Global stocks and S&P futures point to a lower open on Monday and as Mark Cudmore noted earlier this morning, there are plenty of potential catalysts: sudden concerns about global growth rolling over, the slide in Apple suppliers which hit Asian stocks following a report that Apple is developing its own microLED screen, Trump's trade war, this weekend's McCabe firing, the ongoing personnel turnover in the White House, Abe's record low popularity amid Japan’s land scandal, lack of Brexit clarity, Italy’s struggle to form a government, Facebook sliding on data breach concerns, Russia’s spat with the U.K., upcoming concerns about this Wednesday's Fed meeting, ongoing Brexit talks and today's G-20 gathering, and so on. In fact, the proper question is why the market didn't notice any or all of these rising concerns before. Well, they did notice this morning, and world stocks are a sea of red this morning, stuck on their worst run since November on Monday, as caution gripped traders in a week in which the Federal Reserve is likely to raise U.S. interest rates and perhaps signal as many as three more hikes lie in store this year... ... while U.S. equity futures sell led by Nasdaq as e-mini S&P futures break below 50-DMA, with FANG stocks under pressure the pre-market trading led by Facebook (-2.5%) after weekend reports of data breach scandal, helping push the VIX above 17. A 1% drop for Europe’s main bourses amid a flurry of gloomy company news and weaker Wall Street futures meant MSCI’s world stocks index was down for a fifth day running. The biggest risk event this week for global markets is the first U.S. interest rate decision under new Fed Chair Jerome Powell. It comes just weeks after he hinted to investors that he’s open to lifting the policy rate four times this year, rather than the three currently reflected in dot-plot forecasts. Some Wall Street banks such as Goldman Sachs Group Inc. expect the median projection to rise to four on Wednesday, while others say there will be no change following a round of mediocre data and policy makers’ stated intentions to move gradually. “Expected is a confident Fed Chair, both with respect to the economy’s strength and the Fed’s approach to policy,” said analysts at Westpac in a note. “While growth forecasts and the distribution of rate projections are likely to drift up, the median Fed funds forecast should remain unchanged at three in 2018 and three more in 2019,” they added. “Gradual and timely are the operative words for policy.” Analysts at JPMorgan, however, see a risk the Fed might not only add one more rate rise for this year but for 2019 as well. “The worst case is the ‘18 and ‘19 dots both move up - the Fed is currently guiding to five hikes in ‘18 and ‘19 combined but under this scenario that would shift to seven hikes,” they warned in a note to clients. “Stocks would probably tolerate one net dot increase over ‘18 and ‘19 but a bump in both years could create problems.” Furthermore, trade war concerns also remain front and center, especially after Sunday's bizarre snafu in which Treasury official David Malpass said he misspoke hours after claiming the U.S. was pulling out of decade-old formal economic talks with Beijing. This happened on the same day the PBOC announced its new head. Trade will be top of the agenda at a two-day G20 meeting starting later on Monday in Buenos Aires and any signs of escalating stress between the U.S. and China could make investors in Asia nervous. The Stoxx Europe 600 Index headed for its first drop in three days as technology companies slumped with miners. Earlier, the MSCI Asia Pacific Index of stocks also fell, with tech shares under pressure with Bloomberg reporting that Apple was poised to disrupt its supply chain. The yen strengthened amid a huge drop in support for Japanese Prime Minister Shinzo Abe’s cabinet following the Moritomo land scandal, ironically prompting a flight to safety which is, well, the Yen. Japan's Nikkei ended down 1 percent amid a firmer JPY and as support for PM Abe’s administration slumped to 33% (Prev. 45%) in the wake of the land-sale scandal. KOSPI (-0.8%) suffered losses in its top-weighted stocks in which Samsung Electronics fell on news Apple is to develop displays to replace Samsung screens, while Hyundai Motor was hit by a stateside investigation into fatal incidents involving airbag failure which could affect a total of 425K Hyundai and Kia cars. Hang Seng (flat) and Shanghai Comp. (+0.3%) were indecisive and traded choppy amid mixed property data from China, a neutral PBoC open market operation and after China signaled stable monetary policy continuity as it chose PBoC Deputy Governor Yi Gang to be the next central bank hea In FX, the dollar initially made ground on the euro, though, as bond traders saw the gap between 10-year German and U.S. government yields, referred to as the ‘transatlantic spread’, ratchet out to its widest since December 2016. Cable was a big outperformer rising back over 1.40 as expectations for yet another Brexit transition deal are priced in; meanwhile EMFX continue their recent slide against USD. Key FX moves from BBG: The pound jumped on speculation of some sort of a deal being done between the U.K. and the EU. GBP/USD jumps as high as 1.4046, the highest since Feb. 26; joint U.K.-EU press conference due later Monday The Bloomberg Dollar Spot Index was little changed; it closed higher for a fourth week on Friday, its longest streak of gains in five months; should it advance this week, it would be the best run for the greenback since July 2015; 10-year Treasury yield rises 2 bps to 2.86% USD/JPY rose 0.1% to 106.08, after falling to 105.68; the pair was also affected during Asia trading by macro account sales of the euro against the yen, according to an Asia-based FX trader In key overnight developments, the ECB’s Weidmann said he thinks that good economy developments and inflation would permit a rapid end to bond purchases, while the ECB’s Villeroy commented that the progress to inflation target was slower than anticipated. In Brexit-related news, the UK Brexit Select Committee is set to recommend that the UK should request an extension to the EU's Article 50 process beyond March 2019. Separately, according to an HIS Markit survey, household incomes are rising at near their fastest pace since the financial crisis in 2009 with some speculating this could force the BoE to lift rates again soon. The UK’s BCC has raised its GDP forecast for 2018 from 1.1% to 1.4% and in 2019 from 1.3% to 1.5%. Its first forecast for 2020 is for 1.6% growth. S&P affirmed Austria at AA+; Outlook Stable and affirmed Denmark at AAA; Outlook Stable. Fitch affirmed Italy at BBB; Outlook Stable. As widely expected, Vladimir Putin has won the Russian Presidential election with a landslide victory. Japan PM Abe reportedly asked South Korea President Moon to help set up a meeting with North Korea Leader Kim. White House said that US President Trump told South Korean President Moon that still on track to meet with North Korean Supreme Leader Kim by May. UK, France and Germany have proposed new EU sanctions on Iran to aim to keep US President Trump committed to the Iranian nuclear deal, while reports added that sanctions would target individuals involved in ballistic weapons activity and war in Syria. Looking at the commodities complex, WTI (-0.6%) and Brent (-0.7%) are pressured by concerns of oversupply arising as US drilling activity increases. The weekly Baker Hughes rig count added four oil rigs on Friday bringing the total oil rig number to 800 compared to 631 a year ago. Moving on to metals, Gold (-0.1%) continued to edge lower on a firmer dollar but has seen a slight bounce in recent trade. Dalian iron ore fell by 4% to its lowest level since November weighed by high inventories and weaker steel demand. On today's relatively quiet calendar, Oracle is set to report quarterly numbers, while no major economic data is expected. Bulletin Headline summary from RanSquawk European bourses started the week on a poor footing (Eurostoxx 50 -1.0%) as investors anticipate a hawkish Fed meeting later this week. GBP seen higher amid reports that the EU have agreed on the broad terms of UK transition deal Looking ahead, today’s session sees a lack of tier 1 highlights Market Snapshot S&P 500 futures down 0.7% to 2,737.00 STOXX Europe 600 down 0.8% to 374.71 MSCI Asia Pacific down 0.6% to 177.14 MSCI Asia Pacific ex Japan down 0.4% to 584.33 Nikkei down 0.9% to 21,480.90 Topix down 1% to 1,719.97 Hang Seng Index up 0.04% to 31,513.76 Shanghai Composite up 0.3% to 3,279.25 Sensex down 0.8% to 32,925.00 Australia S&P/ASX 200 up 0.2% to 5,959.43 Kospi down 0.8% to 2,475.03 German 10Y yield rose 0.6 bps to 0.577% Euro down 0.2% to $1.2272 Italian 10Y yield fell 0.5 bps to 1.725% Spanish 10Y yield fell 0.7 bps to 1.368% Brent Futures down 0.5% to $65.86/bbl Gold spot down 0.3% to $1,309.82 U.S. Dollar Index up 0.07% to 90.30 Top Overnight News U.S. Treasury Undersecretary Malpass says he was incorrect in saying that the U.S. had ended formal economic dialogue with Beijing; Mnuchin continues to hold private discussions with Chinese officials EU Trade Commissioner Malmstrom will visit Commerce Secretary Ross on Tuesday and Wednesday to discuss U.S. tariffs on steel and aluminum, AFP reports, citing people familiar ECB: bond market liquidity has not deteriorated, despite the buildup of PSPP holdings over time; only some increased volatility when the net monthly volume was reduced White House lawyer Cobb says Trump is not considering firing Mueller Japanese Prime Minister Shinzo Abe saw his support tumble in weekend opinion polls as public anger continues to rise over a cronyism scandal. A top Treasury Department official said he was incorrect in saying that the U.S. had ended formal economic dialogue with Beijing, adding that Secretary Steven Mnuchin continues to hold private discussions with China. China named Yi Gang to run its central bank, elevating a long-serving deputy governor with deep international links to the forefront of efforts to clean up the nation’s financial sector and modernize monetary policy. The U.S. Chamber of Commerce and 44 other associations are urging President Donald Trump not to impose sweeping tariffs in response to China’s trade practices. Brexit negotiators want to secure a written promise of a transition deal from the European Union at a key summit this week, to help reassure businesses that they will get the grace period they desperately want. The U.K.government will consider further action against Russia this week after it accused Moscow of stockpiling the Novichok nerve agent. Vladimir Putin cruised to a landslide victory in Russia’s presidential vote, extending his 18-year rule amid escalating confrontation with the West. Asian equity markets traded mixed with the region indecisive ahead of a widely anticipated Fed rate hike this week. ASX 200 (+0.2%) finished positive as strength in energy kept the index afloat, while Nikkei 225 (-1.0%) underperformed amid a firmer JPY and as support for PM Abe’s administration slumped to 33% (Prev. 45%) in the wake of the land-sale scandal. KOSPI (-0.8%) suffered losses in its top-weighted stocks in which Samsung Electronics fell on news Apple is to develop displays to replace Samsung screens, while Hyundai Motor was hit by a stateside investigation into fatal incidents involving airbag failure which could affect a total of 425K Hyundai and Kia cars. Hang Seng (+0.1%) and Shanghai Comp. (+0.1%) were indecisive and traded choppy amid mixed property data from China, a neutral PBoC open market operation and after China signalled stable monetary policy continuity as it chose PBoC Deputy Governor Yi Gang to be the next central bank head. Finally, 10yr JGBs were flat amid an indecisive risk-tone in the region, while an unsurprising Summary of Opinions release and unchanged Rinban announcement also kept prices range-bound. As such, Japanese yields were mixed while their US counterparts were higher ahead of the FOMC in which the US 2-year yield rose to its highest since 2008. Top Asian News Putin Claims Mandate on Record Vote Amid Conflict With West China Names Yi Gang as First New PBOC Governor in 15 Years Noble Group Braces for First Bond Default as Pressure Mounts Modi’s Anti-Graft Image Under Fire on $2 Billion India Fraud Singapore MAS Imposes Penalties on Stanchart Bank, Trust European bourses started the week on a poor footing (Eurostoxx 50 -1.0%) after a mixed Asian session, as investors anticipate a hawkish Fed meeting later this week. Energy and materials are amongst the worst performing sectors as concerns of US drilling activity points to higher output. Mining names are feeling the pressure from a firmer dollar with Antofagasta (-2.9%), Anglo American (2.8%), BHP (-2.7%), Rio (-2.2%) all seen at the foot of the FTSE 100. On the flip side, the financial sector is outperforming with Barclays (+3.6%) higher after reports that activist investor, Sherborne Investors have acquired a 5.2% stake in the bank. Additionally, SocGen (+0.65%) is providing some support to the sector after the Co. said they expect resolution over the LIBOR probe in the coming weeks. Separately, sources stated the company is applying for a banking license in Australia. In terms of individual movers, Hammerson shares leapt 26% after the Co. rejected a GBP 5bln offer from French retail property developer Klepierre (-4.0%). Micro Focus (-50.6%) plummeted to the bottom of the Stoxx 600 following a double whammy from worse than expected revenue outlook and the departure of their short-lived CEO. Top European News Italy’s Di Maio Appeals to His Voters as He Seeks to End Impasse Micro Focus Shares Collapse After Sales Warning and CEO Exit GKN’s Rival Suitors Offer Incentives to Win Investor Support Barclays in Activist Crosshairs as Bramson Takes 5.2% Stake In FX, the greenback started off firmer with the DXY above the 90.00 level after last Friday’s stronger than expected Industrial Production and ahead of a widely expected rate hike from the Fed. This pressured its counterparts across the board with commodity-linked currencies also kept subdued by weakness in the metals complex, while USD/HKD rose to print a fresh 33yr high. Conversely, JPY was the exception and outpaced the USD amid the indecisive risk-tone and after USD/JPY failed to hold onto the 106.00 handle. However, in the last hour of trading, the USD has given up virtually all gains and the BBG Dollar index was back to session lows. In Commodity prices were lacklustre overnight in which WTI crude futures pulled back from Friday’s gains and briefly slipped to below USD 62/bbl. Elsewhere, gold languished as the greenback remained firm ahead of the looming FOMC, while copper extended on last week’s lows alongside the indecisive risk tone and early weakness in Chinese metals prices in which Dalian iron ore futures slipped over 3% shortly after the open. In commodities, WTI (-0.6%) and Brent (-0.7%) are pressured by concerns of oversupply arising as US drilling activity increases. The weekly Baker Hughes rig count added four oil rigs on Friday bringing the total oil rig number to 800 compared to 631 a year ago. Russian Energy Minister Novak affirmed pledge to see OPEC production deal through to the end and reiterated that Russia is willing to extend cuts if necessary, while he added that Russia is open to discussing phase-out from the deal when appropriate. Moving on to metals, Gold (-0.1%) continued to edge lower on a firmer dollar but has seen a slight bounce in recent trade. Dalian iron ore fell by 4% to its lowest level since November weighed by high inventories and weaker steel demand . On today's global calendar, the commencement of the two-day G20 finance ministers meeting should be the highlight on Monday, while the expected announcement by China's NPC for the PBOC governor role will also be closely watched. Meanwhile the UK's David Davis and EU's Michal Barnier are due to meet in Brussels with the meeting bringing possible clues about an agreement on the terms of Brexit transition. It should be a fairly quiet start to the week for data with UK and China house prices data due overnight, followed by the January trade balance for the Euro area. There is no data due in the US however the Fed's Bostic is slated to speak in the afternoon. US Event Calendar Nothing major scheduled 9:40am: Fed’s Bostic Speaks on Community Reinvestment Act DB's Jim Reid concludes the overnight wrap If markets were feeling a little indecisive last week given the unpredictable spate of headlines which seemed to come from the White House on an almost daily basis then there’s good news as we have the welcome distraction of a Fed meeting this week. Indeed, Wednesday’s meeting is the focal point for markets over the next five days – not least because it is Fed Chair Powell’s debut - although there are a few other potentially interesting events for us to look forward to including today’s two-day G20 meeting of finance ministers and central bankers, the conclusion of China’s NPC tomorrow, the global flash PMIs and UK/ EU summit on Thursday and yet another US government funding deadline due up on Friday. So plenty to keep markets interested. In terms of the Fed, the consensus view amongst economists is for a 25bp rate hike and that’s reflected in the market with fed funds contracts fully pricing that in. With that likely as good as done our US economists believe that there are three key questions going into the meeting that we should be asking. The first is: does the committee still see risks as “roughly balanced”. The second is: will the median dots move up, and in particular, will they signal four rate hikes this year. The third is: how will the new chairman perform in the press conference, and what changes in style/messaging might he signal? In summary, the team expect the answer to the first question to be that the Committee sounds a bit more upbeat (though not yet worried) about inflation developments, and a message on economic activity that is little changed. They also expect the Committee to raise growth forecasts and lower unemployment forecasts. In terms of the second question, their view is that we see the median dot move to 4 hikes from 3. However, this is likely to be a close call. Perhaps of more interest will be the terminal rate though. The team expect the terminal rate forecast to rise to 3.3% in 2020 from 3.1% in the December forecast. As for the third question and Fed Chair Powell’s press conference, on substance, they expect Powell’s message to centre on the signs of an overheating economy, and that the Fed’s current tightening action is clearly in order. This would signal that another rate hike is on the way in June. Away from the Fed, the market will most likely be interested in the rhetoric and debate around protectionism and free trade at today’s G20 meeting with the world seemingly on the brink of a trade war. Ahead of it, Bloomberg reported over the weekend that the US was withdrawing from economic dialogue with Beijing with Treasury’s undersecretary for international affairs David Malpass saying that “because there wasn’t a path back toward a market orientation, I discontinued the China