Global shares traded in the red, and the dollar slumped before a hike in US interest rates, while awaiting key guidance on how many more to expect for this year. S&P futures were little changed, while markets in Europe and Asia dropped; Japan’s Nikkei was closed for holiday. MSCI’s all-country equity index flatlined and is now 6 percent off record highs hit at the end of January, pressured by fears of a global trade war ignited by President Trump and the possibility that the Fed could end up raising interest rates more than three times this year. Markets are also on edge because of the selloff in U.S. tech shares, which has wiped almost $50 billion off the value of Facebook this week amid uproar over the alleged misuse of users’ data. The Facebook losses have filtered through other tech shares in the United States and overseas, with shares in Twitter falling more than 10%. The losses are likely to have hit investors hard, with Bank of America Merrill Lynch’s monthly survey showing global funds heavily positioned in tech shares just before the rout began. “There are tensions between potential bad news and good news in the market. The bad news is the problem facing the tech sector, which has been the leading light of U.S. and Asian equity markets for over a year,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. “The good news is we must recall why the Fed is tightening policy. It’s because of the underlying strength of the U.S. and global economy.” Europe slumped in early trading after Asian shares dropped into the close and copper sagged again. Adding to Europe's uncertainty was the report in La Repubblica that Italian ex-premier Silvio Berlusconi is open to possible center-right coalition pact with anti-establishment Five Star Movement which is spooking markets. The Stoxx 600 fell 0.2%, led lower by travel and leisure sector with airlines hurt by a surge in oil prices: the SXTP was down 0.7%, with Air France-KLM down 2%, easyJet down 1.7%, Lufthansa down 1.2%. Earlier, Asia stocks followed the US example where the major indices rebounded from the recent tech sell-off. ASX 200 (+0.2%) and KOSPI (+0.1%) were marginally positive as Australia’s energy sector tracked the outperformance seen in its US counterparts, although gains were contained approaching today’s FOMC and with Japan closed for Vernal Equinox national holiday. Elsewhere, Hang Seng (+1.1%) and Shanghai Comp. (+0.4%) led the region as focus turned to earnings with the top performers in Hong Kong spurred by recent financial results. However, as China closed local market slumped, with the China’s ChiNext Index of small caps and tech stocks sliding 1.9% Wednesday afternoon, wiping out earlier 0.7% gain. PC makers, pharmaceutcial stocks led the losses. Insurers surged in morning session but tumbled before close following a bearish S&P report on a crackdown. As previewed overnight, today's highlight will be the FOMC decision, where there market implied odds of a rate hike are above 90%. Analysts are split over whether the Fed will raise policy tightening expectations until more price pressures are clearly evident, especially given outside risks to the economy such as a possible global trade war. “A prudent institution would probably give more weight to the facts, at least for the moment,” Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro, wrote in a note predicting the Fed would stick with three projected rate increases for this year. With futures markets anticipating another increase in June, Powell's Fed could leave its rate outlook unchanged until then to see how the economy absorbs the $1.8 trillion in stimulus expected from the Trump administration tax cuts and planned spending. “We might have significant changes in communication compared with what we’ve seen under (previous chair Janet) Yellen,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “The economic situation post tax cuts also justifies a significant shift upwards in the dot plot,” he added, referring to fears the Fed’s de facto policy forecast chart could signal four rate rises rather than three, due to the economic boost delivered by Trump’s tax reforms. The dollar extends its slide and now stands lower on a weekly basis as traders seem less confident that the Fed will signal four rate hikes this year and may not sound as hawkish as previously thought. As Bloomberg notes, leveraged names were seen trimming their long-dollar as Powell could adopt a more balanced stance. The greenback fell against all of its peers apart from the kiwi after Tuesday’s rally when U.S. benchmark yields gained for a fourth session. The Bloomberg Dollar Spot Index slipped 0.3%, the most in two weeks; the Fed is expected to raise rates by 25bps on Wednesday, according to median estimate in a Bloomberg survey. Traders will also focus on whether policy makers change their wording about the near-term economic risks are “roughly” balanced, as well as on any commentary about protectionism and the long-term federal funds rate. Strategists see it as a close call whether U.S. policy makers will add a fourth dot to the rate-hike path at the Federal Open Market Committee review. Volumes in the currency market were low in anticipation