What started off in familiar fashion, with Asian stocks rising, and Europe hitting multi-month highs and US futures in record territory has stumbled in recent minutes following a continued rush for safety in short-dated German Bunds (the 2Y is now trading at -0.92%) and ongoing selling in the USDJPY, which has pushed Stoxx 600 back to unchanged, and S&P futures to modestly red for the session.
The exact catalyst is unclear although traders are citing continued French political risks, as the recent OAT selloff continued this morning on Le Pen fears.
Earlier in the session, global stocks hit record highs on Wednesday, pushing gains for the year above those for all of 2016, while the dollar rose before Federal Reserve minutes that will be scoured for clues on the timing of the next U.S. interest rate rise. MSCI’s main index of global stocks, which tracks share prices across 46 countries, hit a second successive record high. It has risen some 5.7 percent so far this year, beating the 5.6 percent gains of 2016. The MSCI Asia Pacific Index was at the highest level since July 2015 as Chinese shares traded in Hong Kong resumed a rally. Japanese equities managed to end higher even after fluctuations in the yen pressured the Topix.
European shares followed Asian bourses higher, buoyed by all main indexes on Wall Street touching record closing highs on Tuesday with Britain’s Lloyds Banking Group was up 3 percent after reporting its highest full-year profit in a decade, although that early optimism appears to have faded.
As a result, markets painted a mixed picture of investor sentiment on Wednesday, as political risk sent both the euro and German two-year bond yields lower while global equities tracked a U.S. rally. The dollar edged higher before the release of Fed minutes, up 0.3% at 101.64, gaining against the euro and sterling, pressuring oil lower.
The day’s most anticipated event for markets will be the release of the minutes of the Fed’s last policy meeting. Fed Chair Janet Yellen said last week it was likely the central bank would need to raise rates at an upcoming meeting. Markets have priced in only a slim chance of a rise next month but a much greater likelihood in May or June. The dollar rose 0.2 percent against a basket of major currencies and 0.3 percent versus the euro.
Economists expect to see further discussion in the minutes of the Fed’s balance sheet strategy given that many monetary policymakers have been publicly discussing the topic, even though it is clear that policymakers have not yet reached a consensus on the particulars of the Fed’s reinvestment policy. Additionally, DB economists expect the Fed to announce tapering of reinvestments this December, effective in January 2018. However they also expect a slower pace of tapering because the Fed will likely want to put as much distance between the Fed funds rate and the zero rate lower bound before risking greater disruptions to the long end of the Treasury curve. Thus, they still see the Fed hiking four times next year. Another key question many will hope to see some clarity on is whether March is “live” despite the Fed’s generally less than hawkish announcement: it is not clear how the Fed will bridge its actual dovish statement to hawkish minutes that suddenly make the March meeting in play.
Back to markets, where the Euro has dropped for a fourth day, dropping below 1.05 per dollar for the first time in more than six weeks. That lent early momentum to stocks, with the Stoxx Europe 600 Index advancing for a fourth session, however the rally has since fizzled. Germany’s Dax Index, already at an almost two-year high, briefly crossed the 12,000 level.
Technology stocks outperformed with Ericsson surging following an upbeat Bank of America-Merrill Lynch note. Basic resources sector fell, Goldman Sachs strategists wrote in a note commodity markets need proof of demand to rally further. Lloyds Banking Group Plc rose 3.7 percent as the mortgage lender swung to a quarterly profit and boosted its dividend. Futures on the S&P 500 were trading modestly in the red. The index added 0.6 percent Tuesday, with the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 200 Index closing at all-time highs.
EU data saw the inflation rates as expected: core y/y unchanged at 0.9%. German IFO current conditions and expectations both exceeded consensus forecasts at 118.4 and 104 respectively.
European politics and the prospect of higher U.S. rates pushed the gap between short-dated U.S. and German benchmark government bond yields to its widest in nearly 17 years. German two-year yields hit a record low of minus 0.92 percent while U.S. equivalents touched 1.24 percent.
Oil prices dipped. Brent crude, the international benchmark, traded at $56.50 a barrel, down 17 cents. Copper also fell, as traders reduced their positions before the Fed minutes, though supply disruptions supported prices. The metal last traded at $6,030 a tonne, down 0.5 percent on the day. Gold edged up 0.1 percent to $1,236 an ounce.
On today’s calendar are the abovementioned minutes from the latest Fed meeting, which traders hope will provide details on whether March is indeed “live” as a bevy of recent Fed speakers have suggested.