economic dialogue”. Malpass did try to walk back on his words later on and noted that Treasury Secretary Mnuchin continues to hold ‘private’ discussions with China. On the subject of trade, last Friday our global economists published a special report titled “The rising risk of a trade war”. While the team’s baseline assumption is that trade policy actions will be limited to restrictions which are small enough not to have a significant macro impact, they also look at a couple of tail risk scenarios to this view. One is a significant but contained increase in tariffs on US imports from China on a scale very recently floated by the Administration which would likely be met by a similar imposition of tariffs on China’s imports from the US. In the second they assume that US-China trade tensions spiral into a large conflict with high tariffs imposed across the board on both sides. The team also consider the risks around a full withdrawal by the US from NAFTA. See the following link for the full report. While we mention China, over the weekend Yi Gang has been named as the new PBOC Governor, replacing Zhou Xiaochaun. Mr Yi has been the deputy PBOC Governor for nearly 10 years and so the appointment suggests that China is signalling that it’s seeking policy continuity with further focus in modernising the country’s financial sector and monetary policy. The other update to note from the weekend is confirmation that Vladimir Putin has secured victory in Russia’s presidential election with nearly 77% of the votes and will therefore stay at the helm for another 6 years. This morning markets in Asia have opened mixed with the Hang Seng (+0.06%), CSI 300 (+0.23%) and ASX 200 (+0.17%) modestly higher while the Kospi (-0.77%) and Nikkei (-1.11%) are down as we type, in part due to a Bloomberg report suggesting that Apple is designing and producing its own device displays for the first time. Markets in Japan also appear to be reacting to a nationwide survey which has showed a notable decline in support for PM Abe’s cabinet. The survey by Jiji Press shows that support is down over 9 percentage points versus last month to 39% and that disapproval has exceeded approval for the first time in five months. The moves this morning also follow a week in which US equities in particular struggled with the S&P 500 falling in four out of the five days (with Friday’s small +0.17% rebound saving the index from a full house) to clock a -1.24% decline. In fairness, the index is slightly above the mid-point of the YTD high in late January and YTD low in early February and really it’s just struggled for direction for the last five weeks or so. Bond markets were a little less exciting last week with Treasuries about 5bps lower over the week but the curve back to flattening fairly aggressively with 2s10s 8.3bps flatter and 5s30s 7.2bps flatter. In commodities, WTI Oil jumped +1.88% to be up for the third straight day on Friday. DB’s Michael Hsueh believes the fundamental upside risks to oil still exist and is likely to result in some further upward revisions to his 2018 demand growth assumptions. In terms of data on Friday, in the US, the February IP was well above market at +1.1% mom (vs. +0.4% expected) which lifted annual growth to the highest since 2011 at +4.4% yoy, while capacity utilisation also grew to the highest since 2015 at 78.1% (vs. 77.7% expected). The March University of Michigan consumer sentiment survey rose to the highest since 2004 at 102 (vs. 99.2 expected). In the details, the current conditions index jumped 7.9pts to 122.8 – the highest since 1946 while the consumers’ one year ahead inflation expectation edged up 0.2pts to +2.9% (highest since Mar. 2015). Elsewhere, February housing starts and building permits both fell more than expected, at -7.0% mom to 1,236k (vs. 1,290k expected) and -5.7% mom to 1,298k (vs. 1,320k expected) respectively. Factoring in the above, the Atlanta Fed now estimate Q1 GDP growth at 1.8% saar (-0.1ppt from previous). Back in Europe, the Euro area’s final reading of February core CPI was confirmed at 1.0% yoy. Now turning to the ECB speak over the weekend. The ECB’s Villeroy reiterated that the Euro area economy is experiencing a “robust expansion” and that a decision to lose the easing bias on QE should be seen as a sign of confidence. He also added that “there is some kind of welcome alignment of stars between the economic background, market expectations and the convergence of those market expectations towards our own views within the Governing council”. Elsewhere, the ECB’s Knot noted that the Euro area economic “outlook is almost as good as it gets” while indicating the region is “projected to continue this firm path of growth”. On inflation, he noted he has “a high degree of confidence that actually inflation will pick up and will at some point support the definition of price stability”. Finally back on Friday, the latest BOE Financial Policy Committee statement noted that apart from Brexit, UK’s financial stability outlook remains “standard” while potential material risks are from global vulnerabilities. The bank noted “some signs of rising domestic risk appetite in recent quarters” and that issuance of leveraged loans by UK companies have increased in 2017. The bank added that “valuations in some segments of the UK commercial real estate sector appear stretched”, while the proportion of new owner-occupier mortgages at higher LVR has also increased. Elsewhere, the BOE believes that UK banks could withstand a disorderly Brexit with their existing capital buffers but there is still a high potential risks of disruption to existing derivative contracts. On today's calendar, the commencement of the two-day G20 finance ministers meeting should be the highlight on Monday, while the expected announcement by China's NPC for the PBOC governor role will also be closely watched. Meanwhile the UK's David Davis and EU's Michal Barnier are due to meet in Brussels with the meeting bringing possible clues about an agreement on the terms of Brexit transition. It should be a fairly quiet start to the week for data with UK and China house prices data due overnight, followed by the January trade balance for the Euro area. There is no data due in the US however the Fed's Bostic is slated to speak in the afternoon.
After two consecutive days of failed S&P ignition attempts, in which US stocks opened sharply higher only to close near the lows, on Wednesday the algos will try for the third consecutive time to escape the recent late-day selloff funk. S&P futures are higher after declining on Tuesday following a fresh personnel shakeup in the Trump administration and renewed US trade war speculation with China dampened investor sentiment. European stocks rose modestly led by mining shares even as Asian shares fell despite stronger than expected Chinese economic data. Equity markets were attempting to recover after Tuesday’s hefty losses, encouraged by stronger than expected Chinese factory data, but struggled to overcome fears of a global trade war as well as the prospect of political uncertainty in the United States. “As long as the threat of protectionism and a trade war remains, markets will remain vigilant,” Rabobank analysts told clients according to Reuters. The latest set of tariffs, reportedly targeting Chinese tech, electronics and telecoms, were revealed by sources hours after Trump abruptly fired Secretary of State Rex Tillerson. Tillerson’s exit follows that of economic advisor Gary Cohn, a strong free trade proponent. Since Trump took office in 2017 as many as 35 senior officials from his administration have walked out, including Tillerson, according to Citi. “The market probably correctly viewed this move as weakening internal White House opposition to some of Trump’s less market-friendly policies, in particular the President’s trade policy,” Daiwa strategist Mantas Vanagas said, quoted by Reuters. The negative momentum faded somewhat in Europe, with a pan-European equity index up 0.24% after falling 1% on Tuesday. That left MSCI’s all-country equity index down 0.12% its second day in the red, although a rebound in the US will likely push it back in the green. European stocks rose modestly after opening in the red after Tuesday’s plunge as traders assess the implications of a shakeup in the Trump administration amid corporate updates from companies including Inditex SA and Prudential Plc. The Stoxx Europe 600 Index rises 0.3%, with all major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds. Zara owner Inditex drops after reporting a slowdown in sales and its weakest profitability in a decade, while U.K. insurer Prudential rises after saying it divested 12 billion pounds ($16.7 billion) of annuities from its U.K. portfolio and plans to spin off its M&G Prudential unit. Miners were the best-performing industry group after Goldman Sachs analysts said the sector is enjoying robust global demand and after China reported strong economic data overnight. There was no bounce earlier in Asia, where markets followed the negative US lead with the Nikkei (-0.9%), Kospi (-0.3%), Hang Seng (-0.5%) and Shanghai Comp (-0.6%) all down. The latest batch of mixed activity indicators were released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. As shown in the chart below, Chinese macro data has been disappointing in recent months so the modest upside surprise in factory orders was a welcome change. In global FX, the dollar pared an early decline as the euro felt some heat from another Draghi reference to the exchange rate, while the Yen rose following continued focus on the Moritomo scandal that has again rocked the Abe administration. A lackluster London session saw the pound shedding gains ahead of a May speech over the U.K.’s relationship with Russia. Bloomberg breaks down the latest overnight FX action: The euro set a day low of $1.2364 in early London trading after ECB President Draghi said in a speech that adjustments to monetary policy will remain predictable as policy makers look for further evidence that inflation dynamics are moving in the right direction He also said the central bank needs to monitor developments in the common currency closely as its appreciation since the beginning of the year cannot be explained solely by economic expansion AUD/USD saw leveraged demand on stronger-than- expected gains in China’s factory output and investment growth Kiwi shook off weaker-than-estimated 4Q current-account balance to climb on global fund demand to buy New Zealand’s bonds after Tuesday’s issuance Treasuries and euro-area bonds were little changed. German 10-year government bond yields approached one-month lows and currently stand 20 basis points below this year’s peak at 0.60 percent, following a soft 30Year debt auction. Economic data include retail sales and PPI. Williams-Sonoma and Signet Jewelers are among companies due to release results Market Snapshot S&P 500 futures up 0.3% to 2,776.00 STOXX Europe 600 up 0.3% to 376.55 MXAP down 0.5% to 178.18 MXAPJ down 0.4% to 587.85 Nikkei down 0.9% to 21,777.29 Topix down 0.5% to 1,743.21 Hang Seng Index down 0.5% to 31,435.01 Shanghai Composite down 0.6% to 3,291.38 Sensex down 0.4% to 33,720.90 Australia S&P/ASX 200 down 0.7% to 5,935.31 Kospi down 0.3% to 2,486.08 German 10Y yield fell 1.0 bps to 0.609% Euro down 0.2% to $1.2370 Brent Futures down 0.2% to $64.51/bbl Italian 10Y yield fell 0.9 bps to 1.737% Spanish 10Y yield rose 0.8 bps to 1.405% Brent Futures down 0.2% to $64.51/bbl Gold spot down 0.2% to $1,324.41 U.S. Dollar Index up 0.2% to 89.83 Top Overnight News ECB’s Praet says the central bank’s forward guidance on the path of policy rates will have to be further specified and calibrated as appropriate for inflation to remain on the sustained adjustment path toward levels below, but close to, 2% over the medium term The special election in southwestern Pennsylvania remained too close to call with all precincts reporting results. House seat in Pennsylvania may be a bellwether for the fall elections that will decide control of Congress Theresa May will meet with her national security and intelligence chiefs Wednesday to assess whether Russia has given a credible answer to her charge that it was behind the poisoning of Sergei and Yulia Skripal in Salisbury. She will then update Parliament on her response. China’s factory output and investment growth unexpectedly accelerated in the first two months of the year amid robust global demand U.S. Trade Representative Robert Lighthizer presented President Donald Trump with package of tariffs targeting equivalent of $30b a year in Chinese imports, but Trump urged him to aim for higher number, Politico reports, citing three unidentified people familiar with discussions Japanese Prime Minister Shinzo Abe and his finance minister denied ordering officials to tamper with documents at the center of a scandal rocking his administration. German Chancellor Angela Merkel was formally elected to a fourth term in a parliamentary vote, extending her 12 years in office at the helm of Europe’s biggest economy Germany may be ready to sacrifice Jens Weidmann in the contest of becoming the next head of the ECB in a trade for more influence on French President Emmanuel Macron’s push to create closer ties among euro countries European equities are trading in the green this morning, subsequently pairing the initial losses that stemmed from Asian and US bourses, which saw risk-sentiment soured by reports of Secretary of State Tillerson being fired and increased caution over trade wars. All major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds. Top European News Germany Ready to Sacrifice Weidmann as a Pawn in EU Chess Match Draghi Says Policy Adjustments to Proceed at Measured Pace Corin’s Billionaire Owners Said to Mull Sale of Orthopedic Firm Volvo Venture Seeks Top Self-Driving Role Angling for More Deals May Plots to Punish Russia as Crisis Over Poisoned Spy Deepens In Asia, equity markets were negative across the board as the region tracked the losses on Wall St, where sentiment was dampened after another high-profile departure from the administration in which President Trump fired Secretary of State Rex Tillerson, while trade war concerns were also stoked by reports the US is looking to impose tariffs on Chinese goods. ASX 200 (-0.7%) and Nikkei 225 (-0.9%) were negative with financials pressured amid the ongoing royal commission hearings in which NAB employees were said to knowingly approved fake loans to reach targets, while Nikkei 225 was pressured by a firmer JPY and with some analysts also noting ‘Abexit’ worries in the wake of the land-sale/cronyism scandal. Shanghai Comp. (-0.4%) and Hang Seng (-1.4%) conformed to the weakness with tech and telecom names weighed as the US seeks to impose tariffs of USD 60bln on Chinese goods, which would target tech and telecom products as a punishment for intellectual property infringement. Although, losses in the mainland were somewhat stemmed by mixed data including higher than expected Industrial Production and Fixed Asset Investments. Finally, 10yr JGBs were flat despite the weakness in stocks, with an uneventful BoJ minutes release and unchanged BoJ Rinban operation amount for 1yr-10yr maturities also ensured quiet price action. BoJ Minutes from the January 22nd-23rd meeting stated it is appropriate to pursue powerful easing and that price momentum to reach target is maintained. Top Asian News China’s Factory Output, Investment Rise on Robust Global Demand China Imposes Record $870 Million Fine for Stock Manipulation Noble Group Seeks to Sweeten Disputed Debt Deal After Backlash Toyota Offers Bigger Raises as Japan Pushes for Inflation Not Even Trump Can Slow Vietnam’s Economy, Official Says In FX, USD weakness amidst ongoing global trade war and White House personnel concerns remains the principle theme, as the DXY continues to reject advances towards the 90.000 level and beyond, which in turn is shifting the technical outlook more bearish. However, EURUSD and single currency crosses have been knocked back to an extent by comments from ECB President Draghi and Chief Economist Praet, reiterating that inflation is still below target and therefore policy needs to stay ‘patient, persistent and prudent’. Key downside risks were highlighted – FX and the aforementioned potentially adverse trade developments due to US President Trump’s import tariff proposals. Eur/Usd is back below 1.2400, but holding above the 30 DMA at 1.2345, and also eyeing decent expiry interest from 1.2390-1.2405 (around 1 bn). Conversely, Aud/Usd is testing resistance either side of the 0.7900 handle again and recent peaks just below the big figure, aided by some Chinese data beats overnight and more balanced rather than dovish/cautious RBA rhetoric via Assistant Governor Kent. Chart-wise, yesterday’s 0.7898 high forms the first/nearest bullish target and offers are touted around 0.7925, if 0.7900 is breached. Cable looks capped by the 1.4000 level, and Usd/Cad by 1.3000, while Usd/Jpy is back in the 106.50 area after a further retreat from 107.00+ peaks late last week and earlier this week with the 10 DMA at 106.31 holding in for now. Elsewhere, Eur/Sek just a fraction softer after broadly as forecast Swedish CPI data that will underscore growing calls for the Riksbank to refrain from tightening for longer. In commodities, oil prices are trading slightly higher with prices finding some slight reprieve from yesterday’s smaller than expected build in the latest API report, alongside the improvement in risk sentiment, which has seen WTI retest USD 61/bbl Looking at the day ahead, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament. US Event Calendar 7am: MBA Mortgage Applications, prior 0.3% 8:30am: Retail Sales Advance MoM, est. 0.3%, prior -0.3% Retail Sales Ex Auto MoM, est. 0.4%, prior 0.0% Retail Sales Ex Auto and Gas, est. 0.32%, prior -0.2% Retail Sales Control Group, est. 0.4%, prior 0.0% 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.4% PPI Ex Food and Energy MoM, est. 0.2%, prior 0.4% PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4% 8:30am: PPI Final Demand YoY, est. 2.8%, prior 2.7% 8:30am: PPI Ex Food and Energy YoY, est. 2.6%, prior 2.2% 8:30am: PPI Ex Food, Energy, Trade YoY, prior 2.5% 10am: Business Inventories, est. 0.6%, prior 0.4% DB's Craig Nicol concludes the overnight wrap Picking the right moment to run out and grab lunch is something of a fine art working in markets. Indeed, anyone who was out for the 12 minutes between 12.30pm GMT and 12.42pm GMT yesterday probably felt like they’d been gone a lot longer when they returned to their screens. It takes something fairly significant to overshadow US inflation data at the moment however the shock news that President Trump had ousted now former US Secretary of State Rex Tillerson was certainly enough to do just that. The announcement came via a tweet from the President and it also included confirmation that CIA Director Mike Pompeo would take over the role. Trump confirmed with reporters that Tillerson “had a different mindset” relative to the President with the Iran nuclear deal named as an example. It was no secret that Tillerson’s tenure had been somewhat rocky however it’s fair to