Futures Rebound From Overnight Lows On Stronger European Manufacturing Surveys, Dovish ECB

On a day full of Manufacturing/PMI surveys from around the globe, the numbers everyone was looking at came out of China, where first the official, NBS PMI data disappointed after missing Mfg PMI expectations (3rd month in a row of contraction), with the Non-mfg PMI sliding to the lowest since 2008, however this was promptly "corrected" after the other Caixin manufacturing PMI soared to 48.3 in October from 47.2 in September - the biggest monthly rise of 2015 - and far better than the median estimate of 47.6, once again leading to the usual questions about China's Schrodinger economy, first defined here, which is continues to expand and contract at the same time.

Unrelated to China's PMI, was the biggest plunge in the onshore Yuan which after soaring the most since 2005 on Friday (followed by the appropriate surge in the fix overnight) proceeded to tumble by nearly 0.5%, the biggest plunge since the Yuan devaluation, on even more PBOC intervention. This followed a statement that China’s central bank is finalizing revisions to its foreign-exchange rules that would loosen some capital controls while preserving its ability to intervene in times of volatility, according to people familiar with the matter. In other words, keep its SDR cake while eating "malicious short sellers" too and intervening at will.

Certainly unrelated to China's PMI, but even more market moving, was overnight news that Chinese authorities had arrested China's "Carl Icahn", Xu Xiang on insider trading charges, head of the $1.5 billion Zexi Investment fund (with concurrent news from both China National Radio and Xinhua that his partner Wu Shuang had been shot by local police after attempting to flee from arrest). Here are the highlights from Bloomberg's report:

Shanghai police raided hedge fund Zexi Investment on Sunday, taking away computers and other materials, according to a person familiar with the matter, in the latest attempt by Chinese authorities to crack down on strategies blamed for exacerbating a $5 trillion stock-market rout.

 

Xu Xiang, the general manager of top-performing Zexi, was detained on charges including insider trading and stock manipulation, the official Xinhua news agency reported. Two executives at Jiangsu-based Yishidun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($316 million) in “illegal profit", Xinhua reported separately, citing the Ministry of Public Security. Agricultural Bank of China Ltd. President Zhang Yun was taken away to assist authorities with an investigation, people familiar with the matter said on Monday, who didn’t give details.

 

Highlighting the tense environment sparked by the probes, Chinese social media was set abuzz Monday morning by an unconfirmed report of a man associated with the insider trading probe who was shot and killed by police while trying to escape apprehension. The report was retracted less than an hour after being posted to various websites, including that of China National Radio. A person at China National Radio’s news department, who refused to give their name, said the police had informed the broadcaster that the information was untrue.

One easy way to confirm whether or not Wu is alive: present him to the public. Somehow we doubt this will happen.

Continuing the overnight news, following China's bad/good PMI data, it was Europe's turn where at least the manufacturing surveys are improving, if not the economy, which sadly is the reason why Draghi is preparing to unleash even more QE. Specifically, the Final October Manufacturing PMI printed 52.3, vs Ex. 52.0 and a Previous print of 52.0.

Here was Goldman's rundown:

BOTTOM LINE: The final Euro area manufacturing PMI came in at 52.3 in October, 0.3pt above the flash estimate. With this revision, the Euro area manufacturing PMI gained 0.3pt on the month. On a country basis, the German manufacturing PMI edged down on the month by 0.2pt, while the Spanish PMI fell by 0.4pt. The French PMI was flat, and the Italian PMI experienced a robust gain of 1.4pt.

1. The final Euro area manufacturing PMI came in at 52.3 in October, 0.3pt above the flash. Relative to the flash, the German manufacturing PMI was revised up (from 51.6 to 52.1), whilst the French reading was revised down marginally (from 50.7 to 50.6). Between September and October, the Euro area manufacturing PMI rose by 0.3pt (Exhibit 1).
2. The PMI breakdown across subcomponents in October was mixed. Manufacturing output rose (+0.2pt to 53.6), whilst employment fell (-0.5pt to 51.1). The order-to-stock difference fell marginally by 0.4pt in October, reflecting a large increase in the stocks of finished goods.
3. On a country basis, following the upward revision, the German manufacturing PMI now only fell slightly on the month (from 52.3 to 52.1). The Spanish PMI also nudged down in October (from 51.7 to 51.3). The French print was flat on the month (50.6), whilst the Italian value increased robustly (52.7 to 54.1).
4. Outside the 'big 4', the manufacturing PMI in Greece rose by 4.0pt (43.3 to 47.3), while the Irish figure edged down from 53.8 to 53.6.

