With “super Wednesday” – which was a huge dud in terms of actual data surprises – now in the rearview mirror, and with just one day to go until the official launch of Q1 earnings season which is widely expected to be the worst once since 2016, stocks have continued their merry overnight levitation, with S&P briefly flirting with 2,900 before easing back modestly…
… as European stocks rebounded from earlier losses while Asian markets slumped after cautious European and U.S. central banks reinforced investors’ worries about the slowing global economy and trade protectionism which however did not prevent Treasuries to get sold off modestly while the dollar pushed higher.
Europe’s Stoxx 600 Index trimmed earlier losses, as gains in travel companies counter-balanced declines in miners and the basic resources index, which fell as much as 1.5% and was the worst performing sector in the SXXP, as Goldman Sachs wrote in a note that China may temper its easing policy amid stronger economic performance. Chip stocks were also weak as downgrades hit Siltronic following its warning yesterday and analysts mulled what next week’s 1Q results from industry bellwether ASML might hold.
On Wednesday, the ECB kept its loose policy stance and warned that threats to global economic growth remained. The ECB has already pushed back its first post-crisis interest rate hike, and President Mario Draghi raised the prospect of more support for the struggling euro zone economy if its slowdown persisted.
Earlier in Asia, the MSCI index of Asia-Pacific shares outside Japan slipped 0.4% after four straight days of gains took it to the highest since last August. Japan’s Nikkei reversed early losses to end 0.1 percent higher. China’s blue-chip CSI300 index dropped 1.7% while Hong Kong’s Hang Seng index stumbled 0.7%. Australian shares also lost ground, pressured by political uncertainty after the prime minister called a national election for May 18.
Emerging-market stocks were set to end their longest rising streak in more than a year as concern over the global economy dented investor sentiment. Currencies steadied near the strongest level in a month. MSCI index of developing-nation equities followed declines across stock markets, on track to end a 10-day rally that had added 5% to the gauge. Currencies were mixed, ranging from declines for the Turkish lira and the South African rand to gains for the Indian rupee and the Philippine peso.
Investor optimism on global stocks and commodities has begun to waver after a strong start to the year, as warnings about a global economic slowdown abound. Caution over economic pullbacks were expressed by the European Central Bank, the IMF and in the Federal Reserve minutes – which however was interpreted as bullish by traders, as it reinforced expectations that interest rates should be on hold for the rest of this year and may even be cut, resulting in further risk asset gains.
Wednesday data showed U.S. consumer prices increased by the most in 14 months in March but underlying inflation remained benign against a backdrop of slowing global economic growth. At the same time, minutes from a March 19-20 meeting of Federal Reserve policymakers showed they agreed to be patient about any changes to interest rate policy as they saw the U.S. economy weathering a global slowdown without a recession in the next few years.
“Traders continue to operate in a ‘wait and watch’ mode as they look for the next opportunity in a cautious market,” said Nick Twidale, Sydney-based analyst at Rakuten Securities Australia. “Two big event risks are now behind us with the ECB and Fed.” But, Twidale said, investors were still on the lookout for a trigger that would push markets out of their familiar trading ranges.
“If, as we expect, growth in the euro-zone continues to disappoint over the coming months, we think that ECB policymakers will adopt an even more accommodative stance,” analysts at Capital Economics wrote in a note.
In FX, the dollar advanced and commodity currencies came under pressure as oil retreated from a five-month high due to an increase in U.S. crude inventories. Treasuries slipped, euro-area bonds and stocks traded mixed, while a rally in emerging-market currencies lost steam. The Pound fluctuated and its volatility extended its sharp move lower as European Union leaders agreed to extend the Brexit deadline to
In commodities, Brent futures eased 27 cents to $71.46 a barrel. U.S. crude dipped 30 cents to $64.31. Gold hovered near a two-week top on Thursday at $1,306.97 an ounce.
