Brexit day has finally arrived, and despite this major "risk event", European and Asian stocks are trading mixed, while S&P futures are just fractionally lower as a bounce on optimism over the American economy appears to have fizzled and President Trump continues to struggle to pass his legislative agenda. The pound first dipped then rose as the U.K. is set to begin its life outside the EU.
Prime Minister Theresa May will notify EU Council President Donald Tusk in a letter shortly after 1pm CET that Britain really is quitting the bloc it joined in 1973, pitching the United Kingdom into the unknown and triggering years of uncertain negotiations. The start of the formal Brexit process comes a day after the Scottish Parliament backed a bid to hold a second independence referendum that would break up the UK, adding another layer of uncertainty for investors to navigate. "Details are everything now. We could be in for a rough ride today as currency traders react to the contents of the letter being delivered to Brussels and the language May uses in parliament," Neil Wilson, senior market analyst at ETX Capital, told Reuters adding that "a truly hard Brexit has not been priced into sterling. We could see it move lower still if negotiations take a sour turn."
As DB's Jim Reid summarizes today's events, "the official process is expected to start at just after 12.30pm GMT when British ambassador to the EU, Sir Tim Barrow, presents May’s letter of withdrawal to the European Council President Donald Tusk. Perhaps more significant for markets, PM May will then address lawmakers in London this afternoon so it’s worth seeing if anything comes out of that. All this of course follows the news out of Scotland yesterday where lawmakers in Parliament voted by a majority of 69 to 59 to allow First Minister Nicola Sturgeon to go through the legalities of holding a second independence referendum by spring 2019. Its likely to be blocked by Westminster but stand by for lots of noise on this over the coming weeks and months."
The Stoxx Europe 600 Index and futures for the S&P 500 erased early gains to trade little changed. Sterling pared losses of as much as 0.6 percent to edge higher before a letter formally triggering Britain’s departure from the European Union is delivered. The South African rand weakened further as traders await clarity on the fate of Finance Minister Pravin Gordhan.
Still, despite the overnight wobble in risk trades, global stocks remain on course for a fifth straight month of gains as the reflation trade triggered by Trump’s election proves its resilience. As the MSCI All-Country World Index shows, despite the imminent Brexit, risk-on mood prevails around the globe and global equities trade just shy of all time highs.
Germany's DAX was up 0.6 percent, hitting 2 year highs, driven by broker upgrades and results. MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2 percent and back toward recent 21-month peaks, while Japan's Nikkei added 0.1 percent. The Dow Jones snapped an eight-day losing streak on Tuesday, its longest run of losses since 2011, in part as a survey showed consumer confidence surged to a more than 16-year high.
"Economic fundamentals still remain exceedingly sound here in 2017 and you do not need Trump's pro-growth fiscal agenda for this to be one of the best years for growth since the recovery started," argued Tom Porcelli, chief U.S. economist at RBC Capital Markets. "We still think tax reform happens, but you are better off thinking about the timing as an end of year event at best."
“Trump and markets are moving on, with the help of better U.S. data,” Societe Generale SA strategists, led by Ciaran O’Hagan, wrote in a client note, referring to the rebound in risk appetite after last week’s failed health-care bill curbed reflation bets.
Some further thoughts from SocGen's Kit Juckes on today's key risk event(s):
The British Government's decision to trigger Article 50 and start the process of leaving the EU is making all the headlines, of course. But the wider market story is that yet again, volatility has collapsed. Both the Vix, and Deutsche Bank's CVIC FX volatility index, are back below their 50, 100 and 200-day moving averages. The excitement that was caused by the failure of President Trump's healthcare bill has been washed away as bond yields stabilise. A 2.42% 10-year Note yield is neither too hot nor too cold, consistent with a couple more rate hikes this year but not with the Fed's famous dots that take rates to 3% in due course. Rates stay below the nominal growth rate of the economy and asset prices take comfort. Both the dampening effect on volatility and the over-correlation of financial markets that Helene Rey described as the result of too-low rates are back as the dominant force behind markets. In FX, that's a recipe for yield-hungry, risk-tolerant investors to take the lead.