of Powell’s first post-decision press conference and as Japan was closed for a holiday. The pound was boosted by wage data, while the euro approached the $1.23 handle once more. A summary of notable overnight FX moves from BBG: EUR/USD rises toward the 55-DMA at 1.2293 amid broad dollar weakness, with volumes staying low after London open while Tokyo holiday kept Asia volumes contained GBP/USD climbs as much as 0.6% to 1.4075 as data showed U.K. wages rising at their fastest pace since the end of 2016; EUR/GBP reverses its advance and drops 0.2% to 0.8725, the lowest since Feb. 1 USD/JPY edges lower after testing the 21-DMA at 106.50 and with Japanese markets closed; large option strikes due to expire in New York and before the Fed decision include $3.22b at 106 and $1.25b at 107 The Mexican peso and the Canadian dollar advance against the greenback following the Globe and Mail report that Trump administration dropped a demand that all vehicles made in Canada and Mexico for export to the U.S. contain at least 50% U.S. content In other global news, Treasury Secretary Mnuchin said he has had very direct talks with China and that dialogue will continue, while he added that the general G20 view is to see China open its markets. China Vice Commerce Minister said the nation will actively take steps to safeguard interests of its domestic industries following US trade investigations. South Korean President Moon suggested that a 3-way summit between US, South Korea and North Korea is possible, while there were separate reports that South Korea offered to hold a high-level meeting with North Korea on March 29th. In the UK, Trade Secretary Fox said that a FTA is not the UK's only approach to relationships and that the government will also look at incremental steps to improve trade. Separately, three of the nine members of the The Times’s BoE shadow monetary policy committee called for an immediate quarter-point increase. Two said they would raise rates in May and two others added that the Bank should lay the groundwork for rises this year. Market Snapshot S&P 500 futures down 0.05% to 2,722.25 STOXX Europe 600 down 0.2% to 375.47 MSCI Asia Pacific down 0.07% to 176.60 MSCI Asia Pacific Ex Japan down 0.2% to 583.63 Nikkei down 0.5% to 21,380.97 Topix down 0.2% to 1,716.29 Hang Seng Index down 0.4% to 31,414.52 Shanghai Composite down 0.3% to 3,280.95 Sensex up 0.5% to 33,162.61 Australia S&P/ASX 200 up 0.2% to 5,950.27 Kospi down 0.02% to 2,484.97 German 10Y yield rose 0.7 bps to 0.592% Euro up 0.4% to $1.2286 Brent Futures up 0.2% to $67.58/bbl Italian 10Y yield fell 6.7 bps to 1.641% Spanish 10Y yield rose 1.0 bps to 1.318% Gold spot up 0.5% to $1,317.29 U.S. Dollar Index down 0.3% to 90.14 Top Overnight News from BBG Trump administration has dropped demands that all vehicles made in Canada and Mexico for export to the U.S. contain at least 50% U.S. content, Globe & Mail reports, citing people familiar Federal offices in Washington area closed all day due to weather U.K. Jan. Avg. Weekly Earnings 2.8% vs 2.6% est (prev. revised to 2.7% from 2.5%); Unemployment Rate 4.3% vs 4.4% est. Italian ex- premier Silvio Berlusconi open to possible center-right coalition pact with anti-establishment Five Star Movement, according to newspaper La Repubblica, raising the chance of populist parties taking power API inventories according to people familiar w/data: Crude -2.7m, Cushing +1.6m, Gasoline -1.1m, Distillates -1.9m A newspaper affiliated with China’s ruling Communist Party urged “strong restrictive measures” against alleged U.S. soybean dumping, underscoring concern that trade disputes pressed by President Donald Trump could extend into other sectors EU President Donald Tusk sought to play down the impact of potential U.S. tariffs on steel and aluminum imports as Europe braces for more conflict with President Donald Trump Asian stocks took impetus from Wall St. where the major indices rebounded from the recent tech sell-off. ASX 200 (+0.2%) and KOSPI (+0.1%) were marginally positive as Australia’s energy sector tracked the outperformance seen in its US counterparts, although gains were contained approaching today’s FOMC and with Japan closed for Vernal Equinox national holiday. Elsewhere, Hang Seng (+1.1%) and Shanghai Comp. (+0.4%) led the region as focus turned to earnings with the top performers in Hong Kong spurred by recent financial results. Top Asian News Chinese Insurance Stocks Slide After S&P Report on Crackdown Hong Kong Exchange’s Big Bet on China Is Suddenly Under Threat Tencent Profit Beats Estimates as WeChat Games Drive Growth Volvo Owner’s Chinese Unit Sees Overseas Deals Fueling Growth European equities opened with a lack of firm direction, before edging lower (Eurostoxx 50 -0.3%) ahead of the FOMC meeting. The utilities sector is boosted following upgrades of Italy’s A2A (+2.3%) and Germany’s E.ON (+1.9%) by Kepler Chevreux. The FTSE 100 is weighed on by a firmer sterling. Simultaneously, UK retailers are taking a hit amid signs of consumer spending downturn; Moss Bros (-19.8%) crashing after the issue of a profit warning. Carpetright (-0.3%) has taken a loan from a significant shareholder to cover short-term capital