say that markets were still caught off guard, despite his clock probably ticking. Indeed Politico also reported that Tillerson had no plans to leave and was also unsure why he had been let go. There were suggestions that Tillerson’s vocal statements on Monday about condemning the Russian government about its alleged role in the Russian spy incident in the UK could have played a part however that remains to be seen. Various news outlets also confirmed that Trump wanted a new team in place ahead of talks with North Korea and also ongoing trade talks. It’s not the first time that Trump has moved quickly in his administration without warning, with Reince Priebus and James Comey two other such examples. In fact, the NY Times also reported that Trump’s personal assistant, John McEntee, was let go on Monday and escorted from the White House, while another headline from the Times suggested that there would be more staff shifts this week. The bottom line for us is that all these moves show that the President is certainly moving a lot closer to his anti-globalist policy agenda. On that point, the view on Pompeo is that he and Trump are a lot closer aligned and that Pompeo is more likely to have the President’s ear. On a related note, it also appears that Larry Kudlow is now the favourite to replace Gary Cohn based on comments from the President yesterday. That’s perhaps more interesting given that Kudlow and Trump have clashed in the past over tax reform and also the recent tariff announcements. Aside from the 12 minutes of a slightly more positive risk environment following the US CPI report (more on that below), the Tillerson news certainly more than played its part in equity markets dropping from early highs. The S&P 500 finished -0.64% last night after being up as much as +0.67% at one stage. A Reuters story suggesting that Trump was seeking for tariffs of up to $60bn a year on China imports seemed to just extend selling pressure into the evening. Meanwhile the previously untouchable Nasdaq (-1.02%) snapped its 7-day winning run while in Europe the big mover was the export-heavy DAX which tumbled to a -1.59% loss. Moves for bonds were actually a bit more contained. The high-to-low range on 10y Treasuries was 6bps and the yield did fall to the lowest in over a week (2.828%) at one point, however by the end of play they were just 2.6bps lower at 2.843%. The 30y auction was also relatively solid with the highest award to direct bidders since October 2015. In Europe bond markets were broadly 1-2bps lower while the Greenback was well offered with the Dollar index falling -0.26%. Gold (+0.26%) also seemed to benefit from a flight to quality bid. With regards to the CPI data, that in-line +0.2% mom core print meant that the annual rate also held at +1.8% yoy for the third consecutive month. The unrounded reading was +0.182%, so the overall feeling was that it largely mirrored the marginally softer earnings number on Friday. However, momentum is still favouring the hawks with the three-month annualized rate now up to +3.1% and the highest since 2007. The six-month annualized rate is also at a robust +2.5%. That should be comforting to a Fed which is targeting the gradual approach for now though. As a reminder that is the last CPI report that the Fed will see prior to the FOMC meeting next week however they will benefit from the release of the February PPI data today. Expectations for that is also for a +0.2% mom core reading while the headline is expected to show a +0.1% mom rise in producer prices. Here in the UK there were no huge surprises to come from Chancellor Hammond’s Spring Statement. As widely expected the borrowing numbers for the current fiscal year and also the next were revised down. This year was revised down from £50bn to £45bn while next year was revised down from £40bn to £37bn. Headroom relative to the 2% cyclically adjusted borrowing to GDP target by 2020-21 is more or less unchanged versus the November estimate at around £15bn, so not a huge amount more fiscal room. Finally GDP forecasts remain fairly lacklustre and included a cut to the 2021-22 forecast. The 2018 forecast was however revised up one-tenth to 1.5%. Sterling closed up +0.40% last night versus the USD but that appeared to be more USD weakness related to the Tillerson news than anything else. Indeed versus the Euro, Sterling was closer to unchanged. Gilt yields also finished more or less unchanged by the end of play. This morning in Asia, markets have largely followed the negative US lead with the Nikkei (-0.83%), Kospi (-0.51%), Hang Seng (-1.30%) and Shanghai Comp (-0.60%) all down as we type. The latest batch of activity indicators were released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. The combined Jan and Feb data is meant to smooth out the effects of the Lunar New Year. Meanwhile, the Pennsylvania Congressional District special election in the US is appearing to head for a neck and neck finish. Bloomberg is reporting that Democrat Conor Lamb holds a tiny lead of 579 votes over Republican Rich Sacconne, out of about 227,000 votes cast. Finally in Japan, the BOJ minutes showed most board members believe the bank must “persistently” pursue powerful easing. Notably, during Q&A BOJ Governor Kuroda noted “by combining various tools, it’s possible to shrink the BOJ’s balance sheet at an appropriate pace while keeping markets stable”. Turning back to Europe, another Politico article yesterday suggested that the Bundesbank’s Weidmann is the favourite to replace Mario Draghi as ECB President from October 2019. However the story also suggested that his support was receiving pushback, in part given Weidmann’s vocal opposition to Draghi’s QE policy and his strict enforcement of the EU’s fiscal policies. Other potential German candidates touted include Klaus Regling (current head of the ESM) and Marcel Fratscher (Head of the research institute DIW Berlin). Notably, the swing factor for the candidacy likely depends on the relative support of French President Macron, who has been relatively quiet on this topic. In other news, the OECD has upgraded its forecasts on global economic growth by 0.2-0.3ppt to 3.9% for both 2018 and 2019, with “private investment and trade picking up on the back of strong business and household confidence”. Across countries, growth in the US has been lifted to 2.9% for 2018 (+0.4ppt) and 2.8% for 2019 (+0.7ppt) in part due to the tax cuts and new fiscal spending increases, while the UK’s growth was revised slightly higher to 1.3% in 2018 and 1.1% in 2019. Notably, the agency also warned on protectionism and noted that “an escalation of trade tensions would be damaging for growth and jobs” and that countries should “avoid escalation and rely on global solutions to solve steel excess capacity”. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February NFIB small business optimism index was above market at 107.6 (vs. 107.1 expected) and marked a fresh high since 1983. The survey also showed that c.1/3 of owners reported raising compensation to retain or attract workers in the month, the largest share in 17 years. In Europe, Italy’s Q4 unemployment rate was in line at 11% and the final reading of Spain’s February CPI was confirmed at 1.2% yoy. Elsewhere, France’s Q4 total payrolls was up +0.3% qoq (vs. +0.2% expected). Looking at the day ahead, we'll get final revisions to February CPI in Germany along with January industrial production and Q4 employment data for the Euro area. ECB President Draghi is scheduled to speak in the morning (8am London time), as well as the ECB’s Coeure, Praet Constancio and then Bank of France’s Governor Villeroy. In the US, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament.
As trade war fears ease (again) following news late on Wednesday that the White House would consider tariff "carve outs" for Canada and Mexico, markets are modestly higher ahead of a fresh monetary policy catalyst from the ECB this morning. Mario Draghi will be the center of attention today as investors wait to see whether there will be any moves toward an exit from stimulus measures amid the threat of a potential trade war. That said, the ECB is unlikely to make major changes to guidance at today’s meeting as inflation remains far below a target of just under 2%, even with stronger economic growth. Meanwhile, European stocks drift higher, led by technology shares following strong gains in Asia. Nasdaq futures climb steadily toward session highs, mirroring those gains, while the S&P has also found a bid in recent bid. The European cash open mimicked the lead seen on Wall St. and overnight in Asia, with major bourses recouping prior losses (Eurostoxx 50 +0.2%) with the exception of the DAX 30 (-0.2%) which sees Merck (-3.0%) at the bottom of the index after the release of its earnings this morning. Material and Energy names are the session laggards, with BHP Billiton (-3.9%), Anglo American (-2.0%) underperforming in the FTSE and Arcelormittal (-1.0%) in the CAC. Elsewhere, the Telecom sector (+1.0%) outperformance has been supported by phone operators Vodafone (+1.3%), Orange (+0.54%) and DT Telekom (+0.7%). The strong European open followed another green session out of Asia, with Australia's ASX 200 (+0.7%) and Nikkei 225 (+0.5%) higher with sentiment also underpinned by economic releases including encouraging trade figures in Australia and stronger than expected Japanese Final Q4 GDP. Elsewhere, Hang Seng (+1.5%) outperformed and Shanghai Comp. (+0.7%) initially lagged after the PBoC refrained from liquidity operations, before better than expected Chinese trade data provided some inspiration. Bunds retrace some of yesterday’s advance as underperformance in the belly of the curve leads to bear flattening in the 5s30s; Italy outperforms with the rest of the periphery amid speculation of a coalition between euroskeptic and center-left parties. The Bloomberg Dollar Spot Index rallies, pressuring EUR/USD below 1.2400 and pulling CAD, MXN back from overnight highs. WTI crude holds above $61/barrel amid bullish demand outlooks from Exxon Mobil and Goldman Sachs. Market Snapshot S&P 500 futures little changed at 2,729.50 STOXX Europe 600 up 0.4% to 374.01 MXAP up 0.7% to 175.10 MXAPJ up 0.9% to 576.15 Nikkei up 0.5% to 21,368.07 Topix up 0.4% to 1,709.95 Hang Seng Index up 1.5% to 30,654.52 Shanghai Composite up 0.5% to 3,288.41 Sensex up 1.2% to 33,433.90 Australia S&P/ASX 200 up 0.7% to 5,942.87 Kospi up 1.3% to 2,433.08 German 10Y yield rose 1.0 bps to 0.665% Euro down 0.2% to $1.2388 Italian 10Y yield fell 4.2 bps to 1.687% Spanish 10Y yield fell 0.5 bps to 1.445% Brent futures little changed at $64.30/bbl Gold spot little changed at $1,325.63 U.S. Dollar Index up 0.1% to 89.74 Top Overnight News The ECB’s new forecasts will show growth and inflation similar to the picture of solid economic momentum seen three months ago, according to euro-area officials familiar with the matter The EU’s top financial-services official has told member states and lawmakers to get on with plans to hand the bloc’s main markets regulator new powers over investment funds and derivatives clearinghouses China’s Foreign Minister Wang Yi vowed a “justified and necessary response” to any efforts to incite a trade war, in the country’s most forceful response yet to Trump’s threatened tariff actions Purchases of foreign bonds by Japanese banks’ trust accounts, often seen as a proxy for the nation’s pension funds, reached a record 841.7 billion yen in February China Feb. exports rise 44.5% y/y in dollar terms, est. 11.0%; gain 36.2% y/y in yuan terms, est. 7.4% Japan revised 4Q GDP rises annualized 1.6% q/q; est. +1% Asian stocks recouped some of the prior day’s losses with gains across the region after trade protectionism concerns somewhat eased and amid a continued friendlier tone from North Korea, with the nation said to offer a conditional halt to its ICBM program. ASX 200 (+0.7%) and Nikkei 225 (+0.5%) were higher with sentiment also underpinned by economic releases including encouraging trade figures in Australia and stronger than expected Japanese Final Q4 GDP. Elsewhere, Hang Seng (+1.5%) outperformed and Shanghai Comp. (+0.7%) initially lagged after the PBoC refrained from liquidity operations, before better than expected Chinese trade data provided some inspiration. Finally, 10yr JGBs were subdued as demand lacked amid the improved risk appetite and following an uneventful enhanced-liquidity auction, while the BoJ also began their latest 2-day policy meeting which is not expected to provide any fireworks Top Asian News Hong Kong Seen Draining Liquidity as Currency Drops to 1984 Low; Hong Kong Stocks Rise as Volatility Builds in Topsy-Turvy Week Coincheck to Start Paying Back Victims of $500 Million Heist BNP Paribas Expects Noble Group to Skip March 9 Coupon Payment L Catterton-Backed Brand GXG Is Said to Plan $300 Million IPO As trade war fears are easing, the European cash open mimicked the lead seen on Wall St. and overnight in Asia, with major bourses recouping prior losses (Eurostoxx 50 +0.2%) with the exception of the DAX 30 (-0.2%) which sees Merck (-3.0%) at the bottom of the index after the release of its earnings this morning. Material and Energy names are the session laggards, with BHP Billiton (-3.9%), Anglo American (-2.0%) underperforming in the FTSE and Arcelormittal (-1.0%) in the CAC. Elsewhere, the Telecom sector (+1.0%) outperformance has been supported by phone operators Vodafone (+1.3%), Orange (+0.54%) and DT Telekom (+0.7%). So far, newsflow has been on the lighter side as participants await the ECB decision, in which there is rising speculation that the central bank could drop its QE easing bias. Top European News German Factory Orders Drop After Demand Surged at End of 2017 ECB Outlook Is Said to See Solid Growth Similar to December View Aviva Falls After Claims Surge Hits Profit at Canadian Unit John Lewis Warns of Further Profit Squeeze After a Tough Year Adidas Leads DAX Gains; Discount to Peers Unwarranted, BofA Says In FX, the DXY is mildly firmer within a relative narrow 89.770-545 band, as the Greenback ekes out relatively small gains vs all its G10 rivals on more reports that Canada, Mexico and possibly other nations may be given exemptions from US import tariffs that are expected to be officially signed off later today or on Friday. This has calmed global trade war fears to an extent, while North Korea continues its charm initiative on the nuclear front by offering a conditional ICBM suspension. However, the impending ECB meeting provides potential more currency market activity with expectations very split on whether the QE easing bias will dropped or not. Eur/Usd currently towards the lower end of a tight range around the 1.2400 level amidst reports that new ECB Staff forecasts will be largely the same as in December, but latest forward guidance and the tone of President Draghi’s press conference/Q&A are key along with the aforementioned pledge to increase and/or extend asset buying if needed. Options break-even pricing assigns a circa +/- 67 pip move on the eventuality as a benchmark. Elsewhere, Usd/Jpy also remains largely anchored around a big figure – 106.00 where a hefty expiry runs off (1.1 bn), and now awaiting the BoJ for more independent impetus. The Aud and Nzd continue to underperform around 0.7800 and 0.7250 vs the Usd as the partial Dollar revival weighs on commodity prices, and the Aud fails to derive any sustained benefit from a big trade data beat overnight. Elsewhere, some Nok weakness vs the Eur after Stats Norway trimmed its 2018 inflation and growth forecasts (cross nudging towards 9.7300) and Usd/Hkd is close to the top of its peg tolerance ceiling with the HKMA indicating that 7.8500 is the line in the sand (vs 7.8300 at present). USD/TRY also firmer this morning, after Moody’s downgraded Turkey’s sovereign rating deeper into junk territory with the outlook negative. In commodities, oil prices hovering around yesterday’s lows with WTI back at USD 61/bbl (-0.1%), while Brent is around the low USD 60s (-0.2%) amid the slight firming of the USD index. Price action has been quiet, with crude futures trading within a tight range thus far. In terms of newsflow, Platts reported that Libya could restart their 90k bpd Elephant field after reaching a deal with guards. China Feb. iron ore imports 84.66mln tons vs. Prev. 100.3mln tons M/M, while crude oil imports 32.26mln tons vs. Prev. 40.6mln tons M/M. Saudi Energy Minister Al-Falih says energy demand is growing at a rate not seen for decades. Libya could restart 90k bpd Elephant field after reaching a deal with guards. Of note, The field was shut down on Feb. 23rd due to protests by local guards over environmental concerns US Event Calendar 7:30am: Challenger Job Cuts YoY, prior -2.8% 8:30am: Initial Jobless Claims, est. 220,000, prior 210,000 8:30am: Continuing Claims, est. 1.92m, prior 1.93m 9:45am: Bloomberg Consumer Comfort, prior 56.2 12pm: Household Change in Net Worth, prior $1.74t
