Welcome to the post-Janet Yellen era (which technically ends on Saturday, with Jay Powell sworn in on Monday) which sees the month of February begin with solid risk appetite as S&P futures initially rallied out of the gate only to fade into the European session, despite strong performance in Europe and Asia as the MSCI Asia Pacific index rose for first time in four days, as TSY yields spiked to 2.75%, aka the ‘red zone.’
MSCI’s all-country equity index rose around 0.2 percent after Tokyo bounced 1.7 percent off four-week lows. European bourses opened around 0.3 percent firmer MSCI’s emerging Asian index closed 0.3 percent lower however. At publication time, European stocks were green with the E-mini up 0.1%…
… although it will be the 10Y US Treasury and the US Dollar that traders will be more focused on as was the case in most of January, with global shares bouncing after recent end-Jan profit-taking but rising US yields pose a threat as 10Y TSY yields jump to 2.75%, highest since 2014.
Indeed, equity bullishness is being tempered by rising global bond yields. The Fed held interest rates unchanged on Wednesday but raised its inflation outlook, no longer saying it expected price growth to stay below 2 percent. It also flagged “further gradual” rate increases.
Treasuries pulled lower in early trade as red and green Eurodollars push through post-FOMC lows; 10-year yield edges up four basis points to 2.75%. Two-year U.S. yields are approaching decade-highs and could rise further should jobs data due on Friday confirm sustained labor market strength.
The selloff continues across the globe, with the Aussie curve bull steepening for a second day; JGB futures marginally lower after 10-year auction. The 10y German Bund yield was also shaken, jumping above 0.7% to highest level since 2015.
Meanwhile, dollar bulls were faced with another day of disappointment as London trading saw a sharp reversal of the greenback’s fortunes, with the Bloomberg spot index quickly erasing early gains, although it has since posted a modest rebound.
The weak dollar trend will not be changed by Fed rate rises, ING Bank analysts predicted. Not only was policy tightening already priced in, economic recovery elsewhere and U.S. political uncertainty suggested “the overnight dollar strength is unlikely to transform into a trend,” they told clients.
Higher Treasury yields offered little support for the dollar as the perplexing divergence between rates and the U.S. currency remains. The euro and the pound were among the main beneficiaries as real money names kept adding longs. European equities traded in a sea of green with bonds edging lower and commodities trading mixed
This week’s meeting of the U.S. Federal Reserve was more hawkish than expected, but confirmed what markets had already expected – an interest rate rise in March, said Markus Huber, a trader at brokerage City of London Markets.
“In light of today’s flood of earnings in Europe and the United States, the Fed meeting will most likely have only a limited and temporary impact on markets,” Huber predicted.
Amid a flurry of company results the Stoxx Europe 600 Index headed for the first advance in four days, led by finance and technology shares. The FTSE 100 (+0.2%) lagged its peers with GBP/USD back above 1.4250. In terms of sector specifics, all sectors trade higher with the exception of health care names in the wake of Novo Nordisk (-4.5%) latest earnings update; outperformance seen in utilities, IT and financials as earnings dictate the state of play. Notable large cap earnings this morning include, BBVA (+1.1%), Roche (+0.3%), Unilever (flat), Vodafone (-0.8%), Daimler (-0.8%) and Shell (-0.7%).
The MSCI Asia Pacific Index also rose, with a surge in Japanese stocks offsetting declines in China and India. Australia’s ASX 200 (+0.9%) and Nikkei 225 (+1.5%) traded higher with the rebound in crude fuelling outperformance in Australia’s energy sector, while Japan led the gains in the region amid a softer JPY and deluge of corporate earnings. Conversely, Shanghai Comp. (-1.0%) and Hang Seng (-0.3%) were less inspiring and traded choppy after a 6th consecutive open market operation skip by the PBoC (draining 80bn yuan) and an inline Chinese Caixin Manufacturing PMI release, while a slump in Shenzhen stocks to 6-month lows also triggered further mainland pressure. e. Finally, 10yr JGBs were lower amid the positive risk tone in Japan, although prices were supported off lows after stronger demand in the 10yr JGB auction.
Global equity markets are torn between buoyant economic growth and double-digit company earnings, on the one hand, and the possibility that U.S. and euro zone central banks will tighten policy faster than expected. The growth momentum was confirmed by manufacturing activity surveys on Thursday that showed Asian factories getting off to a strong 2018 start and Europe posting solid growth.