Additionally, UK Mfg PMI also unexpectedly surging from 51.8 to a print of 55.5, above expectations of 51.3 boosted sentiment as well.

But perhaps the biggest reason why both Europe and the US wiped out all overnight losses in equities and futures was the latest baffle with BS moment out of Europe, where following this weekend's unexpectedly hawkish interview by Mario Draghi to Il Sole, it was again Ewald Nowotny's turn to bring the doves home, after saying the ECB's 2% inflation target "clearly missed,""therefore, the ECB has to act," according to interview with Austria’s Kleine Zeitung. He then proceeded to engage in an economist's favorite activity: stating what can not proven, namely that "without QE we’d be stuck in much bigger difficulties." Well, one can just as easily state the opposite and have just the same "accuracy."

A quick run through markets starts in Asia, where stocks traded mostly lower following the weak close on Wall St. coupled with discouraging official Chinese PMI figures over the weekend where manufacturing PMI (49.8 vs. Exp. 50.0) was in contractionary territory for a 3rd month, while services PMI (53.1 vs. Prey. 53.4) was at its lowest since 2008. This pressured Chinese markets from the open, however Shanghai Comp. (-1.3%). then recovered after China Caixin manufacturing PMI (48.3 vs. Exp. 47.6) beat expectations, although Chinese equities took another leg lower heading into the European open following news on the Zexi Investment crackdown.

Nikkei 225 (-2.1%) underperformed to trade back below 19,000 as JPY strength weighed on exporters, while ASX 200 (-1.4%) was pressured by financials after big-4 bank Westpac's disappointing update. 10yr JGBs traded lower amid lack of buying by the BoJ ahead of tomorrow's Culture day public holiday.

Despite opening lower on the back of another round of weak macroeconomic data from China, stocks in Europe staged a dramatic turnaround following dovish comments by ECB's Nowotny who said that the central bank has to act given that inflation target is being missed. Bunds have failed to benefit from the above and instead traded lower amid FT reports over the weekend which suggested that China are selling some of its holdings of German government bonds to help assist the ECB's QE programme. Also, somewhat non-committal comments by ECB's Draghi who suggested that it is too early to pass judgement on depo-rate cut resulted in partial unwind of aggressive flattening of the Euribor curve which took place following very dovish press conference by Draghi last month.

In FX, GBP outperformed its peers, with the major pair rising above the 100DMA line following the release of much better than expected UK Manufacturing PMI report, which also comes ahead of the eagerly awaited MPC policy decision and the latest Quarterly Inflation Report. Elsewhere, USD/JPY recovered overnight losses and edged into positive territory to test the key 200DMA line, aided by higher US bond yields that's as USTs were dragged lower by German Bunds. As noted previously, the Turkish Lira has exploded overnight on news that Erdogan's rule is assured for years to come.

The release of yet another round of weak macroeconomic data from China meant that energy and metals markets remained under pressure in Europe this morning. Furthermore, reports that Russian October oil output has risen to record of 10.78mbpd, as well as reports that Iran it to seek 500kbpd output rise at OPEC meeting exacerbated the downside bias by WTI and Brent crude prices.

Top Weekend News:

• Erdogan Party Sweeps Back to Power in Surprise Turkey Win: AK Party sweeps back into office, defying polls, strengthening President Recep Tayyip Erdogan’s 13-year rule following divisive campaign.
• Russian Plane’s Midair Breakup a Puzzle in Modern Jet Era: Wreckage found in area ~8km long, 4km wide, suggesting aircraft broke up at high altitude.
• Macau Casino Shares Advance as Gambling Revenue Slump Eased: Gross gaming revenue fell 28% in Oct., decline was at slowest since Jan.
• ‘Martian’ Holds at No. 1 at Box Office Over Slow Halloween: Film generated $11.4m at U.S., Canadian theaters; Weinstein Co.’s “Burnt,” with Bradley Cooper, landed in fifth, while Warner Bros.’ “Our Brand Is Crisis,” with Sandra Bullock, opened in eighth place; Paramount’s “Scouts Guide to the Zombie Apocalypse” was 12th.
• Citron’s Left Won’t Have ‘Earth-Shattering’ News on Valeant: WSJ: Short seller Andrew Left to issue new Valeant report today
• Pfizer, Allergan Said to Aim to Agree on Deal by Thanksgiving: Cos. keen on friendly deal, hope to agree on the terms of takeover, incl. who will lead combined co., by Thanksgiving: people familiar
• Nissan Raises FY Profit Forecast as Demand Rises in U.S.: Net income may rise to JPY535bin 12 months through March vs JPY457.6b year ago.
• Chipotle Shuts Restaurants in Seattle, Portland on Health Risk: Co. closed 43 restaurants in Seattle, Portland, as health officials investigate E. coli outbreak
• China Factory Gauge Signals Contraction Continued a Third Month: Manufacturing PMI remained at 49.8 in Oct., below ests.

Market Wrap

• S&P 500 futures up 0.1% to 2076
• Stoxx 600 up 0.2% to 376
• MSCI Asia Pacific down 1.2% to 133
• US 10-yr yield up 3bps to 2.17%
• Dollar Index down 0.09% to 96.86
• WTI Crude futures down 1.5% to $45.88
• Brent Futures down 1.5% to $48.84
• Gold spot down 0.4% to $1,138
• Silver spot down 0.9% to $15.41

Bulletin Headline Summary From RanSquawk and Bloomberg

• Stocks in Europe staged a dramatic turnaround following dovish comments by ECB's Nowotny who said that the central bank has to act given that inflation target is being missed
• Bunds have failed to benefit from further dovish rhetoric and instead traded lower amid FT reports over the weekend which suggested that China are selling some of its holdings of German government bonds to help assist the ECB's QE programme
• Finally, going forward market participants will get to digest the release of the latest US manufacturing PMI, manufacturing ISM reports, as well as comments by Fed's Williams.
• Treasuries drop in overnight trading as U.K manufacturing growth accelerated and sends equities higher; this week’s data will be dominated by nonfarm payroll release on Friday.
• Manufacturing in the euro area unexpectedly accelerated in October as German companies fared better than initially reported, according to Markit Economics
• The odds that the Federal Reserve will increase interest rates before year-end climbed to 50%, suggesting Treasuries are poised to extend October’s biggest monthly loss since June
• A 16-month oil rout and growing talk of recessionary risks have led economists tracking monetary policy in Norway to wonder whether zero -- or even negative -- rates are in store for western Europe’s biggest crude producer
• Asian hedge-fund managers are putting more money into their funds, seeking to project confidence after the industry’s worst performance streak since the 2008 financial crisis spurred redemptions
• China is signaling that it’s not letting record outflows this year deter capital-market reforms; changes to foreign- exchange rules will loosen some capital controls while preserving its ability to intervene in times of volatility
• Shanghai police raided hedge fund Zexi Investment on Sunday, according to a person familiar with the matter, in the latest attempt by Chinese authorities to crack down on strategies blamed for exacerbating a $5t stock- market rout
• German Chancellor Angela Merkel faces further coalition discord over the refugee crisis after weekend talks with fellow party leaders failed to identify a common government stance on tackling the biggest influx of migrants since World War II
• The Royals beat the Mets with a come-from-behind 7-2 victory in 12 innings to give them their first championship since 1985
• Sovereign 10Y bond yields mixed, with Greek 10Y yield 12bp higher. Asian and European stocks mixed; U.S. equity- index futures rise. Crude oil, gold and copper fall

US Economic Calendar:

• 9:45am: Markit US Manufacturing PMI, Oct. final, est. 54 (prior 54)
• 10:00am: Construction Spending, Sept., est. 0.5% (prior 0.7%)
• 10:00am: ISM Mfg, Oct., est. 50 (prior 50.2); ISM Prices Paid, Oct., est. 38.8 (prior 38)

Central Banks

• 12:00pm: Fed’s Williams speaks in San Francisco
• 10:30pm: Reserve Bank of Australia cash rate, est. 2% (prior 2%)

DB's Jim Reid completes the overnight wrap

Before we get to the weekend's China numbers its worth highlighting that the strong October kicked into life with the 57 point S&P 500 turnaround on October 2nd just a few minutes after the weak payroll number. So it’s interesting that the end of this week sees the latest instalment in this random number generator of a series. The risk rally took a pause for breath over the last few days of last week not helped by a hawkish FOMC. So lots to play for in the data.

