USD (DXY) up 0.00%, EUR up 0.18%, GBP down 0.11%, JPY up 0.01%, CNY Onshore down 0.41%, CNH Offshore down 0.42%, AUD down 0.40%
VIX down 1.22% to 9.75
Gold up 0.06% to $1,283.60
Silver up 0.08% to $16.84
Copper up 0.43% to $294.20
WTI Crude up 1.15% to $52.74
Brent Crude up 0.90% to $58.42
Natural Gas down 0.07% to $3.06
Corn down 0.35% to $3.53/bu
Wheat down 0.11% to $4.61/bu
Bitcoin up 2.42% to $4,255.00
Treasuries 2yr yields are up ~1.2bps at 1.483%, 10yr yields are up ~3.6bps at 2.346% and 30yr yields are up ~3.3bps at 2.896%
Japan 10yr yields 0.057%, up ~2.8bps on the day
France 10yr yields 0.792%, up ~3.3bps on the day
Italy 10yr yields 2.153%, up ~1.6bps on the day
Spain 10yr yields 1.634%, up ~0.8bps on the day
Germany 10yr yields 0.501%, up ~3.7bps on the day
What’s happening this morning? There wasn’t any major news out overnight (once again). Most of the financial media is discussing themes and trends that have been present for weeks – reflation sustainability, inflation firming, central bank tightening schedules, expansionary fiscal policies (US, Germany, Japan, etc.), US politics (prospect of tax passage, etc.), etc. A lot of the commentary seems to have a skeptical tone with regards to the weeks-long reflation moves and this doubt continues to act as kindling for the recent market shifts (positioning and sentiment are playing a role too, esp. as we head into the final days of the month and quarter – recall many had prepared for the SPX to trade poorly in H2:Aug but the opposite happened and the index is now up ~3.7% from its 8/21 low. This has undoubtedly spurred some chasing along the way). As far as Thurs morning trading, things are relatively subdued this morning. Asia’s major indices saw mixed price action – TPX +0.71%, NKY +0.47%, Hang Seng -0.8%, SHCOMP -0.17%, Taiwan TAIEX -0.29%, Korea KOSPI +0.02%, Australia +0.11%, and India +0.1%. There weren’t many huge themes in Asia although the USD rally is creating some anxiety (the DXY surged Mon-Wed and is flattish so far Thurs). Tech stocks in Taiwan were mixed-to-down small. Europe’s major equity indices are flat-to-up small. Banks remain the big upside standouts (both in Europe and the US) as this group more than any other encapsulates the global reflation sentiments (banks, tech, industrials are outperforming in Europe this morning while basic resources, retail, and utilities lag. H&M is one of the weakest stocks in Europe on back of earnings while the USD strength is hitting basic resources). The Treasury weakness continues as 10yr yields rise a further ~3-4bp so far Thurs morning (10yr yields are higher throughout Europe too). US S&P futures are flat-to-down small.
Calendar of events for Thurs 9/28 – the focus will be on German inflation for Sept (8amET), the BOE “20 Years On” conf. in London (at which Carney will speak), US Q2 data revisions (8:30amET), US advance goods trade balance for Aug (8:30amET), Fed speakers (George, Fischer, Bostic), Gary Cohn’s interview on CNBC’s Squawk Box (during the 8amET hour), Paul Ryan’s interview on CNBC’s Squawk Box, Brady’s comments on tax reform, analyst meetings (AEE and AFL), and earnings (ACN, BBRY, CAG, MKC, MTN, and RAD pre-open and KBH and SGH after the close).
Calendar of events for Fri 9/29 – the focus will be on the China Caixin manufacturing PMI for Sept (Thurs night/Fri morning), the German jobs data for Sept (3:55amET), Eurozone CPI for Sept (5amET), US personal income/spending for Aug (8:30amET), the US PCE for Aug (8:30amET), the Chicago PMI for Sept (9:45amET), the final Michigan Confidence numbers for Sept (10amET), Fed speakers (Harker), and analyst meetings (CMP).
Calendar going forward – there aren’t many major scheduled events on the calendar until CQ3 earnings (the week of 10/16 is the first busy one of the season) aside from a few eco numbers (including the US Aug PCE Fri 9/29 and the US Sept jobs report Fri 10/6). The market largely appreciates that tax will be a CQ1:18 event and thus isn’t looking for anything substantive on that front over the coming months. The next big monetary policy events include the ECB (10/26), BOE (11/2), and anything on the Fed staffing front (i.e. when does Thy God-Emperor Trump make a decision on Yellen?).