The overnight session was already in a festive, risk-on mood with global market a sea of green amid fading fears of trade wars and concerns about Italy and European stability, when the news hit that North Korea is ready to denuclearize "if the regime safety is assured", which sent futures to session highs, the dollar sliding, the USDJPY spiking and 10Y yields surging to 2.895%. S&P futures were especially delighted, with the E-mini tracking dollar weakness, and spiking 8 points on the North Korea news, and up 12 points on the session, while the USDJPY pushed higher by 40 pips, rising above 106 and trading at 106.40 last. Earlier, European stocks had already extended gains following Monday's rally in the U.S. and Asia, even as the European Union was prepared to announce 25% punitive tariffs on American goods. Automakers take pole position among sector, a reversal from yesterday’s underperformance. The Stoxx Europe 600 Index rose a second day, with all Stoxx 600 sectors rising (547 Stoxx 600 members gain, 40 decline) following a broad advance in Asia as indexes from Hong Kong to Seoul clawed back losses incurred since U.S. President Donald Trump laid out a series of import tariffs last week. In the latest development, the European Commission proposed retaliatory measures on U.S. goods ranging from T-shirts and whiskey to motorcycles and ladders. The plans were limited in scope, targeting some 2.8 billion euros ($3.5 billion) of merchandise, and the euro traded little changed. In fixed income, treasuries, bunds extend losses after North Korea signaled its openness to denuclearization; U.S. 10-year yield resumes ascent toward 2.90%, while periphery debt outperforms, while Italy's 10-year BTPs erased all post-election declines. In the aftermath of German and UK auctions Bunds and Gilts witnessed another bout of selling. The core bond is now just off a fresh 159.12 base (-76 ticks) and now eyeing the next downside chart level at 159.03. Gilts have fallen to 120.68 (-63 ticks), with support seen at 120.48 (February 27’s Liffe session low) according to RanSquawk. Risk back on flows come amidst very conciliatory talk attributed to North Korea. Elsewhere, previously resilient US Treasuries have not been able to escape the latest fallout in core EU bonds with futures now all underwater and the curve steeper. The rebound in stocks - even prior to the North Korea news - suggested that fears of an escalation of trade war may be easing as Trump is facing growing domestic resistance to his planned levies on steel and aluminum imports within his own party: House Speaker Paul Ryan has called on him to reconsider, while White House economic adviser Gary Cohn is said to be arranging a meeting between Trump and U.S. executives in a bid to halt the order. “People are realizing a large trade war does not have consensus support, and decent leads last night in the U.S. are driving global risk assets higher,” said Joshua Crabb, the head of equities at Old Mutual Global Investors in Hong Kong. Asia’s emerging currencies and stocks rose amid a rebound in risk appetite driven by speculation that U.S. President Donald Trump will soften his proposed trade tariffs. Sovereign bonds were mostly steady to lower. Separately, Bank of Japan Governor Haruhiko Kuroda dialed back some of his recent perceived hawkishness. Recall last week futures slumped after Kuroda told parliament Japan's QE may end in 2019. Today, the BOJ governor spoke again in a parliament hearing and "clarified" his comments last week: "Regarding exit, I didn’t say that we would make a change in FY2019, what I said was that the chances of inflation reading 2% in FY2019 was high" he said, further adding that "therefore, I said that we would be discussing how to move forward with exit. I never said we would be exiting immediately in FY2019." Also overnight, the Australian dollar pared gains as the central bank left interest rates unchanged at 1.50% as expected, and gave no indication an increase was coming soon. The RBA reiterated that it judged holding policy rates was consistent with sustainable economic growth and reaching the inflation target, while it also repeated that a strengthening exchange rate could slow pace of economic activity and inflation. Furthermore, RBA also stated that low level of rates continues to support domestic economy and that the outlook is for faster growth this year than last year, while it added that wage growth is to remain subdued for some time and gradually pick up. Elsewhere, Riksbank Governor Ingves stated that weaker inflationary pressures creating uncertainty, adding that monetary policy needs to proceed cautiously. Furthermore, saying that inflation will be near 2% even though forecasts have been adjusted downwards. It’s too early and too big a risk to raise rates now. WTI crude rises for a third-straight day to approach $63/barrel. WTI and Brent crude futures trade little changed but in close proximity to yesterday’s highs after the IEA took an upbeat view on global oil demand and OPEC Sec-Gen continued to show support for the solidity of the global supply cut agreement. Further newsflow will likely emanate from the Houston energy conference. In metals markets, spot gold trades with modest gains alongside a slightly softer USD with the move in the yellow metal capped to the upside by this morning’s risk appetite. Elsewhere, zinc prices saw their largest declines in three months in China following rising inventories whilst steel saw further selling pressure overnight as soft demand continues to hamper prices. Looking ahead, highlights include API Inventories, New Zealand GDT Auction and a slew of speakers. Top Overnight News North Korea is said to be open to denuclearisation if regime safety is guaranteed, and added they are willing to freeze nuclear and missile activities during discussions with the US White House economic adviser Gary Cohn is summoning executives from U.S. companies that depend on aluminum and steel to meet this week with President Donald Trump in a last-ditch attempt to blunt or halt the tariffs announced last week, according to two people familiar with the matter The European Commission has proposed retaliatory dues on imports of U.S. steel, apparel, textile and footwear, selected industrial goods, according to draft list seen by Bloomberg BOJ’s Kuroda says lessening stimulus before reaching inflation target is unthinkable, and that in the near term he doesn’t think the BOJ will be unable to buy bonds nor hit the limit before attaining target; also says he didn’t mean in earlier comments that exit will start as soon as FY2019 The EU offer on a post-Brexit trade that U.K. PM Theresa May will bring back from Brussels is likely to be short on detail, leaving Britain in the vulnerable position of having to negotiate substantial chunks of a trade deal after it’s lost much of its leverage Ahead of the ECB’s March 8 policy meeting, the triple whammy of trade war fears, political uncertainty in Italy following Sunday’s election and signs that the euro-area’s economic upswing may be hitting a speed bump all strengthen the case repeatedly made by President Mario Draghi that officials must be patient and persistent in providing stimulus Asian stocks were mostly higher after sentiment rolled over from the strong US session where all majors gained at least 1% after trade war fears somewhat abated and amid encouraging data releases. This positive momentum gathered pace across Asia-Pac bourses with ASX 200 (+1.1%) also underpinned by strength across the energy sector, and Nikkei 225 (+1.8%) outperformed as exporters cheered a weaker JPY. Elsewhere, Hang Seng (+2.1%) joined in on the elation, while the Shanghai Comp. (+1.0%) initially retreated amid a glum tone in the mainland after the PBoC refrained from liquidity operations, but then later conformed to the region. Finally, 10yr JGBs were subdued with demand sapped amid gains across riskier assets and a mixed 30yr auction result. Top Asian News Asia’s Biggest Currency Gain in 20 Years May Be About to End BOJ May Be Thinking But Not Doing Exit in 2019, Kuroda Says Noble Group 2018 Bonds Set for Biggest Gain in Over a Month H.K. Shares Soar as Trade Fears Ease, Chinese Big Caps Advance As trade war fears are easing, the European cash open followed the strong lead seen in the US and overnight in Asia, with all major bourses now firmly in the green (Eurostoxx 50 +0.9%). FTSE MIB (1.4%) and DAX 30 (+1.1%) are clear outperformers today following the underperformance seen yesterday in both indices. Materials sector outperformance has been supported by firmer commodity prices. Smurfit Kappa (+18.9%), a noticeable mover today following news of the company rejecting an unsolicited offer from US based International Paper. Telecom Italia (+5.6%) are seen at the top of the FTSE MIB amid news Elliott Management have increased their stake in the company. Just Eat (-7.2%), a major laggard in focus today after the company failed to deliver on earnings. Top European News Bank of Ireland Senior Executives to Depart in Latest Reshuffle Tesco Rises, Sainsbury Lags After Industry Data Shows Divergence Brexit Is Hurting London Hotel Trade, Hilton’s Nassetta Says Hungarian Opposition May Struggle to Unify Voters, Poll Shows In FX, the dollar dropped after news that North Korea is open to scaling back on its nuclear weapons if the safety of Kim Jong Un’s regime is guaranteed. There was not much net movement in USD pairs prior to the announcement, but an overall improvement in risk appetite has sapped some strength from the traditional safe-havens, with the Jpy also taking on board comments from BoJ Governor Kuroda who clarified that easy policy will remain in place until such time that inflation reaches the 2% target level, which is currently forecast during fy 2019. Usd/Jpy back below 106.00 and Usd/Chf nearer the top of its 0.9385-0.9420 trading parameters with little reaction Swiss CPI data that was firmer than expected m/m, but bang in line with consensus in y/y terms. Usd/Cad remains firmer having just crossed over 1.3000 yesterday amidst ongoing NAFTA and US import tariff concerns, and with the options market indicating more Loonie depreciation ahead. The Kiwi is still benefiting from relative Aud weakness down under after some Aussie data misses overnight (Q4 current account and January retail sales vs a tad smaller decline in Q4 net exports) and a largely unchanged RBA on rates and in the accompanying statement (growth to pick up vs 2017, but inflation and wages still lagging). Nzd/Usd just over 0.7250 and Aud/Usd retreating from a brief 0.7800 test, as Aud/Nzd pulls back towards 1.0700. Elsewhere, some divergence in Eur/Scandi crosses, with the Nok up near 9.6250 highs on an upbeat Norwegian regional survey, but the Sek down to fresh 10.2000+ multi-year lows on more cautious Riksbank policy guidance from Governor Ingves and shrugging off reasons to start normalisation now from rate hike dissenter Ohlsson. Back to Usd/G10 pairs, Eur/Usd looks more supported above 1.2300, but perhaps capped by its 30 DMA around 1.2363, and Cable is holding the bulk of Monday’s gains over 1.3800 on UK PM May’s claims that a transition deal is getting closer (and notwithstanding more reports of hard-line EU demands). In commodities, WTI and Brent crude futures trade little changed but in close proximity to yesterday’s highs after the IEA took an upbeat view on global oil demand and OPEC Sec-Gen continued to show support for the solidity of the global supply cut agreement. Further newsflow will likely emanate from the Houston energy conference. In metals markets, spot gold trades with modest gains alongside a slightly softer USD with the move in the yellow metal capped to the upside by this morning’s risk appetite. Elsewhere, zinc prices saw their largest declines in three months in China following rising inventories whilst steel saw further selling pressure overnight as soft demand continues to hamper prices. Looking at the day ahead, with nothing of note in Europe, the main focus is on the US where we are due to receive January factory orders data along with final revisions to durable and capital goods orders. BOE’s Haldane will speak and over at the Fed, Dudley is due to speak at 7.30am ET. US Event Calendar 10am: Factory Orders, est. -1.4%, prior 1.7%; Factory Orders Ex Trans, prior 0.7% 10am: Durable Goods Orders, est. -3.6%, prior -3.7%; Durables Ex Transportation, prior -0.3% 10am: Cap Goods Orders Nondef Ex Air, prior -0.2%; Cap Goods Ship Nondef Ex Air, prior 0.1% Central Banks 7:30am: Fed’s Dudley Speaks at U.S. Virgin Islands 7pm: Fed’s Brainard to Speak in New York 8:30pm: Fed’s Kaplan Speaks at Energy Conference DB's Jim Reid concludes the overnight wrap As I get on the plane markets are looking a lot better than me and also on where they were towards the end of last week. In the US yesterday House Speaker Ryan’s comments (see below) and the general perception that last week’s protectionist fears may have been too much too soon seemed to drive risk assets higher yesterday, with the S&P (+1.1%) up for the second consecutive day and all sectors higher with gains led by utilities, financials and real estate stocks. Notably, the S&P has now had 14 days of plus or minus 1% moves in either direction since the start of February, which compares to only 10 days from Jan 17 to Jan 18. The Dow (+1.37%) and Nasdaq (+1.0%) also advanced while the VIX fell 4.4% to 18.73. Delving into the rhetoric a bit more, House speaker Ryan’s spokeswoman noted “we’re extremely worried about the consequence of a trade war and are urging the White House to not advance with this (tariffs) plan”, in part as they do not want to jeopardize the economic gains from recent tax reforms. Although President Trump has said “no, we’re not backing down”, he did seemed to softened his stance and opened the door for negotiations, at least for Canada and Mexico where he noted “tariffs on steel and aluminium will only come off if new & fair NAFTA agreement is signed”. Later on, US trade representative Lighthizer confirmed those sentiments and noted that the President’s “view was that it makes sense that if we get a successful (NAFTA) agreement, to have them excluded” from the tariffs. Over in Germany, Ms Merkel’s Chief spokesman Seibert noted “…it makes little sense to compare tariffs on individual products” but added “…we certainly don’t want anything like a trade war”. Turning back to Europe, the Italian election story hasn’t moved on significantly since we discussed it first thing yesterday morning but there has been some posturing. As a reminder the populists of 5SM and the Northern League remain the biggest winners. Arithmetically these two could form a coalition but the former has previously suggested they won’t enter a coalition. However their success means that a government will be incredibly difficult to form without them. Their leader Di Maio did say that 5SM’s victory should allow him to govern Italy and that we are open to talks with all parties. So we’ll see if that means they’re more open to a coalition than before. Meanwhile NL leader Salvini said on live TV that “the centre-right coalition is the coalition that won”. He also said that result requires NL “to be responsible” and that the NL not available for “bizarre coalitions” and that “We want to govern with the centre-right.” This would argue against the desire for a 5SM tie-up. It’s also worth noting that Salvini did say that “the common currency system is bound to come to an end….not because Salvini wants that but because that’s what facts, good sense and the real economy say”. So although his party haven’t been pushing to leave the euro recently he is clearly very negative about the single currency’s future which is interesting for someone who could be a kingmaker. However he has always felt this way so it’s not really new news. Elsewhere, Mr Renzi noted the results were “very disappointing” for the Democratic Party and has resigned as Party Leader. Here is DB’s note published yesterday morning on the results and the implications. This morning in Asia, markets are rallying post the positive US lead. The Nikkei is up for the first time in five day (+1.75%) while the Kospi (+1.48%), Hang Seng (+1.58%) and China’s CSI300 (+0.68%) are also up as we type. Elsewhere, BOJ’s Kuroda spoke at his confirmation hearing in the upper house and noted the BOJ is keeping financial conditions as accommodative as possible. On inflation, the board’s consensus is that it will reach 2% in around fiscal year 2019 and the BOJ will work with the government to end deflation, although conceded that the 2% target is still distant. Now recapping other markets performance from yesterday. European bourses initially opened weaker but recovered quickly to close broadly higher. Across the region, the DAX (+1.49%) led the gains as the SPD voted to form a coalition government with Ms Merkel’s bloc, while the Stoxx (+1.04%) rose for the first time in five days and FTSE (+0.65%) also advanced. In Italy, the FTSE MIB and 10y BTPs both traded down earlier on (-2%; +7bp) but ended the day relatively resilient with BTPs +3.6bp and MIB -0.42% with bank stocks underperforming the market. Over in government bonds, core 10y bond yields were mixed but little changed (UST 10y +1.7bp; Bunds -0.8bp) while peripherals excluding BTPs outperformed with yields down 4-5bp. Turning to currencies, the US dollar index edged higher for the first time in three days (+0.05%), while the Euro and Sterling gained 0.15% and 0.34% respectively. In commodities, WTI oil was up 2.22% to $62.61/ bbl partly due to a production disruption at Libya’s Sharara oil field, although production is expected to resume later this week. Away from the markets and onto China’s National People’s Congress, Premier Li has signalled tolerance for slower growth and cut the fiscal deficit for the first time since 2012 (2017: 3% of GDP; 18E 2.6%). Our Chinese economists believes the changes reinforces their view that GDP growth will slow in 2018F to 6.3% from 6.9% in 2017. The main takeaways from the Premier’s work plan include: i) tightening fiscal policy, tolerating slower growth, ii) stronger support for the new economy, iii) better market access and lower tariffs for foreign firms in China and iv) monetary policy stance to stay unchanged. Refer to their note for more details. In the US, the Fed’s Quarles noted the Volcker rule “…is an example of complex regulation that is not working well” and that “…banks spend far too much time and energy contemplating whether particular transactions or positions are consistent with the Volcker rule”. Hence, US financial agencies are working quickly to make “material changes” to the rules. Elsewhere, the Mississippi Republican Senator Cochran will resign from Congress on 1 April due to health reasons (age 80). His departure sets up a special election this November and could weigh on the Republican’s current slim majority of 51-49 in the Senate. In credit, Michal in my team published a report “IG Strategy: ECB Keeps More Weight on the CSPP as It Takes Steinhoff Losses in Its Stride”. It provides an update on the latest CSPP purchases, their breakdown into primary and secondary, and their relative weight in the ECB QE programme. It includes estimates of the ECB’s average allocation of primary deals and an update on relative pricing of CSPP-eligible and ineligible securities. Finally, it estimates the ECB losses on the Steinhoff bond that they sold after it plunged by half and notes that it has been comfortably absorbed by the returns on the overall CSPP portfolio. Finally, for those interested in empirical studies, the San Francisco Fed published a finding yesterday that noted negative yield curves have predicted all nine US recessions since 1955 with a lag of 6 to 24 months and “while the current environment appears unique”, the authors find “…the term spread is by far the most reliable predictor of recessions”. Something we’d generally agree with! Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February non-manufacturing ISM index was above market at 59.5 (vs. 59 expected). In the details, the new orders index rose 2.1pts to 64.8 (highest since 2005) while the employment index fell 6.6pts from January’s all-time high to 55.0. Elsewhere, the final readings of the February services PMI was in line at 55.9 while the composite PMI was slightly softer at 55.8 (vs. 55.9 previous) but still the highest since January 17. In Europe, the January retail sales print was in line at -0.1% mom, leading to an annual growth of 2.3% yoy, while the March Sentix investor confidence was below market at 24 (vs. 30.9) and the lowest since April 17. The final readings for the Euro area’s February composite PMI (57.1 vs. 57.5 expected) and services PMI (56.2 vs. 56.7 expected) were revised c0.4pt lower. Across the countries, Germany’s composite PMI was +0.2pt higher than expectations to 57.6 while France was -0.5pt below to 57.8. Elsewhere, the flash composite PMI for Italy was lower than expected (56 vs. 57.9) while the UK was above market (54.5 vs. 53.6 expected) and the services PMI was the highest since October (54.5 vs. 53.3 expected). Looking at the day ahead, with nothing of note in Europe, the main focus should be on the US where we are due to receive January factory orders data along with final revisions to durable and capital goods orders. BOE’s Haldane will speak and over at the Fed, Dudley is due to speak at 12.30pm GMT.