Vix and CVix are back under the easy money cosh
Elsewhere in currencies, the euro was down a quarter of one percent at $1.0785 and the USDJPY was being supported by 111. The dollar bounced from 4-month lows as a top Federal Reserve official talked of more rate hikes to come. Fed Vice Chairman Stanley Fischer, one of the more influential policymakers with markets, said two more rate increases this year seemed "about right". The Bloomberg Dollar Spot Index gained 0.45% on Tuesday, the most since March 2.
In China, the onshore yuan declined 0.11%, or the most since March 8, to 6.8899 after the central bank cuts its daily fixing by 0.19% amid broad dollar strength. Additionally, the PBOC continued to soak up liquidity, skipping reverse-repurchase operations for the fourth day in a row, leading to a net withdrawal of 70 billion yuan on Wednesday due to maturities. The overnight repo rate rises 11 basis points to 2.52%; the seven-day repo rate climbs 19 basis points to 2.84%. The one-year interest-rate swaps climb for the first time in six days, adding five basis points to 3.60%.
In commodity markets, base metal prices bounced on more upbeat economic news from China with copper CMCU3 gaining 0.8 percent overnight to add to Tuesday's 2 percent rise. Oil prices gained after a severe disruption to Libyan oil supplies and as officials suggested the Organization of the Petroleum Exporting Countries and other producers could extend output cuts to the end of the year. U.S. crude added 1 percent to $48.83 a barrel, while Brent LCOc1 also rose 1 percent to $51.80. Spot gold was little changed at $1,250 an ounce.
In rates, European bonds mostly edged higher, with a one-basis point decline in the yield of 10-year Spanish bonds among the largest moves. Treasuries gained, with the yield on the benchmark note due in a decade falling one basis point to 2.41 percent. The yield advanced four basis points Tuesday.
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Bulletin Headline Summary From RanSquawk
- EU bourses have shrugged off any potential uncertainty from today's key risk event to trade higher ahead of the US open
- UK PM May signed the Article 50 letter, in preparation to hand to Europe. The letter is expected to be handed to EU President Tusk later today at 1230BST
- Looking ahead, highlights include DoE crude oil and UK Brexit developments
Market Snapshot
- S&P 500 futures little changed at 2,351.50
- STOXX Europe 600 up 0.1% to 377.81
- MXAP down 0.2% to 148.78
- MXAPJ up 0.3% to 482.84
- Nikkei up 0.1% to 19,217.48
- Topix down 0.2% to 1,542.07
- Hang Seng Index up 0.2% to 24,392.05
- Shanghai Composite down 0.4% to 3,241.31
- Sensex up 0.4% to 29,519.45
- Australia S&P/ASX 200 up 0.9% to 5,873.52
- Kospi up 0.2% to 2,166.98
- German 10Y yield fell 0.4 bps to 0.384%
- Euro down 0.2% to 1.0791 per US$
- Brent Futures up 1% to $51.84/bbl
- Italian 10Y yield fell 3.6 bps to 2.161%
- Spanish 10Y yield fell 0.9 bps to 1.671%
- Brent Futures up 1% to $51.84/bbl
- Gold spot down 0.1% to $1,250.37
- U.S. Dollar Index up 0.2% to 99.86
Top Overnight News from Bloomberg
- Britain Heads Into Unknown as May Gets Ready to Trigger Brexit
- Trump Said to Meet With Cohn on Thursday to Discuss Tax Overhaul
- Judge Narrows Precious Metal Manipulation Case Against Firms
- House Clears Measure to Scrap FCC Broadband Privacy Rule
- U.S., Japan Test Xi With Taiwan Moves Ahead of Trump Summit
- EU Blocks Deutsche Boerse’s $14 Billion Takeover of Rival LSE
- Toshiba Sees Record Loss as Westinghouse Unit Files Bankruptcy
- BlackRock Said to Cut Jobs, Fees in Revamp of Active- Equity Unit
- Huntsman Eyes Merger After Spinoff of Titanium-Dioxide Unit
- Delta, Korean Air Sign MOU to Expand Partnership
- Yield Hunters Cut Euro Credit ETF Holdings on Political Risk
- Athene Upsized Secondary Share Offering Priced at $48.50-Share
- Roche Multiple Sclerosis Drug Wins FDA Approval
- AMC Entertainment CEO Sees Making Small Acquisitions in U.S.