requirements, Kingfisher (-6.8%) amongst the laggards following the Co. reporting a fall in earnings and expressing concerns on the outlook for the retail sector, warning that the UK market is tough. On the flip side, LSE (+0.9%) is at the top of the FTSE 100 amid talks that the 21-month Brexit transition deal agreed this week could prompt Intercontinental Exchange (ICE) of the US to make another bid approach. Top European News BofA’s Pullback on Margin Loans Followed Sweeping Internal Probe Deutsche Telekom to Buy Hellenic Telecom Stake for EU284m BMW’s Muted Forecast in Step With Daimler Amid E-Car Stretch Telenor to Sell Central, East Europe Units for $3.4 Billion In FX markets, CAD and MXN were the biggest overnight movers with the currencies lifted on news that the US dropped the contentious auto-content proposal in NAFTA discussions last week. Elsewhere, the rest of currency markets were uneventful ahead of the upcoming Fed decision and dot-plot projections, in which EUR/USD faintly nursed losses and hovered near 1.2250 where there are large option expiries for today’s New York cut. Furthermore, GBP/USD just about held on the 1.4000 handle after the prior day’s losses which were triggered by the CPI miss, while USD/JPY was relatively unchanged amid the absence of market participants in Japan. In commodities, crude prices held on to the gains from yesterday’s rally in which prices rose above USD 63/bbl and also briefly tested USD 64/bbl to the upside. The advances were attributed to ongoing Saudi-Iran tensions and further Venezuelan output declines, while the latest API inventory report was also supportive with headline crude stockpiles at a surprise drawdown. Elsewhere, gold found mild support as the USD pared back some of the strength heading into the FOMC decision later, while copper traded sideways and failed to benefit from the improvement in risk appetite. OPEC are said to be discussing a change of measures for success for the OPEC cut deal and that the Vienna meeting looked at a change to its inventory target. Looking at the day ahead, the big highlight is of course the FOMC meeting outcome at 6pm GMT. Shortly after that Fed Chair Powell will also deliver his first post-meeting press conference as Chair. Away from that it’s another fairly quiet day for data with January/February employment data and February public sector net borrowing data due in the UK, while in the US the Q4 current account balance and February existing home sales data will be released. US Event Calendar 7am: MBA Mortgage Applications, prior 0.9% 8:30am: Current Account Balance, est. $125.0b deficit, prior $100.6b deficit 10am: Existing Home Sales, est. 5.4m, prior 5.38m; MoM, est. 0.37%, prior -3.2% 2pm: FOMC Rate Decision DB's Craig Nicol concludes the overnight wrap With markets really struggling to build up any sort of momentum at the moment, today’s Fed meeting should be seen as a welcome distraction. The meeting takes on a little bit more focus as it’s of course Fed Chair Powell’s debut in the hot seat. So there will be plenty of eyes on what he has to say and what changes in style or messaging he might signal. Indeed, with a 25bp hike as good as certain today our US economists believe that Powell’s performance, along with the answers to whether or not the Committee still sees risks as “roughly balanced” and if the median dots move up, are the three key questions that investors should be looking out for. As a reminder, our colleagues expect the Committee to sound a bit more upbeat (though not yet worried) about inflation developments, and while consumer spending indicators have softened a bit recently, their message about economic activity can remain little changed. They also expect FOMC participants to likely raise their growth forecasts and reduce unemployment forecasts. With regards to the hotly anticipated dots, the team believe that it makes sense to raise the path of rates sooner rather than later. On this basis, they expect the median forecast to move up to four rate hikes this year, from three, although caveat that it could be a close call. Perhaps of more significance for the market though, they expect the entire path of rate hikes to shift up modestly including the terminal rate forecast to 3.3% in 2020 from 3.1% in December. With regards to Powell, the team expect his message to centre on the signs of an overheating economy, and that the Fed’s current tightening action is clearly in order, which would signal that another rate hike is on the way in June. Markets are going into today’s Fed meeting coming off the back of a difficult week and a half. Yesterday the S&P 500 (+0.15%), Nasdaq (+0.27%) and Dow (+0.47%) held their heads above water although were routinely tested with the tech sector again seemingly at the centre of things. Monday’s main culprit – Facebook – fell another -2.56% yesterday (although bounced well off the intraday lows) and is down -9.15% in the last two days. That story seemed to kick up another gear yesterday with the news that the social network company is being probed by the US Federal Trade Commission over the possible violation of a 2011 consent decree, while company officials have also supposedly agreed to brief members of the House Judiciary Committee, possibly as soon as today. The VIX actually edged down less than 1pt yesterday to 18.20. European bourses were broadly higher with the Stoxx 600 (+0.51%), DAX (+0.74%) and FTSE (+0.26%) all up, partly aided by the lower Euro (-0.75%) and energy stocks as WTI Oil rose to the highest in nearly 3 weeks (+2.27%). Bond markets have been a bit more contained by comparison in recent days which is probably as much to do with anticipation over today’s Fed meeting. 