Boeing and Facebook were the latest to reinforce the solid U.S. earnings growth picture. European markets cheered improved performance at Unilever and Royal Dutch Shell. Huber said results from the likes of Amazon and Apple would be crucial. “It will be essential that those companies not only deliver in regard to earnings expectations but also show that the momentum going forward remains strong,” he added.
WTI and Brent crude futures are seen higher alongside the softer USD with prices above USD 65/bbl and USD 69/bbl respectively; prices could also be being supported by comments from Shell who expect their 2018 CAPEX to be at the lower end of their guided range. Notable energy newsflow includes Goldman Sachs raising their Brent crude oil 3-month forecast to USD 75/bbl and 6-month forecast to USD 82.50/bbl as “rebalancing has likely been achieved”. In metals markets, spot gold trades lower amid the broader global risk sentiment and thus unable to benefit from the softer USD. Elsewhere, Chinese steel futures were seen higher overnight amid speculation over an extension to existing output curbs. Finally, Glencore, as part of their production update this morning, announced that copper output should rise to nearly 1.5mln/tonnes this year as production at their Katanga mine ramps up
- S&P 500 futures up 0.2% to 2,830.30
- STOXX Europe 600 up 0.4% to 397.19
- MSCI Asia Pacific up 0.3% to 184.58
- MSCI Asia Pacific ex Japan down 0.4% to 605.58
- Nikkei up 1.7% to 23,486.11
- Topix up 1.8% to 1,870.44
- Hang Seng Index down 0.8% to 32,642.09
- Shanghai Composite down 1% to 3,446.98
- Sensex down 0.09% to 35,932.52
- Australia S&P/ASX 200 up 0.9% to 6,090.07
- Kospi up 0.08% to 2,568.54
- German 10Y yield rose 1.8 bps to 0.715%
- Euro up 0.2% to $1.2443
- Italian 10Y yield unchanged at 1.76%
- Spanish 10Y yield fell 1.2 bps to 1.415%
- Brent futures up 0.8% to $69.62/bbl
- Gold spot down 0.3% to $1,340.94
- U.S. Dollar Index down 0.2% to 89.00
Top Overnight News
- U.K. house prices rose in January as a shortage of properties coming up for sale offset an underlying slowdown in the market; the year-on-year increase reached 3.2%, the fastest pace since March
- The EU is threatening sanctions to stop U.K. undercutting the continent’s economy after Brexit, including “tax blacklists” and penalties against subsidized companies, the Financial Times reports, citing a leaked strategy paper
- Asia’s rich savers are driving up prices of the region’s dollar-denominated bonds, making it harder to find value even as they insulate the market, according to Goldman Sachs Asset Management
- Manufacturing in the euro area grew at one of the fastest paces on record in January, with high demand fueling inflationary pressures
- PBOC is reasonably comfortable with yuan strengthening against USD but would be a problem if it spread to other currencies in trade weighted basket, Reuters reports, citing people familiar
- European Jan. Manufacturing PMIs: Spain 55.2 vs 55.6 est; Italy 59.0 vs 56.6 est; France 58.4 vs 58.1 est; Germany 61.1 vs 61.2 est. Eurozone 59.6 vs 59.6 est; U.K. 55.3 vs 56.5 est.
- Brexit: EU threatens sanctions to stop U.K. undercutting the economy after split; including “tax blacklists” and penalties for subsidies: FT
- In Italy, SWG poll shows 37% are undecided before the election; would make this group the largest bloc from polling numbers
- Chinese Jan. Caixin Manufacturing PMI 51.5 vs 51.5 est.