Expected data include PPIs and jobless claims. Fastenal and Trulieve Cannabis are reporting earnings
- S&P 500 futures little changed at 2,894.75
- STOXX Europe 600 down 0.3% to 385.57
- MXAP down 0.5% to 162.43
- MXAPJ down 0.6% to 540.79
- Nikkei up 0.1% to 21,711.38
- Topix down 0.07% to 1,606.52
- Hang Seng Index down 0.9% to 29,839.45
- Shanghai Composite down 1.6% to 3,189.96
- Sensex down 0.2% to 38,516.12
- Australia S&P/ASX 200 down 0.4% to 6,198.67
- Kospi unchanged at 2,224.44
- German 10Y yield rose 0.2 bps to -0.024%
- Euro up 0.04% to $1.1279
- Italian 10Y yield fell 1.3 bps to 2.059%
- Spanish 10Y yield fell 1.7 bps to 1.027%
- Brent futures down 0.5% to $71.36/bbl
- Gold spot down 0.3% to $1,304.10
- U.S. Dollar Index little changed at 96.91
Top Overnight News
- Julian Assange was arrested by London police Thursday after Ecuador withdrew diplomatic asylum from the Australian who had been linked to leaks of U.S. government secrets
- The Brexit blueprint hashed out during six hours of talks in Brussels allows the U.K. to stay in the bloc until Oct. 31, with a review of progress to be held in June. British Prime Minister Theresa May accepted the offer and must now sell it to skeptical members of Parliament in London
- ECB policy makers agree that euro-zone economic growth has held up in line with their official forecasts despite recent weak data, according to people with knowledge of the matter
- New Zealand central bank governor Adrian Orr, who unexpectedly switched to an easing bias last month, said it’s not yet clear whether an interest-rate cut is warranted in May
- The International Monetary Fund warned of “dangerous” consequences for the U.S. economy if moves such as President Donald Trump’s calls for Federal Reserve interest-rate accommodation lead to monetary policy mistakes
- Global oil markets are tightening as OPEC supply falls, the International Energy Agency said, while warning it could lower demand forecasts because of economic threats
- Prime Minister Scott Morrison called Australia’s election for May 18, with polls showing he’s facing an uphill battle to prevent a shift in power to the left- leaning opposition Labor party
- Federal Reserve officials signaled on Wednesday they’re prepared to move interest rates higher or lower as needed, but an unusual mix of risks means they could remain on hold all year.
- The U.S. and China have agreed to open “enforcement offices” as a way to make sure each side lives up to the terms of a trade deal still under negotiation, Treasury Secretary Steve Mnuchin said Wednesday
- China’s consumer inflation surged in March on rising food prices, while factory- gate prices rebounded from close to zero
- Oil struggled to extend gains beyond a five-month high as an increase in U.S. crude inventories to the highest since late 2017 overshadowed OPEC’s efforts to reduce production
- North Korean leader Kim Jong Un urged a “severe blow” to those imposing sanctions on his country and told his ruling party to push “self-reliance,” signaling his determination to hold the line in talks with U.S. President Donald Trump
Asian equity markets were cautious as the region mulled over the prior day’s central bank activity from both sides of the Atlantic. ASX 200 (-0.4%) and Nikkei 225 (+0.1%) were subdued with Australia dampened by election risk after PM Morrison called for the election to be held on May 18th and with the ruling Coalition facing an uphill battle as it trails the opposition Labor Party by 52%-48% according to the latest polls, while risk appetite in Tokyo was hampered by recent currency flows in which USD/JPY briefly slipped below 111.00. Hang Seng (-0.9%) fell below the psychological 30k level and Shanghai Comp. (-1.6%) underperformed following somewhat inconclusive inflation data from China and as money market rates increased amid continued PBoC inaction. Comments from US Treasury Secretary Mnuchin also failed to inspire even though he noted that talks with China were very productive and that an enforcement mechanism had been agreed, as he also suggested there were still important issues to address. Finally, 10yr JGBs were subdued after a pullback from the 153.00 level and amid lacklustre trade in T-notes, while stronger demand at today’s enhanced liquidity auction for longer-dated bonds (20s, 30s, 40s) also did little to underpin demand for the 10yr.
Top Asian News
- China’s Stimulus Arrives in Sector That Holds Recovery Key
- China Vanke Said to Mull $1 Billion Property Management IPO
- RBNZ’s Orr Says Mixed Picture Makes Next Rate Decision Difficult
- Deadly ‘Super Fungus’ Fuels Surge in Chinese Drugmakers’ Shares
European equities trade with no firm direction [Eurostoxx 50 +0.1%] following on from a cautious Asia-Pac trade in the aftermath of the prior day’s central bank activity. France’s CAC 40 (+0.6%) is the marked outperformer as the index is bolstered by Sodexo (+5.0%) and LVMH (+4.6%) amid optimistic earnings. Sector-wise, consumer discretionary names lead the gains as the upbeat numbers from LVMH lifted fellow luxury names in sympathy with Swatch (+3.0%), Richemont (+1.7%), Kering (+1.8%) and EssilorLuxoticca (+2.0%) all benefiting from the tailwind. Meanwhile, utilities lag after reports that Ofgem are introducing new tougher entry tests from June 2019 for suppliers entering the market.In terms of individual movers, Prysmian (-8.6%) rests at the foot of the Stoxx 600 after the Co. said it could see a potential impact of EUR 60-80mln from issues regarding Western Link high voltage cable and damage claims. In terms of bank commentary, analysts at Citi now forecast 2% gains in global equities over the rest of the year, adding that their bear market checklist suggests buying into the next dip. However, Citi notes that the main risk to their forecast remains a full-blown global recession.