10y Treasuries finished 4.1bps higher yesterday at 2.897% and continue to be stuck in this 2.80-2.90% range where they’ve been for most of the last month. 10y Bunds were also +1.5bps yesterday although there was a notable outperformance in the periphery despite no obvious drivers with Italy (-6.7bp), Spain (-3.1bp) and Portugal (-1.6bp) all down. Overnight, the WSJ has reported that the Trump administration will release a punitive package on Thursday aimed at China that includes tariffs on imports worth at least $30bn as well as proposing investment restrictions on Chinese firms in the US. Notably the measures will have a grace period and the final details are still evolving. Elsewhere, Reuters has reported that the European Commission ill propose new tax rules today that will make large digital companies with material revenue in Europe pay a 3% tax on their turnover, largely consistent with reports over the weekend. This morning in Asia, markets are broadly firmer thanks to the rise for the Oil complex with the Hang Seng (+1.14%), ASX 200 (+0.26%) and Kospi (+0.16%) all up. It’s worth noting markets in Japan are closed for a public holiday. Meanwhile, with China’s NPC now wrapped up our China Chief Economist Zhiwei Zhang concluded with his thoughts in a note yesterday. Zhiwei highlights that the market will be surprised by policy changes from China in 2018, in part as the government will focus more on sustainability than stability. Overall, he believes that growth will likely slow, infrastructure and property cycles may cool off and adversely affect commodity demand, while the government favours the new economy such as the services sector and consumption. Elsewhere, macro policies may lead to short term pain but conducive to growth in the long term. With regards to other big meeting in recent days, over at the G20, talks appear to have ended with no clear developments with the joint statement indicating that “we recognize the need for further dialogue and actions”. More significantly, the statement did little to dispel concerns around a potential trade war and rising protectionism. Closer to home, Brexit headlines continue to trickle through despite Monday’s positive announcement. The newsflow was a little odd with Irish PM Leo Varadkar saying that he welcomed the headway made in Brexit negotiations, but Deputy PM Simon Coveney suggesting that there is an option to extend the Brexit transition period, although that wasn’t disclosed in Monday’s withdrawal text. It’s worth adding that yesterday DB’s Oliver Harvey shifted his view to tactically bullish Sterling in light of a Brexit muddle through being confirmed, Bank of England risks being tilted towards more hawkish repricing, seasonality and long positions being pared back. Staying with the UK, yesterday’s CPI data for February was for the most part slightly softer than expected. Headline CPI rose +0.4% mom compared to expectations for +0.5%, with base effects meaning that the annual rate fell a tenth more than expected to +2.7% yoy from +3.0%. The more significant core print also retreated three-tenths to +2.4% yoy, putting it back to the lowest level since last July. RPI also eased from its previous print of +4.0% yoy to +3.6%. Whether or not that staves off some of the hawks from a rate hike remains to be seen but today’s wages data will perhaps be of more interest with expectations being for a slight increase in average weekly earnings to +2.6%. In other news, we wanted to point readers’ attention to a report by our European economists yesterday looking ahead to the EU Summit this Thursday and Friday. They believe that there are three main market sensitive topics on the agenda: Brexit, EMU institutional reforms and trade. With Brexit now largely ticked off, focus will be on the latter two issues. Our economists note that Macron’s election and the emergence of a Grand Coalition in Germany with an SPD finance minister has raised expectations for what might be achieved in terms of EMU reform. The team expect a statement acknowledging progress but caveat that a lot of work is still likely needed to be done prior to hitting the June deadline. The team also note that trade is the unexpected element on the agenda this week with the EU now facing the dilemma of knowing how to respond to the US threat of tariffs. They expect a middle path to be taken. You can find more in the report by clicking here. Quickly wrapping up the remaining economic data yesterday. Germany’s February PPI was lower than expected at -0.1% mom (vs. +0.1% expected) and +1.8% yoy (vs. +2.0% expected). The Euro area’s March consumer confidence index (+0.1 vs. 0.0 expected) and Germany’s March ZEW survey on current situations (90.7 vs. 90 expected) were both above market. However, the ZEW survey expectations index (5.1 vs. 13.0 expected) was well below expectations and fell to the lowest reading since the latter part of 2016, which could make for an interesting read-through in tomorrow’s PMIs. Looking at the day ahead, the big highlight is of course the FOMC meeting outcome at 6pm GMT. Shortly after that Fed Chair Powell will also deliver his first post-meeting press conference as Chair. Away from that it’s another fairly quiet day for data with January/February employment data and February public sector net borrowing data due in the UK, while in the US the Q4 current account balance and February existing home sales data will be released.