- Vertex Says Cystic Fibrosis Combo Met Goals in Phase 3 Studies
Asian equities traded mostly higher following the rebound on Wall Street where stocks were led by strength in financials and energy sectors, as well as encouraging data with consumer confidence at a 16-year high. ASX 200 (+0.9%) outperformed with broad-based gains and was similarly led by strength in the aforementioned sectors, while Nikkei 225 (+0.%) failed to benefit from a weaker JPY, as poor retail sales data overshadowed sentiment before seeing some mild reprieve heading into the close. Financials outperformed in the Hang Seng (+0.2%) after AgBank kick-started the Big 4 earnings reports with an encouraging result, while upside in the Shanghai Comp. (+0.1%) was limited after the PBoC refrained from open market operations for the 4th consecutive day which resulted to a daily net drain of CNY 70bIn. 10yr JGBs were flat despite an indecisive tone seen in Japanese stocks, while underperformance was observed in the 5yr after the BoJ's Rinban announcement in which it reduced buying in 3yr-5yr maturities to JPY 380b1n from JPY 400BN. PBoC refrained from open market operations for a fourth consecutive day, for a net daily drain of CNY 70bIn.
Top Asian News
- Thailand Holds Key Rate in Rebuff to IMF Call for Easing
- HNA Unit Plans $1.2 Billion Share Sale to Fund Land Purchases
- From Silk to Bees and Back? Hedge Fund Battles 144-Year Old Firm
- Vietnam’s GDP Expands 5.1% in First Quarter; Est. 6.25%
- Bailouts Fail to Rescue India Farmers Trapped in Debt Spiral
- Anglo’s New Billionaire Investor Agarwal Says He’s No Activist
- Billionaire Solomon Lew’s Premier Buys 10.77% Stake in Myer
- Agarwal: No Intention to Buy Anglo Assets in South Africa
- Turkey’s Halkbank Plunges After U.S. Probe Extends to Lender
- Topix Index Declines as Ex-Dividend Impact Outweighs U.S. Data
European bourses have shrugged off any potential uncertainty from today's key risk event to trade higher, with the weak GBP and higher commodities prices may be providing the FTSE (+0.3%) a lift. Elsewhere, mining names are performing well with BHP Billiton shares gapping up at the open off the back of a rebound in base metals prices. Finally, EU anti-trust regulators have blocked the proposed Deutsche Boerse (DB1 GY) and LSE (LSE LN) merger (as expected). The UK/German 10YR spread has pushed up in the last couple of sessions and is holding around 81.5bps but this kind of price action is to be expected with Brexit looming. Risk sentiment overall seems to be in the risk on side which is pushing core EU products lower this morning.
Top European News
- Britain Heads Into Unknown as May Signs Brexit Letter
- U.K. Mortgage Approvals Fall to 68,315 in Feb. Vs. Est. 69,100
- Morgan Stanley Favors Buying Pound as Excessive Pessimism Priced
- Italy Consumer Confidence Rises to 107.6 in March; Est. 106.6
- EDF’s Bailout Leaves Nuclear, Power-Price Challenges Intact
In currencies, the British pound trimmed earlier losses to trade 0.1 percent lower. The euro weakened 0.2 percent. The Bloomberg Dollar Spot Index was little changed. South Africa’s rand slipped 0.7 percent. Price action in GBP/USD was initially bearish with price printing below the 1.24 handle only to find support at 1.2380. It will be hard to read price action on a day like today due to the aforementioned risk event. USD/JPY looks to have found support with the USD looking like the key beneficiary of safe haven flows, keeping an eye on levels there is a resistance level on the horizon at 111.55 where price was supported multiple times during February. The EUR remains out of favour amid month-end flows, concerns over the EU in the wake of Brexit and Greece's repayment plan. Elsewhere, commodity currencies have received a boost this morning with strength across all the major commodities pushing AUD & CAD higher against the USD. AUD/USD bounced off the 0.7600 support and looks to me aiming for the recent consolidation mean value area of 0.7669 and USD/CAD has struggled after 1.34 was rejected with the next key support lying around the 1.33 area.