Asia equity markets were mostly higher as region digested a slew of earnings and after initial momentum from the US, where stock markets looked past the widely-anticipated hawkish language tweak by the FOMC and topped off the best monthly performance in the S&P 500 and DJIA since 2016. ASX 200 (+0.9%) and Nikkei 225 (+1.5%) traded higher with the rebound in crude fuelling outperformance in Australia’s energy sector, while Japan led the gains in the region amid a softer JPY and deluge of corporate earnings. Conversely, Shanghai Comp. (-1.0%) and Hang Seng (-0.3%) were less inspiring and traded choppy after a 6th consecutive open market operation skip by the PBoC and an inline Chinese Caixin Manufacturing PMI release, while a slump in Shenzhen stocks to 6-month lows also triggered further mainland pressure. Finally, 10yr JGBs were lower amid the positive risk tone in Japan, although prices were supported off lows after stronger demand in the 10yr JGB auction. Chinese Caixin Manufacturing PMI Final (Jan) 51.5 vs. Exp. 51.5 (Prev. 51.5). PBoC skipped open market operations again today for a daily net drain of CNY 80bln. PBoC set CNY mid-point at 6.3045 (Prev. 6.3339)
Top Asian News
- The Breakneck Rise of China’s Colossus of Electric-Car Batteries
- India Said to Propose Long-Term Capital Gains Tax on Equities
- India to Curb Cryptocurrency Use While Embracing Blockchain
- India Breaches Deficit Goals, Taxes Stock Investors to Woo Votes
- Bond Rout in India Set to Deepen as Modi Widens Deficit Targets
European equities trade higher across the board (Eurostoxx 50 +0.6%) amid another positive close on Wall Street which saw the best monthly performance in the S&P 500 and DJIA since 2016; FTSE 100 (+0.2%) lags its peers with GBP/USD back above 1.4250. In terms of sector specifics, all sectors trade higher with the exception of health care names in the wake of Novo Nordisk (-4.5%) latest earnings update; outperformance seen in utilities, IT and financials as earnings dictate the state of play. Notable large cap earnings this morning include, BBVA (+1.1%), Roche (+0.3%), Unilever (flat), Vodafone (-0.8%), Daimler (-0.8%) and Shell (- 0.7%). In European Fixed Income, not much chance to counter-trend and little respect for or support evident at pre-FOMC session lows as bond bears pounce on upticks to push benchmark futures deeper into negative territory. Bunds have now slumped to 158.27 at worst (-55 ticks on the day), and Gilts hit 121.50 (-64 ticks) to record a new March contract base.
Top European News
- U.K. Manufacturing Growth Unexpectedly Slows as New Orders Ebb
- Fox Casts Doubt on the Brexit Transition as May Vows to Fight
- Dutch Regulator Recommends Slashing Groningen Gas Output 44%
- Hungary Rejects Macron ‘Arrogance’ as EU Reform-Fight Looms
- Vodafone Forced Into Discounts Over Southern Europe Rivalry
- Euro-Area Manufacturers Start Year With Near-Record Momentum
In FX, the DXY only derived modest and fleeting support from the FOMC’s more hawkish inflation outlook and upbeat growth assessment with the Index back on the 89.000 handle having topped out some way short of 89.500. In the event, rate (hike) expectations for March and 2018 overall are barely changed in the aftermath so the Dollar has resumed its broadly weaker trend with post-Fed gains only maintained against a few G10 currencies. Usd/Jpy remains firmer within a wide 109.00-110.00 band, as loose BoJ policy is not seen shifting anytime soon, eyeing support around 109.41 (200 HMA) and resistance in the 109.60-75 area before 109.88 (50% Fib) on the narrow. Aud/Usd has rejected the 0.8100 level again, and pulled back further towards the big figure below and almost retesting last week’s 0.8005 base just ahead of key support a few pips under 0.8000 – sharp drop in Aussie building permits weighing. Conversely, Cable continues to recover and consolidate above the 1.4250 level, but capped by a small UK manufacturing PMI miss and offers said to be sitting at/over 1.4280. Eur/Usd is also back in the ascendancy having reclaimed 1.2400+ status and basing ahead of 1.2366 chart support, the 200 HMA at 1.2375 and bids from 1.2370-80. Note, however, hefty option expiries between 1.2400-25 may yet exert some influence.
In commodities, WTI and Brent crude futures are seen higher alongside the softer USD with prices above USD 65/bbl and USD 69/bbl respectively; prices could also be being supported by comments from Shell who expect their 2018 CAPEX to be at the lower end of their guided range. Notable energy newsflow includes Goldman Sachs raising their Brent crude oil 3-month forecast to USD 75/bbl (Prev. USD 62/bbl) and 6-month forecast to USD 82.50/bbl as “rebalancing has likely been achieved”. In metals markets, spot gold trades lower amid the broader global risk sentiment and thus unable to benefit from the softer USD. Elsewhere, Chinese steel futures were seen higher overnight amid speculation over an extension to existing output curbs. Finally, Glencore, as part of their production update this morning, announced that copper output should rise to nearly 1.5mln/tonnes this year as production at their Katanga mine ramps up.