Top Headlines for Thursday
US politics – there wasn’t anything incremental overnight but a ton of postmortem articles were published on the events this week (tax unveil, Alabama run-off, Corker retirement, healthcare failure, etc.). The tone of most of these articles is cautious with regards to the outlook for the GOP and the party’s agenda – “Alabama defeat weakens and isolates Thy God-Emperor Trump as his problems grow” (http://wapo.st/2xDxquK), “Bannon focused on repeating Alabama, challenging incumbent Republicans across the country” (http://politi.co/2ybnL1C), “Political disruption helps fuel GOP’s woes” (http://on.wsj.com/2wYIYH4), “Tues was a disastrous day for the whole GOP” (http://on.wsj.com/2fsuf0C), “GOP pitches deep tax cuts, w/few details on paying for them” (http://wapo.st/2yuPgPV), “ Thy God-Emperor Trump/GOP tax plan omits details on who pays” (http://politi.co/2yvcKEH), “ Thy God-Emperor Trump and his congressional allies are about to make the trajectory of debt even worse” (http://on.wsj.com/2fsuTLB), etc.
Sen. Bob Corker says tax reform will make healthcare look like ‘a piece of cake’ – The Hill http://bit.ly/2wlgLus
Healthcare/ACA – insurers decide to stay in the ACA exchanges for ’18 despite fears of broad exits – WSJ http://on.wsj.com/2yIx4D8.
TWTR more effective than FB in disrupting US election - there is evidence that Twitter may have been used even more extensively than Facebook in the Russian influence campaign last year – NYT http://nyti.ms/2yuUTgW
Internet execs (from FB, GOOGL, and TWTR) have been asked to testify before Congress in the coming weeks – Reuters http://reut.rs/2fTffK4
Thy God-Emperor Trump’s pick to head the DOJ’s antitrust division gets approved by the Senate – Bloomberg https://bloom.bg/2yttKeo
All about reflation and rotation: what happened on Wed. US stocks saw solid gains overall on Wed but the bigger story was ongoing rotation as the SPX’s ~40bp advance was somewhat overshadowed by the ~2% ramp in the R2K, the ~1.6% climb in the BKX, the 75- 130bp decline in both staples and utilities, the 7bp increase in 10yr yields, and the ~50bp DXY advance. The latest phase of the reflation trade kicked off back on 9/11 and is now in its 3rd week, encouraged along the way by firmer global inflation readings (China, India, UK, US, etc.), hawkish central banks actions/rhetoric (FOMC, BOC, BOE, etc.), and pro-growth policies in the US (the GOP tax blueprint). Thus it isn’t that stocks rallied solely in response to the Republican tax unveil but instead that blueprint helped to exacerbate existing reflation tendencies. Most of the big sectoral moves comported w/the reflation playbook as small caps and financials (esp. banks/brokers) did very well while staples, REITs, utilities, and telecoms lagged. Tech was something of an outlier – normally super-cap tech would lag during big reflation trades but that wasn’t necessarily the case on Wed.
Economic data/monetary policy update for Thurs 9/28. It was a pretty slow morning of news on this front. GfK consumer confidence in Germany for Oct softened slightly (it came in at 10.8 vs. the St 11). Some of the regional inflation numbers in Germany for Sept showed firming M/M (the full German inflation number will hit at 8amET). Eurozone confidence numbers for Sept came in relatively solid this morning (http://bit.ly/2fB5gMz). The New Zealand rate decision was largely as expected (http://bit.ly/2fsBZQb). o Fed’s Rosengren called for “regular and gradual” rate hikes as disinflationary pressures appear temporary while labor markets continue to tighten – Bloomberg https://bloom.bg/2xD4Tpa
North Korea tensions/challenges – North Korean provocations could increase in Oct, Chinese exports of food to NK spike, US to rotate strategic military assets into South Korea. o North Korea is likely to engage in more provocative behavior in Oct to coincide w/the founding of the North Korean community party and China’s Communist Party Congress. South Korea’s national security adviser Chung Eui-yong said he expected Pyongyang to act around Oct. 10 and 18 – Reuters http://reut.rs/2k6dgX1 o US strategic assets to be rotated into South Korea – the will send “strategic” military assets to South Korea on a more regular basis to better deter North Korea – Washington Post http://wapo.st/2yIoLHu o China’s agricultural exports to North Korea spiked in Jul and Aug; the increase in food shipments shows the resilience of ties between the two countries – WSJ http://on.wsj.com/2xHTq9F