Looking now at the China data from the weekend and this morning. The official manufacturing PMI number for October has failed to show signs of a pickup in the sector, holding steady at 49.8 after expectations for a rise to 50.0. That was the third straight month of contraction in the sector and while the new orders component nudged up, there was some softness to be seen in the employment index in particular. Meanwhile the official non-manufacturing PMI declined three-tenths last month to 53.1, the lowest print now since December 2008.

There was a hint of more positive news in this morning’s Caixin manufacturing PMI. Although the 48.3 reading for last month supported the evidence from the weekend that the sector is still struggling, the reading was up 1.1pts from September and ahead of expectations of 47.6. DB’s Zhiwei Zhang notes that the rise in the non-official reading was the biggest this year. He reports that this rise, combined with some of the strength in key subcomponents (namely output and new orders) is consistent with his expectation that economic activities are picking up in Q4. Zhiwei reiterates his view that Q4 GDP will rebound to 7.2% from 6.9% in Q3.

There looks set to continue to be a reasonable amount of focus on China this week with the remaining Caixin PMI numbers due on Wednesday, foreign reserves data on Saturday and trade data on Sunday. On top of this we should also hear about the IMF’s decision on including the Chinese Yuan in its SDR basket with a decision due sometime early this month (with an exact date yet to be announced). Our Asia FX colleagues think that the likelihood of inclusion has increased in recent weeks reflecting better fulfillment of several of the SDR technical conditionalities and strong reporting from the Europe and the US during President Xi’s visit.

It’s been a volatile start to markets in China this morning following the latest data. The Shanghai Comp initially opened down -1.6%, although the slight upside surprise in the non-official PMI data has seen the index pare almost all of those losses to currently sit at -0.14%. It’s been a similar start also for the CSI 300 (-0.11%) although the Shenzhen (+1.03%) has rallied back strongly. Elsewhere it’s been a pretty weak start for bourses in Asia. The Nikkei is -1.94% after Japan’s final Nikkei manufacturing PMI nudged down one-tenth to 52.4. The Hang Seng (-0.65%) and ASX (-1.41%) have also seen losses. Asia credit indices are around a basis point wider while some of the more interesting moves have been in FX where the Chinese Yuan was set 0.54% stronger versus the USD this morning, the most the fix has been strengthened since 2005. This follows a 0.62% gain for the Yuan on Friday after the PBoC said it was to loosen capital controls around Yuan convertibility.

Turkey is also attracting plenty of headlines this morning following the parliamentary elections yesterday in which the ruling AK party gained what was seen as a surprise victory after taking about 49% of the total votes and a seat majority in parliament, having lost support in polls just five-months ago. The result may come as relief after previous polls had pointed towards the possibility of a hung parliament and heightened uncertainty. The Turkish Lira has jumped nearly 3% against the USD this morning in early trading – the most since January 2014.

Also of note from the weekend were comments from ECB President Draghi which keeps open the argument for more ECB stimulus as soon as next month. In an interview published in Italian Press Il Sole 24 Ore on Saturday, Draghi was quoted as saying that ‘if we are convinced that our medium-term inflation target is at risk, we will take the necessary actions’ and that ‘we will see whether a further stimulus necessary’. With expectations rising that another cut in the deposit rate might be necessary as soon as December, Draghi said that it is ‘too early’ to make that judgment, but that ‘the interest rate on deposits could be one of the instruments that we use again’.
These comments came a day after US equity markets faded into the close on Friday, although not enough to stop the S&P 500 posting its fifth consecutive weekly gain. The index finished -0.48% on Friday, while there were similar declines for the Dow (-0.52%) and Nasdaq (-0.40%) after stocks softened up in the final half hour of the US session. It had previously been a much more mixed session in Europe with the Stoxx 600 (-0.06%) finishing more or less unchanged, but the Dax (+0.46%) having a better day. Moves were pretty muted in credit but the bigger story continues to be one of a buoyant US primary market. Last week saw nearly $37bn price in US IG, the eleventh busiest week YTD but the $105bn priced in the month of October the busiest October on record. YTD volumes are actually now sitting at about the same as the total for 2014 and there looks set to be no let up with another $25-$30bn expected to come to market this week.

Earnings season continues with another 20 S&P 500 companies reporting on Friday. The overall trend was generally disappointing relative to what we’ve seen so far with just 13 (65%) beating earnings expectations (and 2 matching) and 9 (45%) beating revenue expectations. That was despite some better than expected numbers from the bellwether oil names on Friday after Chevron and Exxon Mobil exceeded analyst expectations, although the former in particular announcing that it expects to cut up to 11% of its workforce as well as scale back production guidance. With that the overall numbers now with 341 S&P 500 companies having now reported shows 73% have beat earnings expectations (similar to the 75% and 73% in the previous two quarters this year) but just 44% have beat revenue expectations (compared to 49% and 48%). Digging deeper, DB’s David Bianco notes that YoY EPS growth so far is standing at +1.7%, although this rises to +9.6% when you strip out the energy names, but equally declines to -1.7% excluding the financials stocks. The obvious weakness has been in revenues however where YoY growth is -5.8%. Again energy stocks have been a large driver of this, with the YoY growth rate actually +0.6% excluding these names.

In Europe meanwhile we’ve now seen quarterly reports from 213 Stoxx 600 companies. The trend so far continues to be one of notable weakness relative to prior periods with just 47% beating earnings expectations and 44% beating revenue expectations. That compares to 66% and 61% respectively in Q2 and 72% and 57% in Q1.

Friday’s dataflow in the US was a fairly mixed bag. It was hard to get too excited about the inflation numbers. The PCE core for September rose a less than expected +0.1% mom (vs. +0.2% expected) during the month, with the YoY staying put at +1.3%. The PCE deflator matched expectations at -0.1% mom, with the YoY rate nudging down one-tenth to +0.2% to match the lowest reading this year. The Q3 employment cost index also offered no surprises relative to expectations after printing at +0.6% qoq, which was up from a particularly soft Q2 (+0.2%). Meanwhile the final University of Michigan consumer sentiment reading for October revealed a 2.1pt downward revision to 90.0. Of more interest was the downgrade in 5-10y inflation expectations to 2.5% (from 2.6%) which matched the lowest level since the data series started in 1979. That helped take US Treasury yields lower, the benchmark 10y closing 3bps down at 2.143% while the USD softened with the Dollar index falling -0.35%.

Elsewhere, there was an impressive bounce-back in the October Chicago PMI which rebounded 7.5pts to 56.2 (vs. 49.5 expected) and to the highest level since January this year. The October ISM Milwaukee print was supportive too, rising 7pts to 46.7 (vs. 44 expected). Our US colleagues still expect this afternoon’s ISM manufacturing reading to print sub-50 however, consistent with the contraction in the manufacturing sector.

There was also some chatter out of Fed officials on Friday. The San Francisco Fed President Williams said he needs to see more economic data in the coming weeks to decide whether or not a December hike is warranted, although he did acknowledge that the mentioning of December in the minutes was meant as a signal that its ‘very much a live meeting’. Richmond Fed President Lacker confirmed that he voted against the FOMC’s decision to hold rates in October, noting that rates should be higher in his eyes given ‘the steady growth in output and household spending that we have been observing and expect to continue’. Finally the Kansas City Fed President George, while giving little away on her view of the potential for a December move, said that recent jobs and housing market improvement should ‘continue to see optimism on the part of consumers’ and that economic growth this year should largely keep pace with its longer-term trend.

Prior to this in Europe on Friday, the latest Euro area CPI estimate for October revealed a modest pickup as expected to 0.0% yoy, up one-tenth of a percent from September. There was a similar edge up for the core to +1.0% yoy, while the latest unemployment rate reading for the Euro area in September revealed an improvement to 10.8% from an already downwardly revised 10.9% in August. German retail sales for September disappointed (0.0% mom vs. +0.4% expected) as did the latest consumer spending report out of France (0.0% mom vs. +0.3% expected).