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Global Stocks Drop Ahead Of Fed Rate Decision; Dollar Rises As Sterling Tumbles

European stocks declined for first session in five ahead of Wednesday's Dutch elections, debt ceiling expiration and the conclusion of the Fed's 2-day meeting where it is expected to raise rates by 25 bps. Tightening concerns emerged, also dragging down Asian shares and S&P futures, while the dollar continued its rise for a second day. Crude oil has ended its six-day drop. The pound tumbled 0.8% to the lowest since mid-January in a delayed reaction after Theresa May won permission to trigger the country’s departure from the EU. On today's US calendar, we get the Producer Price Index although most NYC-based traders are likely taking a snow day off or trading from home.

A quick reminder of the key events this week:

  • The Fed’s 26 bps increase is expected on Wednesday.
  • The Bank of England, Swiss National Bank, Bank of Japan and Bank Indonesia are expected to keep monetary policies unchanged on Thursday.
  • The Dutch go to the polls on March 15.
  • G-20 finance ministers will gather in Germany for a series of meetings.
  • Trump is expected to unveil his budget

In a relatively quiet session, the standout move was the plunge sterling which dropped on Tuesday after Britain's parliament paved the way for Prime Minister Theresa May to launch divorce talks with the European Union. Curiously, on Monday, sterling had jumped 0.4 percent after Scotland's First Minister Nicola Sturgeon demanded a new independent referendum in late 2018 or early 2019, once the terms of the UK's exit from the EU are clearer with the delayed selloff coming largely on priced-in news.

Europe's Stoxx 600 Index was headed for its first decline in five days with every industry except healthcare in the red in early trading. India's NSE Nifty 50 Index surged to a record and the rupee climbed to an 11-month high after Prime Minister Narendra Modi’s victory in state elections. The yield on 10-year Treasuries remained near the highest level of the year and oil fluctuated after declining for six straight days.

The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent, while Japan's Nikkei closed down 0.1 percent. Shares of Toshiba closed up 0.5 percent after plunging as much as 8.8 percent, their biggest one-day loss in almost a month. The company said it would "aggressively consider" a sale of most of Westinghouse and announced it had received approval from regulators to extend for a second time the Tuesday deadline for its official third-quarter earnings. Its statement earlier in the session that it had requested the extension to expand a probe into problems at its U.S. nuclear unit Westinghouse sent the shares tumbling, Reuters reported.

Chinese shares reversed early gains after data showed retail sales dropped more than expected in the first two months of the year, posting their first single-digit Y/Y increase since 2003.

 

Other China data on Tuesday was more upbeat and positive for the global economy, with investment and industrial output expanding more than expected, but investors feared those signs of strength may not be sustainable. China has cut this year's economic growth target to about 6.5% to give policymakers more room to push through painful reforms to contain financial risks. The economy grew 6.7 percent in 2016, the slowest pace in 26 years. On Monday, Goldman Sachs upgraded Chinese stocks to "overweight" on better growth prospects and a bullish view on the country's banking sector, a move interpreted by many as a top-tick indicator. 

Overnight, Wall Street was mixed, with the Dow Jones Industrial Average down 0.1 percent, while Nasdaq rose 0.24 percent and the S&.SPX was little changed. 

According to Bloomberg, putting a damper on risk sentiment today are expectations the Federal Reserve "will raise borrowing costs at a faster pace than was expected at the start of this year have surged as data globally pointed to firming growth and accelerating inflation." The question for most traders now is how fast the Fed will move, and they hope to get the answer tomorrow in the comments accompanying Wednesday’s expected quarter-point increase for clues. “The market is waiting,” said Peter Schaffrik, global macro strategist at RBC Europe Ltd. “Moves today have been fairly muted. The Fed is clearly on everyone’s mind. The rate hike is a foregone conclusion, so it’s the press conference that’s really relevant.”

"On one hand, the market ponders a surprise hold, in which massive unwinding of positions could take place with the hike already priced in," Jingyi Pan, market strategist at IG in Singapore, wrote in an note. "On the other hand, concerns have also been paid to an acceleration in the Fed’s path to normalization, where the likelihood of four Fed hikes has been raised, up from the current projection of three," she said. "The immediate reaction is likely to be seen in the dollar and upsides towards December’s high on the dollar index may be eyed."

Perhaps in anticipation of a tighter Fed, the dollar index rose another 0.2% at 101.49, extending Monday's gains following a bout of profit taking at the end of last week. The dollar gained 0.1% to 114.92 yen JPY, but remains below the seven-week high touched on Friday on expectations of a Fed move at the end of a two-day meeting on Wednesday.