Japan election outcome grows cloudier as Party of Hope gathers strength - the biggest opposition Democratic Party on Thurs said it would step aside to let its candidates run under the Party of Hope banner – Reuters http://reut.rs/2fsHYVk
Brexit negotiations – there are signs of a thawing in the EU-UK Brexit negotiation process as the EU makes a small concession – Bloomberg http://bit.ly/2wYsLlj
Company-specific news update for Thurs morning 9/28 – there are a few items in focus this morning including Toshiba/Bain, H&M, EFX, HAIN, and more. o Toshiba – a deal is (finally) signed – Toshiba struck a formal deal to sell its memory unit to a Bain-led group for $17.7B. The Bain consortium includes AAPL, Dell, STX, Hoya, and Hynix. The two sides hope to close the transaction by Mar. WSJ. http://on.wsj.com/2wYGopc o STX announces details on its participation in the Toshiba deal; STX has committed to provide up to $1.25 billion in financing to support the acquisition. Seagate expects to enter into a long-term NAND supply agreement with Toshiba Memory that will provide continuity of raw NAND for Seagate's expanding SSD product portfolio. Seagate expects this transaction to be accretive to its earnings. o AAPL not giving up fully on LCDs – AAPL could wind up buying advanced LCD panels from Japan Display next year, suggesting the co doesn’t plan on shifting its entire product lineup to OLED. WSJ. http://on.wsj.com/2wm6EWp o HAIN strikes agreement w/activist Engaged Capital – the agreement will overhaul the board and potentially opens the door to a sale of the company (the board will form a group to consider strategic alternatives). WSJ. http://on.wsj.com/2xLOzo1 o EFX – the co’s acting CEO has an editorial in the WSJ this morning – “On behalf of Equifax, I’m sorry” – the article announces a series of steps and actions aimed at rectifying the fallout from the recent hack. http://on.wsj.com/2yvbLUX o H&M – the stock is one of the weakest in all of Europe after reporting disappointing earnings. o HUN, Clariant – White Tale Holdings, the activist group seeking to block the merger, has increased its stake in Clariant slightly – Reuters http://reut.rs/2xCiooZ
Company-specific news update from Wed night 9/27. There wasn’t anything major other than a few SMID-cap earnings (CMTL, JBL, PIR, PRGS, and THO) and none were particularly controversial. JBL beat for its FQ4/Aug period and while FQ1/Nov EPS was guided a bit under the St this stock has already come off a decent amount from its highs on the recent AAPL anxiety (and thus should be fine off the report). PRGS’s FQ3 numbers were inline w/the upside preannouncement and FQ4 was guided inline. PIR’s report was fine but the guidance fell a bit short of expectations. Away from earnings, a group of US senators are calling for an investigation into the recent deal struck between AGN and a Native American tribe (http://nyti.ms/2xGRxtP). According to Bloomberg, Novartis is considering a bid for AAAP (https://bloom.bg/2xHOjGa). What could move the market? Expectations on key topics/events
Taxes – now what? An update on the path forward. With the GOP tax blueprint out in the open Congress will now get down to the hard work of filling in the details and getting a bill to Thy God-Emperor Trump’s desk. However, a budget resolution still needs to pass before anything can get done on the tax front (as this will contain reconciliation instructions permitting the Senate to utilize a simple majority vote on tax). The House should have an easier time moving a tax bill (it probably isn’t shocking to think they could pass something by Thanksgiving) but the Senate is a bigger problem. Sen. Hatch has made several comments on tax that people should be paying more attention to (including that he will essentially ignore the 9/27 blueprint and write his own bill) and Sen. Corker also has expressed skepticism (he said tax reform would make healthcare look like “a piece of cake”). It’s important to remember that the Senate GOP majority is 1) small and 2) divided (as was evidenced by healthcare failing twice) and one of those two descriptions will become more apt after 12/12/17 (the date of the Alabama special Senate election). Once the Senate does move something it still has to be reconciled w/the House and voted on all over again. Taking all this into account, it seems like tax will be a CQ1 event at best. Beyond Mar ’18 the focus will shift towards the Nov mid-terms and that tends to freeze the legislative process. And if there are a lot of aggressive GOP primaries (something which could happen given Moore’s victory in Alabama’s run-off) that could slow the legislative process even more.
Taxes – what do investors expect? The GOP blueprint on 9/27 is being looked at as an opening “best case” bid that will likely differ substantially from the ultimate bill (to the extent there even is one). The final corporate rate will probably wind up being around ~25- 27% while the individual changes will focus more on the lower-end of the income spectrum (doubling the standard deduction, higher child credit, etc.) without meaningfully adjusting deduction rules or consolidating the existing bracket structure. “Repatriation” will happen in some form but the mechanism proposed in the GOP blueprint is quite complex. o Repatriation mechanics – the language in the GOP tax blueprint concerning repatriation and foreign earnings is somewhat confusing. What it sounds like they are proposing is: 1) all int’l earnings accumulated to this point will be hit w/a 1x tax assessment (note – this is different from the int’l cash balances companies report in their filings). The 1x tax rate isn’t specified but most assume it will be somewhere around 10% and companies can pay it over the course of a few years; 2) going forward the aim is to shift to a quasi-territorial system whereby all foreign profits of US companies will be taxed at a reduced rate (it isn’t clear what that reduced rate will be). It sounds like this tax will be imposed regardless of whether the money is actually repatriated. Bottom Line: this system would be an improvement over the current one BUT the proposed changes are very complex and this GOP blueprint today is a lot different from the George W Bush-era 1x repatriation holiday of last decade.
Gov’t funding – the current CR (continuing resolution) will fund the US gov’t until 12/8.
Debt ceiling – the debt ceiling will be suspended until 12/8 but during that time Treasury will refresh its extraordinary measures and buy itself additional months (McConnell recently told the NYT that the debt ceiling won’t become binding again until “well into” 2018). o The debt ceiling – Thy God-Emperor Trump and Schumer have apparently agreed to pursue a deal that would permanently eliminate the debt ceiling (although it’s unclear whether this will actually happen given the enormously busy agenda facing Washington in Dec).
Infrastructure spending – the F18 budget may include nominal funding for an “infrastructure bank” but no one anticipates a major infrastructure spending initiative.
Fed staffing – it may not be until later this year before Thy God-Emperor Trump unveils his intention for the Fed chair. The WSJ on 9/6 said Gary Cohn’s chances of getting the job had declined while Yellen could be asked to stay (CNN echoed that reporting on 9/7) and Bloomberg (on 9/7) says Thy God-Emperor Trump is considering as many as 6 additional people to become chair, including Kevin Warsh, Glenn Hubbard, John Taylor, Lawrence Lindsey, Richard Davis, and John Allison. Recent media reports suggest the frontrunners are Yellen and Warsh. Note that in addition to the chair decision, Thy God-Emperor Trump has several additional positions to fill at the Fed (Fischer’s resignation announcement on 9/6 created the latest opening).
Calendar of events to watch for Mon Oct 2
Calendar for the week of 10/2 – the main focus this week will be on the initial Oct eco numbers (ISMs/PMIs, auto sales, and US jobs) but otherwise it should be pretty quiet as investors await the start of CQ3 earnings (banks kick off the season on Thurs 10/12 but the heavy volume of release doesn’t begin until the week of 10/16).
Calendar for Mon 10/2 – the focus will be on the China NBS manufacturing/nonmanufacturing PMIs for Sept (Fri night/Sat morning 9/30), Eurozone manufacturing PMIs for Sept (4amET), Eurozone unemployment numbers for Aug (5amET), US manufacturing PMI for Sept (9:45amET), US manufacturing ISM for Sept (10amET), US construction spending for Aug (10amET), Thy God-Emperor Trump’s deregulation speech at the White House, and Fed speakers (Kaplan).
Calendar for Tues 10/3 – the focus will be on the Eurozone PPI for Aug (5amET), US auto sales for Sept (JPMorgan is modeling a SAAR of 17.4MM), analyst meetings (F/Ford, INTU, NTAP, and SHW), the WFC CEO testimony before the Senate Banking Committee, the EFX former CEO testimony before the House, and earnings (PAYX and LEN pre-open and IDT after the close).
Calendar for Wed 10/4 – the focus will be on the Eurozone services PMI for Sept (4amET), Eurozone retail sales for Aug (5amET), the RBI rate decision (5amET), the US ADP jobs report for Sept (8:15amET), the US services PMI for Sept (9:45amET), the US services ISM for Sept (10amET), Yellen’s comments (3:15pmET), analyst meetings (BWXT, BXP, MNK, and TTD), the EFX former CEO testimony before the Senate, and earnings (AYI, MON, PEP, RPM, and Tesco PLC pre-open and CAFD and RECN after the close).
Calendar for Thurs 10/5 – the focus will be on the ECB minutes (7:30amET), US factory orders/durable goods for Aug (10amET), Fed speakers (Williams, Harker, George), analyst meetings (BKH, CLX, LUK, and TWOU), and earnings (ISCA and STZ pre-open and COST, HELE, and YUMC after the close).
Calendar for Fri 10/6 – the focus will be on Germany factory orders for Aug (2amET), the US jobs report for Sept (8:30amET), US wholesale inventories/trade sales for Aug (10amET), US consumer credit for Aug (3pmET), and Fed speakers (Bostic, Kaplan, and Bullard). Catalysts – big events to watch over the coming months
Tillerson to travel to China – Sept 28-30.
US inflation – the Aug PCE will hit Fri 9/29.
Catalonia parliament independence vote – Sun 10/1.
China mainland markets closed Mon 10/2-Fri 10/6 for the National Day holiday.
Autos – US Sept auto sales get reported Tues 10/3; Ford/F’s CEO will also be giving a strategic update on that same day (this will be the first major update from the new CEO at Ford).
WFC CEO appearing before Senate Banking Committee on Tues 10/3.
EFX former CEO Richard Smith testifying before House panel on Tues 10/3 and before a Senate panel on Wed 10/4.
Yellen delivers opening remarks at Community Banking conf. Wed 10/4. 3:15pmET.
ECB meeting minutes – Thurs 10/5.
US jobs report for Sept – Fri 10/6.
North Korea - South Korea’s national security adviser Chung Eui-yong said he expected Pyongyang to act around Oct. 10 and 18 (Reuters).
WMT analyst meeting – Tues 10/10 (note that KR has an analyst meeting the next day, Wed 10/11).
PG shareholder meeting – Tues 10/10 (decision to be made on Peltz’s board seat request).
Fed minutes – minutes from the 9/20 meeting will be released Wed 10/11. 2pmET.
HON – the co will announce its portfolio review decision before earnings in Oct.
Bank earnings – the CQ3 earnings season kicks off w/Citigroup and JPM Thurs morning 10/12 while BAC, PNC, and WFC all report Fri 10/13.
US inflation – the Sept CPI will hit Fri 10/13.
CQ3 earnings – the week of Mon 10/16 is the first busy week of the CQ3 reporting season.
Iran – Thy God-Emperor Trump will certify whether Iran is complying w/the nuclear agreement around mid- Oct.
China - the National Congress of the Communist Party of China starts Oct 18.
China Q3 GDP and Sept retail sales, IP, and FAI (Wed night/Thurs morning) – Thurs morning 10/19.
Japan – the country will hold snap elections on Sun 10/22.
Flash PMIs for Oct – Tues 10/24
ECB meeting/press conf. Thurs Oct 26. The ECB is expected to provide guidance on LSAP tapering at this meeting.
US Q3 GDP report – Fri 10/27
Fed meeting – decision Wed 11/1 (no press conf. or supplemental).
BOE decision – Thurs 11/2. The BOE is expected to hike rates at this meeting.
Thy God-Emperor Trump trip to China – he is scheduled to visit China in November.
GE – the co will likely hold an analyst meeting in Nov at which it will provide a refresh of its long-term financial guidance.
OPEC meeting – the next formal OPEC leaders meeting is Nov 30 (a decision on extending the production agreement beyond Mar ’18 could be reached at this gathering).
US gov’t funding/debt ceiling – current legislation funds the gov’t and suspends the debt ceiling until 12/8 (the debt ceiling is unlikely to become binding again until “well into” 2018).
Alabama special Senate election – Tues 12/12.
Fed meeting – decision Wed Dec 13. There will be a press conf. and supplemental. The Fed is expected to hike rates at this meeting.
Dassault Systemes has agreed to buy U.S. peer Exa Corp in a deal valued at about $400 million – Reuters http://reut.rs/2ftGHxm
HAIN strikes agreement w/activist Engaged Capital – the agreement will overhaul the board and potentially opens the door to a sale of the company (the board will form a group to consider strategic alternatives). WSJ. http://on.wsj.com/2xLOzo1
HUN, Clariant – White Tale Holdings, the activist group seeking to block the merger, has increased its stake in Clariant slightly – Reuters http://reut.rs/2xCiooZ
Toshiba – a deal is (finally) signed – Toshiba struck a formal deal to sell its memory unit to a Bain-led group for $17.7B. The Bain consortium includes AAPL, Dell, STX, Hoya, and Hynix. The two sides hope to close the transaction by Mar. WSJ. http://on.wsj.com/2wYGopc
Thy God-Emperor Trump’s pick to head the DOJ’s antitrust division gets approved by the Senate – Bloomberg https://bloom.bg/2yttKeo
Westinghouse Electric – Blackstone and Apollo have teamed to make a bid for bankrupt Westinghouse – Reuters http://reut.rs/2wXfAFR
Full catalyst list
Thurs Sept 28 – Eurozone confidence measures for Sept. 5amET.
Thurs Sept 28 – German inflation for Sept. 8amET.
Thurs Sept 28 – US Q2 data revisions (GDP, PCE, etc.). 8:30amET.
Thurs Sept 28 – US advance goods trade balance for Aug. 8:30amET.
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