In commodities, WTI rose 0.7% to $48.69, extending Tuesday’s 1.3% advance as an unexpected disruption in Libyan crude output helps investors shrug off record U.S. stockpiles.Gold rose less than 0.1% to $1,252.70. Base metals this morning have been stealing the show as zinc trades higher by 1%. The bounce in the base metals has been attributed to the rise is US consumer confidence yesterday, with analysts at ANZ commenting that some of the Tump woes may be fading off the back of the strong reading. Early Friday morning will be a real test for metals in the form of Chinese Manufacturing PMI but it is expected to remain flat at 51.6 so any surprise could boost prices further. WTI (+ USD 0.36) and Brent crude (+USD 0.42) futures are trading positively after a smaller build than last week was noted in last night's report. Today we will be looking out for the DOE inventory levels which is also surly set to inspire some volatility. Gold prices are slightly subdued and prices look to be consolidating between USD 1262/oz and USD 1246.98/oz.
Looking at the day ahead now, it’s quiet in the US with pending home sales data the only release of note. Away from the data, the Fedspeak today consists of Evans at 9.20am, Rosengren at 11:30pm and Williams at 1.15 pm. The ECB’s Praet is also due to speak at 4.50pm GMT. Also of note today is the aforementioned Article 50 trigger by UK PM Theresa May.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -2.7%
- 10am: Pending Home Sales MoM, est. 2.45%, prior -2.8%; NSA YoY, prior 2.7%
Central Banks
- 9:20am: Fed’s Evans Speaks on Economy and Policy in Frankfurt
- 11:30am: Fed’s Rosengren Speaks at Economic Club of Boston
- 1:15pm: Fed’s Williams Speaks to Forecaster’s Club of New York
DB's Jim Reid concludes the overnight wrap
The failed healthcare bill hasn't destroyed markets so far this week with the S&P 500 (+0.73% yesterday) now back at the highest level for just over a week after Banks yesterday (+1.56%) rebounded strongly for the sector’s biggest gain since March 1st. The Dow (+0.73%) also brought to an end a run of 8 consecutive daily losses and the longest run since 2011. It is worth noting however that the loss during that period was only -1.91% (of which most came last Tuesday) so yesterday’s rally has already recovered nearly 40% of that. At the same time the VIX also plummeted to a new one week low last night after dropping nearly 8% to 11.53. That is having touched the highest level since November just two days ago.
As we discussed in yesterday's EMR, many here at DB think that Trump trades had already been priced out to a large degree and therefore the disappointment over Friday's news may be limited. Firm global growth being the most important factor in where markets are trading. Trump reforms are still very important though especially if global growth slows. Without a big reform package the US is unlikely to be able to pick up the slack if any slowdown occurs. So we certainly don't want to downplay the political events but their ramifications may not be immediate.
On that note it was interesting to see the surge in yesterday’s consumer confidence print in the US to 125.6 (+9.5pts) in March and the highest since December 2000. The present conditions gauge also increased to the highest since August 2001 at 143.1 and a measure of consumer expectations for the next six months hit the highest since September 2000 at 113.8. It is worth noting however that the sample period of data being collected had a cutoff date of March 16th and obviously prior to the healthcare bill debacle. While the recent trend is clearly encouraging (largest five-month gain since 2011-12) it’s probably worth waiting until next month’s data to see how much of impact last week’s developments have had, if at all. The data did however help the Greenback to spike higher with the US Dollar index closing up +0.55% for its strongest day since March 1st. 10y Treasury yields also rose 4bps to 2.419% and are back to Friday’s closing levels while Gold (-0.24%) retraced a bit. Comments from the Fed’s Fischer saying that two more rate hikes this year “seems about right” probably also contributed to some of those moves.
