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Futures Halt Three-Day Rally, Drop On Energy Weakness, IBM Earnings

After yesterday's closing ramp "prudently" just ahead of an abysmal IBM earnings report with the lowest revenues since 2002, and the latest rally in capital markets which sent European stocks to their highest level since August on the back of a barrage of global bad data which has unleashed the Pavlovian liquidity dogs screaming for moar central bank bailouts, this morning has seen a modest decline in the Stoxx 600 driven by energy names, while S&P500 futures are set to open lower on IBM's disappointment at least until the latest massive BOJ USDJPY buying spree sends the pair to 120 and the S&P solidly in the green. The biggest political event overnight was the Canadian election, where Trudeau's liberals swept PM Harper from power, capping the biggest political comeback in the country's history; the Canadian dollar is largely unchanged after initially weakening then rising.

Asian equity markets traded mixed with subdued price action due to a lack of tier 1 data or speakers . Nikkei 225 (+0.3%) outperformed lifted by gains in tech names after the 4th largest weighted stock KDDI (+6%) was supported by a favourable broker move, while ASX 200 (-0.7%) underperformed amid pressure from commodity names and losses in large banks, which face an increase in capital requirements. Shanghai Comp. (+1.1%) returned back to its old "government intervention, last-minute ramp" ways, spikinmg 1.1% in the last 30 minutes of trading, despite declines in the energy sector. 10yr JGBs tracked the rebound seen in USTs, with a better than prior 20yr JGB auction also supporting the 10yr.

European equities retraced their initial gains to trade firmly in the red (Euro Stoxx: -0.8%), weighed on my energy names in tandem with the energy complex coming off its highs while exporters were weighed on by strength in EUR. on a company specific breakdown, the likes of InterContinental Hotels (+4.7%), Actelion (+3.1%) and Whitbread (+2.0%) are among the best performers after reporting earnings premarket. In line with the pullback in stocks, Bunds have come off their worst levels since the open to trade relatively flat on the day, with macro news fairly light. While orders for UK 2065 Gilt have exceeded GBP 16.5b1n, with price guidance set at 1.5 bps over 2068 Gilt.

The European session kicked off seeing volatility in FX markets, with GBP/JPY breaking above its 200 DMA, with the upside also attributed to by some desks to a touted large order in the cross. The initial upside in GBP/JPY filtered through to both GBP/USD and USD/JPY as well as commodity currencies. This saw AUD build on its gains from overnight on the back of the neutral RBA minutes from overnight and aided CAD in paring back some of the losses seen after the results of the Canadian election showed a victory for the Liberals, although CAD went on to see weakness heading into the North American crossover.

RBA Minutes from October 6th meeting stated that economic and financial conditions are to be considered in the RBA's policy stance. Members also stated that earlier rate cuts were supportive of aggregate demand and that the RBA expects Q3 GDP to improve from Q2. (BBG/RTRS)

The energy complex heads into the NYMEX pit open relatively flat after paring its upside from overnight after yesterday's comments after from Libya and Iran regarding prospects of increased output. This comes ahead of API crude oil inventories (Prey. 9300K), which are set to be at 2135BST/1535CDT.

In the metals complex, gold has come off overnight lows, trading in close proximity to its 200 DMA at 1175.70. Elsewhere, copper prices were weaker amid continued concerns over global demand and increased Chinese production of the metal, while iron ore remains range bound with prices failing to be bolstered following a 4.4% decline in China iron ore output last month.

On today's US docket we have September housing starts and building permits data as the notable releases, while Dudley and Powell are due to speak at the NY Fed Conference at 9:00 am, shortly followed by Fed Chair Yellen at 11:00 am BST who is scheduled to make brief opening remarks at an induction ceremony. Corporate earnings will again be closely watched with 22 S&P 500 companies due to report including Verizon, Yahoo and United Technologies. In Europe we’ve got 6 Stoxx 600 companies set to report. Today's large cap US earnings include Verizon, United Technologies, VMware, Bank of New York Mellon, ACE, Travelers Cos, Lockheed Martin, Yahoo, Discover Financial Services, Chubb, Chipotle and Illumina.

Market Wrap

  • S&P 500 futures down 0.3% to 2021
  • Stoxx 600 down 0.7% to 362
  • MSCI Asia Pacific down 0.1% to 134
  • US 10-yr yieldunchanged at 2.02%
  • Dollar Index down 0.19% to 94.74
  • WTI Crude futures up less than 0.1% to $45.90
  • Brent Futures down 0.7% to $48.28
  • Gold spot up 0.2% to $1,173
  • Silver spot up 0.1% to $15.87

