Futures inch higher, reversing earlier losses even as bond yields gain 3bps to rise to a one week high, and the USD is once again rising. As of 8:00am ET, S&P 500 and Nasdaq 100 inched up 0.1% and 0.2% respectively with Mag7 names mostly higher premarket, even as other large cap tech names are hit post-earnings after software giant Oracle slid as much as 8.8% after quarterly results underwhelmed. Nvidia looked set to extend losses following news that China is probing the AI chipmaker over alleged anti-monopoly violations. US-listed Chinese shares also slipped, ceding gains notched the previous day after Beijing pledged to loosen monetary policy. The commodity complex is weaker as energy items fail to hold yesterday’s gains. Today shapes up to be a quiet macro day ahead of CPI.
In premarket trading, Oracle dropped 7% after the software company reported second-quarter results that are seen as underwhelming in the wake of robust stock performance. Homebuilder Toll Brothers declines 3% after the luxury builder’s profit-margin projection fell short of estimates. Here are some other notable premarket movers:
Investors have been monitoring the upsurge in geopolitical risk in the Middle East, after rebel forces toppled Bashar-al-Assad’s regime in Syria. Oil prices eased, however, as concerns over a looming supply glut overshadowed the political risks and China’s stimulus plan. Looking ahead, Wednesday’s CPI print will be the final major price reading before the Fed’s policy meeting next week. Any indication that progress has stalled on the inflation front could well undercut the chances of a third straight reduction in rates. Bloomberg’s Dollar Spot Index and Treasury yields edged higher suggesting inflation is once again ascendant.
“Markets seem to have run out of steam going into the end of the year and participants are waiting for some kind of fresh catalyst,” said Lee Hardman, a strategist at MUFG Bank Ltd.
Turning to the upcoming inflation data, Hardman noted that even a relatively robust monthly payrolls reading had not derailed bets on further policy easing. Money markets currently see about an 80% chance of a quarter-point easing next week. “It would have to be a really bad CPI report tomorrow to make the market pare back expectations for a cut this month,” he said. “You have to assume if it comes in in line with expectations, it’s not going to really alter the view.”
Elsewhere in this week's main events, we get a flood of central bank decision, with the European Central Bank expected to cut rates for the fourth time this year, amid a deteriorating economic outlook and political turmoil in France and Germany. The Swiss National Bank is also forecast to trim rates on Thursday.
A key focus will be China’s Central Economic Work Conference — due to start Wednesday — where authorities could hint at more fiscal support to follow up their pledge for “moderately loose” monetary policy in 2025. Chinese stocks rose as much as 3.3% on Tuesday, only to hand back most of those gains by the close.
“The proof will be in the pudding but these statements do seem to show the authorities are poised to take more aggressive action and are encouraging,” said Rupert Thompson, chief economist at IBOSS, Kingswood Group.
Uncertainty on whether China will follow up on its stimulus pledges weighed on Europe’s Stoxx 600 index, which is set to snap an eight-day winning streak. Chinese shares pared gains into the close with the Stoxx 600 now down 0.2%, led by declines in miners and consumer products while automobile and health care stocks are the biggest outperformers. Here are the biggest movers Tuesday:
Earlier in the session, HK/China opened stronger but faded as the market saw little follow through buying post the Politburo meeting. Furthermore , investors do not expect the CEWC to surprise to the upside. The one standout within China was the retail buying which focused on the CSI500 and CSI1000 ETFs. In Korea, the market found a near-term bottom amidst the political turmoil. From a sector perspective, AI names were generally weaker as NVIDIA’s anti-trust probe overnight weighed on sector regionally as well as the Oracle earnings miss.
