While U.S. equity futures were little changed in a rerun of every other morning this month ahead of a diagonal ramp that closes the S&P at daily all time highs, things were more volatile elsewhere with the dollar sliding as investors weighed the possibility that current Fed Governor Jerome Powell, seen widely as far more dovish than Kevin Warsh, might take the reins from Janet Yellen, who Bloomberg reported was said to be getting the cold shoulder.
Both the Bloomberg Dollar Spot Index and 10-year Treasury yields retreated from recent highs following the a Bloomberg report that Trump had been presented with a shortlist of Fed chair candidates, among them, ex-board member Kevin Warsh has criticized the central bank for trying to do too much with monetary policy while current Governor Jerome Powell has voted in sync with Chair Janet Yellen, who’s term is up in February and who was said to have gotten little support from Trump’s group of close advisors.
Following the report, Jerome Powell’s odds of replacing Yellen soared to second behind Kevin Warsh, and were at 35% most recently, ahead of John Taylor and Gary Cohn, with Janet Yellen in 5th spot.
While the latest September econ data out of Europe was solid, pushing the euro higher, Spanish assets tumbled as a Catalan spokesperson reiterates commitment to becoming a republic and the regional leader scheduled a press conference; the bund/bono spread was wider by 7bps and Spanish IBEX heavily underperforms as domestic banks decline. Spanish notes slumped on news that Catalonia’s leader Carles Puigdemont would release a statement at 9 p.m. CET after promising a formal announcement to regional lawmakers of the referendum results, triggering a 48-hour countdown to a unilateral declaration of independence. This prompted a sharp drop in Spanish assets, with the IBEX sliding as much as 2.5% on surging volumes more than twice 30DMA, led lower by Catalan exposed banks such as Banco de Sabadell (4.7%), CaixaBank (4.5%), Banco Santander (2.7%) and BBVA (2.7%); the drop sent the IBEX into correction territory now down 10% from intraday peak on May 8.
“As far as market reaction is concerned the short-term effect is that investors would be reluctant to hold Spanish exposure ahead of this event risk,” said Antoine Bouvet, an interest-rate strategist at Mizuho. Others chimed in with a bearish take: “A pause in the global stock market rally is necessary and the political stress coming from Spain could become one of the triggers”, said Jerome Troin-Lajous, cross-asset sales trader at Louis Capital Markets. “This could revive the grim view of some U.S. investors that Europe is a political can of worms.” The deteriorating Spanish politics acted as a drag on positive read-across from the record highs on Wall Street, says Jasper Lawler, head of research at London Capital Group
The EUR/USD continued to find bullish pressure, following the support seen yesterday around the 1.17 handle, triggered by option expiries in the pair, with around 4.6bln between 1.17 and 1.18. EUR has seen subdued price action through early European trade, as much anticipation lies on pending European Markit PMI data, alongside later commentary from ECB’s Draghi.
Meanwhile, as Spain tumbled, Chinese (offshore) stocks soared and Hong Kong equities added to yesterday’s surge on optimism about monetary loosening. With the mainland closed this week for holiday, offshore Chinese shares extended gains to the highest in almost a decade, as most lenders continued to climb following the central bank’s decision to reduce their RRR in 2018, while real-estate developers rallied.MSCI China Index rises 0.5%, at highest since December 2007; Hang Seng China Enterprises Index advances 0.8% in Hong Kong, taking 3-day gain to 4.8%; Hang Seng Index adds 0.7% for 3-day advance of 3.5%, most since July 2016. Property developers were among main gainers in Hong Kong, with Country Garden Holdings Co. rising 7.2% for 3-day gain of 9.1%. Sunac China Holdings Ltd, Shimao Property Holdings Ltd, China Vanke Co., Guangzhou R&F Properties Co. among top 10 performers on MSCI China, all rising at least 3.8%.