Top European News
- ECB Officials Are Said to Agree Slowdown Hasn’t Worsened
- Deutsche Boerse Is in Negotiations to Buy Refinitiv FX Units
- U.K. Business Gets Dumped With Yet More Brexit Frustration
- ASML Business Secrets Stolen by Staff Linked to China: FD
In FX, first we look at CAD/AUD/NZD as fall-out from the latest Fed minutes, which were less dovish than some anticipated, has been more pronounced across the commodity bloc where the high beta currencies are particularly sensitive/prone to swings in risk sentiment and underlying prices. The Loonie has lost most ground vs its US counterpart within a 1.3313-57 range as crude prices retreat from fresh 2019 peaks, closely followed by the Aussie and then the Kiwi that have both topped out after extending gains overnight and are retesting support/bids around 0.7150 and 0.6750 respectively.
- JPY/GBP – Also losing out to a broadly firmer Usd post-FOMC minutes, as the DXY nudges back up towards the 97.000 axis, with Usd/Jpy also bouncing off the 200 DMA (110.90) and a little beyond the top end of hefty option expiries (1.7 bn) straddling the 111.00 level from 110.85 to 111.05 that could yet keep the topside in check ahead of 111.20. Meanwhile, Cable remains top heavy around or just above 1.3100 where short term chart resistance resides, and Eur/Gbp is still supported circa 0.8600 even though the EU has afforded Britain a longer A 50 extension and thereby prevented a Friday or May 22nd no deal Brexit. Note also, 1.4 bn expiries between 0.8600-10 may underpin the cross over the NY cut.
- CHF/EUR – The Franc and single currency are holding up relatively well against the recovering Greenback, with Usd/Chf slipping back from multi-week highs towards parity and Eur/Usd reversing all and a bit more of its post-dovish ECB declines to revisit technical resistance protecting 1.1300.
- SEK/NOK – The Swedish Krona has picked up the inflation baton from its Scandi peer in wake of Swedish CPI metrics that saw headline y/y rate and core m/m rates eclipse consensus. Eur/Sek slipped below 10.4200 in response, but has rebounded since, while Eur/Nok is also consolidating off Wednesday’s post-Norwegian inflation lows around 9.5800.
- EM – The Lira’s woes simply go on, and regardless of Turkish data that should be supportive, such as narrower current account and trade deficits or a rise in weekly reserves. Instead domestic and geopolitical angst continues to trouble Try investors and the reaction to yesterday’s economic plan remains underwhelming. Hence, Usd/Try remains near the upper end of a 5.7300-6770 range.
In commodities, the oil complex remains lacklustre with upside in WTI (-0.7%) and Brent (-0.8%) futures capped by the wider-than-forecast builds in crude inventories this week. The IEA Oil Market Report provided little impetus for the benchmarks, despite leaving global oil demand growth estimates unchanged whilst its OPEC and EIA counterparts downgraded the measure. However, the IEA and OPEC reports were relatively in-fitting in regard to OPEC output declining by over 500K BPD to just over 30mln BPD and both reports also highlighted that the slump in Venezuelan production led to the decline in global output. Elsewhere, gold (-0.3%) remains just above the USD 1300/oz level after giving up breaching its 50 DMA to the downside (1307) as the Greenback recoups some of the pre-FOMC losses. It’s also worth keeping in mind that South African production of the yellow metal declined 20.6% Y/Y in February (Prev. -22.5% Y/Y). Finally, copper (-0.5%) remains lacklustre amidst the overall risk tone around the market and as Chinese CPI provided little in the way of inspiration for the red metal.