Is the dead cat bounce over? European shares rolled over this morning after a late downswing in Asia as markets struggled to find stability despite Monday's frenzied rally, with futures this morning a bit of a mess. "I think what we are seeing is a little bit of a consolidation,” said DZ Bank strategist Christian Lenk. “Given the pace of the move so far, we had to take a break somewhere and we have reached that region now." While there has been no specific driver, USD weakness for the third day in a row, and a consequent selloff in USD/JPY - which tumbled shortly before midnight ET - was the main focus in European session. The resultant surge in the yen, which climbed to the highest since November 2016 pushing the USDJPY as low as 107.40, slammed the Nikkei after the midday break in Asia, with Trump comments on reciprocal tax yesterday also potentially having an influence on USD. Whatever the reason, Japanese stocks pared morning gains with Topix erasing 1.1% advance to trade 0.9% lower on the day. And with the USDJPY nearing the 2017 low of 107.32, Nikkei futures sold off further after the cash close. At the same time, the EUR/USD lifted to 1.2350 mainly due to move in USD, while the British pound was briefly jolted to a session high of $1.3924 after headline annual UK inflation came in at 3.0%, a tenth of a point above forecasts and holding close to its highest level in nearly six years. In South Africa, the ZAR dipped briefly after President Zuma was said to refuse ANC’s resignation call. Pressured by the weaker dollar and sliding European stocks, S&P 500 futures pointed to a drop for U.S. stocks at the market open after two days of gains. The 10-year Treasury yield fell back to 2.83% after touching 2.902% on Monday. The general risk-off lifted core fixed income, U.S 2s10s flatten away from 200DMA after testing level for third day. German bonds were also back in demand as recent multi-year highs on yields on both sides of the Atlantic proved attractive for some investors. Germany’s 10-year yield fell by almost 2 basis points to 0.73 as it retreated further from the 2-1/2 year high of 0.81 percent hit last week. Hedge funds and other large speculators have boosted bets on Treasury futures to a record, indicating they expect the 2018 bond-market rout will resume in the days ahead. An investor at Goldman Sachs Asset Management warned Treasury 10-year yields could rise to as high as 3.5% in the next six months as the market prices in a steeper pace of Federal Reserve tightening. All eyes will be on tomorrow's CPI report. "The (U.S.) consumer prices numbers (on Wednesday) bear close watching as if it shows a strong rise, that could rattle U.S. long-term yields," and currencies and stocks said Koji Fukaya, president of FPG Securities in Tokyo. Meanwhile, in global stocks, a jump in global equities yesterday wasn’t enough to put traders’ minds at ease that the volatility that wiped $2 trillion from U.S. stocks last week has come to an end. Consumer-price data due Wednesday could give some clues on direction, given that pressure on equities has been emanating from the outlook for inflation. European equities opened on the back foot (Eurostoxx 50 -0.3%) compared to the positive trading session in Asia (ex-Japan), with virtually all bourses in the red. Materials stand out as an outperforming sector amid the US infrastructure plans released yesterday whilst metals are extending gains. Telecoms underperform with BT (-1.2%) at the bottom of the FTSE 100 awaiting news from the Premier League TV rights. While European equities declined and the Swiss franc gained alongside Treasuries and core euro-area bonds, there has been no clear shift toward haven demand as the kiwi rallied and EMFX rose a third day. European equity markets grind lower, while peripheral equity markets and export stocks underperformed. Commodities found support from the weaker dollar, with metals higher, and bullion set for back-to-back gains. Copper prices on the London Metal Exchange extended an overnight rally to trade 1.4% higher at $6,927.00 per tonne. A report from the EIA yesterday noted that shale production for crude is to rise by 100k bbls in March, while another report this morning from the IEA expects US supply to grow more than demand in 2018, with US seen topping Russian production at year-end; as such both WTI and Brent have been pressured throughout the morning with the former briefly slipping below $59bbl. In metals markets, gold prices are near