Asian bourses and European shares fell after surprisingly bad Chinese PMI and Japanese econ data added to a perceived hawkish tilt in Fed policy emerging from Chair Powell's testimony which weighed on global equities. Benchmark Treasury yields held near a four-year high and the dollar was steady after Tuesday’s jump. As a reminder, in addition to the unexpectedly hawkish Powell testimony, China disappointed with a broadly weak set of Mfg and Service surveys, as the Chinese NBS Manufacturing PMI printed 50.3 vs. Exp. 51.1 (down from 51.3), and the lowest since September 2016, while the Chinese NBS Non-Manufacturing PMI dropped from 55.3 to 54.4 vs. Exp. 55.0. The result has been a sea in most global stock markets... ... if not S&P futures, which after hitting session lows shortly before midnight ET have managed to stage another modest rebound and were on the green side of unchanged this morning. As noted above, the watercooler topic this morning was Fed Chair Jay Powell’s upbeat assessment of the world’s biggest economy, whose inaugural testimony provided a hawkish view on inflation and was also optimistic on economic growth, which raised the prospects of 4 hikes for this year and subsequently weighed on equity markets across the globe. The market noticed, and has pushed the number of priced-in Fed hikes for 2018 to precisely 3, the highest yet; a little more hawkishness from Powell and the market will start considering 4 hikes as a realistic option. “What the markets are telling you today and year-to-date is that interest rate hikes are expected and that’s getting priced in,” Medha Samant, Fidelity International investment director, told Bloomberg TV. “The question is, despite all the upbeat data that we see coming out of the U.S., what is going to be the pace of these rate hikes and how quickly is it going to happen.” Still, not everyone is convinced: as SocGen's Kit Juckes notes in the aftermath of the disappointing Chinese PMI data, "it would take a big surprise from US ISM data to avoid a second monthly decline in global PMI measures. That, along with falling economic surprise indices, and signs that at a global level inflationary pressures aren't noticeably building, fuels the view that the growth spurt at the end of 2017 is now behind us. The case for fading the long-end Treasury sell-off would seem to be growing" (more on this note shortly). Investors’ focus now shifts to U.S. GDP data due Wednesday after Powell opened the door to four Fed rate increases this year, saying his personal outlook for the economy had strengthened. U.S. and European bond yields have soared in recent months amid speculation that the Fed’s monetary policy will be tightened at a faster pace, but for equity investors, that’s testing nerves. As Bloomberg notes, global stocks are poised for their worst month since January 2016 after years of central-bank stimulus push up valuations. * * * Meanwhile, European equities slide in tandem with their U.S. and Asian counterparts as investors digested Powell’s testimony; miners lead declines after weaker-than-expected China manufacturing PMI data. However, losses have been pared throughout the morning (Eurostoxx 50 -0.4%). In terms of sector specific performance, movements have been relatively broad-based with support for IT names following strong earnings from Dialog Semiconductor (+10%) which has sent their shares to the top of the Stoxx 600, energy names also firmer as crude modestly recoups some of its post-API losses. Most euro-area and U.K. bonds rise, while Germany underperforms after a soft 10-year auction. The MSCI Asia Pacific Index also dropped across the board as the impact from Fed Chair Powell’s testimony reverberated in the region and as participants also digested disappointing Chinese PMI data. ASX 200 (-0.7%) and Nikkei 225 (-1.4%) were lower with the worst performers in Australia also dampened by poor earnings results, while Nikkei 225 suffered from a firmer JPY as well as weak Industrial Production and Retail Sales data. Elsewhere, Hang Seng (-1.4%) and Shanghai Comp. (-1.0%) were the early laggards. Of note: Bloomberg highlights that Chinese offshore investors became sellers of mainland-listed equities in February for the first time since 2016, dumping net 564 million yuan ($89 million) of A shares via the exchange links with Shanghai and Shenzhen, Bloomberg calculations based on daily quota usage showed. That translates into average daily net selling of 37.6 million yuan. Elsewhere, the Bloomberg Dollar Spot Index consolidated and stays near 2 1/2-week high seen yesterday; yen outperforms after the Bank of Japan cut purchases of ultra-long JGBs, although offsetting tapering fears, the BOJ left its planned bond purchase amounts for March unchanged from February. The Bloomberg Dollar Spot Index is set to halt a three-month decline, with the yield on Treasury 10-year notes holding around 2.9%, close to cycle highs. On the topic of the dollar, Citi writes that "all anyone in markets can talk about Jerome Powell, but has the game really changed that much overnight? Any sustained USD strength from here faces evident headwinds, but in the short-term, today is month-end, which might mean just the opposite." Indeed, it has been another difficult day for euro bulls as a still-crowded trade becomes a pain one for leveraged names. The euro briefly slipped below 1.22 handle for the first time since Jan. 18 as leveraged names that have been supporting the common currency in the past week offload part of their longs, but euro-area inflation data which met estimates helped to keep the currency off its day low. Month-end flows do no favors as they lean toward the dollar-supportive side, keeping cable below 1.3900 ahead of the EU’s draft Brexit treaty. Elsewhere, crude oil was little changed as the International Energy Agency warned about seemingly unstoppable U.S. shale production. Sterling added to yesterday’s decline as U.K. Prime Minister Theresa May squared off for a fight with the European Union over a Brexit deal. Brent crude recovered from day lows, though remains below $67/barrel, with WTI crude near $62.60. Traders will also be mindful of yesterday’s source reports stating that OPEC are set to meet with US shale producers next Monday. In metals markets, spot gold is particularly flat today in the wake of yesterday’s Powell-inspired sell-off whilst Chinese steel futures were seen higher overnight with the move to the upside capped by soft demand. Dalian iron ore weakens for second day. Wednesday’s agenda includes the second revision of Q4 GDP, Chicago PMI, pending home sales and MBA Mortgage Applications. L Brands and Mylan are among companies set to report quarterly numbers. Market Snapshot S&P 500 futures up 0.2% to 2,753.00 STOXX Europe 600 down 0.2% to 381.52 MSCI Asia Pacific down 1% to 177.16 MSCI Asia Pacific ex Japan down 1% to 578.27 Nikkei down 1.4% to 22,068.24 Topix down 1.2% to 1,768.24 Hang Seng Index down 1.4% to 30,844.72 Shanghai Composite down 1% to 3,259.41 Sensex down 0.5% to 34,189.13 Australia S&P/ASX 200 down 0.7% to 6,015.96 Kospi down 1.2% to 2,427.36 German 10Y yield fell 1.2 bps to 0.667% Euro down 0.1% to $1.2216 Italian 10Y yield fell 1.3 bps to 1.736% Spanish 10Y yield fell 2.8 bps to 1.537% Brent Futures up 0.2% to $66.79/bbl Gold spot up 0.2% to $1,320.50 U.S. Dollar Index up 0.1% to 90.44 Bulletin Headline Summary From RanSquawk European bourses kicked the session off on the back-foot following similar performance in their Asia-Pac counterparts, post-Powell The broad Dollar continues to benefit from month end positioning and a more hawkish tone emanating from Fed chair Powell during the live testimony and Q&A session Looking ahead, highlights include US GDP, Chicago PMI, Pending Home Sales, DoE inventories, EU Brexit Draft Treaty Top Overnight News from Bloomberg Jerome Powell opened the door to the Federal Reserve raising U.S. interest rates four times this year as he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes Jared Kushner can no longer attend some meetings of the National Security Council, see the highly classified President’s Daily Brief or war-related intelligence after losing his top-secret security clearance as part of a broader White House crackdown, according to a person familiar with the matter Eight Conservative Party lawmakers have backed an amendment calling for the U.K. to keep close ties to the European Union after it leaves, an attempt to reverse Theresa May’s Brexit policy that could threaten her political survival U.K. consumer and business confidence was muted in February as Brexit obscured prospects for economic growth. The Bank of Japan cut purchases of bonds maturing in more than 25 years for the second time this year, after yields declined on the back of solid demand before the end of the fiscal year in March China’s official manufacturing gauge fell the most in five years in February as Spring Festival holiday closures curbed output and export orders declined China-based Geely Group structured the purchase of its 7.3 billion-euro ($9 billion) stake in Daimler AG through complex derivative transactions that allowed the buyer to build a large equity holding while limiting the risks, people with knowledge of the matter said China is ‘strongly dissatisfied’ with U.S. duties on aluminum foil and the country will take necessary measures to safeguard its legitimate rights, Wang Hejun, chief of the trade remedy and investigation bureau at Ministry of Commerce, says in a statement on website China plans to cap the amount that investors can redeem from money- market funds on a single day, according to people familiar with the matter Governor Haruhiko Kuroda says the Bank of Japan won’t continue its current powerful monetary easing once inflation hits its 2% target in a stable manner, even if the government puts pressure on the central bank to keep interest rates low Asian equity markets were negative across the board as the impact from Fed Chair Powell’s testimony reverberated in the region and as participants also digested disappointing Chinese PMI data. The inaugural testimony by Fed Chair Powell provided a hawkish view on inflation and was also optimistic on economic growth, which raised the prospects of 4 hikes for this year and subsequently weighed on equity markets across the globe. ASX 200 (-0.7%) and Nikkei 225 (-1.4%) were lower with the worst performers in Australia also dampened by poor earnings results, while Nikkei 225 suffered from a firmer JPY as well as weak Industrial Production and Retail Sales data. Elsewhere, Hang Seng (-1.4%) and Shanghai Comp. (-1.0%) were the early laggards with investor sentiment dragged following a miss on Chinese Official Manufacturing and Non-Manufacturing PMI data in which the former printed its weakest since September 2016, while aluminium names also felt the brunt after the US confirmed tariffs on aluminium foil imports from China. Finally, 10yr JGBs lacked demand despite the broad global risk-averse tone, as Japanese yields tracked the upside in their US counterparts and which also followed a reduction of the BoJ’s Rinban purchases in the super-long end. The PBoC skipped open market operations for a 2nd consecutive day. PBoC set CNY mid-point at 6.3294 (Prev. 6.3146) Top Asian News BOJ Cuts Purchases of Super-Long Bonds After Curve Flattens Chinese H Shares Sink, Wrapping Up World’s Biggest Monthly Drop Noble Group Perpetual Holders Unite to Oppose Restructuring Afghan President Offers Taliban Political Recognition, Talks European bourses kicked the session off on the back-foot following similar performance in their Asia-Pac counterparts, post-Powell. However, losses have been pared throughout the morning (Eurostoxx 50 -0.4%). In terms of sector specific performance, movements have been relatively broad-based with support for IT names following strong earnings from Dialog Semiconductor (+10%) which has sent their shares to the top of the Stoxx 600, energy names also firmer as crude modestly recoups some of its post-API losses. Other notable movers this morning post-earnings include St James Place (+3.9%), Ahold (+2.8%), Travis Perkins (-6.2%), Taylor Wimpey (-2.4%), ITV (-6.2%) and Bayer (-3.4%). Top European News Swedish Economic Growth Accelerates Along With Global Revival German Joblessness Falls as Companies Struggle to Find Workers Johnson: Irish Border ‘Being Used’ to Keep U.K. in Customs Union New ITV CEO Disappoints on Ad Revenue Outlook, Lack of Dividend In FX, the broad Dollar continues to benefit from month end positioning and a more hawkish tone emanating from Fed chair Powell during the live testimony and Q&A session. The index is retesting near term chart resistance in the 90.500-600 area, and could establish a firmer recovery base if it manages to close above. EURUSD may be pivotal on this front as the pair only just held the 1.2200 level having breached 1.2206 support, with stops expected on a clear break below and exposing several tech supports (1.2181/1.2173 Fibs and 55DMA at 1.2176) ahead of the January 18 ytd low at 1.2165. Above forecasts German jobs data has subsequently seen the headline pair move back into the 1.2220 area. The Greenback is also extending gains vs the JPY, but struggling around 107.00 again amidst decent offers above the big figure and option expiries at the strike (today and more running off this week). Cable looks prone to a deeper pull-back from 1.4000 and while under 1.3900 further declines could see techs target double bottom support circa 1.3855 (especially if the EU’s draft Brexit paper is particularly hard-line). AUDUSD is also hovering above key downside levels and a hefty 0.7800 expiry (1.1 bn), including 200 and 100 DMAs from 0.7784-76 and the 2018 low at 0.7758, while NZDUSD is inching closer to 0.7200 after Tuesday’s trade data miss. Usd/Cad is holding just below strong resistance at 1.2796 ahead of Canadian PPI and raw material price data. In the commodities complex, WTI and Brent crude futures have seen a mild uptick in recent trade following last night’s API-inspired losses. Whereby, prices suffered despite a smaller than expected build to headline crude stockpiles, as it was also accompanied by an unexpected build to gasoline inventories. Traders will also be mindful of yesterday’s source reports stating that OPEC are set to meet with US shale producers next Monday. In metals markets, spot gold is particularly flat today in the wake of yesterday’s Powell-inspired sell-off whilst Chinese steel futures were seen higher overnight with the move to the upside capped by soft demand. US Event Calendar 7am: MBA Mortgage Applications, prior -6.6% 8:30am: GDP Annualized QoQ, est. 2.5%, prior 2.6%; Personal Consumption, est. 3.6%, prior 3.8%; Core PCE QoQ, est. 1.9%, prior 1.9% 9:45am: Chicago Purchasing Manager, est. 64.1, prior 65.7 10am: Pending Home Sales MoM, est. 0.5%, prior 0.5%; NSA YoY, prior -1.8% DB's Jim Reid concludes the overnight wrap The big story yesterday was yields spiking after the inaugural testimony from new Fed Chair Powell to the House Financial Services Committee. The first impressions of Mr Powell are favourable from us here in the Thematic Research team at DB as he gave our “yields are rising ... and why they’ll continue to....” theme week some fresh impetus yesterday as 10 year Treasuries climbed over 7bps from the lows of the day after his Q&A to the House yesterday. Staying with yields the big event today is core PCE in the US which is the Fed’s preferred inflation measure. Before we delve into Mr Powell’s testimony, a reminder of the theme week so far and to highlight today’s piece on what higher yields mean for global equity investors. So Powell’s testimony at Capitol Hill was fairly hawkish yesterday but it took until the Q&A for the market to decide this. Most were expecting a more ‘steady as she goes’ approach so it took investors a bit by surprise. As soon as the initial headlines from the prepared testimony hit the wires the main takeaway was perhaps Powell's comments that “some headwinds facing the US economy are now tailwinds” and also that the policy committee “will strike a balance between avoiding an overheated economy and moving inflation to the 2% target on a sustained basis” and that financial conditions “remain accommodative”. There were also the usual mentions of seeing “further gradual rate hikes” and also that the “outlook remains strong”. For the market however, Treasuries really got moving once the Q&A kicked off. The Fed Chair confirmed that while he wouldn’t prejudge, his personal outlook for the US economy has strengthened since December and that “we’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target”. He also noted that “we’ve seen continued strength around the globe, and we’ve seen fiscal policy become more accommodative”. Powell also added that he does not want “regulations to inappropriately slow credit”. Overall there appeared to be no sign of Powell being concerned about the mini selloff in February as impacting the Fed’s outlook for the economy while all the risks appeared to be biased toward upside to growth rather than downside to inflation, as well as the benefits from fiscal policy going