US Event Calendar
- 8:30am: PPI Final Demand MoM, est. 0.3%, prior 0.1%;
- PPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%;
- PPI Ex Food and Energy YoY, est. 2.4%, prior 2.5%
- PPI Ex Food, Energy, Trade YoY, prior 2.3%
- 8:30am: Initial Jobless Claims, est. 210,000, prior 202,000; Continuing Claims, est. 1.74m, prior 1.72m
- 9:30am: Fed’s Clarida Speaks at Annual IIF Meeting in Washington
- 9:35am: New York Fed’s Williams Speaks in New York
- 9:40am: Fed’s Bullard Speaks on Economy and Monetary Policy
- 2pm: Fed’s Kashkari to Hold Q&A Via Twitter
- 4pm: Fed’s Bowman Speaks on Community Banking
DB’s Jim Reid concludes the overnight wrap
If I didn’t have a job and family then the next four days would go something like this. Masters golf on TV, bed, Masters golf, bed, play golf myself, Masters golf, play golf, watch Liverpool on TV, final round of the Masters and then the big one! Yes Game of Thrones starts at 2am Sunday night / Monday morning just after the Masters finishes. Of the above I’ll probably catch an hour or so of golf on the telly at some point before falling asleep on the sofa and maybe the Liverpool game while I cook the kids dinner. As for GoT I will be going off the grid for 10 days as of Monday avoiding spoilers as I want this to be the first thing my wife and I watch in our new house. Whether I can avoid any plot info for 10 days is highly debatable but I’m going to try.
If you’re planning on catching up with “Super Wednesday” in markets on demand later and don’t want the spoilers as to what happened then please look away now…….. Basically we had the late night Brexit extension to Halloween, a fairly unexciting set of FOMC minutes, a dovish ECB that possibly opened the way for more rate cuts (yikes!) and a US CPI that just missed expectations but with one-offs again confusing the picture.
So late last night in Brussels, the EU27 agreed to offer the UK a nearly 7-month Brexit extension through to October 31. If we get that far I’m sure they’ll be lots of scary Halloween no-deal analogies. The UK PM May has accepted the offer and this will require the UK to participate in this year’s European elections. However, May has indicated that she still aims to leave by May 22 to avoid EU elections. Maybe she can bring her WA for one final vote sometime in the next 36 hours, but either way the odds of an early election continue to rise. She told EU leaders that’s she’s hopeful something can come of the cross party talks but the mood music domestically doesn’t suggest we’re close. She has previously promised binding Parliamentary votes on various Brexit preference so that should also come back onto the agenda soon. The pound appreciated +0.30% yesterday as the risk of a cliff edge Brexit this week reduced and is trading broadly flat (+0.04%) this morning.
The minutes of the March FOMC meeting provided a lot of interesting details, but not much in the way of market-moving revelations. On the hawkish side, the minutes said that most participants expected Q1 economic weakness to reverse later this year, and a few participants noted that the lower-for-longer rate environment could pose financial stability risks. On the other hand, a couple of them favoured using macroprudential policies to alleviate risks. Consistent with the dotplot, some participants judged further rate hikes to be appropriate later this year. On the dovish side, several participants said that rates “could shift in either direction” depending on how the economy develops. That’s one of the clearest signals yet that the committee is open to their next move being a cut, and several members also voiced concerns about low longer-term inflation expectations. So something for everyone in these minutes, and no lasting market impact.
For the ECB, the big takeaways were 1) to signal that deposit tiering is under consideration, 2) to open the possibility of a rate cut, 3) a decision framework for the TLTRO3s, and 4) the assertion that the inflation target is symmetrical and not a ceiling. The full review from our economists is available here .
On the first, Draghi confirmed that the ECB is discussing – and more importantly considering – whether the side-effects of negative rates need mitigating. There was no talk of a policy response yet which is in line with what our economists expected, and Draghi sounded generally non-committal during the press conference, however it’s clear now that it’s becoming an active policy discussion. Second, some form of tiering or mitigation technique would in theory make more-negative rates less painful to the financial sector, and therefore may make them more attractive as a policy option. Draghi emphasized that the ECB will use its entire toolkit as appropriate.
Third, TLTRO 3 pricing details are to “be communicated at one of the other forthcoming meetings.” The decision will be driven by the bank-based policy transmission mechanism as well as by the economic outlook. Draghi reiterated the party line on growth, which is risks to the Euro Area outlook are still “tilted to the downside”. The risk of recession for the Euro Area remains low however while inflation is expected to decline over the coming months. Fourth, Draghi reiterated that the inflation target is symmetrical and that the ECB would tolerate overshoots. This isn’t new policy, but it does emphasize how the ECB is determined to keep policy accommodative to ensure they don’t repeat the over-tightening mistakes of 2011.
European Banks were down as much as -1.75% from their intraday highs at one stage and finished the day down -0.71%. So that would suggest the sector is more concerned by the potential for further rate cuts, despite tiering in theory being positive for banks. Interestingly Draghi reiterated on numerous occasions that the market reaction to his ECB watchers speech showed that the market understood the ECB’s reaction function which is significant as this was when the market moved to price in more cuts.