one-week highs amid the softer USD which has dictated a bulk of the price action for precious metals. Elsewhere, China have voiced concerns over US protectionism over steel, whilst aluminium prices have been pressured by building stockpiles. IEA have upgraded their forecast for global oil demand growth to 1.4mln bpd in 2018 from 1.3mln, however they say Non-OPEC supply, led by US, which is likely to grow more than demand in 2018. On today's calendar, U.S. sells 4-week bills; small business optimism index, which rose from 104.90 to 106.90, but below the 108.50 consensus. Starting Feb 15, Lunar new year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21. India is out Tuesday for a public holiday. Bulletin headline summary from Ransquawk European equities lower across the board after a mixed session overnight which saw the Nikkei 225 (-0.7%) hampered by the firmer JPY In FX markets, USD softer against its peers. GBP firmer as UK inflation exceeds expectations (3.0% Y/Y vs. Exp. 2.9%) Looking ahead, highlights include APIs, Japanese GDP and Fed’s Mester Market Snapshot S&P 500 futures down 0.6% to 2,638.25 MXAP up 0.6% to 172.27 MXAPJ up 0.9% to 563.36 Nikkei down 0.7% to 21,244.68 Topix down 0.9% to 1,716.78 Hang Seng Index up 1.3% to 29,839.53 Shanghai Composite up 1% to 3,184.96 Sensex up 0.9% to 34,300.47 Australia S&P/ASX 200 up 0.6% to 5,855.90 Kospi up 0.4% to 2,395.19 Brent Futures down 0.4% to $62.35/bbl Gold spot up 0.5% to $1,328.85 U.S. Dollar Index down 0.4% to 89.84 Top Overnight News The People’s Bank of China appointed JPMorgan Chase Bank N.A. as a yuan clearing bank in the U.S., the first non-Chinese lender for such a role globally and a further step to promote international use of the currency A whistle-blower told U.S. regulators that a scheme to manipulate the VIX, the volatility gauge thrust into the spotlight last week during a wild trading session, costs investors hundreds of millions of dollars a month OPEC and its allies have almost achieved their goal of clearing an oil glut, but their efforts could be derailed by rising supplies from the U.S. and other rivals, the International Energy Agency said South Africans awoke to find their nation in limbo after President Jacob Zuma’s refusal to obey his ruling African National Congress’s request to resign voluntarily prompted its top leadership to order his removal from office Cleveland Fed President Loretta Mester (voter) speaks; she holds a hawkish approach, looks for three hikes this year In Asia, stocks traded mostly higher as the region cheered the continued rebound in the US, where all majors finished with firm gains and the S&P 500 posted its best 2-day performance in over 2 years. ASX 200 (+0.6%) and Nikkei 225 (-0.7%) both opened higher in which mining-related sectors led in Australia, while Japanese stocks were initially outperformed buoyed as participants played catch up on return from holiday, although a firmer currency later saw gains wiped out. Elsewhere, Shanghai Comp. (+1%) and Hang Seng (+1.3%) were jubilant heading closer to the Lunar New Year holidays and after the PBoC announced to lend CNY 393bln through the 1yr Medium-term Lending Facility. Furthermore, there was a decline in money market rates in which the 1-week CNH HIBOR fell by the most so far in 2018, and the latest Chinese lending data also showed both New Yuan Loans and Aggregate Financing surged from prior. Finally, 10yr JGBs were flat amid similar range-bound trade overnight in T-notes and although the BoJ were present in the market under its bond-buying program, this was kept at a reserved amount. Japanese PM Abe said he is undecided on the next BoJ Governor, while Abe also stated that it is up to the BoJ to decide specific monetary policy measures and that he expects the BoJ to continue taking bold measures to achieve price stability. Top Asian News China Is Said to Plan Blocks on Take-Two’s Grand Theft Auto European equities this morning opened on the back foot (Eurostoxx 50 -0.3%) compared to the positive trading session in Asia (ex-Japan) and the US. Materials stand out as an outperforming sector amid the US infrastructure plans released yesterday whilst metals are extending gains: Gold (+0.4%), Silver (+0.1%), Copper (+0.8%). Telecoms underperform with BT (-1.2%) at the bottom of the FTSE 100 awaiting news from the Premier League TV rights. Top European News Greece Launches Tender for 5% Hellenic Telecom Stake Sale BHP Expects $1.8b Income Tax Expense Due to U.S. Reforms U.K. Inflation Holds Steady After BOE Warns of More Rate Hikes In currencies, Yen strength is the main overnight and early European theme, as Usd/Jpy breached last Friday’s 108.05 low to the downside before overcoming barrier and psychological support at 108.00 on its way to fresh 5 month lows around 107.55. Bids reportedly in the 107.70 area were also filled in pretty short order as risk aversion ratcheted higher, but it remains unclear whether heightened demand for the Jpy (and Chf to a lesser degree) was prompted by the Nikkei’s failure to maintain catch-up gains after Japan’s long holiday weekend or vice-versa. 