It is fitting that just a few hours until the Fed’s second rate hike in two quarters, and one day after Goldman downgraded global stocks to Neutral for the next 3 months, not to mention with the results of the anticipated Dutch election due shortly, that global stocks as well as S&P futures are higher, while crude oil has finally managed to stage a rebound as the Dollar DXY index is fractionally in the red.
In addition to the Fed, a barrage of monetary policy decisions at the BOE, the BOJ, the SNB and Bank of Indonesia within the next 36 hours were further reasons for investors’ cautious stance.
East Coast traders return to their desks following a rather disapponting nor’easter, where they will be prompted bombarded by data over the next 2 days. Here is a quick summary of main events over the next 36 hours courtesy of Bloomberg:
- The Fed’s decision will be announced at 2 p.m. in Washington, followed by Chair Janet Yellen’s news conference a half hour later. Investors are focused on any hints of a change in the number of increases the central bank foresees this year.
- Wednesday’s vote in the Netherlands will deliver a reading on the state of populism in Europe as races in France and Germany heat up.
- The Bank of Japan is set to keep its rates and yield-curve policy unchanged in its policy decision on Thursday. The Bank of England, Swiss National Bank and Bank Indonesia are also expected to stand pat with policy decisions.
- U.S. Secretary of State Rex Tillerson travels to Japan, South Korea and China in his first visit to the region since taking office.
- U.S. President Donald Trump’s first budget outline for fiscal 2018 is expected on Thursday. He’s said he’ll seek a $54 billion boost in defense spending, paid for by an equal amount of cuts to non-defense agencies.
Asian stocks have consolidated much of their recent gains on Wednesday before an FOMC meeting that braved yesterday’s non-blizzard and which is expected to signal not only another 25 bps interest rate increase but also how many more hikes traders can expect during the remainder of the year. Though recent data, particularly out of China, has fueled a rally in Asian equities since the start of the year, Reuters notes that investors are expecting more headwinds for emerging markets due to an increasingly hawkish Fed. “The positive sentiment towards emerging markets is not sustainable as the interest rate differential advantage in Asia’s favor is likely to reduce in the coming months,” said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale in Hong Kong.
Having posted its second-biggest daily gain this year in the previous session, MSCI’s index of Asia-Pacific shares ex-Japan was up 0.2% near the day’s highs in cautious trading. Asian had a good start to the week thanks to positive news out of China and India. Strong data out of China this week sparked a fresh rally in Hong Kong stocks while Indian shares climbed to a record high on Tuesday as investors regarded Prime Minister Narendra Modi’s landslide victory in the northern state of Uttar Pradesh as an endorsement for his economic reforms. While recent economic Chinese data has been supportive, Premier Li warned at a press conference that China’s economy faces domestic and external risks this year, but added the country has many policy tools to cope with them.
“China’s economy had pretty good performance in January and February. March data will be crucial as investors are anxious for any hint on whether the recovery is sustainable,” said Linus Yip, strategist at First Shanghai Securities Ltd.
Bucking the trend, Japan’s Nikkei was down 0.2% while stocks in mainland China and Korea were fractionally lower, by 0.08 and 0.04 percent respectively. Hong Kong shares pared declines as Chinese Premier Li Keqiang played down the risk of a trade conflict. Speaking at a press conference after the close of the annual National People’s Congress, Li said it’s important for both China and the U.S. to keep talking to build trust. Furthermore, a worrying drop in global oil prices has cast doubt on how much Asian policymakers are likely to raise interest rates this year to maintain their premium over U.S. rates, with risks of another global tantrum rising.
The S&P is set to open higher, with E-minis trading 0.2% in the green in early Tuesday trading.
The big commodity story of the past week continues to be oil, and crude prices remain a dominant story in markets, with oil’s rebound helping underpin European stocks as investors wait for Wednesday’s expected U.S. interest rate increase. As Bloomberg notes, WTI trades above $48.50/bbl as Tuesday’s API drop in U.S. crude stockpiles counters Saudi boost in production reported by OPEC. IEA says market is still working to clear surge in output from end of last year. “The OPEC data sent us lower on the idea that there’s higher supply there, but we’ve flipped and now the APIs are suggesting inventories in the U.S. are ticking lower,” says Jasper Lawler, senior market analyst at London Capital Group. “The market is massively oversold and that’s been enough to trigger a bounceback.”
The swings in oil added some drama to financial markets that have entered a two-day period brimming with central bank decisions, European political drama and a raft of economic data. With the Federal Reserve seen as all but certain to raise rates, investors have been weighing how precarious energy prices will feed into the central bank’s path for future moves.
In currencies, the U.S. dollar was broadly unchanged against major rivals ahead of the FOMC meeting, and most attention will be focused on what Fed Chair Janet Yellen says about the future path of interest rates. The dollar index was flat at 101.69, staying in a well worn recent range. The British pound led gains in the Group-of-10 currencies, rising by as much as 0.9 percent before trading 0.4 percent higher. The euro rose by 0.2 percent to $1.0623, following its 0.5 percent drop a day earlier.
“Of course, everyone is waiting for the Fed, so we’re expecting range-bound trading until we get some clear signals about expectations for the rest of the year,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden-Baden starting on Friday, their first meeting since Donald Trump won the U.S. presidential election.
Bulletin headline summary from RanSquawk
- European equities trade modestly higher ahead of upcoming key risk events with energy and material names the notable outperformers
- Early FX trade has focused on GBP once again, with the early European hit on GBP yesterday reversed today, seeing 1.2200 reclaimed in Cable
- Looking ahead, highlights include FOMC rate decision, US CPI and Retail Sales, UK employment data and comments from ECB’s Praet
- S&P 500 futures up 0.2% to 2,367.25
- STOXX Europe 600 up 0.2% to 374.21
- MXAP up 0.06% to 145.77
- MXAPJ up 0.2% to 470.09
- Nikkei down 0.2% to 19,577.38
- Topix down 0.2% to 1,571.31
- Hang Seng Index down 0.2% to 23,792.85
- Shanghai Composite up 0.08% to 3,241.76
- Sensex down 0.01% to 29,440.36
- Australia S&P/ASX 200 up 0.3% to 5,774.00
- Kospi down 0.04% to 2,133.00
- German 10Y yield unchanged at 0.445%
- Euro up 0.2% to 1.0629 per US$
- Brent Futures up 1.4% to $51.64/bbl
- Italian 10Y yield fell 2.3 bps to 2.341%
- Spanish 10Y yield rose 0.8 bps to 1.879%
- Brent Futures up 1.4% to $51.64/bbl
- Gold spot up 0.3% to $1,203.16
- U.S. Dollar Index down 0.2% to 101.51
Top Overnight News
- President Donald Trump made more than $152.7 million and paid $38.4 million in federal taxes in 2005, according to two pages of his federal income tax return for that year that were broadcast by MSNBC and posted online
- Dutch voters are heading to the polls in a general election that will provide the first gauge of the spread of populism into the core of Europe
- Oil Market Still Digesting Pre-Deal OPEC Output Surge, IEA Says
- EON Posts Record Loss as German Power-Plant Writedowns Mount
- Zara Owner’s Margin Shrinks to Lowest Level in Eight Years
- Walgreens Said Poised to Sell More Assets to Win Rite Aid Nod
- China Lodging 4Q Adj. Profit Per ADS Misses Est.
- Cellcom Won’t Pay 4Q Dividend as Competition Affects Results
- General Electric to Build 200 MW Power Plant in Ghana: Graphic
- Deutsche Securities Warned by Japan Over Bond Trading Collusion
- Osaka Gas Says LNG From Freeport Project to Be Price Competitive
- MoneyGram Says to Carefully Review & Consider Euronet Proposal
- Manulife Receives China Investment Company WFOE License
- Chevron Says Oil Well in Bay Marchand Field Shut After Spill
- Ant Financial Still ‘Highly Committed’ to Merger With MoneyGram
- Amazon Poses Opportunity, Not Threat in Australia: Kogan.com CEO
In Asia, markets traded mostly lower as global sentiment remained dampened by pre-FOMC caution. This weighed on Nikkei 225 (-0.2%) from the open, while ASX 200 (+0.3%) recovered amid resilience in commodity stocks, aside from the gold miners which suffered after the precious metal briefly dropped below USD 1200/oz. Shanghai Comp. (+0.1%) and Hang Seng (-0.1%) conformed to the lacklustre tone, although losses have been stemmed after the PBoC slightly upped its liquidity injections to a total CNY 60bIn. 10yr JGBs are only marginally higher despite a subdued risk tone and the BoJ’s presence in the market for a total of JPY 1tIn, with demand weak ahead of tomorrow’s BoJ announcement in which consensus is for the central bank to hold off on any policy tweaks.
Chinese Premier Li concluded the NPC in which he stated that the GDP target of around 6.5% is not low and is not easy to reach. Premier Li also ruled out systemic risks in finance system which he described as generally safe and added that China has many policy tools to cope with risks. PBoC injected CNY 10bIn in 7-day reverse repos, CNY 10bIn in 14-day reverse repos and CNY 40bIn in 28-day reverse repos. PBoC set CNY mid-point at 6.9115 (Prey. 6.9118).
Top Asian News
- Singapore 2017 GDP Forecasts Boosted in MAS Survey of Economists
- China to Let Investors Buy Onshore Debt via Hong Kong This Year
- INR Rally Continues Even as RBI Seen Intervening: Asian NDFs
- BOJ Bond Purchases Draw Higher Demand Before Fed, BOJ Decisions
- Chinese Shares Decline in Hong Kong as Oil Tumbles, Fed Ponders
- RBI Seen Intervening as Modi’s Win Sparks Rupee Rally: Roundup
- For Pound Traders, Brexit Giveth and Taketh Away: Markets Live
- Japan Ex-Econ Minister Amari Says Still Too Soon for BOJ Taper
- Premier Li Says China Supports Integrated Europe and Strong Euro
European equities trade modestly higher with energy and material names the notable outperformers with the former lifted by last nights unexpected drawdown in API inventories. Utilities are underperforming, dragged lower by Eon, despite the Co. opening higher in the wake of their earnings as investors continue to remain concerned over the record losses at the Co. That said, markets are ultimately in wait-and-see mode as investors await the upcoming FOMC policy announcement and Dutch election. In fixed income markets, Bunds reside modestly in the green but with trade likely to remain subdued ahead of the aforementioned FOMC. More specifically, Gilts have continued to underperform their German peers with the latest jobs report out of the UK doing very little to sway prices whilst peripheral markets remain relatively subdued.
Top European News
- Och-Ziff Executives Said to Leave After $13 Billion Withdrawn
- Oil Rebounds on U.S. Stockpile Drop Report as Saudis Lift Output
- Croat Govt Meets With Agrokor’s Russian Creditors, N1 TV Says
- Zodiac Tumbles; Profit Warning Undermines Deal Valuation: Kepler
- French Bank Shares Could Lose 25% on Le Pen Victory, Citi Says
- Twitter Accounts Globally Posting Swastikas, Pro-Erdogan Content
In currencies, the Bloomberg Dollar Spot Index slipped by 0.2 percent. The British pound pared gains after wage growth slowed. A YouGov poll for The Times showed that 57 percent of Scottish voters want to remain inside the U.K. compared to 43 percent who seek independence. It traded 0.4 percent higher after jumping as much as 0.9 percent earlier. The euro rose by 0.3 percent to $1.0629, following its 0.5 percent drop a day earlier. Early FX trade has focused on GBP once again, with the early European hit on GBP yesterday reversed today, seeing 1.2200 reclaimed in Cable, while EUR/GBP was pushed under 0.8700, but tentatively so as yet. The UK employment report this morning highlighted wage growth slowing, but we saw the rate ease off to 4.7% and a higher than expected claimant count fall. Price action has since moderated. For the EUR, Dutch election risk has been relatively muted but should hamper the upside across the board. EUR/GBP we have already mentioned, but EUR/USD is naturally struggling south of 1.0650, with the upcoming FOMC rate announcement also keeping the USD supported despite a tailing off of UST yield in the mid curve. USD/JPY is looking heavy in this respect, but support from 114.50-20 propping up here for now.
In commodities, WTI gained 1.7 percent to $48.54 as of 10:03 a.m. in London. U.S. inventories fell by 531,000 barrels last week, the industry-funded American Petroleum Institute was said to report.
Gold climbed 0.3 percent to $1,202.24 an ounce after falling 0.4 percent Tuesday. Iron ore jumped 3.4 percent, adding to a 4.3 percent advance in the previous session. The notable moves in commodities in Oil once again, but this time in favour of the black stuff, which sees WTI back through USD48.00 and holding these levels in the wake of the surprise drawdown reported in the API late yesterday. Brent is pushing session highs ahead of USD52.00, but not too much price action anticipated here, or indeed across the board as Fed policy dominates (later) today. Copper rises a little higher amid the ongoing impasse at the Escondida mine, though operations in some areas ‘not connected’ to wage talks may resume. Base metals higher across the board in fact, with Zinc leading.
Looking at today’s calendar, the big releases start at 8:30am and include the February CPI report where the market consensus is for 0.0% mom and +0.2% mom for the headline and core respectively. At the same time we will also get the latest retail sales data for February where the consensus is for a +0.1% mom headline print and +0.2% mom ex auto and gas print. Due out at the same time will be the March empire manufacturing print where a modest decline is expected. Later we will then get the NAHB housing market index print for March and January business inventories. All of this comes before the FOMC meeting this evening followed by Yellen’s press conference shortly after. The other focus today will of course be the Dutch election.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 3.3%
- 8:30am: Empire Manufacturing, est. 15, prior 18.7
- 8:30am: US CPI MoM, est. 0.0%, prior 0.6%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
- 8:30am: US CPI YoY, est. 2.7%, prior 2.5%; CPI Ex Food and Energy YoY, est. 2.2%, prior 2.3%
- 8:30am: Real Avg Weekly Earnings YoY, prior -0.63%; Real Avg Hourly Earning YoY, prior 0.0%
- 8:30am: Retail Sales Advance MoM, est. 0.1%, prior 0.4%; Ex Auto MoM, est. 0.1%, prior 0.8%; Ex Auto and Gas, est. 0.2%, prior 0.7%; Retail Sales Control Group, est. 0.2%, prior 0.4%
- 10am: NAHB Housing Market Index, est. 65, prior 65
- 10am: Business Inventories, est. 0.3%, prior 0.4%
- 2pm: FOMC Rate Decision
- 4pm: Total Net TIC Flows, prior $42.8b deficit; Net Long-term TIC Flows, prior $12.9b deficit
* * *
DB’s Jim Reid concludes the overnight wrap
As the east coast gets back to normal today we’re set for a busy day of US data (CPI the highlight) with a likely Fed hike and Dutch election thrown in for good measure. To start with today we’ll preview the FOMC and Dutch election.
With a Fed rate hike virtually nailed on today thanks to some skilful Fed speak over the past two weeks, the main focus for the market will be the dots. DB’s Joe LaVorgna expects the median 2017 “dot” to remain at 1.375%, because it would take four of the six policymakers currently at the median to raise their forecasts, which he thinks is a lot given the uncertainties over Trump’s fiscal policy. However he does expect about one or two policymakers to increase their year-end 2017 fed funds projection, and this could impact next year’s median forecast. Only two participants currently at the 2018 median of 2.125% need to raise their forecasts for the 2018 median to rise to 2.375%. In addition, only one of the two Fed officials currently at the 2019 median of 2.875% would need to raise their forecast for the median to increase to 3.0% or possibly 3.125%. So Joe believes there is roughly a one in three chance that the 2017 median dot goes up 25 bps to 1.625%, but the 2018 and 2019 median dots will likely increase. Joe is overall of the opinion that a ‘dovish hike’ is going to be tough with the dots edging up and a Committee that is getting more confident in its outlook which Chair Yellen will want to emphasize. So all eyes on 6pm GMT.
Today also brings the Dutch elections which DB’s Jochen Moebert fully previewed in this week’s Focus Europe (pages 15-18 of https://goo.gl/QBifW6). Exit polls will be available soon after polls close at 21:00. The latest polls suggest established parties have slightly gained ground at the expense of the right-wing PVV and other Euro sceptic parties. Although the PVV have lost the lead in the polls they are still expected to come second in a tight race. However their current opinion polling is around half the 30% our economists think is necessary for the other parties to be unable to ignore them in forming the coalition. So a Euro friendly coalition is likely but the PVVs success (or lack of it) relative to their recent polling might give us clues as to how pollsters are doing in capturing non-establishment movements after poor performance with Brexit and President Trump. A big outperformance might renew fears of a Le Pen victory in France or at least increase the probabilities. Obviously the opposite is also true. So for us that’s the subplot to this election. If we take the latest poll from each of the 5 main pollsters (I&O, Ispos, TNS and Peil published yesterday and Monday), the average is just under 15% for the PVV (range: from 10.7% to 16.0%) and just under 18% for the VVD (from 16.0% to 19.3%). There are 3 other parties in the low teens (the best of these are CDA who are only slightly behind PVV). So for PVV and populism not finishing first will be a disappointment relative to a few weeks ago but now with support supposedly waning maybe hanging onto second and only 2-3% behind the VVD will be par.
Ahead of today’s main events markets have been fairly reluctant to really get going so far this week. That said Oil has been doing its best to keep everyone on their toes. The main news yesterday was the monthly OPEC report which revealed that Saudi Arabia’s production had increased in February to the tune of about 263k barrels a day to more than 10 million barrels again which reverses around a third of the cuts the kingdom had made in January in the wake of the OPEC agreement. In conjunction with OPEC also raising their forecast for non-OPEC supply growth in 2017, WTI tumbled to an intraday low yesterday of $47.09/bbl (about -2.70% on the day) which is the lowest price since the end of November. However the report prompted a rare public response from Saudi Arabia with the energy minister issuing a statement saying that the kingdom “assures the market that it is committed and determined to stabilising the global oil market by working closely with all other participating OPEC and non-OPEC producers”. WTI has actually ended up doing a complete u-turn since and is back to $48.56/bbl this morning which is pretty much where it closed on Monday with some suggestion that the API data showing a drop in US crude inventories last week also helped provide some support.
The turnaround for Oil did however come too late in the day for risk assets. With the energy sector alone down -1.10% the S&P 500 closed -0.34%, albeit on volumes some 20% below the usual average reflecting the impact of the storm. It’s worth noting that the index hasn’t closed down more than 1% in 105 sessions now which is the longest streak since 1995. In Europe a similar drag from energy stocks saw the Stoxx 600 finish -0.31%. Commodity-sensitive and EM currencies also suffered with the Russian Ruble (-0.59%) and Norwegian Krone (-0.54%) standing out. Sterling also fell -0.54% albeit for a different reason following that confirmation from Parliament which cleared PM May for the triggering of Article 50. A Bloomberg report yesterday suggested that the EU is considering forcing May to wait until June before discussing negotiating the formal Brexit terms. That throws up a few issues not least limiting the amount of time May will have to complete negotiations. Our FX colleagues reiterated yesterday in their FX daily that Sterling has room to fall much further given that; (i) financial fair value metrics point much lower, (ii) longer-run valuation metrics are not stretched, (iii) inflows are drying up, (iv) growth expectations are not pricing hard Brexit and (v) political risks have yet to materialize. Their H2’17 target is 1.14 in GBP/USD. A link to the report is attached here https://goo.gl/wbStod.