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. U.S. Treasury Secretary Steven Mnuchin will be "pushing hard" to advance U.S. interests in his debut G20 meeting, including reaffirming commitments to avoid competitive currency devaluations, a senior Treasury official said on Monday.

In commodities, oil prices dipped after touching a 3-1/2-month low in the previous session as concerns about rising U.S. production offset optimism about supply cuts by the Organization of Petroleum Exporting Countries. Both WTI and Brent staged a modest rebound, halting 6 days of losses, although just shy of 3 month lows.

Market Snapshot

  • S&P 500 futures down 0.2% to 2,368.50
  • STOXX Europe 600 down 0.2% to 373.77
  • MXAP down 0.09% to 145.38
  • MXAPJ up 0.3% to 468.66
  • Nikkei down 0.1% to 19,609.50
  • Topix down 0.2% to 1,574.90
  • Hang Seng Index down 0.01% to 23,827.95
  • Shanghai Composite up 0.07% to 3,239.33
  • Sensex up 1.9% to 29,484.90
  • Australia S&P/ASX 200 up 0.03% to 5,759.14
  • Kospi up 0.8% to 2,133.78
  • German 10Y yield rose 0.9 bps to 0.48%
  • Euro down 0.08% to 1.0644 per US$
  • Brent Futures up 0.2% to $51.47/bbl
  • Italian 10Y yield fell 0.3 bps to 2.364%
  • Spanish 10Y yield rose 2.3 bps to 1.929%
  • Brent Futures up 0.2% to $51.47/bbl
  • Gold spot down 0.09% to $1,203.19
  • U.S. Dollar Index up 0.3% to 101.56

Top Overnight News

  • Monsanto Loses Bid to Seal Documents Related to Ex-EPA Official
  • Trump’s Border Wall Likely a Boon for Martin Marietta, Says CEO
  • Synopsys to Replace Harman International in S&P 500 Index
  • Spain’s Popular Said to Tap UBS to Explore Sale of U.S. Bank
  • China’s Economy Holds Momentum as Output, Investment Accelerate
  • Oil Holds Losses as U.S. Crude Stockpiles Seen Rising 10th Week
  • BMW Being Probed by U.S. Over Car Leases to Military Members
  • Trump, Xi Said to Discuss Mar-a-Lago Summit Amid Korea Tensions
  • Pfizer Launches Zavicefta Antibiotic in U.K., Germany
  • GE Wins Contract to Supply Its Largest Gas Turbine in China
  • Physicians Realty Trust Stock Offering Priced at $18.20 Apiece

Asia equity markets traded mixed after a mixed close on Wall Street as a non-committal tone persisted ahead of key risk events. ASX 200 (Unch.) closed relatively flat with outperformance seen in commodity related sectors after copper and iron ore prices rose by around 1% and 2% respectively, while Nikkei 225 (-0.1%) was subdued by a firmer currency with USD/JPY failing to reclaim 115.00. Shanghai Comp. (+0.1%) and Hang Seng (-0.1%) were choppy after the PBoC slightly increased its liquidity injections and as participants digested mixed data in which Chinese Industrial Production beat expectations to print a 6-month high, although Retail Sales disappointed and showed the weakest start since 2002. The Nifty (+1.6%) outperformed to hit a fresh all-time high as India returned from a long weekend and reacted to state election results in which the ruling BJP party won a landslide victory in the country's largest state of Uttar Pradesh, which highlighted political stability and confidence in PM Modi's government. 10yr JGBs were mildly higher amid a subdued tone in riskier Japanese assets and after a mixed 20yr auction where the b/c slightly declined, but prices rose from the prior month.

Top Asian News

  • China Bond Default Woes Deepen as Steel Producer Misses Payment
  • Mitsubishi Heavy Shares Jump as Damages Due to Edison Capped
  • PBOC Saps Funds for 14th Straight Day as Hoarding Period Looms
  • Modi’s Victory Sends Indian Stocks to Record, Rupee Advances
  • Morgan Stanley Sees China Bonds in Key Indexes in Three Years
  • Rupee Snaps Rally on RBI Speculation, Others Quiet: Asian NDFs

UK House of Lords passed the Brexit bill without the EU citizen rights or final vote amendments after House of Commons rejected amendments, with reports stating that Parliament also granted UK PM May permission to start Brexit. Furthermore, it is now expected that the UK will trigger Article 50 in the last week of March rather than this week, with UK Brexit Minister Davis stating Article 50 will be triggered by the end of this month as planned. The BoE accepts resignation of Charlotte Hogg in the wake of the central banker failing to disclose her brother's position at Barclays.