forward. Much of the interest now will be on whether or not this translates into a change in the March dot plot. 10y Treasuries quickly spiked through 2.90% as Powell spoke after trading as low as 2.846% after his prepared remarks were released. They topped out at 2.923% and eventually closed at 2.894% (+3.1bp). The move was led by the belly of the curve with 3, 5 and 7y yields 4-5bp higher while 2y and 30y yields ended 3.8bp and 0.6bp higher respectively indicating a notable bear flattener. In Europe, 10y Bunds ended +2.6bps higher having chopped around earlier in the day in response to a slightly softer Germany CPI print (more below). Meanwhile the USD index closed +0.58% and just off the highs while risk assets suffered with the yield move. The S&P 500 ended down -1.27% - with declines accelerating in the evening session - and brought to an end the three-day winning streak, while the Dow ended -1.16%. The early moves lower in risk were also enough to see European markets edge into the red by the close of play (Stoxx 600 -0.18%). The VIX was up for the first time in five days to 18.59 (+17.7%). The Powell testimony straddled some mixed US data with the hard numbers weak but with confidence data and survey data strong (see below). However the hard data was enough to push the Atlanta Fed GDPnow Q1 tracker down to 2.58% versus 3.20% previously and as high as 5.4% early in the quarter! This morning in Asia, markets are all lower with the Nikkei (-0.97%), Kospi (-0.95%), Hang Seng (-1.36%) and China’s CSI 300 (-0.48%) all down as we type. Datawise, China’s February manufacturing PMI (50.3 vs. 51.1 expected) and non-manufacturing PMI (54.4 vs. 55.0 expected) were both below market and declined mom, with the former at the lowest since July 2016. Elsewhere,Japan’s January IP (2.7% yoy vs. 5.3% expected) and retail trade (1.6% yoy vs. 2.4% expected) were also lower than expectations. We’re definitely seeing global data dipping from a strong peak in the last week. Turning to other markets yesterday. The Euro and Sterling fell 0.68% and 0.42% respectively given the USD strength. In commodities, WTI oil fell 1.67% to $62.84/ bbl, in part as the IEA warned about “explosive growth” in US output. Elsewhere, precious metals weakened c1.3% (Gold -1.15%; Silver -1.39%) and other base metals retreated as the USD firmed (Copper -1.16%; Zinc -0.96%; Aluminium +0.04%). Away from the markets and onto the ECB’s Weidmann where he broadly reiterated his prior comments. On the outlook for rates, he noted the market’s expectation for hikes to begin in mid-2019 was “not completely unrealistic” and that ECB’s current policy guidance of keeping rates unchanged “well past” the end of QE “is a rather vague time dimension” and should be strengthened. On QE, he would have preferred the ECB to have set a “clear end date” when it extended the program back in October. Turning to the US, the US Treasury Secretary Mnuchin said President Trump “is willing to negotiate” on the Transpacific Partnership, “whether we do multilaterals or going back to TPP…that’s something that’s on the table”. Elsewhere, the US commerce department has proposed duties of 49%-106% on Chinese aluminium foil for selling the product in the US. The issue will go to a vote on 15 March at the US International trade commission. Turning to some Brexit headlines. On the transition period, the UK had recently suggested “around two years” with suggestions of potentially leaving it open ended. Yesterday, the EU negotiator Barnier was quite firm, noting that the transition period “must be short…must be clearly specified and for the moment this is clearly the line that we’re pursuing – a period ending on Dec 2020”. Elsewhere, the UK trade secretary Fox noted if the UK stayed in the customs union post Brexit, this would be a “complete sell out” and limit UK’s ability to negotiate other trade deals. Finally, the UK PM May “remains committed to avoid a hard border between Northern Ireland and the rest of the UK” with more details to be provided in her big speech on Friday. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the CB consumer confidence index was above market and rose to a 17 year high (130.8 vs. 126.5 expected) while the February Richmond Fed manufacturing index also beat at 28 (vs. 15 expected). However on the downside, the January advanced goods trade deficit was the widest since 2008 at -$74.4bln (vs. -$72.3bln expected) as growth in imports outpaced exports. Elsewhere, wholesale inventories grew 0.7% mom (vs. 0.4% expected) while both core durable goods orders (-0.3% mom vs. 0.4% expected) and core capital goods orders (-0.2% mom vs. 0.5% expected) were below market but still up 6.9% yoy and 6.3% yoy respectively. Finally, the December FHFA house price index (0.3% mom vs. 0.4% expected) and the S&P corelogic house price index (6.3% yoy vs. 6.35% expected) were both slightly below expectations. Germany’s February CPI was 0.1ppt lower than expectations, at 0.5% mom and 1.2% yoy respectively, with the annual rate at a 16 month low. Spanish inflation beat expectations though (1.2% yoy vs. 0.9% expected). The Euro area’s January money supply was in line at 4.6% yoy and the final reading on February consumer confidence was unrevised at 0.1. Elsewhere, the February confidence indicators across Europe were slightly ahead of market, with the Euro area’s economic confidence at 114.1 (vs. 114 expected), Italy’s manufacturing confidence at 110.6 (vs. 109.2 expected) and consumer confidence at 115.6 (vs. 115 expected). Conversely, France’s consumer confidence was below market at 100 (vs. 103). Looking at the day ahead, Germany’s March GfK consumer confidence index is due in early morning. Then the flash February CPI readings for the Euro area, France and Italy will be out. Elsewhere, France’s January PPI and 4Q GDP along with Germany’s February unemployment rate are also due. In the US, the February Chicago PMI, second reading on the 4Q GDP and Core PCE as well the January pending home sales data will be due. Onto other events, the EU negotiator Barnier will brief permanent EU representatives on Brexit and the withdrawal text is also expected to be published.
Last June, when looking at the most unstable of China's mega conglomerates Anbang Insurance (the others are HNA, China Evergrande and Dalian Wanda), we said that "Anbang's troubles could soon become systemic." Half a year later, that's exactly what happened when in a "surprising" twist, the $315 billion insurer was bailed out by Beijing, just days after we pointed out the tremendous surge in the yield on its bonds. HNA's 2019 bonds YTM 12%, after hitting 14.2% recently pic.twitter.com/DwZj0GgOWv — zerohedge (@zerohedge) February 18, 2018 And while the market has so far blissfully ignored the potential consequences of this admission by China that all is not well with its biggest corporations, that may soon change. For starters, there is HNA's massive debt: according to Bloomberg data, HNA Group’s dollar debt dwarfs that of other stressed Asian borrowers such as Noble Group Ltd. and India’s Reliance Communications. S&P Global Ratings recently lowered HNA Group’s credit profile to ccc+ from b earlier this month, saying it is unclear if existing access to capital markets and some apparent bank support is sufficient for meeting its upcoming obligations. One look at the chart above should confirm that any hope HNA may have had of accessing markets is now gone, leaving only the government as a lender of last resort. And while there’s no indication - yet - that HNA is facing such financial difficulties that a default is in the offing, some market participants are starting to game plan scenarios, and a variety of takes have emerged. For one, the amount of dollar bonds outstanding for the conglomerate and its units, at $13.7 billion, accounts for more than 1% of Asian high-yield bonds outside of Japan, and raises the question of the impact on the broader market. While many see little wider impact in the event of a default, the case of China’s most popular, to date, debt default - that of Kaisa Group Holdings three years ago, when Asian dollar junk bond premiums widened considerably - should serve as a warning. Below is a summary of some initial views from analysts on how any default scenario for HNA would impact the Asian bond market. What is remarkable is just how optimistic every single analyst is that a default won't result in contagion. Which, if history is any indication, means that precisely the opposite will happen. Courtesy of Bloomberg: HSBC (Glenn Ko) - Isolated case HNA is more of idiosyncratic case rather than systemic. Institutional clients and even China-based investors are not involved. Therefore the impact should be contained. Of course, if this happens on top of other negative news flow in the market, the situation could be different Lombard Odier (Homin Lee) - Situation manageable HNA is a well-known story right now, so the impact of its bond fallout will be limited. Other BB names in Asia still have a strong tailwind behind them, such as real estate names amid macro stability. Single name facing some default issues will be manageable in the credit markets in Asia “I don’t doubt there could be some intra-day moves reflecting this worry. But in terms of the overall trend, can it make a difference? I doubt it” ANZ (Owen Gallimore) - Default digestible Isolated Chinese non-state-owned junk bond defaults will be digested, even if it is HNA In many ways non-rated state-owned firms and LGFV dollar bond issuance has replaced the traditional China HY market of developers and industrials, so one needs to see problems in these sectors for a broader market correction Haitong International (Ray Wepener) - Contained contagion “The impact of an HNA default on the wider market would depend on a number of factors. I would expect a knee jerk reaction, mostly isolated to recently (overseas) acquisitive companies" While HNA spreads more than doubled in 2017, Asian HY spreads tightened by 100 basis points from the wides The market has seen for some time now that ‘buy the dip’ has provided a floor, which should contain any widespread contagion UBS - Spread surge A default scenario would increase funding costs for high-yield issuers, mainly Chinese property companies and LGFVs, and could push out spreads on junk bonds in the region by 160-240 basis points, according to a Feb. 6 equity strategy note UBS said in the report it doesn’t cover HNA and hasn’t done due diligence on the company, so it cannot comment on the likelihood of a default * * * Finally, here an interesting take from Bloomberg Markets Live commentator, Andrew Cinco, who sees the Anbang blowup as eerily similar to the Japanese bubble peak. I guess the NYC Landmark signal still works. Anbang goes wobbly just a few short years after its splashy purchase of a trophy Manhattan property, the Waldorf-Astoria Hotel. It brings to mind the Japanese real-estate bubble in the late 80s, and one has to wonder whether China will suffer the same retreat eventually. The height of Japan's property-market glory was marked by Mitsubishi Estate's acquisition of Rockefeller Center in October 1989 (NB: the Nikkei Index peaked just two months later, on Dec. 29). Mitsubishi walked away from the iconic property almost exactly six years after announcing the deal. The NY Times reported the end of the deal this way: "Mitsubishi's sudden decision to exit Rockefeller Center is the most striking in a string of recent retreats from the trophy properties stretching from New York to Honolulu that Japanese companies acquired during a real estate binge in the 1980s."
The global selloff that started on Monday as traders were spooked by the double whammy of surging interest rates and fears about iPhone X demand, and resulting in the biggest drop in US stocks since September, accelerated overnight and as seen below world stocks and US equity futures are a sea of red this morning: In an odd reversal, yesterday's dollar bounce lost steam amid position rebalancing before Trump’s State of the Union address and the Fed’s two-day meeting. So far today, it has been a tale of two halves: Light dollar buying throughout the Asia session, reversing once London opened, with EUR and other G10 pairs bouncing off the lows. Bunds have also come down from the highs. USD is now looking heavy, with perhaps more selling to come according to some desks, even as US yields are dipping. Most pairs remain range-bound for the time being, as we head into the magic of month-end tomorrow, for the first time in 2018. Month-end related selling is expected at some point. The euro advanced alongside the yen, and the pound erased a drop. The yen advanced against all of its Group-of-10 peers as a stock selloff prompts risk aversion. Tokyo-based funds are selling the Aussie against the yen ahead of Trump’s speech Tuesday night, according to a trader who spoke to Bloomberg. “After last week’s large moves, currency markets are wary of this week’s upcoming events but also of the implications for higher yields,” said Mansoor Mohi-uddin, head of currency strategy at NatWest Markets in Singapore. “The focus in G-10 currencies is whether higher yields cause stocks to weaken, thus supporting safe haven currencies.” Predictably, volatility across FX continues to rise, with EUR/USD driven back above 1.24, while GBP/USD rallies 100 pips to 1.41 after sliding below 1.40. Actually make that vol across all assets classes. Treasury yield rose above 2.7% before slipping back, while European government bonds edged higher as traders digested growth data from the region. Rate moves were supported as rebalancing inflows widely flagged over last week, keeping the curve relatively unchanged; bunds initially rally after soft Saxony CPI reading, however other German regions reduce probability of large national German CPI miss. US TSYs tracked the dollar for much of the session, although they have since rebounded from session lows even as the BBDXY continues to decline. Overnight the US bond selloff spread to Japan, where the benchmark 10-year bond yield briefly rose over 2bps above 0.10%, the highest since July 11, with yields up ~1bp across the curve at last check. Any sustained increase in the 10-year yield to 0.1% would test speculation the BOJ will offer to buy unlimited amount of bonds for fixed rates. Meanwhile in equities, European stocks opened in the red and drifted lower, mirroring a particularly weak Asian equity session and the drop in U.S. index futures. The Stoxx Europe 600 Index drops 0.5%, declining for the fourth time in five days. Miners are among the biggest decliners as copper and gold prices fall, with banks also sliding. Index losses are tempered by a gain for Swatch after its earnings beat estimates, while Siemens Gamesa also advances after saying it’s on the right path to meet 2018 targets. Asian markets also traded lower across the board as the selling in US equity futures and retreat from record highs gathered pace overnight. Australia's ASX 200 (-0.9%) and Japan's Nikkei 225 (-1.4%) were both negative with Australia led lower by weakness across commodity-related sectors, while Japanese participants digested earnings and a slew of data including a contraction in Household Spending, as well as higher Unemployment. Selling accelerated in late trade amid a slump in US equity futures, in which DJIA futures fell over 200 points after a breakdown of near-term support at 26,400. Hang Seng (-1.1%) and Shanghai Comp. (-1.0%) conformed to the losses after continued PBoC inaction which resulted to a daily net drain of CNY 240bln and amid reports that banks were ordered to curb overnight lending, while tech names and Apple suppliers in the region were also mostly downbeat after the tech giant was said to reduce Q1 iPhone X orders by 50% due to slower than expected sales At the same time, a wariness is emerging in equity markets as surging rates on government bonds test appetite for stocks at elevated valuations. Investors are weighing whether stronger corporate earnings, a pick-up in economic growth and optimism over U.S. tax cuts can continue driving up prices in markets that recently touched their highest on record; as noted yesterday, Goldman Sachs predicted a correction is imminent, but said any such pullback would be a buying opportunity. “An acceleration in the selloff of global bond markets appears to be starting to let some of the air out of the recent rally in global equity markets,” said Michael Hewson, chief market analyst at CMC Markets UK. “U.S. markets suffered their worst one day fall this year, though sharp falls in tech stocks also contributed.” Apple Inc. shares dropped as much as 2.6 percent amid renewed concerns about falling demand for the iPhone X. Looking at today's key event, expect Trump's State of the Union address to borrow from Trump’s Davos appearance with respect to detailing the America First approach, Credit Agricole strategists including Valentin Marinov write in a note. Markets will be particularly sensitive to any hints of further trade barriers to protect domestic U.S. producers, probably with negative implications for the USD. A quick look at the ongoing Brexit chaos, cable