Looking at the day ahead, we’ll get the final PMI revision alongside the January ISM manufacturing and December construction spending. Also due out in the US will be Q4 nonfarm productivity and unit labour costs, as well as the latest weekly initial jobless claims and January vehicle sales data. Today will be a busy day for corporate earnings releases too with Alphabet, Amazon, Apple, Royal Dutch Shell and Alibaba all reporting. Elsewhere, the ECB’s Praet and BOE’s Brazier will speak.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior -3.6%
- 8:30am: Nonfarm Productivity, est. 0.7%, prior 3.0%; Unit Labor Costs, est. 0.9%, prior -0.2%
- 8:30am: Initial Jobless Claims, est. 235,000, prior 233,000; Continuing Claims, est. 1.93m, prior 1.94m
- 9:45am: Markit US Manufacturing PMI, est. 55.5, prior 55.5
- 10am: Construction Spending MoM, est. 0.4%, prior 0.8%
- 10am: ISM Manufacturing, est. 58.6, prior 59.7
- Wards Domestic Vehicle Sales, est. 13.5m, prior 13.7m
- Wards Total Vehicle Sales, est. 17.2m, prior 17.8m
DB’s Jim Reid concludes the overnight wrap
Welcome to February. I hope you all Super Blue Blood Mooned well yesterday. I’m starting to worry that the twins are werewolfs as for the last two nights they have been howling pretty much non-stop. I was going to say it’s a nightmare but at least in nightmares you’re asleep!!! Anyway at the end of today’s note – through bleary eyes – we do our usual monthly performance review. January was a fascinating month with one of the largest divergences between equity and bond returns for some time. The S&P extended its record run of positive monthly total returns to 15 months and January was in fact the strongest of these. Treasuries had their worst month since Mr Trump was elected in November 2016. Indeed bonds made up all but 2 of the 12 global tracked assets that were in negative return territory for the month (39 in total). For more on this see the full performance review at the end.
Staring in the US this morning, as widely expected, the Fed left rates unchanged but the tweaks to the FOMC statement seemed slightly hawkish. On rates, the committee expects that “economic conditions will evolve in a manner that will warrant further gradual increases in federal funds rates”, with the word “further” added this time. On inflation, there appears to be more confidence now with the Fed expecting it “…to move up this year and to stabilise” around the goal versus “remain somewhat below 2% in the near term”. Notably, it also noted that “market based measures of inflation compensation have increased in recent months but remain low”. Elsewhere, the committee reiterated that “near term risks to the economic outlook appear roughly balanced”. Our US economists continue to expect four rate hikes in 2018 and the Bloomberg implied odds of a rate hike in March jumped c9ppt to 99%.
Staying with central banks, the ECB’s Coeure seemed a bit dovish. On QE, he noted “of course (it) won’t last forever”, but “there is also a very wide…broad agreement in the Governing council” that “we have to be patient, prudent and persistent…because we’re not yet where we want to be in terms of inflation”. On Euro area inflation, he expects it will converge “only very gradually” to the ECB’s goal with “no (upside) inflation tail risk at the current juncture” and that ample degree of monetary stimulus remains necessary. On rates, he said that they will stay “very low for an extended period of time”. Elsewhere on FX, he said the ECB “have agreements that we should not target our exchange rates…we want to see rates that reflect economic and monetary conditions in different places”. Although he also noted that “we’ve seen some volatility recently” and that “if that kind of volatility would lead to an unwarranted tightening of our monetary policy, we would have to reassess and consider”.
This morning in Asia, markets are mixed. The Nikkei (+1.52%) and Kospi (+0.19%) are up while the Hang Seng (-0.31%) and China’s CSI 300 (-0.93%) are down as we type. Datawise, China’s January Caixin manufacturing PMI was in line and steady mom at 51.5, while Japan’s Nikkei manufacturing PMI was slightly above last month’s print at 54.8 (vs. 54.4). After the bell in the US, Paypal dropped c11% after eBay said it will gradually change its payments partner from Paypal to Adyen BV. Facebook’s shares recovered and is up c1% after its 4Q result while Microsoft is up c0.2% after its 2Q revenue beat estimates.