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Upside in GBP/JPY as European participants arrived at their desks filtered through to both GBP/USD and USD/JPY
  • European equities retraced their initial gains to trade firmly in the red, weighed on my energy names in tandem with the softness in the energy complex while exporters were weighed on by strength in EUR
  • Looking ahead, today's highlights include US housing starts and building permits, GDT auction and API crude oil inventories, while speakers include BoE's McCafferty & Carney, ECB's Nowotny, Fed's Dudley & Yellen
  • Trudeau’s Liberals Oust Harper With Surprise Canada Majority: Liberal Party swept into office, capping the biggest political comeback in the country’s history
  • The day of reckoning for many debt-heavy oil drillers has been postponed as lenders are giving energy producers more time to cut costs and raise cash
  • The U.S. dropped its view that China’s currency is “significantly undervalued” while saying that forces driving appreciation in the longer term remain and China needs to allow such strengthening eventually
  • United Picks Counsel as Acting CEO With Munoz on Medical Leave: Brett Hart named acting CEO; says it’s still too early to determine “course and treatment” of Munoz’s recovery
  • When Wal-Mart Stores Inc. raises its minimum wage to $10 an hour next year, Target Corp. and other competitors are going to face a dilemma: follow along and jeopardize profits or risk losing their best workers
  • SanDisk Said in Advanced Talks to Sell to Western Digital: Co. said to be discussing price of $80-$90 per SanDisk share; SanDisk closed at $72 in NY trading on Monday
  • ECB Says Credit Standards Improve as QE Program Supports Lending: Credit standards on loans to cos. eased for 6th consecutive qtr, ECB’s Bank Lending Survey showed on Tuesday
  • Blackstone in Deal to Buy New York’s Stuyvesant Town Complex: Private equity firm said to pay $5.3 billion for complex
  • Goldman Sees Treasuries Rally Overdone as Inflation to Pick Up: Investment bank sees Fed interest-rate increase in Dec.
  • Apple CEO Defends Encryption, Opposes Govt Back Door: Cook and director of NSA squared off on Monday in debate over how much access tech cos. should afford U.S. intelligence agencies
  • Yum Said in Advanced Preparations to Separate Chinese Business: Plans to break up business could be announced before end of month
  • VW’s 12-Brand Behemoth Under Scrutiny as Costs of Scandal Mount: While VW in the past could afford to prop up financially struggling divisions with profit from Porsche and Audi, that money will now need to help cover costs linked to the crisis
  • U.S. Softens Criticism of Yuan Level Amid Currency Pressures: Treasury says yuan now below “appropriate medium-term valuation”
  • ‘Star Wars’ Demand Crashes Websites as Fans Rush for Tickets: Attempts on Fandango to buy tickets to the movie, which opens on Dec. 18, during the first few hours of availability produced the notice “Error 500: Technical Difficulties”

US Event Calendar

  • 8:30am: Housing Starts, Sept., est. 1.142m (prior 1.126m)
    • Housing Starts m/m, Sept., est. 1.4% (prior -3%)
    • Building Permits, Sept., est. 1.170m (prior 1.170m, revised 1.170m)
    • Building Permits m/m, Sept., est. 0% (prior 3.5%)

Central Bank Speakers

  • 9:00am: Fed’s Dudley, Powell speak in New York
  • 11:00am: Fed Chair Yellen to make brief welcoming remarks at Labor Dept. ceremony in Washington

DB's Jim Reid completes the overnight event wrap

It's a scary 38 years since the first Star Wars film and yesterday it was the 28th anniversary of Black Monday where the DOW fell -22.61% in a fraught trading session. Last night the DOW closed a slightly less earth shattering +0.08% higher (S&P 500 +0.03%) on fairly light volumes as markets took a breather. The early Chinese data dump we discussed yesterday didn't really seem to change anyone's opinion on the country's fortunes but as we'll highlight later our economist thinks there are some important signs of more positive momentum under the surface. If anything, the main market reaction was for commodities to fall on concerns about the strength of the recovery overall. It was a tough session for Oil in particular as we saw Brent fall back below $50 after tumbling -3.03% to $48.93/bbl. WTI closed the session down -2.26% and is now sitting just above $46 as the record Saudi Arabia stockpile data from the weekend also weighed on prices. Gold closed down -0.55%, dragging most of the precious metal space with it, while Copper (-1.49%), Aluminum (-1.46%) and Lead (-1.13%) also slid lower. Those moves helped put some pressure on EM FX too, with falls of at least a percent for currencies in Russia, South Africa, Egypt and Colombia in particular.

Back to China and the latest update from our China Chief Economist Zhiwei Zhang (Data Flash - China: lackluster Q3, Q4 looks encouraging dated Oct, 19th). On the back of yesterday’s data, Zhiwei noted that there are signs from some of the leading indicators that seem to suggest that there will be an investment-led growth rebound in Q4. In particular, the notable developments include both a strong pickup in floor space starts in the property markets and secondly an improvement of the fiscal situation. On the property market, floor space starts strengthened in September with monthly growth at +15.3% yoy, which compares to -16.7% and -21.3% in August and July respectively. Meanwhile, government revenues improved on the back of the land sales recovery. Local government land sales revenues declined only -27.2% yoy in Q3, better than the -36% in Q1 and -41% in Q2. As a result, general government revenues dropped only -0.5% yoy in Q3, also better than the -3.6% in H1 2015. Zhiwei also points out that there were stronger government expenditure numbers last quarter. Added to this, strong new RMB loans and new total social financing in September are also indicating a possible recovery of investment in Q4. As a result, Zhiwei reiterates his view that GDP growth will pick up modestly in Q4 to 7.2%, led by an investment recovery. With regards to monetary policy, he does not expect an IR cut until the end of 2016, but expects one RRR cut this quarter followed by one for each quarter of 2016. On the FX front, Zhiwei believes that the CNY rate should remain stable at around 6.4 this year, before depreciating modestly to 6.7 by the end of 2016.