107.50-45 next in sight for Usd/Jpy, with buying interest not really seen until the low 107.30 area (including last year’s 107.32 low), while cross demand is also rife as Gbp/Jpy falls below the 150.00 handle. GBP firmer after higher than expected inflation figures (3.0 vs. Exp. 2.9% Y/Y), however the rise had been short-lived, given that the headline figure had been in line with the BoE’s forecast. Nzd another noted beneficiary of US Dollar weakness as the Index loses grip of 90.000 again, with the Kiwi reclaiming 0.7300 status and in part also gaining some impetus from Aud underperformance amidst mixed sentiment readings overnight and RBA rhetoric – Aud/Usd above 0.7850, but Aud/Nzd back under 1.0800. Other Usd/G10 major pairings more contained, albeit still showing a generally softer Greenback, with Eur/Usd regaining 1.2300, Cable around 1.3850 eyeing UK inflation data and Usd/Cad sub-1.2600. Elsewhere, Usd/Zar still in focus and testing recent lows (currently circa 11.9000) ahead of an ANC briefing at 12GMT, with President Zuma still resisting efforts to remove him from office In commodities, the theme continues for the oil markets, more supply is set to come from US shale producers. A report from the EIA yesterday noted that shale production for crude is to rise by 100k bbls in March, while another report this morning from the IEA expects US supply to grow more than demand in 2018, with US seen topping Russian production at year-end; as such both WTI and Brent have been pressured throughout the morning with the former briefly slipping below USD 59.00bbl. In metals markets, gold prices are near one-week highs amid the softer USD which has dictated a bulk of the price action for precious metals. Elsewhere, China have voiced concerns over US protectionism over steel, whilst aluminium prices have been pressured by building stockpiles. IEA have upgraded their forecast for global oil demand growth to 1.4mln bpd in 2018 from 1.3mln, however they say Non-OPEC supply, led by US, which is likely to grow more than demand in 2018. Iraq oil minister states that there is no current discussion over exiting supply cut agreement Russian Energy Minister Novak stated that OPEC and Non-OPEC allies need to act very cautiously and avoid knee-jerk reactions in respect of new decisions Looking ahead, the January CPI/PPI/RPI report in the UK is the main focus. In the US, the January NFIB small business optimism print will be released. Away from data, the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings. US Event Calendar 6am: NFIB Small Business Optimism, est. 105.3, prior 104.9 8am: Fed’s Mester to Discuss Monetary Policy and Economic Outlook DB's Jim Reid concludes the overnight wrap Welcome to US CPI eve. All has seemed a bit quiet over the last 24 hours which probably partly reflects half-term (the rush hour trains were lovely and quiet yesterday), partly that the peak position squaring from last week’s vol spike has seemingly passed for now and also that markets are building up to tomorrow’s big US number. Maybe traders and investors were also buying Valentine’s Day cards and presents as well. I’ll be making my annual trip to Hotel Chocolat later today to buy overpriced chocolates in a nice (but far too big for the amount of produce inside them) package. Given my wife is full time feeding for her plus two ravenous boys, her chocolate intake at the moment is something to admire. Ahead of tomorrow’s number we have an interesting CPI dress rehearsal today in the UK. This has been made more interesting by the hawkish BoE meeting last week and also two hawkish BoE speakers yesterday. Vlieghe suggested that 3 BoE hikes still leaves some excess demand and wouldn’t get inflation fully back to target. McCafferty said that rates will have to go up slightly earlier and fractionally more than the bank previously expected. For today, markets are expecting a CPI print of -0.6% mom and 2.9% yoy (2.6% yoy for core) and a PPI reading of 3.0% yoy. Before that, global equities continue to rebound. US bourses were all higher for the second consecutive day (S&P +1.39%; Dow +1.70%; Nasdaq +1.56%), with all sectors in the S&P up and gains led by the materials, tech and energy stocks. The VIX also traded 11.9% lower to 25.61. Since the beat on US wage growth, the S&P is now down 5.9% overall, but is up 4.9% from the intra-day lows. Similarly the VIX has jumped 90% since 1 February, but is 49% lower than the intra-day highs of 50.30 over the past seven trading days. Key European markets also advanced yesterday, with the Stoxx 600 (+1.17%), DAX (+1.45%) and FTSE (+1.19%) all higher, while the VSTOXX fell 18.9% to 28.16. This morning in Asia, markets are rallying on the positive lead from the US. The Kospi (+0.68%), Hang Seng (+1.55%) and China’s CSI 300 (+1.23%) are all up as we type but the Nikkei has given up gains of >1% to trade lower for the day. Datawise, Japan’s January PPI was broadly in line at 0.3% mom and 2.7% yoy while China’s monthly net new loans were higher than expected at RMB$2,900bn (vs. $2,050bn expected). In the US, President Trump has proposed a $4.4trn federal budget for 2019 that seeks to reduce domestic programs such as Medicare in favour of higher spending on the military and immigration enforcements. The plans will see the deficit