocks.
The Bloomberg Dollar Spot Index was down less than 0.1 percent after climbing 0.4 percent to the highest in more than three weeks.
The yen was little changed at 111.65. It gained 0.2 percent on Monday.
The won fell 0.4 percent to 1,136.58 per dollar.
The euro was at $1.1860 after falling 0.9 percent.
The Australian dollar bought 79.44 U.S. cents. The New Zealand dollar dropped 0.3 percent, adding to a 0.9 percent slide on Monday.
The yield on 10-year Treasuries was at 2.22 percent, maintaining a three basis point drop on Monday.
Australia’s 10-year bonds yield fell three basis points to 2.77 percent.
Gold was steady at $1,311.26 an ounce, after jumping 1 percent on Monday.
West Texas Intermediate crude edged lower to $52.16 a barrel after rising 3.1 percent on Monday to the highest since April. Turkey threatened to shut down Kurdish crude shipments through its territory.
For finance professionals, Corporate America’s credit cycle and the U.S. economic outlook not to mention Brexit-induced stresses and debt dynamics in Asia are all spookier than a deranged-looking Bozo.
With Halloween just around the corner, we asked top analysts around the world for charts about things that go bump in the night and we’re not just talking about the daily yuan fix. Here’s what they said scares them.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG.
“Wealth to income is near an all-time record high,” LaVorgna points out. “When this has happened in the past during the late 1990s NASDAQ and mid-2000s housing bubbles it was an ominous sign for the economy and the asset markets.”
David Schawel, portfolio manager at New River Investments.
“A rise in delinquency rates for commercial and industrial loans has previously preceded recessions,” says Schawel. “Although the recent rise in delinquencies is coming from a historically low base, the credit quality of banks’ loan books continues to bear watching.”
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.
“We are investing less than four cents of every dollar we earn back into our nations productive capacity,” Feroli notes. “The economic possibilities for future generations will not be promising if we stay on this path.”
Neil Dutta, head of U.S. economics at Renaissance Macro Research.
“With profit growth contracting over the last year, business cash flow concerns have increased,” says Dutta. “This is largely the result of weak global growth, a strong U.S. dollar, and falling commodity prices. The good news is that the drag from these factors have ebbed, which should push profits up. However, should profits continue falling, we would be worried.”
Lichoo Tay, head of credit sales in Asia at MUFG Securities.
“Leverage in the Chinese economy in general is high and might be higher than available statistics show, says Tay. “If some of this starts to unravel in the form of increased defaults, the impact on debt markets in general could be very negative and the impact wouldnt be limited to China or even just Asia.”
David Doyle, economist at Macquarie Capital Markets Ltd.
“Here is one chart we find unsettling on the U.S. In the near-term it actually bodes well,” Doyle caveats. “Wage growth accelerating in cyclical industries like construction and manufacturing are a positive development. The scary part relates to the potential for it to be suggesting we are nearing an overheating (and an unfriendly, more aggressive policy response). While not our base case, the latter development could result in the conclusion of this long durable U.S. expansion (and the associated market tumult) earlier than we are anticipating.”
Torsten Slok, chief international economist at Deutsche Bank AG.
“Most conversations in financial markets at the moment are about what the Fed hiking in December will do to stocks and credit and financial stability more broadly,” says Slok. “But the Fed doesnt seem particularly worried about financial stability at the moment. This disconnect between the narrative in the markets and the narrative from the Fed is worrying.”
Conor Sen, portfolio manager at New River Investments.
Sen chooses “the CPI medical care index measures price growth in consumer out-of-pocket healthcare expenses. It’s now growing at almost a 5 percent rate. Wage growth for workers is finally accelerating, but if that additional income all gets eaten up by healthcare costs it’s going to hold back a more robust economic expansion.”
Brian DePratto, economist at Toronto Dominion Bank.
“Canadians seem to love housing, with real estate near its highest-ever share of the economy (although the history is quite short),” notes DePratto. “With new measures to cool the housing market in play, it can be scary to think what might happen if Canada were to lose this driver of growth.”
Peter Tchir, head of macro strategy at Brean Capital LLC.