Meanwhile credit markets continue to feel a bit sluggish. The CDX IG and iTraxx Main indices were 1bp and 1.5bps wider yesterday while US HY spreads were 10bps wider in cash terms. In fact US HY spreads have now widened for 8 sessions in a row and in that time are 42bps wider and at the widest level now (at 408bps) since February 8th. US HY energy spreads were also 13bps wider yesterday and at 475bps are now at the widest level since December 8th. Those moves in credit also came despite a backdrop of stronger rates with 10y Treasuries and Bunds finishing -2.6bps and -2.5bps lower respectively.
This morning in Asia it’s been a similarly subdued session. While the Nikkei (-0.25%), Hang Seng (-0.05%) and Kospi (-0.13%) are modestly in the red, the ASX (+0.09%) along with bourses in China (Shanghai Comp +0.08%) are a touch firmer. The latter coming while China premier Li Keqiang is making final remarks at China’s NPC. Li told his audience that he doesn’t want to see a trade war with the US, emphasised that China will maintain basic stability in the renminbi and is not looking at depreciating the currency in order to boost exports.
Moving on. With regards to the data yesterday, in the US the main highlight was the February PPI report. Headline PPI was reported as rising a bit more than expected during the month (+0.3% mom vs. +0.1% expected) lifting the annual rate to +2.2% yoy while the same could also be said for the ex food, energy and trade print (+0.3% mom vs. +0.2% expected). Meanwhile the NFIB small business optimism reading came in at 105.3 for February which was down a tad from the 105.9 in January. Closer to home there were no surprises in the final revisions to the February CPI report in Germany with headline inflation confirmed at +0.7% mom and +2.2% yoy. The ZEW survey was also released and showed a rise in the current situations index this month to 77.3 from 76.4, albeit a slight miss versus expectations for 78.0.
Before we wrap up, yesterday our European equity strategists published a report looking at what’s being priced for global growth. While some investors expect an acceleration in US GDP growth over the coming quarters to lead to further upside for equities, Tom Pearce on DB’s European equity strategy team argues that much of the good news is already in the price. European equities, which are up by 9% over the past six months, have continued to track global PMIs, which have just seen the largest rise in nearly five years. Even if US GDP growth were to hit 4%, this would be consistent with only marginal further upside for global PMIs and, hence, European equities. What is more, our strategist thinks the most likely scenario is a slight fade in global PMIs over the coming months. This would point to a pull-back of around 5% for European equities. A link to the report can be found here. https://goo.gl/oT6fCf.
Looking at today’s calendar, this morning in Europe the early data due out is from France where any final revisions to the February CPI report will be made. Thereafter we will get the January and February employment data in the UK before Q4 employment data for the Euro area is released. Over in the US this afternoon the calendar is packed. The big releases are due out shortly after lunch and include the aforementioned February CPI report where the market consensus is for 0.0% mom and +0.2% mom for the headline and core respectively. Our US economists are forecasting +0.1% and +0.2%. At the same time we will also get the latest retail sales data for February where the consensus is for a +0.1% mom headline print and +0.2% mom ex auto and gas print. Due out at the same time will be the March empire manufacturing print where a modest decline is expected. Later in the afternoon we will then get the NAHB housing market index print for March and January business inventories. All of this comes before the aforementioned FOMC meeting this evening followed by Yellen’s press conference shortly after. The other focus today will of course be the Dutch election. It’s worth also keeping an eye on Brexit Secretary David Davis