DB's Washington expert Frank Kelly yesterday hosted a client call on the political implications of last week's events. He suggested that the surprise withdrawal of the Republican healthcare bill on Friday is a sign of the continued division within the Republican Party and is perhaps a precursor to growing political and policy risks in the US. Even before considering the difficulties involved in passing President Trump’s tax reforms, there exists a very real possibility of a government shutdown on April 28 when the current continuing resolutions set to expire. There is a significant chance that the Freedom Caucus will reject a new continuing resolution due to their opposition to the continued funding of Planned Parenthood and Obamacare, while Trump’s spending plans for a border wall will see opposition from both Democrats and Republicans in the Senate. Frank estimates the probability of a government shutdown at roughly 40% and notes that the next 2 weeks will be critical to watch. Beyond the risks of a government shutdown, policy uncertainty continues to manifest itself in the form of questions surrounding Trump’s tax reform bill: Frank expects that the controversial Border Adjustment Tax (BAT) will not even make it into the final bill (at least not in its current form) and that the new corporate tax rate will likely be closer to 25% rather than the expected 15-20% range. Also despite the failure of the healthcare bill there is unlikely to be any acceleration in the proceedings on tax reform to fill the gap. The bill remains likely to go to Congress sometime in the first two weeks of May, and will likely only be picked up by the Senate in September. Given these developing uncertainties, Frank suggests that markets should downgrade their expectations of progress going forward.
Staying with politics but jumping to this side of the pond, today the two-year clock for negotiations will officially start when UK PM Theresa May invokes Article 50. The official process is expected to start at just after 12.30pm GMT when British ambassador to the EU, Sir Tim Barrow, presents May’s letter of withdrawal to the European Council President Donald Tusk. Perhaps more significant for markets, PM May will then address lawmakers in London this afternoon so it’s worth seeing if anything comes out of that. All this of course follows the news out of Scotland yesterday where lawmakers in Parliament voted by a majority of 69 to 59 to allow First Minister Nicola Sturgeon to go through the legalities of holding a second independence referendum by spring 2019. Its likely to be blocked by Westminster but stand by for lots of noise on this over the coming weeks and months.
To markets again now where the positive momentum which swept through Wall Street last night seems to have stalled a bit in Asia this morning. While the ASX (+0.89%) is higher, the Nikkei, Kospi, Shanghai Comp and Hang Seng are all little changed as we go to print, despite there being little in the way of any new newsflow this morning. In FX sterling has been the big mover again, deepening yesterday’s losses ahead of the Article 50 trigger later today. The Pound is down about -1.20% over the last 24 hours now versus the Dollar.
Moving on. In terms of the remainder of the moves in markets yesterday, here in Europe sentiment was also generally positive as evidenced by the decent gains for the Stoxx 600 (+0.61%) and DAX (+1.28%), amongst others. Sovereign bonds were a bit more mixed but moves were fairly modest while the biggest mover and shaker in commodities was Oil with WTI (+1.34%) rising back above $48/bbl following reports of a curb on shipments in Libya.
The remaining data was a bit of a wash in the US. The Richmond Fed manufacturing index rose 5pts in March to 22 after expectations were for a modest retreat. Wholesale inventories were reported as rising a bit more than expected in February (+0.4% mom vs. +0.2% expected) while the advance goods trade balance reading for February revealed a slight narrowing in the deficit to $64.8bn. The S&P/Case-Shiller house price index for January also revealed that house prices rose +0.9% mom from December. Meanwhile there wasn’t much else to take away from the remaining Fedspeak. Fed Chair Yellen didn’t comment directly on monetary policy in her speech but did highlight the unevenness of labour market improvement. Kansas City Fed President George said that it is important to remove accommodation in “a gradual but deliberate fashion” while Governor Powell spoke after the close and said that the Fed should be “moving slowly toward a more neutral stance” and that it will be appropriate to start reducing the balance sheet when the “economy has significant momentum”.
Looking at the day ahead now, this morning in Europe we’ll be kicking off in France where the consumer confidence reading for March will be out. Shortly after that we turn over to the UK with the February money and credit aggregates data due out along with February mortgage approvals data. It’s quiet in the US this afternoon with pending home sales data the only release of note. Away from the data, the Fedspeak today consists of Evans at 1.20pm GMT, Rosengren at 3.30pm GMT and Williams at 5.15pm GMT. The ECB’s Praet is also due to speak at 4.50pm GMT. Also of note today is the aforementioned Article 50 trigger by UK PM Theresa May.