Top European News

  • Amundi Starts Rights Offering; Credit Agricole Stake to Drop
  • Prudential Full-Year Operating Profit Rises 7% on Asia Business
  • RWE Sees Profit Rising This Year on Trading, Innogy Units
  • Aker Solutions Surges on Report of Halliburton Deal Talks
  • May Eyes Late-March Brexit Trigger as Parliament Clears Way
  • Scottish Referendum May Re-Open Pressure Points for Markets
  • No Trichet Flashback for Poland as CPI Jolts Eastern Europe
  • Fraport, Vinci Interested in Belgrade Airport: Blic
  • Popular Seeks to Sell Private Banking Unit: Independiente

In currencies, he Bloomberg Dollar Spot Index gained 0.2 percent at 9:55 a.m. in London, up for a second day. The British pound led losses, weakening by as much as 0.9 percent before trading 0.8 percent lower. The euro slipped 0.1 percent to $1.0639, following a 0.2 percent drop Monday. Cable was the overnight standout, taking another sharp hit, as the 2 Houses of Parliament finally agree on the Brexit Bill, giving the green light to trigger Article 50. Some will point to a knee jerk response from the market, but with the House of Lords having effectively undermined the government with its amendment proposals, PM May's negotiating powers may/will have been impaired. Cable has tested 1.2100, but has so far held, while EUR/GBP has retested the resistance ahead of 0.8800, but this also holding for now.

In commodities, oil traded near a three-month low as U.S. crude stockpiles were seen rising for a 10th week, but West Texas Intermediate managed to add 0.4 percent to $48.61 a barrel. Aluminum led a decline in industrial metals, falling 0.5 percent to $1,871.50 a metric ton as China, the largest producer, increased output to a record. Gold was little changed at $1,203.72 an ounce as investors prepared to assess the tone of the Fed’s commentary. In the run up to the FOMC meeting, the commodities market is trading a tight range, with some of the losses seen in Oil and Copper specifically having tailed off over the last 24- 36 hours or so. Oil prices are set to stay pressured however, as the market is focusing on the next OPEC meeting in Jun, and looking to further agreements on production given the impact on inventory so far. Concerns over Shale production have also heightened, keeping WTI below the USD50.00 mark. Copper is back above USD2.60, but all down to the disruptions (strikes) in key mines in Chile and Peru. Base metals all looking heavy, with Lead underperforming. Gold continues to hover above USD1200.00, and is looking a little more resilient given the fresh drop-off in Treasuries ahead of Wednesday's key policy meeting.

Looking at the day ahead, in the US the February PPI report is due to be released as well as the latest NFIB small business optimism print, which missed expectations. Away from the data Dutch party leaders are due to hold a final debate this evening ahead of tomorrow’s election. Meanwhile a meeting which had been scheduled between President Trump and Chancellor Merkel today has now been postponed to Friday given the concerns over the storm.

US Event Calendar:

  • 6am: NFIB Small Business Optimism 105.3, est. 105.6, prior 105.9
  • 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.6%
    • PPI Ex Food and Energy MoM, est. 0.2%, prior 0.4%
    • PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2%
    • PPI Final Demand YoY, est. 1.9%, prior 1.6%
    • PPI Ex Food and Energy YoY, est. 1.5%, prior 1.2%
    • PPI Ex Food, Energy, Trade YoY, prior 1.6%

DB's Jim Reid concludes the overnight wrap

The calm before the storm is the probably the best way to describe how markets have kicked off this week. Ahead of much bigger events starting tomorrow and continuing into the end of the week – namely the Fed, BoJ, BoE, Dutch election, US data, G-20 meeting and Trump budget – it was a fairly quiet start to the week for the most part yesterday. The most significant news concerned the UK where Brexit headlines dominated. Late last night we got the news that Parliament has passed the legislation which allows PM May’s government to go ahead with triggering Article 50. That came after the House of Commons overturned the House of Lords amendments which had included guaranteed rights for EU citizens in the UK and also the amendment concerning giving Parliament a ‘meaningful vote’ on May’s negotiation terms with the EU. May is now expected to address the House of Commons today however it’s still unclear when exactly she will look to start the formal process of leaving the EU although the FT did cite government figures as saying that the last week of March is most likely.