- S&P 500 futures down 0.1% at 2,357.75
- STOXX Europe 600 down less than 0.1% to 373.33
- MXAP up 0.6% to 146.14
- MXAPJ up 0.6% to 470.46
- Nikkei down 0.01% to 19,379.87
- Topix up 0.1% to 1,557.09
- Hang Seng Index up 1% to 24,201.96
- Shanghai Composite up 0.2% to 3,261.22
- Sensex up 0.4% to 28,879.78
- Australia S&P/ASX 200 up 0.2% to 5,805.10
- Kospi up 0.2% to 2,106.61
- German 10Y yield fell 2.6 bps to 0.275%
- Euro down 0.3% to 1.0504 per US$
- Brent Futures down 0.6% to $56.32/bbl
- Italian 10Y yield rose 6.3 bps to 2.247%
- Spanish 10Y yield unchanged at 1.683%
- Brent Futures down 0.6% to $56.32/bbl
- Gold spot up 0.1% to $1,237.29
- U.S. Dollar Index up 0.3% to 101.64
Top Overnight News from BBG
- Fed’s $2.5 Trillion Hoard of Treasuries Seen Barely Shrinking
- McDonald’s to Cut Prices on Drinks as Fast-Food Industry Slumps
- Toll Brothers Beats Estimates as Company Delivers More Homes
- Facebook Said in Talks to Stream Major League Baseball Games
- Samsonite Says Mulling U.S. Manufacturing, But Not Due to Trump
- UPS Races to Cut Costs as E-Commerce Shifts Deliveries to Homes
- ConocoPhillips’ Reserves Drop to 15-Year Low as Oil- Sands Fade
- Ternium to Buy CSA Siderurgica do Atlantico From Thyssenkrupp
- Mexico and Canada Say Nafta Should Be Re-Negotiated Trilaterally
- Aramco Picks JPMorgan, HSBC, MS as Lead Underwriters
Asian markets traded mostly higher following the positive lead from Wall Street where all 3 major US indices posted gains of at least 0.5%. ASX 200 (+0.2%) saw mild upside amid buoyant consumer staples and healthcare sectors, however upside was limited by gold miners. Nikkei 225 (flat) initially declined amid the risk averse sentiment in the region alongside JPY strength, however double digit gains seen in Toshiba shares helped return the index to flat on the session. China was traded higher as Shanghai Comp. (+0.1%) initially lingered in the red following a weak liquidity injection by the PBoC but staged a late recovery, while Hang Seng (+0.8%) outperformed with properties leading the index as China Resources Land and China Overseas shares both surged more than 3%. 10yr JGBs traded higher amid the risk averse tone in the region, while the BoJ bond buying operation also provided support for the Japanese paper.
Top Asian News
- China’s $9 Trillion Moral Hazard Problem Grows Too Big to Ignore
- China Home Prices Rise in Fewest Cities in a Year Amid Curbs
- Petron Malaysia 4Q Net Income 112.6m Ringgit Vs 16.2m Rgt Y/y
- China Insurance Watchdog Vows to Severely Punish Speculators
- Anta Sports Proposes Higher Dividend; FY Net in Line With Est.
- Indonesia Debt Attractive for Manulife Even as Yield Gap Narrows
- China’s $9 Trillion Moral Hazard Grows Too Big to Ignore
European bourses have faded early gains, with Price action in equity markets has been dictated by the latest slew of earnings. UK financials have been led higher by Lloyds after the bank reported profits were ahead of analyst expectations, while the DAX broke above 12000 to touch its highest level since Apr’15 with Thyssenkrupp leading the index amid reports that they will divest assets of their Brazilian steel plant. Another day, another record low for the Schatz which is now yielding -0.9% amid signals that the ECB is buying German bonds, in particular those with a yield below the -0.4% deposit rate, which implies strong demand. While investors are seemingly holding off selling their short-end German debt as they are used as collateral to receive cash at the ECB, subsequently reigniting the fears of last year of a collateral squeeze which Draghi and Co. attempted to address in December. Additionally, the decline in the 2-yr yield has been much more pronounced (falling 13bps from Friday) since Le Pen’s significant narrowing in the Presidential poll seen at the back-end of last week (now over 40%).