almost double in FY19 to $984bln and rise $7.1trn over the next decade. Mr Trump said he would push for a “reciprocal tax” on imports against higher tariff countries without providing details and reiterated his $1.5trn infrastructure plan of which $200bln federal funds will act as seed funds to incentivise further spending by state and local government as well as the private sector. Notably, both Reuters and NY Times noted Presidential budgets are rarely enacted by the Congress. The budget director Mulvaney called the plans as a “messaging document”, so we’ll wait and see if these messages will translate into any reality. Yesterday we published a note using our fair value model between credit and volatility to assess where credit spreads should trade if and when the VIX (for US credit) or VStoxx (for European credit) stabilise at various levels. Spikes in vol are rarely sustained outside of a crisis so the fact that the current difference between actual and modeled spreads (see graphs in the note) are at one of the widest points on record isn't necessarily a cause for major alarm yet. However to cite examples in the note, if equity vol settles at 15, Euro IG and HY should settle 15bps and 68bps wider. For the US, these numbers 24bps and 61bps wider all other things being equal. For vol at 20, these numbers are +27bps, +107bps, +43bps and +145bps respectively. See the full note here for more on this. A reminder that yesterday morning we also put out a quick note comparing this current sell-off across various assets to that seen during the 34 day taper tantrum in May 2013 and the 60 day risk sell-off after the surprise Fed hike in February 1994. All of them having a rates/yield/inflation related catalyst. Back to credit, the latest ECB CSPP holdings data was released yesterday. The CSPP/PSPP ratio was 18.4% (28.1% over last 4 weeks). Before Apr 2017 when we were still at full QE the ratio was 11.5%. In the first taper (Apr-Dec 2017) the ratio edged up to 12.7% and since Jan 2018 it has increased to 24.8%. So far this year, QE purchases have been in line with our long-standing expectation that the CSPP/PSPP ratio would move to around 20% after the January taper. Now recapping other markets performance from yesterday. Government bonds weakened slightly, with core 10y bond yields up 1-3bp. The UST 10y yields rose 0.7bp and Bunds up 1.2bp while Gilts underperformed (+3.1bp), partly weighed down by the hawkish BOE speak. Turning to currencies, the US dollarindex retreated 0.32% yesterday but is still up c1.7% since the beat on wage growth, while the Euro and Sterling gained 0.32% and 0.08% respectively. In commodities, WTI oil rose for the first time in seven days (+0.15%), in part as OPEC has revised up its demand forecasts and expect global demand to outpace the growth in US shale supply. Elsewhere, precious metals strengthened c1% (Gold +0.46%; Silver +1.16%) and other base metals were broadly higher (Copper +0.45%; Aluminium +1.02%; Zinc -0.38%). Away from the markets and onto Germany, the latest Sonntagstrend survey showed 57% of Germans want the SPD members to vote and approve a coalition with Ms Merkel’s bloc. The support level is higher amongst SPD and CDU voters, at 85% and 87% respectively. Elsewhere, our asset allocation strategist Binky Chadha has taken a closer look at the potential causes for the recent pullback in equities. Overall, the team concludes that a long overdue pullback on extended positioning was amplified in US equities by structured products. But despite the size of the pullback it was still just that and likely more to do with the need for liquidity and quick risk reduction. The team also noted 10% corrections in US equities are very rare outside recessions, with only 15 such selloffs since 1950. Further, they are normally associated with a clear unexpected catalyst such as oil price collapse, China devaluation and Russia LTCM. Refer to their note for more details. In the UK, according to documents sighted by Bloomberg, EU officials will hold a discussion this Thursday on the options for a future trade deal with the UK post Brexit. The meeting looks to discuss the mobility of workers and how cars, chemicals and food safety are regulated in the internal market. Before we take a look at today’s calendar, we wrap up with other data releasesfrom yesterday. In the US, the monthly federal budget surplus was $49.2bln(vs. $51bln expected) in January. The NY Fed survey of consumer expectations showed median one year ahead inflation expectations fell to 2.71% in January (vs.2.82% previous). Notably, respondents expect wage growth to be 2.73% in the coming year, the highest since the data series began in 2013. In the UK, Acadata noted London house prices fell 4.3% in 4Q17, the largest fall since 2009. Looking ahead, the January CPI/PPI/RPI report in the UK is the main focus. In the US, the January NFIB small business optimism print will be released. Away from data, the Fed’s Mester is due to speak in the afternoon on monetary policy and the economic outlook. Pepsico will release earnings.
While there have been winners in many corner of the space, ETFs tracking oil and gas futures market led the way higher in February.