As for other markets during the ECB, the euro weakened as Draghi spoke and was off as much as -0.51% from the intraday highs at one stage. However by the end of the European session it had completely pared losses and in Asia is trading at $1.1276 which is roughly similar to the pre-ECB levels. Meanwhile 10y Bunds finished-1.6bps lower at -0.026% which mirrored moves across most other European bond markets. Inflation breakevens also fell slightly, with the 5y5y inflation swap forward rate down to 1.34%, within 10bps of its all-time low from mid-2016. This suggests that the market doesn’t think rate cuts are the answer to the current low-inflation environment. Credit was little changed, while the STOXX 600, despite feeling the financials move, did manage to just about stay onside, closing up +0.26%, as real estate and utilities sectors rose.
Ahead of the FOMC minutes 10y Treasuries moved in sync with Bunds (a soft CPI reading also having a say however – more below) with yields down as low as 2.467% at one stage before the FOMC minutes. After the release of the minutes, yields rose slightly to end -3.4bps lower at 2.470%. The market also digested a $24bn 10-year auction with no problem. The S&P 500 was unfazed by the minutes, building on its rally to end the day +0.35% higher. The DOW closed flat while the NASDAQ rallied +0.69% to a new 6-month high. WTI oil prices rose +1.43% to $71.62 per barrel despite data showing another weekly build in US inventories.
In Asia this morning markets are heading lower with China’s bourses leading the decline – the Shanghai Comp (-1.36%), CSI (-1.98%) and Shenzhen Comp (-1.73%) are all down. There is some chatter (Bloomberg) that after a huge performance YTD the authorities are looking to curb margin leverage in equities and cool gains. We’ve also had the latest inflation data out of China which showed that both March CPI and PPI came in line with consensus at 2.3% yoy and +0.4% yoy respectively. Elsewhere the Hang Seng (-0.92%), Kospi (-0.10%) and Nikkei (-0.04%) are also down. Futures on the S&P 500 are little changed (-0.03%). The Aussie Dollar is down -0.17% after closing +0.66% yesterday. This followed Sky news reporting that PM Morrison has called a federal election for May 18th. The latest Newspoll poll showed that Labour leads by 4pts over the current ruling Liberal-National coalition.
Of the four blockbusters yesterday the US CPI report was probably the least significant certainly as far as markets were concerned. The +0.1% mom core reading was below estimates for +0.2% but it was more a matter of rounding given that the unrounded reading was +0.1475% mom. That said the annual rate did pull back to +2.0% yoy having been above it for 12 months. It’s probably worth taking the reading with a slight pinch of salt though given that apparel prices fell by the most since 1949 following a methodology change, contributing -8bps to the monthly rate and explaining the entire miss. On the plus side rents were a big upside surprise, rising +0.42% mom for the strongest move since 2007. The trimmed mean CPI metric, which excludes some outliers, showed a 2.28% yoy print. The 23bps gap between the trimmed mean and the actual core CPI is the widest in over seven years, suggesting some risks of convergence moving forward.
Given that it was one big outlier which determined the CPI move it’s unlikely to move the dial too much for the Fed. Speaking of which, Fed nominee Moore spoke yesterday and confirmed that he will be the “growth hawk” should he join the Fed. He added to this that he thought the US economy could grow at 3% or 4% but that “5% might be a stretch”. That should make for an interesting dynamic should he join.
As for the other data, the March monthly budget statement in the US which was out last night revealed a slight improvement in the budget deficit to ‘only’ -$146.9bn in March, better than the -$181.0bn expected.This fiscal year is still on track for the widest deficit since 2012 though. In Europe February industrial production prints for France (+0.4% mom vs. -0.5% expected), Italy (+0.8% mom vs. -0.8% expected) and the UK (+0.6% mom vs. +0.1% expected) all surprised to the upside, while the February GDP print in the latter came in at +0.2% mom (vs. 0.0% expected). The manufacturing sector drove that strong reading for the UK and combined with the labour market data, certainly aides the case for the BoE raising rates. How much will depend on to what extent stockpiling is driving the data at the moment, which as we’ve seen has also shown up in the PMIs.
To the day ahead now, where this morning we’ve got final March CPI revisions for Germany and France (no change from the flash estimates expected). This afternoon there’s more inflation data in the US to digest with the March PPI report where the consensus is for a +0.2% mom core reading. We’ll also get the latest claims reading at the same time. Away from that we’ve got scheduled speeches from the Fed’s Clarida, Bullard, Kashkari and Bowman. South Korean President Moon Jae-in is due to visit the White House and meet with President Trump, while it’s worth seeing if we get much in the way of headlines from the IMF/World Bank meetings too.