Top European News
- German Business Sentiment Rises as Bundesbank Sees Growth Pickup
- Airbus Takes $2.3 Billion A400M Hit, Sees Profit Gain This Year
- RWE Writes Off 4.3 Billion Euros on Sliding Power Prices
- U.K. Gained Momentum at End of 2016 on Trade, Consumer Spending
- May Faces Calls to Tighten Takeover Rules After Kraft- Unilever
In currencies, the Bloomberg Dollar Spot Index rose 0.2 percent, reversing an earlier drop. The yen led advances in major currencies, strengthening 0.5 percent to 113.17 per dollar, following two days of declines. The British pound weakened 0.3 percent. The EUR is the big mover on the day as the fall out of the recent Le Pen gains (in the polls) continues. This has had a notable impact into short end German paper as investors are driven into ‘safe havens’ – precious metals also benefiting. EU/USD has now tested below 1.0500 and continues to do so, with the early drivers coming from EUR/GBP and EUR/JPY specifically. This looks set to continue as long as the polls remain where they are, and breaking some notable support levels, the cross rates in particular look vulnerable. EU data saw the inflation rates as expected — core y/y unchanged at 0.9%. German IFO current conditions and expectations both exceeded consensus forecasts at 118.4 and 104 respectively. Both Cable and USD/JPY have been impacted, with the former pushed up through 1.2500 in the early exchanges before 1.2500+ sellers overwhelmed. This pair remains range bound inside 1.2350-1.2600 for now, but the latest Q4 business investment figures disappointed — falling 0.9% vs +0.4% previously, though the GDP rate was revised up slightly to prompt some immediate algo driven buying. USD/JPY has now slipped back to 113.00 as a result, with lacklustre UST yields also playing their pair. The 10yr rate looks pretty stagnant inside the 2.30-2.55% range, but this translates into limited momentum in the spot rate either way
In commodities, gains in Gold (up 0.1% to $1,237) are perhaps more of a function of risk sentiment as the political arena in Europe grabs more of the attention. The polls show Le Pen making some notable gains, albeit still behind in the 2nd round, but enough to unnerve EUR holders at the very least if not investors globally. Safe haven flow has prompted significant moves in shorter end Bunds, but given the safe haven aspect, Gold has also benefited alongside Silver. Energy prices have seen some downside in European trade, paring some of yesterday’s gains which saw WTI fail to make a sustained break above USD 55.00/bbl. Furthermore, participants will likely be looking ahead to today’s rescheduled API release which has recently provided a slew of large builds.. Comments from Barkindo on further compliance have supported, but last night’s rhetoric from Iran suggested a move to $60.00 would hurt OPEC — in terms of deterring fresh production (Shale?). Inventory levels for Iron Ore in China are grabbing more of the headlines, and may put the brakes on some of the moves seen in base metals of late. On the day, Lead is the out-performer, while Copper gives back some of its recent gains, though holds comfortably above $2.70.
Looking at the day ahead, in the US the lone data release is January existing home sales. Later this evening we’ll get the FOMC minutes from the Jan 31st/Feb 1st meeting. Away from the data we’re due to hear from the Fed’s Powell at 6pm GMT, while BoE deputy governor Cunliffe is due to speak later this morning.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -3.7%
- 10am: Existing Home Sales, est. 5.55m, prior 5.49m; MoM, est. 1.09%, prior -2.8%
- 1pm: Fed’s Powell Speaks on Economic Outlook in New York
- 2pm: FOMC Meeting Minutes
DB’s Jim Reid concludes the overnight wrap
Markets are in a celebratory mood at the moment with the flash European PMI’s for February lending further strength to the argument of an improving growth picture in Europe. Indeed the composite reading for the Euro area surged 1.6pts to 56.0 in February after the consensus was for broadly little change. That is the highest reading since April 2011 while the details revealed a 0.3pt rise in the manufacturing PMI to 55.5 and an even more significant 1.9pt jump in the services reading to 55.6. The country level breakdown also revealed an impressive 1.3pt jump in the composite for Germany to 56.1 and a 2.1pt jump in the composite for France to 56.2. So decent evidence that the European economy is showing signs of strong upward growth momentum in the first quarter of this year with growth also encouragingly broad-based by sector and country.
Significantly that data is also coming despite an increasingly uncertain political environment. Much has been made of the recent tightening in the French polls in favour of Le Pen versus Macron and Fillon. Yesterday we got more evidence of that with the release of another poll. The Elabe poll (covering 18-20 Feb) revealed first round support for Le Pen of 27.5% (up from 26% from the same pollster earlier this month) while support for Fillon actually rose 3 points to 20% and support for Macron fell about five points to 18.5%. In the second round a Le Pen – Fillon race has the latter coming out on top at 56% versus 44% which is unchanged, but a Le Pen – Macron race showed the margin of loss for Le Pen as tightening to 18% (59% versus 41%) from 26%. It’s worth noting that a live TV debate between Fillon, Hamon, Le Pen, Macron and Melenchon has been scheduled for March 20th, so that might be one to note in the calendar.
In terms of markets, French 10y OATs (+2.9bps to 1.080%) again underperform Bunds (+0.3bps to 0.296%) which in turn sent the spread between the two to a new four-and-a-bit year high of 79bps. The peripherals were also anywhere from 3bps to 7bps higher yesterday although in Greece 2y yields (-102bps) hit their lowest level since January following that news that Greece’s creditors are to return to continue discussions, suggesting a political framework is in place to allow an agreement to proceed.