“History may not repeat itself, but it is interesting that in May 2013 Treasury VIX was about where it is today and the 10-year yield was 1.76 percent right around where it is today. I am not an alarmist on Treasury yields by any means, but this is a bit disturbing,” says Tchir. “Going back all the way to 2003, the only other time Treasury VIX got this low in May 2007.”
Nikolaos Panigirtzoglou, global market strategist at JP Morgan Chase & Co.
“Retail investors bought bond funds and sold equity funds over the past few weeks in continuation of a trend that characterized most of this year,” begins Panigirtzoglou. “This strong preference for bond over equity funds is illustrated in the chart, which shows that the current pace of this trend line, at minus $10 billion per week, is very negative by historical standards and it matches levels previously seen in early 2009, during the depths of the Lehman crisis, or in 2012 during the depths of the euro debt crisis.”
Kit Juckes, global strategist at Societe Generale SA.
Juckes puts it succinctly: “What the FX market thinks of the U.K. economy’s prospects” as shown by the Bank of England’s calculated exchange rates for sterling.
Jordan Rochester, foreign-exchange strategist at Nomura.
“What’s scary is that what we’ve seen strong signs in October of a fall in market confidence that makes trading sterling of late resemble that of an emerging market currency,” says Rochester. “For the U.K., with its reserve currency, very rarely does the currency fall when yields in the U.K. are rising faster than its peers. Typically investors purchase the pound to benefit from the rising yields but as the chart above shows with the red line we are deeply in the negative territory of late. Going forward, either the U.K. has to have a large economic rebalancing or U.K. assets need to become more attractive to foreign investors via either higher yields or a continued fall in the currency.“
Alberto Gallo, portfolio manager at Algebris Investments.
“Sterlings depreciation will push up inflation in the U.K., which imports nearly 50 percent of its food and energy,” notes Gallo. “Yet [the] 10-year gilt yield remains around 1.1 percent, well below 10-year inflation expectations. In our view, gilts are the most overvalued bond market in the world and could be the next victim of a likely hard Brexit, following sterling. The 10-year gilt yield could rise towards 1.5 percent.”
Barnaby Martin, European credit strategist at Bank of America Merrill Lynch.
For us, the story of negative-yielding assets is not just about government debt,” says Martin. “The phenomenon has taken over the European credit market. There is almost 400 billion euros of negative-yielding corporate debt now in Europe. Our fear is that this is far too tempting for companies not to take advantage of. If we are right, then the risk we think is a rise in ‘bad’ M&A, leverage buyouts, and more generally a misallocation of capital across European credit markets. Central bank quantitative-easing policies may ultimately be sowing the seeds of the next default cycle in Europe.”
Fielding Chen and Tom Orlik, economists at Bloomberg Intelligence.
“Based on the official numbers, Chinas non-performing loan ratio is a very manageable 1.75 percent,” begin Chen and Orlik. “The trouble is, with helter-skelter credit expansion in the last eight years, many analysts believe the official data understate the extent of the problem. A dive into the data for listed companies provides an alternative read. Looking at the entire universe of Chinese listed companies, based on the latest data for the first half of 2016, 8.4 percent of loans are to companies without enough earnings to cover interest payments. That methodology, also used by the IMF, provides a scarier, and more perhaps more realistic, read on the state of bad loans in Chinas banks.”
Frederik Ducrozet, economist at Pictet Wealth Management.
“The euro-area credit impulse is weakening, this needs close monitoring,” according to Ducrozet. “Bank lending remains key to the macro outlook, especially for investment in small-and-medium enterprises and hiring decisions. If credit flows fail to pick up more strongly in coming months, the risk is that the ECB needs to step in again, possibly expanding on previous measures, such as as targeted longer-term refinancing operations, to try and boost the credit cycle again.”
Richard Koo, chief economist at the Nomura Research Institute.
“Governor Kurodas quantitative easing has had zero impact on Japans money supply and credit growth,” says Koo.
George Pearkes, macro strategist at Bespoke Investment Group.
“Current 12-month forwards are pricing in a 2.13 percent depreciation to 6.9356 versus 6.7877 spot. If markets are going to get ‘scared’ by USDCNH (spot weakening much faster than forwards), depreciation will need to quicken further,” writes Pearkes.