initially sold off on news that PM May will reject the EU’s proposed deal on the Brexit transition period and go into battle next week over freedom of movement and so-called “rule taking”, the Telegraph reported. Then, the Times said that May is facing a donors’ revolt and growing pressure to leave Downing Street as soon as the outline of a trade deal is negotiated with the European Union this autumn. Finally, BuzzFeed leaked the UK government’s unreleased Brexit analysis which reportedly showed that UK will be worse off in every scenario outside the EU. Elsewhere, many metals pared Monday’s gain, though gold reversed a decline to trade higher. Bitcoin fluctuated around $11,000 and emerging-market stocks slumped. Both WTI and Brent crude futures traded lower amid the (early) resurgence in the USD with prices hovering around the USD 65bbl and USD 69bbl levels respectively with energy newsflow otherwise relatively light. In metals markets, gold trades lower amid the global risk environment and the yellow metal’s safe-haven status. Bulletin Headline Summary from RanSquawk European bourses are trading mostly lower (Eurostoxx 50 -0.3%), in-fitting with the global risk sentiment Choppy trade for the USD as gains prove to be short-lived with EUR/USD and GBP/USD back above 1.2400 and 1.4000 respectively Looking ahead, highlights include German national CPIs and a slew of central bank speakers Market Snapshot S&P 500 futures down 0.3% to 2,844.50 STOXX Europe 600 down 0.3% to 398.53 MSCI Asia Pacific down 1.1% to 184.84 MSCI Asia Pacific ex Japan down 1.3% to 605.78 Nikkei down 1.4% to 23,291.97 Topix down 1.2% to 1,858.13 Hang Seng Index down 1.1% to 32,607.29 Shanghai Composite down 1% to 3,488.01 Sensex down 0.7% to 36,027.57 Australia S&P/ASX 200 down 0.9% to 6,022.80 Kospi down 1.2% to 2,567.74 German 10Y yield fell 1.9 bps to 0.675% Euro down 0.02% to $1.2381 Italian 10Y yield rose 2.0 bps to 1.758% Spanish 10Y yield fell 1.8 bps to 1.401% Brent futures down 0.4% to $69.21/bbl Gold spot up 0.3% to $1,343.98 U.S. Dollar Index down 0.1% to 89.20 Top Headline News The U.S. identified 96 of Russia’s richest people as “oligarchs” and 104 top government figures in lists mandated under last year’s sanctions law, adding pressure over alleged Kremlin interference in the 2016 presidential vote Struggling to find an approach to Brexit that can win the support of her divided cabinet, U.K. PM Theresa May is asking European officials and leaders to come up with ideas on what kind of future relationship might be on offer, according to three people familiar with the situation The euro-area economy expanded 0.6% q/q in 4Q, matching the median economist forecast while economic confidence for the region fell to 114.7 from 115.3 in December Mnuchin says U.S. debt limit suspension can be extended into February Dubai’s Biggest Lender in Talks With Sberbank on Turkey Unit Wynn Scrutiny Intensifies as Macau Regulators Voice Concerns HNA Crisis Deepens as Group Is Said to Face Liquidity Crunch Varian to Buy Sirtex for $1.3 Billion to Add Cancer Drugs Trump Agenda Faces Tough Fiscal Reality After State of the Union Blackstone in Talks Buy TRI Unit Stake For $17b: Reuters Japan December retail sales 0.9% vs -0.4% est; y/y 3.6% vs 2.2% est New Zealand December trade balance NZ$640m vs -NZ$125m estimate Asian markets traded lower across the board as the selling in US equity futures and retreat from record highs gathered pace overnight. ASX 200 (-0.9%) and Nikkei 225 (-1.4%) were both negative with Australia led lower by weakness across commodity-related sectors, while Japanese participants digested earnings and a slew of data including a contraction in Household Spending, as well as higher Unemployment. Furthermore, selling then accelerated in late trade amid a slump in US equity futures, in which DJIA futures fell over 200 points after a breakdown of near-term support at 26,400. Hang Seng (-1.1%) and Shanghai Comp. (-1.0%) conformed to the losses after continued PBoC inaction which resulted to a daily net drain of CNY 240bln and amid reports that banks were ordered to curb overnight lending, while tech names and Apple suppliers in the region were also mostly downbeat after the tech giant was said to reduce Q1 iPhone X orders by 50% due to slower than expected sales. Finally, 10yr JGBs were lower as Japanese yields played catch up to their US counterparts in which the US 10yr yield rose above 2.7% to its highest since April 2014, while firmer demand for the 2yr JGB auction. Top Asian News China Stocks in Hong Kong Sink to Pare World’s Steepest Rally PetroChina Says Profit May Triple Amid Cost Cuts, Higher Oil Top Noble Group Shareholder Urges SGX Probe of Trader’s Actions Apps to Screen Tenants Latest Chinese Startups Battleground Asian Suppliers Fall on Report Apple Cut IPhone X Targets European bourses are trading broadly lower (Eurostoxx 50 -0.3%), in-fitting with the global risk sentiment spurred from equity performance seen in US and Asia-Pac hours. The only index immune to losses this morning is the SMI (+0.3%) with the Swiss bourse supported by the luxury sector after a positive update from Swatch (+2.7%) and the latest Swiss watch exports which have also lifted Richemont (+1.8%) higher in sympathy. Elsewhere, IT names trade higher after chip makers such as Infineon (+0.8%) and STMicroelectronics (+0.5%) are granted some reprieve in the wake of yesterday’s news that Apple could curtail some of their production of the iPhone X. Additionally, material names lag their peers amid the price action seen in the metals complex. Finally, Telecom Italia (+2.8%) top the FSTE MIB after news that the Co. are to unveil their network spin-off proposal on February 7th. Top European News U.K. Mortgage Approvals at 3-Year Low as Housing Market Slows Russian Traders Unfazed by U.S. Oligarch List as Bonds Rally Top Norway Fund Manager Is Betting on Rigs for 200% Return In currencies, the USD initially managed to maintain its recovery momentum after recovering above 89.500 on widespread gains vs its G10 rivals (Ex-JPY and CHF), before sentiment reversed and the USD was dragged into negative territory. EUR/USD briefly retested overnight lows around 1.2337 on a weak inflation read from German state Saxony, but very mixed data from others ahead of heavyweight NRW, broad USD softness and progress in German coalition negotiations prompted a marked rebound towards 1.2400. GBP/USD initially lost the 1.4000 handle with stops triggered on a break to 1.3980, but has recovered to trade around 1.4080 in choppy price action. AUD/USD mid-range between 0.8040-0.8100 and undermined by ongoing weakness in metals/commodities, while NZD/USD has retreated further towards 0.7300 despite decent NZ trade data as CFTC shorts continue to pare positions. USD/CAD nudging higher again between 1.2330-1.2380 as some positive NAFTA discussions are offset by another downturn in oil prices. Ahead, US President Trump’s State of the Union address kicks off a busy line up of risk events, with the FOMC concluding its 2-day meeting on the last trading day of January and NFP looming on Friday. In commodities, both WTI and Brent crude futures traded lower amid the (early) resurgence in the USD with prices hovering around the USD 65bbl and USD 69bbl levels respectively with energy newsflow otherwise relatively light. In metals markets, gold trades lower amid the global risk environment and the yellow metal’s safe-haven status. Elsewhere, copper was pressured during Asia-Pac and fell below USD 3.20/lb amid broad declines across the complex and with sentiment spooked as the equity sell-off gathered pace. Additionally, zinc prices have shown losses in London after printing 11 year highs yesterday. Looking at the day ahead, the highlight is President Trump’s first State of the Union address in front of Congress. Also due to speak is the BoE’s Carney before the UK Parliament’s Economic Affairs Committee. Datawise, in Europe the highlights include a first look at Q4 GDP for the Euro area and France, the flash January CPI report in Germany, UK credit and money aggregates data for December and January confidence indicators for the Euro area. In the US the highlight is the January consumer confidence print, while the November S&P/ Case-Shiller house price index is also due to be released. Away from this, the ECB’s Mersch speaks in Frankfurt and Catalonia’s parliament votes on its regional president. Pfizer and McDonald’s will release earnings. US Event Calendar 9am: S&P CoreLogic CS 20-City NSA Index, prior 203.8; MoM SA, est. 0.6%, prior 0.7%; YoY NSA, est. 6.3%, prior 6.38% 10am: Conf. Board Consumer Confidence, est. 123, prior 122.1;Present Situation, prior 156.6;Expectations, prior 99.1 DB's Jim Reid concludes the overnight wrap Bonds continue to be caught in the cross hairs at the moment although a story at the end of the European session on the ECB likely tapering between September and December rather than abruptly ending the program stemmed a little bit of the sell-off yesterday. The global rise in yields did start to cause some damage though with the S&P 500 (-0.67%) seeing its worst day since September and the VIX climbing 24.9% to 13.84 - the highest close since August. More on equities below but the bond sell-off started after we went to print yesterday morning and finished with 10yr USTs +3.5bp and 10yr Bunds +6.5bps. 5yr equivalents sold off 2bps and 3.3bps respectively. The four bonds mentioned above are up +8bps, +12.4bps, +7.9bps and +12.8bps respectively since the intraday lows after the ECB meeting on Thursday afternoon. So a pretty substantial sell-off in these low yield times. In terms of landmarks, US 10yr hit the highest level since April 2014 (close 2.695% - day’s highs 2.725%) and 10yr Bunds the highest since September 2015 (close 0.691% - day’s highs 0.6995%). 5 year Bunds spent most of the day trading above 0% but closed at -0.006%. We haven’t closed above zero since November 2015. There was nothing particularly igniting the sell-off. However there’s no doubt that global yields remain too low given strong growth, the likely pick up in US inflation, much less QE going forward, significantly higher upcoming US treasury supply, higher oil and a weaker dollar. Yesterday gives us confidence that the reasoning behind our credit view for 2018 has some basis. To recap we think Q1 will be good for credit but that higher yields and inflation through the year will eventually lead to volatility picking up and spreads reversing. It’s too early for too much damage to be done in credit (especially with CSPP technicals still strong - see below) but recent moves have given us a hint of a slightly higher vol regime if rates continue to climb as we expect. Despite the notable rise in 10y treasury yields, our US economists believe there is considerable scope for bond yields to rise before they weigh on growth and equities. They note the economy neutral 10-year yield (10yr-star) in nominal terms is currently c3.5% – suggesting that bond yields could rise about 80bp from current levels before we would begin to worry about them materially slowing growth momentum. For more details, refer to their note. Staying with rates, the Bloomberg story that the ECB will likely taper QE between September and YE 2018 was attributed to officials familiar with the discussions. The main implication is that it probably rules out a rate increase before June 2019 as the perception is that there will be a six month gap between the end of QE and the first rate hike. Staying with the ECB, the latest CSPP/PSPP ratio has exceeded last week's record and is again way above the long-run average. The net CSPP purchases were €2.3bn last week with net PSPP purchases at €5.8bn. The CSPP/ PSPP ratio was a huge 39.5% (27.2% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). There may have been another lumpy PSPP redemption just like in the previous week, which could have pushed the ratio up meaningfully. However, with every weekly print, a signal is emerging from the noise that gives us confidence that the role of corporate bonds in QE has indeed risen as we forecast – at least around the 20% mark that we expect on average in H1. This morning in Asia, equities have followed the negative lead from the US and are down c1%. The Nikkei (-1.46%), Kospi (-1.08%), Hang Seng (-1.05%) and China’s CSI 300 (-0.53%) are all down, while UST 10y yields are up c2bp as we type. Elsewhere, Exxon Mobil is reportedly planning a $50bn capex over the next five years in the US, according to a tweet from Texas Senator Kevin Brady – whose district is home to Exxon’s corporate campus. Now recapping other markets performance from yesterday. US equities retreated c0.6% from their record highs (S&P & Dow -0.67%; Nasdaq -0.52%). All sectors within the S&P were in the red with losses led by utilities, energy and telco stocks. Apple fell 2.1% after the Nikkei reported that Apple told suppliers it will halve 1Q production targets for the iPhone X. European markets were broadly lower, with the Stoxx 600 (-0.19%) and Dax (-0.12%) modestly lower while the FTSE rose marginally (+0.08%), partly benefiting from a lower Sterling. Turning to currencies, the US dollar index gained 0.27%, while the Euro and Sterling fell 0.39% and 0.62% respectively, although the latter is still up c4.2% since early January. In commodities, WTI oil retreated -0.88% from its c3 year high. Elsewhere, precious metals weakened c1% (Gold -0.61%; Silver -1.30%) and other base metals were mixed but Zinc edged 0.5% higher to a fresh 10 year high (Copper -0.13%; Zinc +0.50%; Aluminium -0.71%). Away from the markets and ahead of tomorrow’s official forecasts, unnamed sources told Reuters that the German government has lifted its 2018 GDP growth forecast to 2.4% from 1.9%, while the unemployment rate is expected to fall 0.4ppt yoy to 5.3% in 2018. Elsewhere, ITV reported that Ms Merkel said her behind the scenes Brexit talks with UK’s PM May were going round in circles, with an endless cycle of “what do you want?” (from Ms Merkel) and “make me an offer” (from PM May). Following on with some more Brexit headlines. On the EU side, Chief negotiator Barnier noted “we very much need the UK to clarify its position” and “we have to make sure we do have time (to complete the Brexit deal)….we’re working towards the end of October”. Conversely, the UK’s Brexit Secretary Davis pushed back on the deadline, noting “…it can be done in the time – (but) the end of this year” and subject to clarity on a future trade deal. Elsewhere, he added “… we think it would be cherry picking the other way around (by the EU) to leave financial services out” and given it’s so big, we’ll have to treat it separately, with a key argument around financial services being regulatory equivalence. Finally, Bloomberg noted the opposition leader Mr Corbyn has told a private group of business executives that his party’s policy on Brexit is wide open, but a second referendum is out of the question. Over in Canada, the sixth round of NAFTA talks seemed to have ended with a slightly positive tone. The US trade representative Lighthizer noted “…we finally began to discuss core issues…but we’re progressing very slowly”, my hope is that we “start seeing some breakthroughs between now and the next round” of talks scheduled in late February. Elsewhere, the Canadian and Mexican counterparts noted “some progress” and “on the right track to reach a deal” respectively post the talks. Finally as a reminder, President Trump’s State of Union speech is out just before we go to print in the morning (late evening US time tonight). DB’s Ruskin noted that it’s not normally a market mover but that if there is a potential market sensitive topic its US trade relations with China. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the December PCE core was in line at 0.2% mom and 1.5% yoy. Notably the three and six month annualised rate was firmer at 1.9% yoy and 1.7% yoy respectively. The January Dallas Fed manufacturing activity index was above market at 33.4 (vs. 25.4) and the highest in 12 years. Elsewhere, the December personal income was above expectations at 0.4% mom (vs. 0.3%) while personal spending was in line at 0.4% mom, but the prior month’s reading was upwardly revised by 0.2ppt. In Europe, Germany’s December import price index was in line at 1.1% yoy, while Italy’s December PPI was lower than the prior month’s print at 2.2% yoy (vs. 2.8%). Looking at the day ahead, the highlight is President Trump’s first State of the Union address in front of Congress. Also due to speak is the BoE’s Carney before the UK Parliament’s Economic Affairs Committee. Datawise, in Europe the highlights include a first look at Q4 GDP for the Euro area and France, the flash January CPI report in Germany, UK credit and money aggregates data for December and January confidence indicators for the Euro area. In the US the highlight is the January consumer confidence print, while the November S&P/ Case-Shiller house price index is also due to be released. Away from this, the ECB’s Mersch speaks in Frankfurt and Catalonia’s parliament votes on its regional president. Pfizer and McDonald’s will release earnings.