Treasury yields also edged a bit higher with the 10y yield up 1.4bps to 2.429% although that was actually despite some disappointment in the latest PMI’s there (more on that below). Instead it was another day of familiar record highs for US equities which dominated the headlines with the S&P 500 (+0.60%), Dow (+0.58%), Nasdaq (+0.47%) and Russell 2000 (+0.75%) indices all notching up new all time highs. Better than expected results in the retail sector from Wal-Mart and Home Depot seemed to help, as did further gains for Oil with WTI finishing up +1.02% and back above $54/bbl.
Looking ahead to today, while there’s not a huge amount of data scheduled we will get the FOMC minutes later this evening from the Jan 31st/Feb 1st meeting. Our US economists noted in their daily that they expect to see further discussion in the minutes of the Fed’s balance sheet strategy given that many monetary policymakers have been publicly discussing the topic. They note though that it’s clear that policymakers have not yet reached a consensus on the particulars of the Fed’s reinvestment policy. Our economists have however re-evaluated the likely path of Fed balance sheet adjustments. They continue to expect the Fed to announce tapering of reinvestments this December, effective in January 2018. However they also expect a slower pace of tapering because the Fed will likely want to put as much distance between the Fed funds rate and the zero rate lower bound before risking greater disruptions to the long end of the Treasury curve. Thus, they still see the Fed hiking four times next year. Keep an eye on the minutes this evening for any more clues.
Back to markets where this morning in Asia it’s been a bit of a mixed start. While the Nikkei, Kospi and ASX are little changed, the Hang Seng is up +0.82% following stronger than expected GDP data out of Hong Kong (+1.2% qoq in Q4 versus +0.7% expected). On the other hand bourses in China are modestly in the red (Shanghai Comp -0.15%) following a strong start in the first two days of the week. In other markets the US Dollar is flat after the Fed’s Mester said that the Fed doesn’t want to surprise markets on possible future rate hikes. US equity index futures are also little changed Oil has continued to push on and bonds are mixed, albeit with modest moves.
Moving on. Trump related headlines may have abated somewhat in the last week or two but that’s not to say that this will continue. Our FX colleagues pointed out in a piece yesterday that two forthcoming events could bring more clarity to the border adjustment tax debate in particular. Trump is due to address a joint session of Congress on February 28th while the release of the White House’s “phenomenal” tax plan in the next fortnight or so could bring some clarity to the White House’s position. Both occasions could see a definitive endorsement or rejection of the Ryan-Brady BAT proposal and tip the balance in Congress. The team highlight that anecdotally, investors remain unconvinced that border adjustment will happen. Beyond this, it is impossible to derive a market-implied probability. But at least we can gauge the market’s fear of border adjustment from a number of instruments which would be idiosyncratically affected. Specifically, the discount of WTI over Brent futures has widened again since almost closing in early January. Since border adjustment would likely result in WTI trading at a premium, the oil market appears to increasingly discount the reform. The US retail sector, moreover, has almost fully closed its underperformance in the stock market since early January, also reflecting diminished fears of a BTA-driven rise in import costs. Lastly, the US breakeven curve still prices a higher risk of a nearterm, transient inflation shock than earlier this year, but this is probably consistent with lingering expectations of some protectionist measures, not just the BAT proposal. In conclusion our colleagues highlight then that the relevant principal component of these proxies suggests that the market has gradually discounted the border adjustment reform over the past three weeks, and expectations are now even below the peak of early January, prior to President Trump’s critical remarks in the Wall Street Journal on 15 January. Hence, while the market hasn’t fully priced it out, the risk is increasingly skewed toward Trump surprising the market with an endorsement of the Ryan-Brady proposal.
Wrapping up the remaining data yesterday, as noted earlier overall the PMI’s in the US were a little disappointing. Both the flash February services (-1.7pts to 53.9; 55.8 expected) and manufacturing (-0.7pts to 54.3; 55.4 expected) readings fell after expectations were for modest gains. That resulted in a dip in the composite to 54.3 from 55.8 although putting it in context that is still above the levels in 10 of the 12 months in 2016. There was also some Fedspeak to take stock of. Philadelphia Fed President Harker said that “at this point I would not take March off the table” while also highlighting that there is still important data to come. Meanwhile comments from BoE Governor Carney seemed to help Sterling to climb slightly after he said that if the Brexit process proceeds “relatively smoothly to an increasingly clear end-point” then that “would be consistent with a higher path of interest rates”.
Looking at the day ahead, this morning we’ll be kicking things off in Germany where the February IFO survey will be released. Shortly after that we get preliminary Q4 GDP in the UK with the various growth components also due to be released. The other data due out this morning will be the final January revisions for Euro area CPI. This afternoon in the US the lone data release is January existing home sales. Later this evening we’ll get the FOMC minutes from the Jan 31st/ Feb 1st meeting. Away from the data we’re due to hear from the Fed’s Powell at 6pm GMT, while BoE deputy governor Cunliffe is due to speak later this morning.
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