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Buying Panic Fizzles As Option Expiration Looms

In the absence of any key economic developments in the Asian trading session, Asian stocks traded mostly under the influence of the late, pre-opex US ramp momentum courtesy of another day of ugly economic data in the US (bad econ news is good news for liquidity addicts), closing solidly in the green across the board, led by China (+1.6%) and Japan (+1.1%) thanks in no small part to the latest tumble in the Yen carry trade, which mirrored a bout of USD overnight weakness.

And since a major part of the risk on move yesterday was due to ECB member Ewald Nowotny's comments welcoming more QE, news from Eurostat that the final Eurozone CPI print in September was -0.1%, which confirmed Europe's deflation continues, should only be greeted with even more buying as it assures further easing by the ECB - even if like Sweden the ECB has virtually no net supply left to monetize - is inevitable.

That said, what happens on Opex day, stays on Opex day, which is what today is with a number of October option expiries including FTSE 100, CAC, DAX, SMI, Eurostoxx, Eurodollars as well as S&P, Nasdaq and DJIA. And as shown before, there is a distinct pattern involving US option expiration, namely one where 8 out of 8 times there has been a rally ahead of OpEx...


... followed by prompt profit taking in the sessions thereafter. Will this time be different?

For now US equity futures are virtually unchanged. One can be certain that they won't close there, especially not after algos get the latest Gartman flip-flop.

A quick look at regional markets starting with Asia shows equities traded mostly higher with financials outperforming following the strength seen in the sector during US trade on better than expected earnings from Citigroup , with firm lending data from China also supporting sentiment. Financials led the gains in the Nikkei 225 (+1.0%) and ASX 200 (+0.7%), while the Shanghai Comp. (+1.6%) was supported at the open after aggregate lending and new yuan loans beat expectations. Furthermore, there were reports margin lending rose and China's NDRC approved USD 15bIn worth of investments in infrastructure projects. Finally, 10yr JGBs traded mildly higher despite the mostly positive risk tone in Asia.

Despite being disappointed by less than impressive corporate earnings from both sides of the pond, stocks continued to edge higher (Euro Stoxx: 0.8%), underpinned by the growing expectation of further policy easing by the ECB and the Fed refraining from hiking rates just yet. As a result, Euribor curve continued to flatten and in turn supported the upside by Bunds, in tandem with stocks.

Consumer staples and discretionary names underperformed on the sector breakdown , after the heavyweights Nestle (-2.0%) and Hugo Boss (-10.4%) cut forecast. On the other hand, Syria related war premium, together with the decrease in US crude output as indicated by the EIA yesterday, continued to support oil price which in turn ensured the outperformance by energy related names.
Today's notable US earnings include GE and Honeywell, while also of note today sees a number of October option expiries including for FTSE 100, CAC, DAX, SMI, Eurostoxx, Eurodollars as well as S&P, Nasdaq and DJIA .

In FX markets, CAD failed to benefit from recent commodity strength, with the USD index residing in positive territory and weighing on commodity currencies, with AUD/USD testing the 0.7300 level to the downside, while NZD/USD approached its highest level in 31/2-months after New Zealand CPI beat expectations (Y/Y 0.4% vs. Exp. 0.3%), before the pair retreated on profit taking. Of note, heading into the CPI release, 9/14 analysts had expected the RBNZ to cut rates at their Oct 29th meeting, however, 10/16 analysts now expect the RBNZ to keep rates on hold at 2.75%. Elsewhere, the final reading of Eurozone CPI all printed in line with expectations (Y/Y -0.1%), seeing no reaction in EUR.

Looking at commodities shows WTI and Brent trading with modest gains heading into the NYMEX pit open with Brent residing above the USD 50 handle after a massive build in US crude inventories. Yes, it makes no sense. So what?

Elsewhere, the modest strength in USD has weighed on gold, with the yellow metal moving away from its multi month high amid light newsflow.

Looking at today's US calendar, highlights include industrial and manufacturing production out of the US, as well as JOLTS job openings and the preliminary reading of University of Michigan sentiment and comments from ECB's Jazbec and Coure and BoE's Forbes.