Moving on. The relatively benign trading session in the US last night has filtered through to the Asia session where there’s little obvious direction in markets this morning. There’s modest gains for the Nikkei (+0.27%) and Kospi (+0.19%), while China is mixed (Shanghai Comp -0.09%, Shenzhen Comp +0.94%) but the Hang Seng (-0.48%) and ASX (-0.65%) are lower. Oil (WTI +0.46%) is a touch higher after yesterday’s heavy losses while Asian credit is mostly weaker, the Asia iTraxx in particular 4bps wider as we go to print. Elsewhere, moments ago the news has emerged that the Liberals have won a surprise majority in the Canadian election, ending 10 years of Conservative ruling with the latter’s leader Stephen Harper resigning following the result as per FT.

Meanwhile, the story on the Chinese SOE Sinosteel that we mentioned yesterday is gathering steam with a Bloomberg article noting moments ago that the company delayed an interest payment on its Yuan dominated bonds due today. The same story suggests that the Chinese regulator and State Council are working with all related parties in order to try to prevent a default. Certainly a noteworthy story testing China’s commitment to allowing market reform.

It was very much a mixed day on the earnings front yesterday. Of the 7 S&P 500 companies to report, all seven names reported a miss at the top line in a similar theme to much of what we’ve seen so far this quarter. However it was a different story at the profit level where 4 of the 7 (57%) companies beat analyst expectations. After that and with 65 companies now reporting so far this season, that’s taken the earnings beats number to 74%, which compares to just 43% of beats for the top line.

Yesterday we saw Morgan Stanley join Goldman Sachs and JP Morgan in putting out a largely disappointing Q3 report. Revenues in the quarter tumbled with the drop exceeding analyst estimates by nearly $1bn after fixed income revenues in particular were down over 40%. EPS of 48c was well below the 63c market estimate, helping to send the bank’s share price down nearly 5% by the close. IBM was another to disappoint investors. After reporting a fourteenth consecutive quarter of declining sales, the company also cut its full year profit guidance, causing its share price to slide a couple of percent in after-hours trading.

It was a very quiet day for data yesterday, but the one print of note was the October NAHB housing market index print which was up 3pts from last month to 64 (vs. 62 expected), reaching the highest level since October 2005. Away from this, there was more Fedspeak for us to digest with the San Francisco Fed President Williams the latest to opine. Without pinning down any particular timing and although acknowledging that the decision is a close call, Williams noted that he expects economic conditions in the US to allow the Fed to act ‘in the near future’. While making claim that the decision will be data dependent, Williams did say that the recent data has been ‘all over the map’.

Of interest also yesterday was the Treasury’s semiannual report on economic and currency policies of major trade partners. In particular, it was the commentary around China and its devaluation of the Yuan which stood out. The report noted that further currency appreciation of the Yuan is key to the process of China rebalancing its economy in shifting its domestic economy towards greater reliance on household consumption. The report did however suggest that the near-term trajectory of China’s currency is difficult to assess given economic uncertainties, volatile capital flows and prospects for slower growth. At current levels the Treasury determined that the Yuan remains ‘below its appropriate medium-term valuation’, a change in language and notably softer than prior releases where the Treasury determined that the Chinese currency was ‘significantly undervalued’.

There wasn’t a whole lot to report in the European session yesterday. The Stoxx 600 finished up +0.31% along with the bulk of core European bourses yesterday. The underperformer was the FTSE 100 which finished down -0.40% as miners dragged the index lower. Ahead of the ECB meeting on Thursday, there were some moderately hawkish comments from ECB official Noyer, saying that the ECB’s QE program is ‘well calibrated’ and that ‘it’s already bearing fruits’.

Looking at today’s calendar, it’s another particularly quiet day for data in Europe this morning with just German PPI the notable release. It’ll be worth keeping an eye on various comments from BoE officials however with Bailey due to speak at 10am BST, followed by McCafferty at 10.45am BST and Governor Carney shortly after at 11am BST. Over in the US this afternoon September housing starts and building permits data are the notable releases, while Dudley and Powell are due to speak at 2pm BST at the NY Fed Conference, shortly followed by Fed Chair Yellen at 4pm BST who is scheduled to make brief opening remarks at an induction ceremony. Corporate earnings will again be closely watched with 22 S&P 500 companies due to report including Verizon, Yahoo and United Technologies. In Europe we’ve got 6 Stoxx 600 companies set to report.

May the force be with you today!!