Creditors take control of commodity trader as shareholders all but wiped out
The recent frantic moves in Treasurys and the dollar continued on Monday as we enter what is set to be a juggernaut of a "rollercoaster week", and while the dollar collapse seems to have slowed for now, this is as a result of an acceleration in the Treasury selloff, with 10Y yields blowing out to 2.72% for the first time since early 2014, and now deep into what Jeff Gundlach called the "danger zone" for equities. The TSY weakness is also hitting German Bunds, where the 10Y yield rose to 0.682%, the highest since 2015 and rapidly threatening another VaR shock should the selloff accelerate from here. Also of notable: the German 5-year bond yield rose as much as 4bps from the open to turn positive for the first time since Dec. 2015, rising as high as 0.012% after ECB Governing Council member Klaas Knot over the weekend said there isn’t a single reason to continue with the QE program. For once, the Greenback is a broad winner, if very modestly, as high/rising US Treasury yields, now at levels last seen in early 2014, are finally offering the USD some support after 7 weeks of losses, while month-end rebalancing is also prompting short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500. “The higher Treasury 10-year yield is spurring dollar-buying,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The dollar is consolidating with major currencies failing to break Thursday’s highs.” Meanwhile, the yen fell after Kuroda’s comments on stronger inflation. GBP/USD slid as much as 0.5% to 1.4094 amid media reports that the Conservatives are poised to trigger a vote of no confidence in U.K. PM May. The Swiss franc fell versus all G-10 peers amid speculation of possible Swiss National Bank intervention first spurred leveraged buying of USD/CHF, before sellers responded and pulled the pair back down; SNB declined to comment on the matter. The euro weakened as German bonds retreated for a fourth day, while the Stoxx Europe 600 Index turned lower after benchmarks were mixed in the Asian session. After trading mixed early in the session, European tech stocks retraced much of their earlier gains on Monday, as traders cited the previously noted report that Apple has cut production as much as 50% for the iPhone X. Nikkei Asian Review says Apple has alerted suppliers it has cut its production target for the flagship phone to 20 million units in Q1, from a previous estimate of 40 million envisaged in November. Apple suppliers Dialog Semiconductor DLGS.DE, STMicroelectronics STM.BN, Infineon IFXGn.DE, IQE IQE.L and AMS AMS.S all fade gains shortly after the report, though all five stocks remain up on the day after AMS reported results well ahead of expectations In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate. Earlier, Asia-Pac bourses traded mixed: the ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves and the stronger yen killed early upside equity momentum. Notably, Chinese stocks slumped the most in 2 months as large caps retreated. Equities in Hong Kong also fell, while the big-cap CSI 300 Index loses 2% as of 2:49pm local time. Shanghai Composite Index closed down 1.3% while the Shenzhen Composite Index fell -1.7%. Some Chinese investors are closing their books before Chinese New Year, which means inflows to the stock markets will slow, said Frank Lee, acting chief investment officer for North Asia at DBS Bank (HK) Ltd. Elsewhere, U.S. oil fell, though it’s at about its strongest level in five months relative to Brent as a weaker dollar and falling stockpiles boosted the American marker. Metals advanced amid optimism over global growth and the impact of the softer greenback, with zinc soaring to the highest level in more than a decade. Bitcoin climbed, holding its value above $11,000 even after a heist of nearly $500 million in a different digital token spurred calls for more cryptocurrency regulation Janet Yellen’s final policy meeting as Federal Reserve chair will be the main focus of investor attention in what’s shaping up to be another active week for markets still finding their feet after the recent dollar selloff. There’s a string of fresh economic data due, as well as a State of the Union address from President Donald Trump and earnings releases from the world’s biggest tech companies. Bulletin Headline Summary from RanSquawk The USD regains some ground against its major counterparts as US 10yr yields break above 2.7% European equities have kicked the week off with little in the way of sustained direction Looking ahead, highlights include US personal consumption and PCE data, NZ trade, ECB’s Coeure Market Snapshot S&P 500 futures down 0.3% to 2,868.75 STOXX Europe 600 down 0.01% to 400.53 MSCI Asia Pacific down 0.08% to 187.07 MSCI Asia Pacific ex Japan up 0.02% to 613.88 Nikkei down 0.01% to 23,629.34 Topix up 0.06% to 1,880.45 Hang Seng Index down 0.6% to 32,966.89 Shanghai Composite down 1% to 3,523.00 Sensex up 0.8% to 36,332.10 Australia S&P/ASX 200 up 0.4% to 6,075.41 Kospi up 0.9% to 2,598.19 German 10Y yield rose 5.1 bps to 0.682% Euro down 0.2% to $1.2406 Italian 10Y yield rose 4.3 bps to 1.738% Spanish 10Y yield fell 0.7 bps to 1.402% Brent futures down 0.6% to $70.11/bbl Gold spot down 0.1% to $1,348.48 U.S. Dollar Index up 0.2% to 89.23 Top Overnight News Donald Trump’s presidency would “end” if he followed through on efforts to fire Robert Mueller, the special counsel leading the investigation into Russian interference in the 2016 U.S. election, said Senator Lindsey Graham Trump’s Infrastructure Plan Hits Early Roadblock Over Funding Massive Cryptocurrency Heist Spurs Calls for More Regulation The European Central Bank has to end its quantitative easing as soon as possible, according to ECB Governing Council member Klaas Knot, who said there’s not a single reason anymore to continue with the program Sanofi Leapfrogs Novo With $4.8 Billion Cash Bid for Ablynx U.S. Is Said to Consider Building 5G Network Amid China Concerns The bumpy journey toward Brexit reaches another fork in the road this week as the upper chamber of the British parliament plans to rewrite a key piece of Prime Minister Theresa May’s legislation Billionaire Singh Brothers Accused in Suit of Siphoning Cash Germany’s Social Democratic leader said he needs concessions from Chancellor Angela Merkel to sell party members on staying in her government Noble Group Said to Reach In-Principle Deal to Restructure Debt Ingvar Kamprad, Ikea’s Swedish Billionaire Founder, Dies at 91 Brexit Woes Mount for May, Fox Says ‘Foolish’ to Challenge Her Europe Closes In on Fresh Trade Deal as Trump Puts Up Barriers Sentiment among London’s Brexit-hit bankers sank to its gloomiest depths since the 2008 financial crisis, a survey showed - a stark contrast to the bullish tone of finance executives gathered last week in Davos, Switzerland Japan’s Vice Minister for International Affairs and currency chief Masatsugu Asakawa says officials are watching foreign-exchange markets closely as volatility has increased Asia-Pac bourses traded somewhat mixed, as the region failed to maintain the early broad momentum from last Friday’s gains on Wall St. where sentiment was underpinned by earnings and in which all major indices closed at their all-time highs. ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves. Both the Hang Seng (-0.6%) and Shanghai Comp. (-1.0%) initially conformed to the gains in which the former continued to post fresh record levels, although the tone later deteriorated amid increases in money market rates after the PBoC skipped open market operations, coupled with underperformance in Shenzhen where Leshi fell limit down for a 4th consecutive day. In addition, Wynn Macau was a notable underperformer in Hong Kong and slumped around 5% due to allegations of sexual misconduct by Wynn Resorts Chairman, CEO and founder Steve Wynn. Finally, 10yr JGBs are mildly lower as prices fell amid an initial positive risk tone in the region and alongside spill-over selling from their US counterparts, while the BoJ’s Rinban operation was relatively light with the central bank in the market for only JPY 435bln of JGBs. PBoC skipped open market operations for a net daily drain of CNY 140bln. Top Asian News • Moody’s Cautions Vietnam Against Further Monetary Easing • Fitch Sells Stake in China Rating Firm Amid Market Opening • Alibaba, Foxconn Invest $350 Million in Chinese Car Startup • India Does Not Rule Out Fiscal Consolidation Pause This Year • China H Share Euphoria Enters New Stage as Laggards Surge European equities have kicked the week off with little in the way of sustained direction (Eurostoxx 50 flat) after a relatively mixed session during Asia-Pac trade. In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate. Top European News Offshore Cash Spike Rattles World’s Biggest Covered-Bond Market Le Pen’s National Front Slips in First Votes of the Macron Era In currencies, the Greenback is a broad winner (for once), as high/rising US Treasury yields are finally offering the USD some support, while month end rebalancing could also prompt short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500. USD/JPY has bounced off 108.50 again, but remains top heavy around 109.00 amidst offers at the big figure and a fib just above (109.07). EUR/USD is straddling 1.2400, but firmly supported above a 1.2344 Fib and via hawkish comments from ECB’s Knot, while Cable has retreated sharply from post-Brexit vote highs (1.4345) to 1.4100 or a few pips under amidst more UK political and EU divorce agreement uncertainty. USD/CAD is back up near 1.2350 after mixed NAFTA noises as some reports suggest progress and others big sticking points. USD/CHF around the middle of a 0.9335-0.9385 range with the SNB declining comment on any intervention AUD/USD and NZD/USD have both backed off from recent 0.8100+ and 0.7400+ peaks on the back of softer metals/commodity prices and cross currency flows (clear rebound over 1.1000 in AUD/NZD). Very busy week ahead, with US President Trump’s State of the Union address, January’s FOMC meeting and the first NFP release of 2018. In the commodities complex, WTI crude futures marginally extended above the USD 66.00/bbl level while Brent remains above USD 70bbl. Notable energy newsflow has included comments from the Iranian oil minister who stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. In metals markets, gold trades modestly lower as prices are hampered by the reprieve seen thus far for the USD. Elsewhere, focus has been on Zinc with prices surging to their highest levels in over 10 years amid speculation of contracting global supply. Iranian Oil Minister Zanganeh stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. JP Morgan raised their 2018 WTI forecast by USD 10.70/bbl to USD 65.63/bbl, and Brent forecast by USD 10/bbl to USD 70/bbl citing OPEC's efforts to rebalance the market. Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak. US Event Calendar 8:30am: Personal Income, est. 0.3%, prior 0.3% 8:30am: Personal Spending, est. 0.4%, prior 0.6%; Real Personal Spending, est. 0.4%, prior 0.4% 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.2%; YoY, est. 1.7%, prior 1.8% 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.5%, prior 1.5% 10:30am: Dallas Fed Manf. Activity, est. 25.4, prior 29.7 DB's Jim Reid concludes the overnight wrap It’s a potentially electrifying week ahead with a number of the big rolling themes at the moment having fresh data points for us all to pore over. It’s fair to say that inflation is absolute key to macro at the moment and therefore the most watched print of the week will likely be average hourly earnings in Friday’s payroll report. With regards to inflation and wages we also have the US PCE core and the deflator readings today, the US ECI index on Wednesday, the flash January CPI report for the Euro area also on Wednesday with country level reports out in Germany (Tuesday) and France (Wednesday) and US unit labour costs and productivity on Thursday. In today’s pdf we copy a chart from DB’s Marcus Heider’s inflation weekly from Friday night where he showed that periods of US$ weakness have typically been associated with higher inflation in developed markets over the past twenty years. He also discusses how Oil prices have benefited from news of another (counter-seasonal) weekly decline in US crude inventories and that recent news imply upside risks to oil price forecasts. Regular readers will know we think that a number of variables are stacking up at the moment towards higher inflation and a combination of these two factors above potentially adds to the story. Outside of inflation and labour costs, Friday’s payroll report will be a focus (consensus 180k, DB at 210k) as will tomorrow’s first State of the Union address by Mr Trump. It’s not entirely clear yet what he will talk about but expect the recently passed Republican tax reform bill, trade, the state of the US economy and markets, infrastructure proposals and immigration to all potentially play a part. We also have the latest Fed meeting on Wednesday which Mrs Yellen will chair for the last time with Jerome Powell taking over next week. This meeting could be a bit of a non-event with the next rate hike pencilled in for the March meeting (market pricing currently around 95%). DB continue to expect four rate hikes in 2018 (one above that implied by the Fed dot plots). Away from this, Thursday will be a busy day for manufacturing sector data with the final global PMIs due along with the ISM manufacturing in the US. Finally, earnings season will really ramp up this week with 120 S&P 500 companies due to report, including the turn of some of the big tech heavy hitters including Facebook, Microsoft and eBay on Wednesday, and Alphabet, Amazon and Apple on Thursday. Pfizer, McDonald’s (both Tuesday), AT&T, Boeing (both Wednesday), Shell, Alibaba (both Thursday), ExxonMobil and Chevron (both Friday) are amongst other notable companies scheduled to release results. The full week ahead is published at the end. The week is off to a mixed start in Asia, with the Kospi 0.74% up, the Nikkei is broadly flat while the Hang Seng (-0.16%) and China’s CSI 300 (-1.05%) are down as we type. The YEN jumped 0.76% back on Friday after Governor Kuroda noted that on inflation “…I think we’re finally close to the target”, but over the weekend, the BOJ clarified the Governor did not revise the inflation outlook and his view is in fact no different to the bank’s Outlook for Economy Activities that was released earlier last week. This morning, the YEN is c0.2% weaker. Elsewhere, Bloomberg reported that hackers have stolen $500m of digital tokens from Japanese crytocurrency exchange Coincoin Inc. back on Friday. In other news over the weekend, the ECB’s Knot noted QE should end as soon as possible as “the program has done what could realistically be expected of it” and there is not a single reason to continue with it. Further, he added there there’s enough proof for the ECB to end the program, which is also the current sentiment in the governing council. Ahead of tomorrow’s state of the union address, Friday’s Davos speech by Mr Trump gave us some clues as to his current mood. Initially he noted the US would “no longer turn a blind eye” to what he described as unfair trade practices and will “enforce our trade laws and restore integrity to the trading system”. That said, his other remarks seemed a bit less protectionist. He noted the US is “open for business” and that “now is the best time to bring your money....jobs…businesses to America”. Further, he noted that he would always promote “America First”, but he added “America first does not mean America alone. When the US grows so does the world”. Elsewhere, he said “I may terminate NAFTA, I may not”. So lots bubbling along until his big speech. Now recapping other markets performance from Friday. US equities rose to fresh highs following strong corporate results, including Intel (shares +11%) and Abbvie (+14%). The S&P (+1.18%), Dow (+0.85%) and Nasdaq (+1.28%) were all higher as all sectors within the S&P advanced. European markets were all higher too, with key bourses up 0.3%-0.7% (DAX +0.31%; Stoxx 600 +0.50%; FTSE +0.65%). The VIX fell for the first time in four days to 11.08 (-4.3%). Over in government bonds, core 10y bond yields were 2-4bp higher with UST up 4.3bp to a fresh 3.5 year high (2.661%), while Bunds and Gilts rose 1.7bp and 3.2bp respectively. In currencies, the US dollar index extended its three year low (-0.36%), while the Euro and Sterling gained 0.25% and 0.13% respectively. WTI oil strengthened further, up 0.96% to $66.14/bbl (+4.5% for the week). Elsewhere, precious metals were slightly higher (Gold +0.06%; Silver +0.63%) and other base metals were mixed but little changed (Copper -0.60%; Aluminium -0.24%; Zinc +0.29%). Away from the markets and onto some of the Brexit headlines. In Davos, President Trump said he would have taken a “different attitude” to Brexit talks and that “….I’d have taken a tougher stand in getting out”. Back home, the UK opposition Labour Party leader Corbyn reiterated “we’re not asking for a second referendum” on Brexit and that the UK should have a regulatory environment that is “commensurate with the EU, but must also have power to influence EU rules after Brexit. Elsewhere, a Guardian/ICM poll showed 47% of respondents would favour another referendum once the terms of UK’s departure are clear. If excluding those without a view, 58% of respondents would support a second vote on Brexit. There is also lots of press (incl. Bloomberg) here in the U.K. suggesting that PM May is under increasing pressure within her party to exercise control with rival factions repeatedly speaking out with competing Brexit visions. A vote of no confidence and leadership battle is increasingly being discussed, as per Bloomberg. Over in Germany, Ms Merkel seemed a bit more open to compromise in order to further progress in the coalition talks with the SPD. The CDU state premier KrampKarrenbauer noted that “our scope (to negotiate with the SPD) is very narrow”, but Ms Merkel noted the preliminary agreement with the SPD is an “outline”, which suggests some room for negotiations in order to finalise talks by 4th February. We wrap up with other data releases from Friday. In the US, the 4Q GDP was below consensus at 2.6% annualised (vs. 3%).Our US economists noted that despite strength in consumer spending, growth in the quarter was impacted by an outsized increase in imports and materially less inventory accumulation than expected. Net exports subtracted -113bp from headline growth while inventories were an additional -67bp drag. They expect the latter will likely reverse, hence they have raised their Q1 real GDP growth forecast to 3.1% (from 2.3% previously). The 4Q core PCE was in line at 1.9% qoq while personal consumption was slightly above market at 3.8% (vs. 3.7% expected). The December durable goods orders (ex-transportation) was in line at 0.6% mom but the prior month was upwardly revised by 0.4ppt, while core capital goods beat at 0.6% mom (vs. 0.4% expected). Finally, the December advance goods trade balance deficit widened to -$71.6bln (vs. -$68.9bln) and wholesale inventories grew 0.2% mom (vs. 0.4% expected). In the UK, 4Q GDP was above market at 0.5% qoq (vs. 0.4%) and 1.5% yoy (vs. 1.4%). Elsewhere, France’s January consumer confidence was slightly below expectations 104 (vs. 106) but manufacturing confidence was above at 113 (vs. 112 expected), which is back to November levels that was a c11 year high. What to look out for on Monday: Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak.