On the last day of an extremely volatile first quarter, following the latest torrid push higher in risk assets over the past two days following Yellen's dovish Tuesday comments, today has seen a modest pull back in risk, whether because the market is massively overbought, because someone finally looked at what record multiple expansion that has taken place in Q1 as earnings are set to collapse by nearly 10%, or simply due to fears that tomorrow's payrolls number will show an abnormal amount of minimum wage waiters and bartenders added.
Whatever the reason, stocks slipped and have unwound some of the March rebound that had the MSCI All-Country World Index on the brink of erasing its losses for 2016. Crude oil retreated with base metals. As Bloomberg notes, the Stoxx Europe 600 Index fell for the first time in three days, declining with shares in Tokyo and Hong Kong. Crude slid back to $38 a barrel after OPEC reported that March output rose to 32.52MM b/d from 32.44MM b/d in February, making a mockery of any "production freeze."
As a reminder, this is where we stood as of last night: by the close of play yesterday the S&P 500 (+0.44%) had extended its winning streak to three consecutive sessions and in the process reached the highest level since December 29th. In fact yesterday’s move means the index has rallied over 14% off the intraday low midway through last month and is just 3% off the 2015 high set back in May.
S&P 500 futures fell 0.1 percent, suggesting US stocks could snap a three-day winning streak that pushed the measure to its highest level this year. Among the key events today, investors will look to today's initial jobless claims report for indications of the health of the labor market before Friday’s key non-farm payroll data.
After beating U.S. equities last year by the most in a decade, European stocks are now trailing them by the most since 2003. This quarter, analysts have slashed profit estimates, now forecasting declines for the year. Fund managers have withdrawn money for seven straight weeks, the longest streak since 2014, according to a Bank of America Corp. note last week.
The strong EUR and Europe's NIRP have also meant that while the broader market has not suffered too much, European banking stocks are a different matter entirely.
European bank stocks this quarter pic.twitter.com/Vz1oqCE231
— Jonathan Ferro (@FerroTV) March 31, 2016
The MSCI Asia Pacific Index pared gains to 0.1 percent, and is poised for an 8.2 percent jump in March. The Topix index fell 0.7 percent in Tokyo.
As reported before, we close off the quarter with the Bloomberg Dollar Spot Index headed for its worst month since 2010 and Treasury yields were on course for their largest quarterly drop since 2012 after Federal Reserve Chair Janet Yellen reiterated that weaker global growth called for a gradual approach to raising rates. Copper and zinc pared their first quarterly increases since 2014, while gold headed for its biggest three-month gain since 1986.
European stocks are heading for their first monthly gain since November, although progress hasn’t been sufficient to avoid a third quarterly drop in four. Global equities are up more than 7 percent in March, their first increase since October, but are still down 0.3 percent for the first three months of 2016.
“A lot of the recent rebound has been down to the Fed back-tracking on rate hikes,” Mark Lister, head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion, said by phone. “We’ve seen a big rally but there are still some genuine worries out there. Markets had been overpricing some of the risks, whereas now they’re probably underpricing them.”
Futures now show no chance of the U.S. central bank altering monetary policy at its April meeting and only 20 percent odds of a rate increase in June.
Market Snapshot
- S&P 500 futures down 0.1% to 2054
- Stoxx Europe 600 down 0.8% to 338.3
- MSCI Asia Pacific up 0.2% to 129.02
- US 10Yr yield down 2 bps to 1.81%
- Dollar index down 0.2% to 94.67
- WTI oil futures down 1.2% to $37.87/bbl
- Gold spot up 0.7% to $1233.37/oz
Top Global News:
- Google Objects to Oracle’s $8.8 Billion Claim for Java Trial
- BlackRock Is Said to Plan About 400 Job Cuts as Growth Slows
- Mallinckrodt Said to Work With Bank to Seek Nuclear Unit Bidders
- Oil Declines as Rising U.S. Crude Stockpiles Expand Global Glut
- Chinese Stocks in Hong Kong Enter Bull Market; Shanghai Rebounds
- IBM Said to Buy Cloud Consulting Co. for About $200m: Re/code
- U.K. GDP Grows More Than Estimated; Current-Account Gap Widens
- German Unemployment Unchanged as Refugees Bolster Labor Force
- Bidder for Mideast KFC Operator Said to Get $1.5 Billion Funding
- Buffett’s Energy Unit Sees Tax Benefits Double to $1.8 Billion
- World’s Biggest Shipping Company Pours Billions Into Market Rout
- Twitter Insiders Pitched Standalone Messaging App Idea: Re/code
- FDA Eases Rules for Abortion Pill, Making Access Simpler
- Westinghouse Sees India Reactor Deal Signed in June: Reuters
- U.S. May Let Govts, Banks Use USD for Business With Iran: AP
- Eurazeo to Buy Brands From Mondelez for EU250m, Les Echos Says
- Tesla to unveil Model 3 at 8:30pm PT in Calif; Tesla Model 3 Electric Car Seen Getting 225 Miles Per Charge
- Medivation Said to Work With Advisers to Defend Against Takeover
Looking at regional markets, Asia stocks traded indecisive amid fiscal year-end and as the recent dovish-Fed euphoria began to wane. ASX 200 (+1.29%) took the impetus from Wall St.'s gains as commodity names outperformed led by strength in blue chips BHP Billiton and Rio Tinto, while Nikkei 225 (-0.7%) saw choppy trade with price-action subdued by a firmer JPY and fiscal-end rebalancing. Elsewhere, Shanghai Comp (+0.1 %) also fluctuated between gains and losses following several large named earnings including big-4 banks ICBC and Bank of China which both surpassed estimates but announced a reduction in dividend pay-outs amid sluggish profit growth, while the PBoC also upped their liquidity injection. S&P revised China sovereign rating outlook to AA- negative from AA- stable.
Asia Top News
- A $2 Billion Fund Says Good Riddance as ‘Dumb Money’ Flees Japan
- Barclays’s Japan Chief Nakai to Resign Later in Year, Memos Say
- Chief of Malaysia’s Embattled 1MDB Says My Job Is Done Here
- Najib’s Brother Disbursed Funds Before Malaysian Polls, WSJ Says
- Guosen Securities Unit Said in Default Event on Dim Sum Debt
- The Giant of Southeast Asian Markets Is Getting Trounced in IPOs
In Europe, Yellen inspired sentiment entered a pause mode today as market participants took an opportunity to book profits ahead of the release of the latest US jobs report due out on Friday. As a result, the more defensive sectors outperformed, with energy and materials names under pressure amid lower energy prices. S&P's move to revise Chinese sovereign rating outlook to negative from stable and firmer than expected EU CPI data only underpinned the cautious sentiment, while an upward revision to UK GDP report also failed to result in any meaningful upside in EU based equity indices.
In FX, much to Draghi's embarrassment, the stand-out performer this morning has been the EUR, with the lead spot rate pushing up towards the highs to suggest a move on the Feb highs at 1.1375. This is pushing the USD index back to the lows, after some early weakness in the commodity currencies suggested a modest turnaround was in the making — perhaps justified ahead of US payrolls Friday. EUR/GBP buying month end saw the cross rate through .7900, pushing Cable lows around 1.4325, but after some steady support at the lows, an upward revision in Q4 GDP gave the Pound a fresh bid. Strong offers ahead of 1.4400, while a resilient EUR (vs GBP) will always win out these days.
Any JPY strength on Japanese fiscal year end has yet to materialise, but yesterday's highs remain intact, with USD/JPY holding steady above 112.00. EUR/JPY buoyant, and looking to better the 127.81 high from Tuesday. Limited impact from the S&P outlook change on China from stable to negative. CNH and CNY both at lows on the week.
Bloomberg’s dollar gauge, which tracks the greenback against 10 major peers, slipped 0.1 percent, for a fourth day of declines. The index has lost 3.9 percent this month, its steepest drop since September 2010.
“The dollar is overvalued, particularly against the major currencies, euro and yen,” said Steven Saywell, BNP Paribas SA’s global head of foreign-exchange strategy in London, in an interview on Bloomberg TV.
In commodities, West Texas Intermediate crude declined 1.3 percent to $37.83 a barrel, dropping for the fifth time in six days as the increase in U.S. stockpiles reinforced concern over a global glut in the commodity. Brent lost 0.5 percent to $39.07. Both are still heading for their first quarterly increases since 2015.Inventories expanded for a seventh week to 534.8 million barrels, according to a report from the Energy Information Administration Wednesday, while imports and production dropped. Ecuador and Venezuela will support a cut to output at a meeting between major exporters in Doha next month, Ecuador’s Oil Minister Carlos Pareja said in a post on the ministry’s Twitter account.
Gold for immediate delivery added 0.7 percent to $1,233.73 an ounce, after sliding 1.4 percent last session. Silver has managed to stay above the upward trendline on the daily chart maintaining its higher lows, currently above USD 15.24 with the next support level down at USD 15.06, while gold is still on course for its best quarter in 25 years due to safe-haven demand. Elsewhere, copper declined for a 5th consecutive day while iron ore prices fell over 1.5% alongside broad-based weakness across the commodities complex.
On the calendar today we get the Chicago PMI print for March (expected to improve over 3pts to 50.7) given the improvement in several regional PMI series, and of course ahead of tomorrow’s ISM manufacturing print. Away from this there’s more employment market data with last week’s initial jobless claims data. As well as the data, the latest Fedspeak is due to come from NY Fed President Dudley (due at 10pm BST), while Chicago Fed President Evans will speak again this afternoon (2.45pm BST).
Bulletin Headline Summary from RanSquawk and Bloomberg
- Caution prevailed ahead of NFP release due on Friday, with defensive sectors outperforming in early European trade
- Brexit concerns and month-end EUR/GBP demand failed to weigh on GBP, with GBP/USD advancing to 1.4400 level following better than expected UK GDP report
- Going forward, the focus will be on the release of the latest US Challenger Jobs and Chicago PM! reports ahead of NFP tomorrow
- Treasuries little changed, global equities drop and commodities mixed in overnight trading; today’s economic data includes jobless claims, ISM Milwaukee and Chicago PMI.
- Standard & Poor’s has cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. The nation’s credit rating is AA-
- The nation’s largest state-controlled lenders cut their dividend payouts for last year amid rising bad loans, underscoring what Bank of China Ltd.’s president described as a “new normal” of low profit growth for the lenders
- Euro-area inflation fell 0.1% from a year earlier after a 0.2% drop in February, in data released on the eve of the European Central Bank’s first day of expanded debt purchasing to fight deflation
- German joblessness was unchanged in March, snapping a run of five consecutive declines, in a sign that Europe’s largest economy may be struggling to absorb a wave of refugees
- Wall Street is used to getting the opportunity to influence bank rules before they are unveiled. Now financial firms are getting the chance to argue that a key capital requirement should be softened even after it was supposed to be finished
- Recession worries and central-bank stimulus in Europe and Japan have given fresh life to a three-decade-long rally in global debt. Bonds worldwide are off to the best annual start since at least 1996. They’ve earned about 3.2% this quarter and added $2.1 trillion of market value
- $4.7b IG credit priced yesterday, weekly volume to $15.8b, March $160.605b, YTD $454.855b; $5.225b HY priced yesterday, WTD 6 deals $7.8b, MTD 28 deals for $21.66b, YTD 53 deals for $36.52b
- Sovereign 10Y bond yields mixed; European and Asian equity markets lower; U.S. equity-index futures drop. WTI crude oil and copper drop, gold moves higher
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, March (prior 21.8%)
- 8:30am: Initial Jobless Claims, est. 265k March 26 (prior 265k); Continuing Claims, March 19, est. 2.2m (prior 2.179m)
- 9:00am: ISM Milwaukee, March (prior 55.22)
- 9:45am: Chicago Purchasing Manager, March, est, 50.7 (prior 47.6)
- 9:45am: Fed’s Evans speaks in New York
- 10:00am: Wholesale Trade, benchmark revisions
- 5:00pm: Fed’s Dudley speaks in Lexington, Virginia
DB's Jim Reid concludes the overnight wrap
For the most part the past 24 hours or so markets have seen a continuation of the decent performance for risk assets ignited in the wake of Yellen’s cautious comments. Yesterday, despite the usually dovish Chicago Fed President Evans offering his view that he still expects two rate hikes this year, futures markets continued to push the probability of a tightening lower and we’re now down to just a 20% probability of a hike in June based on pricing this morning (from 38% pre-Yellen) and 54% by December (from 73%). With one eye on the other big event of the week - that being tomorrow’s payrolls number - yesterday’s ADP employment change reading was fairly supportive after printing a tad ahead of expectations at 200k (vs. 195k expected) which has the early chatter looking for a similar 2-handle NFP number.
By the close of play yesterday the S&P 500 (+0.44%) had extended its winning streak to three consecutive sessions and in the process reached the highest level since December 29th. In fact yesterday’s move means the index has rallied over 14% off the intraday low midway through last month and is in fact just 3% off the 2015 high set back in May. It was US credit indices which were the relative outperformer yesterday though with CDX IG eventually finishing 4bps tighter on the day with the index closing back in again on the YTD tights made earlier this month. Cash markets had a decent day too with US HY spreads finishing 8bps tighter. The US Dollar continues to struggle post Yellen and despite attempting to rebound on yesterday’s employment data (and Evans’ comments to some degree), the Dollar index still closed with a -0.34% loss to take its post-Yellen move lower to -1.14%. Emerging market currencies were the main beneficiary of that move while in rates markets 2y Treasury yields dipped another 3bps lower yesterday to 0.759% which means the bonds are now nearly 21bps lower in yield since the FOMC meeting of two weeks or so ago. The curve did however steepen with 10y and 30y yields up 2bps and 5bps respectively.
This morning, while trading has been a bit choppy the bulk of bourses have followed Wall Street’s lead and are posting gains. The CSI 300 (+0.32%), Shanghai Comp (+0.36%), Nikkei (+0.44%) and ASX (+1.35%) in particular are all currently up, while the Hang Seng (-0.17%) and Kospi (-0.55%) are lagging a bit. A leg lower for WTI (-1.23%) perhaps contributing to some of that. Asia credit is flat but the Aus iTraxx has rallied to the tune of nearly 4bps. Meanwhile, reports of further corporate bond defaults in China are also gaining some attention. On Tuesday Dongbei Special Steel announced that it had missed a principal and interest repayment, notable given its status as state-owned. This follows the news of a creditor committee being set up to help restructure Bohai Steel’s debt load, while this morning the FT is reporting that a unit of Guosen Securities (China’s 8th largest IB) is said to have technically defaulted on a HK traded-RMB bond. All this a reminder that default risk and idiosyncratic stories in China seems to be on the rise this year and the broader economic slowdown is certainly not helping what has been generally viewed as an overleveraged corporate sector in China.
Back to those comments from the Fed’s Evans yesterday. Despite mentioning that he expects the US economy to be strong enough to justify raising rates twice this year, Evans did come across as a little more cautious with regards to his views on inflation saying specifically that he was a ‘bit uneasy’ on hitting the 2% target. The Fed President also said that ‘it is too early to tell whether the recent firmer readings in the inflation data will last or prove to be temporary volatility and reverse in coming months’, while also signaling that is important for the Fed to take the recent decline in inflation expectations, as perceived by the market, seriously.
Playing catch up, European equities had a strong session yesterday with the Stoxx 600 in particular gaining +1.30% to trim further its YTD loss (which has now dipped under 7% although at one stage was as much as -17% on the year at the February lows). It was actually energy sensitive names which had driven much of that performance after Oil at one stage rallied close to 4% and to a shade under $40/bbl (boosted seemingly by the weaker USD). That move was completely eliminated come the close of play in the US however as the market digested more bearish US crude inventory numbers and its proving hard to ignore the fact that inventories are still near record highs. Interestingly Gold was in reversal mode yesterday after tumbling -1.38% which in turn has taken it into negative territory for the month. That said the precious metal is still on course to close out the quarter with a gain of 15% or so as things stand.
European credit indices had a decent session also with the iTraxx Crossover and Main closing 12bps and 4bps tighter respectively. The primary market in Europe is still yet to get going post the holiday break but one deal which caught the eye earlier this week was that of French corporate Sanofi who managed to get a 3-year bond deal away at a yield of just 5bps and a coupon of 0%. It’s clearly not the first zero-coupon bond we’ve seen but what’s telling is that in the past such zero-coupon bonds have typically priced with a large discount and so offering a more tempting yield. Clearly this is not the case here and perhaps won’t be the last such is the influence of the latest ECB measures (including of course buying corporate bonds). An incredible stat that stood out is Bloomberg reporting that about €14bn of corporate bonds are now trading with a negative yield.
Before we take a look at the day ahead, wrapping up the data yesterday in Europe the main release of note was a better than expected inflation report out of Germany. The March CPI number came in at +0.8% mom (vs. +0.6% expected) which had the effect of lifting the YoY rate up three-tenths to +0.3%. Much of the commentary suggesting that this helps support upside risks to today’s wider Euro area inflation report. With regards to the remainder of the data, the Euro area confidence indicators for this month were a bit of a mixed bag. The headline economic confidence reading fell 0.9pts to 103.0 (vs. 103.8 expected) which is the lowest print since February last year. Industrial confidence was little changed, services confidence dipped but the business climate indicator was a smidgen higher.Taking a look at today’s calendar, this morning in Europe the early data comes from Germany where we will see the February retail sales numbers. This is quickly followed by the first print for the March CPI report in France, along with consumer spending numbers while Italy and Spain will also report their latest inflation numbers. The Euro area CPI report for March follows this where current expectations are for a modest one-tenth improvement in the headline rate to -0.1% yoy. In the UK we’ll get the final reading of Q4 GDP (expected to stay unchanged at +0.5% qoq) along with the February money and credit aggregate data. Turning to the US, expect there to be a fair bit of attention paid to the Chicago PMI print for March (expected to improve over 3pts to 50.7) given the improvement in several regional PMI series, and of course ahead of tomorrow’s ISM manufacturing print. Away from this there’s more employment market data with last week’s initial jobless claims data. As well as the data, the latest Fedspeak is due to come from NY Fed President Dudley
(due at 10pm BST), while Chicago Fed President Evans will speak again this afternoon (2.45pm BST).