In FX, the Bloomberg Dollar Spot Index rises 0.1%. The Aussie dollar is among the weakest of the G-10 currencies, falling 0.6% against the greenback after the RBA said it’s “gaining some confidence” that inflation is moving sustainably toward target. AUD/USD was down 0.8% to 0.6389 (spot closed up 0.8% on Monday after China’s top leaders signaled bolder economic support in 2025) after traders lifted expectations the RBA may cut interest rates at its February meeting to a 64% chance, up from about 50% prior to the policy decision, according to meeting-linked swaps data compiled by Bloomberg
“The RBA is still mostly cautious but ‘gaining confidence’ in the inflation outlook,” said Sean Callow, senior FX analyst at Intouch Capital Markets in Singapore. “AUD/USD has now unwound yesterday’s China stimulus-inspired bounce but if China does deliver next year, it should outweigh any careful RBA easing”
In rates,treasuries are under pressure in early US trading, led by bear-steepening in gilts where UK 30-year yield reached highest levels since Nov. 22. Treasury supply is also a factor, with first of this week’s three coupon auctions ahead at 1pm New York time. US yields are 1bp-4bp higher on the day with 2s10s, 5s30s spreads steeper by about ~1bp; 10-year is around 4.24% with UK counterpart lagging by 2bp and Germany’s outperforming by 2bp. The week's auction cycle begins with $58b 3-year new issue and includes $39b 10-year and $22b 30-year reopenings Wednesday and Thursday.
In commodities, oil prices decline, with WTI falling 0.6% to around $68 a barrel. Spot gold climbs $9 to ~$2,670/oz. Bitcoin rises toward $98,000.
It's a quiet US economic data calendar which only includes the NFIB small business confidence print (101.7, exp.95.3), and 3Q final nonfarm productivity at 8:30am. Fed officials are in self-imposed quiet period ahead of their Dec. 18 Fed policy announcement.
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APAC stocks were mostly firmer following a negative Wall Street lead, but with APAC players reacting to China easing its overall monetary policy stance. ASX 200 was the regional laggard and failed to benefit from a net dovish RBA, with the index dragged by a poor performance in Tech. Nikkei 225 eked mild gains amid the recent JPY weakness, but with gains capped as the currency claws back some losses in APAC trade. Hang Seng and Shanghai Comp were the regional outperformers after Politburo said China's fiscal policy is to be more proactive next year, and monetary policy is to be moderately loose (prev. prudent), marking the first shift in the stance of monetary policy since 2011. Although bourses were off the best levels ahead of the Chinese Central Economic Work Conference.
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European bourses began the session entirely in the red and have continued to traverse the bottom end of today’s range throughout the morning. The pressure is seemingly a paring back of the prior day’s upside and as traders react to the poor performance in Wall St. in the prior session. European sectors hold a strong negative bias, in-fitting with the pressure seen across the complex. There are only a handful of sectors in positive territory, and with the breadth to upside marginal; Healthcare incrementally tops the pile, followed closely by Autos and Travel & Leisure. And in a turn of fortunes from the prior day, Basic Resources and Consumer Products both give back some of the strength seen on Monday. US equity futures have traded on either side of the unchanged mark, but have been edging higher in recent trade. White House says the Commerce Department has made a > USD 6.1bln investment in Micron (MU).
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DB's Jim Reid concludes the overnight wrap
In the first half of my career these two weeks into the holidays would have been back to back client Xmas lunches that often extended into the evening. Without wishing to offend the numerous clients I have Xmas lunched with over the years I'm glad those days are behind us. It was exhausting. Talking of fatigue, there was a bit of it in markets yesterday as the positive impact from China’s stimulus announcement, after we published yesterday morning, was eventually outweighed by the political uncertainty across several regions. China continues to rally this morning but remember that in the last week alone we've seen the French government voted down, the declaration of martial law in South Korea, the cancellation of Romania’s election, and the collapse of the Assad regime in Syria.
In terms of the China news we heard from the Politburo around an hour after we went to press yesterday. They said they would take a “moderately loose” position for monetary policy in 2025, and said there would be “more proactive” fiscal policy as well. On the former this follows 14 years of a "prudent" strategy.
Our economists and strategists believe this was an unusually strong indication as to the direction of travel, and there was a clear market response in the aftermath, with the Hang Seng moving from negative territory to end the day +2.76% higher. This morning the Hang Seng is a further +0.84% higher while the Shanghai Composite (+1.24%) is strong even if it's halved its opening surge.
The positive impact from this story was evident in US and European markets yesterday too. For instance, the CAC 40 (+0.72%) was the top performer among the major European indices, as it has a concentration in luxury goods firms that will benefit from more Chinese demand. Another outperformer was the STOXX 600 Automobiles & Parts Index (+1.11%), as the sector also has a large trade exposure to China. Meanwhile in the US, the NASDAQ Golden Dragon China index surged +8.54%, and that’s an index that includes companies which are publicly traded in the US, but who do a majority of their business in China.