Bulletin headline summary from Bloomberg and RanSquawk

  • European and Asian stocks continue to edge higher, underpinned by the growing expectation of further policy easing by the ECB and the Fed refraining from hiking rates just yet
  • USD has seen strength during the European morning to weigh on major pairs
  • Highlights include US industrial and manufacturing production, JOLTS job openings and the prelim reading of University of Michigan sentiment, as well as comments from ECB's Coeure and Nowotny and BoE's Forbes
  • Treasuries steady, heading for gain on the week after weak retail sales and global growth concern pushed Fed liftoff expectations to 2016.
  • Debt and money markets are readying for a cut to the ECB’s deposit rate, regardless of what its policy makers say in public
  • Fed data show commercial lenders boosted UST holdings to a record $2.15t at the end of last month, signaling expectations for the central bank to postpone raising rates
  • EU leaders failed to reach a final agreement on recruiting Turkey to help stem the flow of refugees from the Middle East, with some eastern countries dragging their heels over how much aid to grant their neighbor
  • Turkish military says it shot down an aircraft at the Syria border today; the aircraft, whose nationality is unknown, was warned 3 times after being spotted inside Turkey’s airspace, military said
  • Volkswagen AG failed to keep pace with European competitors as the German carmaker’s market share slipped last month in the wake of the diesel-emissions test scandal
  • Hillary Clinton’s campaign is collecting more cash from employees of the six biggest U.S. banks than any other presidential candidate
  • Traders of bonds, currencies and commodities are facing a shrinking year-end bonus pool after their revenue in the first nine months slumped 11% to $32b at the four biggest U.S. investment banks
  • $3.1b IG priced yesterday, no high yield. BofAML Corporate Master Index OAS narrows 1bp to +173, YTD range 180/129. High Yield Master II OAS narrows 5bp to +626, YTD range 683/438
  • Sovereign 10Y bond yields mostly lower. Asian and European stocks gain, U.S. equity-index futures little changed. Crude oil higher, copper anad gold fall

US Event Calendar

  • 9:15am: Industrial Production m/m, Sept., -0.2% (prior -0.4%)
    • Capacity Utilization, Sept., est. 77.3% (prior 77.6%)
    • Manufacturing (SIC) Production, Sept., est. -0.2% (prior -0.5%)
  • 10:00am: JOLTS Job Openings, Aug., est. 5.580m (prior 5.753m)
  • 10:00am: UMich Sentiment, Oct. P, est. 89 (prior 87.2)
    • UMich Current Conditions, Oct. P (prior 101.2)
    • UMich Expectations, Oct. P (prior 78.2)
    • UMich 1 Yr Inflation, Oct. P (prior 2.8%)
    • UMich 5-10 Yr Inflation, Oct. P (prior 2.7%)
  • 4:00pm: Net Long-term TIC Flows, Aug. (prior $7.7b)
    • Total Net TIC Flows, Aug. (prior $141.9b)

DB's Jim Reid conlcudes the overnight news

There is little sign of the fundamentals forcing gravity to kick in market wise at the moment as the rally that started with the weak payroll number two weeks ago today got a fresh breath of life over the last 24 hours as markets have slowly come to terms with the fact that the 'great' global central bank liquidity story of '2008-20XX' is far from over. Indeed maybe I should have X-ed out the '20' end part of the range too. Last night the S&P 500 closed at its highest level in 8 weeks after advancing +1.49%. The Dow (+1.28%) moved higher too, while European equities closed up +1% to +1.5% despite VW tumbling lower after the Federal Motor Transport Authority (better known as the KBA) announced the official recall of 2.4m vehicles from the automaker.

Elsewhere, 10y Treasury yields nudged higher yesterday and back above 2% to close at 2.018% (+4.6bps) while the Dollar index firmed up nearly half a percent. Oil markets closed largely unchanged after paring back an intraday decline of some 3% as headlines on Bloomberg suggested that Russia is prepared to discuss production cuts which helped offset the latest inventory data showing US crude stockpiles ticked up again last week.

Earnings played a big part in shaping the better tone in markets yesterday. Financials in particular led yesterday’s move higher across the pond with Citigroup a standout following their latest quarterly report. Despite revenues sliding a tad more than analyst expectations, a decent fall in expenses helped support a beat at the profile line, sending the shares up over 4%. Goldman Sachs also closed higher yesterday following its earnings release. Despite falling short of market expectations at both the top line and profit line (the first miss in four years) after fixed income trading revenues plummeted during the quarter, investors were seemingly buoyed by messages of patience stressed in the conference call that followed. Meanwhile, reporting after the closing bell Schlumberger painted a fairly bleak picture for the outlook in the oil and gas industry. Schlumberger’s CEO was noted as saying that the market is ‘increasingly challenging’ and that ‘activity is expected to be reduced further’. The CEO also noted that a ‘lack of available cash flow exhausts capital spending for a number of our customers’ which is set to lead them to taking on a more conservative view for spending next year.

Also in the spotlight yesterday was a mixed batch of data out of US. Of particular focus was the September CPI print. Headline inflation was as expected at -0.2% mom, which dragged the YoY rate down two-tenths to 0.0%. Supported by an increase in rents and medical costs, core CPI was ahead of consensus (+0.2% mom vs. +0.1% mom) which was enough to lift the YoY one-tenth to +1.9%. It was noted however that core inflation excluding shelter costs was up a tenth, but still low at just +1.0% yoy, evidence of the general lack of inflationary pressure outside housing. Elsewhere, initial jobless claims marked a new 42-year low after declining 7k to 255k (vs. 270k). The latest manufacturing readings made for less good news however. The NY Fed’s empire manufacturing print for October improved less than expected, up 3.3pts to -11.4 (vs. -8.0 expected) while the Philly Fed manufacturing index rose 1.5pts and below market to -4.5 (vs. -2.0 expected). Finally, during September the US Treasury recorded a $91.1bn budget surplus, slightly below expectations of $95bn.

Moving on, markets in Asia this morning are largely following the lead from the US last night and closing out the week on a high note. The Nikkei (+1.08%) is leading the gains, while the Shanghai Comp (+0.31%), CSI 300 (+0.34%), Hang Seng (+0.57%) and ASX (+0.86%) are also up. The Shanghai Comp is in fact on course to close at its highest level since August 21st, while a Bloomberg story this morning is suggesting that the Chinese government is considering forming a new company aimed at bringing together all aerospace assets under one entity, thought to be part of the government’s restructuring of SOE’s.

Staying in China, our Chief China Economist Zhiwei Zhang published a note yesterday looking ahead to the upcoming 5th Plenary Session of the 18th Central Committee of the Communist Party of China, due to be held from October 26th-29th. Zhiwei expects, from an economic perspective, that the most important topic will be the new Five-Year Plan which is the blueprint for social and economic development over the period. The finalized version of this plan should reveal the growth target for the relevant period. Zhiwei believes that while there are still uncertainties on the growth target, he believes that the likelihood of keeping the 7% target is slightly higher than cutting it to 6.5%. He notes that the two possible targets will have very different implications on policy outlook. For example if the target is set at 7%, then he believes the government will have to maintain its loose policy stance and do more easing and as a result the leverage of the economy will rise. While on the other hand if the target is set at 6.5%, it means the government will tolerate slower growth to allow more space for structural adjustments, and so in this case he expects that there will be less stimulus efforts by the government. Zhiwei also noted that he does not expect a stimulus announcement for 2015 at the Plenum given the strategic nature of issues to be discussed. An important upcoming event to keep an eye on.

Early yesterday we got more Fedspeak in the form of NY Fed President Dudley. The Fed official reiterated that the Fed should liftoff this year, but made mention that this is a forecast and not a commitment. While Dudley downplayed some of the recent soft data, he did note that ‘the recent economic news suggests the economy is slowing’ and that some of the concerns emanating from China and emerging markets could still hold back the US economy. Meanwhile, Cleveland Fed President Mester continued to push her view that in her mind she believes that the US economy can handle an increase in the fed funds rate and that delaying the start of liftoff for too long risks having to move rates up more aggressively later on.

Prior to this, there were some decidedly more dovish comments from ECB Governing Council member Nowotny yesterday. Fueling chatter for more ECB stimulus, Nowotny warned that ‘we’re clearly missing our target’ for inflation, not only at the headline but also at the core. The official went on to say that the ECB is using the monetary policy instruments available, but in his view ‘it is quite obvious that in the current economic situation additional sets of instruments are necessary’. The comments saw the Euro fall 0.77% yesterday and should add some fuel to the fire ahead of next Thursday’s ECB meeting.

Looking at the day ahead now, this morning’s focus in Europe will likely be on the final September CPI reading for the Euro area, while we’ll also get trade data for the region. Over in the US this afternoon, the latest industrial and manufacturing production prints for September are due up along with capacity utilization, while we’ll also get the August JOLTS job openings data and the preliminary University of Michigan consumer sentiment reading. There’s no Fedspeak expected but the ECB’s Coeure and BoE’s Forbes are due to speak at various stages. The highlight on the earnings front is General Electric, due to report before the US open. We'll review the earnings season as it stands so far on Monday morning.