Indeed it was highlighted separately that the formal process would unlikely start before the EU celebrations to mark the 60th anniversary of the EU’s founding treaty on March 25th in Rome, as well this week’s Dutch election and the Scottish National Party conference this weekend. With British Parliament on recess on March 31st that makes the days from March 27th-30th most likely. Meanwhile that news last night also comes after Scotland’s First Minister Nicola Sturgeon announced her plan to call another Scottish independence vote by spring 2019. It’s expected that Sturgeon will ask Scottish parliament to vote to authorize such next week. That wasn’t all with Sinn Fein leader Michelle O’Neil also quoted as saying that a referendum in Northern Ireland “has to happen as soon as possible”. So well worth keeping an eye on things over the coming days.

Sterling initially rallied yesterday on the Scottish independence vote headlines, touching an intraday high of $1.225 in the afternoon (about +0.69% on the day) before easing back in the evening session. It’s down a bit more this morning and back to $1.220 although still up about +0.30% versus Friday’s close. The FTSE 100 also edged up +0.33% and 10y Gilt yields were +1.6bps higher at 1.244% although the news that Parliament had passed legislation did come after markets closed.

Away from that equity markets weren’t hugely exciting elsewhere. The S&P 500 (+0.04%) seemingly started the process of battening down the hatches early for storm Stella with volumes well below the usual average. The Stoxx 600 did close up +0.38% helped by a decent session for the miners with commodities largely stabilizing or having a solid session (Gold -0.03%, Copper +1.12%, Iron Ore +1.78%, WTI Oil -0.19%). Bonds were a bit more exciting though. 10y Treasury yields reached a new two and a half year high at 2.626% (+5.1bps) with corporate issuance again enjoying another bumper day which weighed on Treasuries. In contrast 10y Bund yields were actually -1.2bps lower at 0.467% after the ECB’s Smets was quoted in the WSJ as saying that the ECB’s latest policy statement “does not in itself signal a change in the monetary policy stance”.

This morning in Asia the focus has by and large turned over to another batch of data out of China with the release of the latest activity indicators. In summary the data suggests that China has, on the whole, started the year on a firm footing. Indeed industrial production was revealed as rising +6.3% yoy (vs. +6.2% expected) in the first two months of the year from +6.0% in December while fixed asset investment climbed materially to +8.9% yoy (vs. +8.% expected) from +8.1% in the same period. Retail sales data was less upbeat however with sales softening from +10.4% to +9.5% yoy (vs. +10.6% expected) with the impact of tax changes on small engine cars seemingly having a big impact. Market wise there hasn’t been much of a reaction with bourses in China pretty much unchanged as we go to print along with the Hang Seng. Elsewhere the Nikkei (-0.13%) has edged a bit lower while the Kospi (+0.65%) is higher for a second successive day.

While we’re on China it’s worth highlighting a potential date for your diary. Over April 6th-7th President Trump is planning to host China President Xi Jinping in Florida with the escalating tension around North Korea expected to be high on the agenda. We should get confirmation of the meeting this week.

Staying on the subject, yesterday was a quiet day for data but we did get the latest ECB CSPP holdings data. As of March 10th the ECB reported total holdings of €70.43bn which implies net purchases settled last week of €2.09bn. That works out to be an average daily run rate of €417m and another strong, above average week of purchases compared to the €367m average daily run rate since the program started.

Before we wrap up, a quick mention that yesterday our House View team published their latest report called ‘Policy landscape remains in focus’. They note that potential shifts to the policy landscape remain in focus for markets, where uncertainty still reigns on most fronts. Polls for the French Presidential Election have tightened. A Le Pen victory remains unlikely but cannot be ruled out. Politics will continue to be at the fore elsewhere in Europe, with the Dutch election, the UK triggering Art. 50, turmoil in Italy and ongoing negotiations with Greece. Prospects for the key pillars of Trump's economic agenda also remain uncertain. Markets have better clarity on other fronts: a chorus of more hawkish Fed rhetoric jolted expectations for a March hike. Counterbalancing this uncertainty is a broad-based uptick in global growth momentum, which has supported market sentiment. In the US, surveys point to robust growth, and consumer and business sentiment are showing signs of animal spirits, though hard data have been somewhat weaker. Europe has been an upside surprise, with supportive data tilting the balance of risks in a more positive direction. The growth story is also cautiously more positive in China and EM more broadly.

Looking at the day ahead, this morning in Europe the main focus should be on Germany where we will get the final revisions to the February CPI report, along with the March ZEW survey which is expected to showing a slight improvement in sentiment. Industrial production data for the Euro area is also due to be released. Over in the US this afternoon the February PPI report is due to be released as well as the latest NFIB small business optimism print. Away from the data Dutch party leaders are due to hold a final debate this evening ahead of tomorrow’s election. Meanwhile a meeting which had been scheduled between President Trump and Chancellor Merkel today has now been postponed to Friday given the concerns over the storm.