But even as equities with China exposure did very well, that wasn’t always the case more broadly. Indeed, the S&P 500 (-0.61%) fell back from its record high on Friday, posting its largest decline in over three weeks. Sectorally, the downside for the index was led by financials (-1.41%) and communication services (-1.31%). And matters weren’t helped by Nvidia (-2.55%), which lost ground after China’s State Administration of Market Regulation had opened an antitrust probe. Despite Nvidia’s retreat, the Magnificent 7 (-0.27%) were a relative outperformer as Apple (+1.61%) reached another record high. Over in Europe, equities continued to advance, with the STOXX 600 (+0.14%) posting an 8th consecutive gain.
In terms of the various political developments around the world, there’s still no sign of a new French Prime Minister yet following Wednesday’s vote of no confidence. But investors don’t seem too alarmed about the situation, as the Franco-German 10yr yield spread tightened by another -1.8bps yesterday to 75.3bps. So there’s been a decent fall relative to its peak of 88.3bps the previous Monday, which was the highest since 2012. Moreover, spreads tightened across Europe, with both the Italian and Spanish 10yr spread over bunds reaching their tightest level in 3 years, at 107.7bps and 64.0bps respectively. That came amidst a fresh rise in the 10yr bund yield (+1.4bps), which moved up to 2.12%.
Over in the Middle East, the situation in Syria remains very unstable, and commodity prices moved up in light of the uncertainty. For example, Brent crude (+1.43%) was up to $72.14/bbl, and gold prices rose +1.18% to $2,665/oz. Meanwhile in Syria itself, television reported that Mohammed Al Bashir will form a transitional government, and Israel said they carried out strikes on chemical weapon sites in Syria. But there were concerns about what the situation might mean for the wider Middle East, as well as the potential for refugee flows into other countries.
In the meantime, US Treasury yields also moved higher ahead of tomorrow’s CPI report for November. That release is going to be crucial one, as it’s probably the last big piece of the jigsaw ahead of the Fed’s policy decision next week, where a rate cut is now priced in as an 86% probability. And in the meantime, yields moved up across the curve, with the 2yr yield (+2.1bps) rising to 4.13%, whilst the 10yr yield saw its largest daily rise in four weeks (+4.8bps to 4.20%). The move got further support thanks to the New York Fed’s Survey of Consumer Expectations for November. In fact, the share of people saying they expected their household financial situation to be better off in a year reached its highest since February 2020, just before the pandemic hit, while 1-year ahead inflation expectations ticked up after falling to a 4-year low the previous month. This morning in Asia, 10yr USTs are -1.2bps lower trading at 4.19% as I type.
Coming back to Asia, the KOSPI (+2.28%) is rebounding sharply after recent losses with the Nikkei (+0.32%) also higher. Elsewhere, the S&P/ASX 200 (-0.41%) is edging lower even after the Reserve Bank of Australia (RBA) sounded more dovish on the outlook for interest rates in its latest board meeting (more on this below). US equity futures are flat.
Moving onto the RBA’s decision, the central bank held interest rate steady at a 12-year high of 4.35% while flagging some confidence that inflation was moving towards its target, as economic growth cooled. In what was clearly a more dovish commentary, the RBA board also dropped earlier guidance that it couldn't rule any policy change "in or out." Our local economists now believe we'll see a cut in February. Against that background, the Aussie (-0.81%) is losing ground trading at 0.6388 against the dollar as we go to print. Meanwhile, yields on the 3yr Australian Government bond are -4.9bps lower standing at 4.62%.
Early morning data showed that China’s exports increased +6.7% y/y in November, but slower than market expectations of +8.7%. It followed a robust rebound of +12.7% the previous month. Meanwhile, import data surprised with a decline of -3.9%, marking the sharpest fall since September 2023 as against a -2.3% loss in the previous month. Markets had expected imports to grow +0.9%. So perhaps some justification behind the Chinese authorities' change of policy momentum yesterday.
To the day ahead now, and data releases from the US include the NFIB’s small business optimism index for November. In Italy, we’ll also get industrial production for October.