Now recapping market performance from yesterday. The S&P initially rose c0.6% following solid results from Boeing (+4.9%) and Xerox (+4.4%) but pared gains to close only marginally higher (S&P +0.05%; Nasdaq +0.12%; Dow +0.28%). Within the S&P, modest gains in the real estate and utilities sectors were partly offset by losses for health care stocks. Key European markets slightly weakened with the Stoxx 600 (-0.17%), DAX (-0.06%) and FTSE (-0.72%) all down. The latter weighed down by heath care stocks on concerns of the potential industry disruption from the Amazon consortium. The VIX fell for the first time in three days to 13.54 (-8.5%).
In government bonds, treasuries initially weakened after the government boosted the amount of longer term debt for auctions in the upcoming quarter ($42bn), but losses reversed post the FOMC statement with 10y yields closing 1.5bp lower for the day at 2.706%. Although this morning, the UST 10y yield is back up c2bp. In Europe, Bunds (+1.5bp) and OATs 10y yields (+0.6bp) rose slightly, while Gilts rose for the sixth consecutive day (yields +5bp and +c30bp since early Jan). Turning to currencies, the US dollar index fluctuated and was marginally lower (-0.03%), while the Euro and Sterling gained 0.10% and 0.31% respectively. In commodities, WTI oil was up for the first time in three days (+0.36%) despite higher US oil output for November. Elsewhere, precious metals strengthened (Gold +0.49%; Silver +1.19%) and other base metals were mixed but little changed (Copper +0.15%; Zinc +0.37%; Aluminium -0.76%).
Away from markets, former Fed Chair Alan Greenspan sees two bubbles – a stock market and a bond market bubble. He said “the bond market bubble will eventually be the critical issue, but for the short term, it’s not too bad”. The main cause for their being a bond bubble was “we’re beginning to run an ever-larger US government deficit”.
In Germany, the SPD leader Schulz said negotiations with Ms Merkel’s bloc to form the next coalition government were “very encouraging” in terms of discussions on European policy, with negotiators discussing the role of the ESM bailout fund in more detail.
Now onto some Brexit headlines. Contrary to the EU’s view of protecting its citizen rights post Brexit, the UK PM May noted “…I’m clear there’s a difference between those people who came prior to us leaving and those who will come when they know the UK is no longer a member of the EU”. Elsewhere, the Irish deputy PM Simon Coveney said that post Brexit, Ireland wants “as close to status quo as possible from a trading perspective” with Britain and sees “difficult negotiations” for Britain with the EU in terms of potentially including financial services into a trade deal.
Finally, DB’s George Saravelos has reiterated his bearish call on the USD (target of 1.30 for EURUSD) and also looked at three myths on the dollar, including: i) the market is very short dollars, ii) the rate differential is overwhelmingly in favour of a stronger dollar and iii) there is an impending wave of dollar buying because of US tax repatriation. Refer to his note for more details.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January ADP employment change was above market at 234k (vs. 185k), while the Chicago PMI also beat at 65.7 (vs. 64 expected). Elsewhere, the December pending home sales was in line at 0.5% mom. The 4Q employment cost index also met expectations at 0.6% qoq, lifting annual growth to 2.6% yoy – which is the fastest rate since 3Q 2008 and likely adds to the argument that inflation is picking up.
The Eurozone’s January core CPI was in line at 1% yoy and 0.1ppt higher mom, while France’s CPI was above market at 1.5% yoy (vs. 1.1%), partly due to higher energy prices. In labour markets, the Eurozone’s unemployment rate was in line at 8.7%, while Italy’s reading was slightly lower than expected at 10.8% (vs. 10.9%). In Germany, the January unemployment rate was in line at 5.4% – marking a new post reunification low, while the December retail sales was volatile and below market at -1.9% yoy (vs. 2.8%). Finally, UK’s January GfK consumer confidence remained negative but was better than expected at -9 (vs. -13).
Looking at the day ahead, in Europe we’ll get the final manufacturing PMI revisions including a first look at the data for the UK and periphery. In the US we’ll also get the final PMI revision alongside the January ISM manufacturing and December construction spending. Also due out in the US will be Q4 nonfarm productivity and unit labour costs, as well as the latest weekly initial jobless claims and January vehicle sales data. Today will be a busy day for corporate earnings releases too with Alphabet, Amazon, Apple, Royal Dutch Shell and Alibaba all reporting. Elsewhere, the ECB’s Praet and BOE’s Brazier will speak.