Following two days of rangebound moves, where Monday's modest market rebound was undone by the Tuesday just as modest decline (despite the early surge higher on the latest "bullish for stocks" European terrorism), overnight equity action continued to be more of the same, and as of this moment S&P 500 futures were unchanged, while European stocks were modestly higher. But while equities remain surprisingly uneventful despite loud warnings by both JPM and Goldman now that another bout of volatility and equity downside is coming, in FX there has been a substantial change, one which has seen the US dollar rise for a fourth day, the longest winning streak in a month, driven by the latest round of hawkish Fed jawboning courtesy of the Chicago Fed's Charlie Evens yesterday, which in turn has pushed down prices of oil, gold and copper.
As noted earlier by Bloomberg, the greenback gained against almost all of its major peers, with only the Japanese yen keeping pace, after a Federal Reserve official commented on the interest-rate outlook. This is in line with a warning issued by JPM yesterday, according to which selling of USD is about to fall out of vogue as it heads for worst month since 2011. The bank said hedge funds cut bets on further gains in dollar to the lowest since 2014 prior to last week’s Fed meeting, and with speculators having already ditched the U.S. currency, few are left to sell and push it down further, making greenback less susceptible to outflows of hot money. The last 4 days appear to have confirmed just this.
Elsewhere, the British pound fell to a one-week low after the explosions that killed at least 31 people in the Belgian capital stoked bets on the U.K. leaving the European Union. And speaking of terrorism, some were surprise that the initial selloff transformed into a surprising rally after yesterday's bomb Brussels explosions, although as we showed, this is precisely the pattern followed by markets following terrorist events.
"Usually such attacks will have only a short-term impact," said Chris Green, an Auckland-based strategist at First NZ Capital Group Ltd., a brokerage and wealth management firm. "Investors focus remains on macro-economic fundamentals and we do need to see more signs of sustainability in the U.S. economy and some stability in the Chinese data. I’m somewhat cautious given the recent rally we’ve seen.”
Still, others expressed a more skeptical outlook than merely being swayed by the manipulated price action: "There is a growing perception among European public opinion that EU leaders are not in control of the continent’s terrorist threat,” Mujtaba Rahman, director of European analysis at Eurasia Group, said in a note to clients. “This will in turn put more pressure on incumbent governments and limit their space for policy action to address Europe’s multiple crises."
In any case, as a result of the stronger dollar and weaker euro, European stocks rose, more than recouping losses recorded after Tuesday’s deadly terror attacks in Brussels. The Stoxx Europe 600 Index rose 0.4 percent, the biggest gain in more than a week. Futures on the Standard & Poor’s 500 Index were little changed, while the MSCI Asia Pacific Index slipped 0.8 percent from its highest close since Jan. 1.
Australia’s S&P/ASX 200 Index fell 0.5 percent , while benchmark shares gauges in Hong Kong and Japan declined by as much as 0.4 percent. BHP Billiton Ltd., the world’s largest mining company, slid 1.7 percent in Sydney. Newcrest Mining Ltd., Australia’s biggest gold producer, sank 4.8 percent.
Where markets are at this moment:
- S&P 500 futures unchanged at 2044
- Stoxx 600 up 0.4% to 342
- FTSE 100 up 0.2% to 6203
- DAX up 0.8% to 10071
- German 10Yr yield up 2bps to 0.23%
- Italian 10Yr yield up less than 1bp to 1.26%
- Spanish 10Yr yield up 9bps to 1.52%
- S&P GSCI Index down 0.3% to 336.4
- MSCI Asia Pacific down 0.8% to 129
- Nikkei 225 down 0.3% to 17001
- Hang Seng down 0.2% to 20615
- Shanghai Composite up 0.4% to 3010
- S&P/ASX 200 down 0.5% to 5142
- US 10-yr yield up less than 1bp to 1.94%
- Dollar Index up 0.29% to 95.92
- WTI Crude futures down 0.7% to $41.16
- Brent Futures down 0.4% to $41.62
- Gold spot down 1.1% to $1,234
- Silver spot down 1.7% to $15.62
Top Global News
- Brussels Attack Suspects Sought as Suicide Bombers Identified: Authorities searching for 1 of 3 men filmed on closed-circuit TV wheeling baggage carts at airport after identifying 2 suicide bombers.
- Credit Suisse to Cut More Jobs, Speed Up Trading Reductions: Bank plans to eliminate an additional 2,000 jobs this year; deepen cuts at investment banking business.
- Clinton, Trump Win Arizona Primaries, Cruz Takes Utah Caucuses: Bernie Sanders won Democratic caucuses in Utah, Idaho.
- Nike Tumbles After Tepid Forecast Raises Concerns About Growth: Sales will increase by a high-single-digit percentage during next fiscal year.
- Amazon Exec. Undercuts Staples Claim of Competitive Threat: Amazon.com struggling to win primary office-supply contracts with companies, undercutting key argument that Staples is making to defeat U.S. opposition to its planned Office Depot deal.
- Zoox Gets Self-Driving Auto Permit to Build Uber for Robo Cars: Co. was granted permission by California to test self- driving cars on public roads in the state.
- Amazon Hosts Exclusive Robotics Conference in Palm Springs: Robotics cos., academics descended on resort in Palm Springs this week for an invitation-only conference.
- Oil Security Seen at Risk by IEA on ‘Historic’ Investment Cuts: Cuts taking place now increase possibility of surprises in “not-too-distant” future, says IEA’s Oil Industry & Markets Neil Atkinson.
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Looking at regional markets, we start in Asia where stocks traded negative with sentiment cautious following the Brussels terror attacks. ASX 200 (-0.50%) underperformed with commodity names leading the declines after a retreat in metals and oil prices, which saw WTI retest the USD 41/bbl level to the downside after a large build in API crude inventories. Elsewhere, Nikkei 225 (-0.3%) saw choppy trade with the index driven by the overall risk-averse tone, while the Shanghai Comp (+0.4%) moved between gains and losses after several uninspiring earnings releases. Finally, 10yr JGBs were initially lower following spill-over selling from UST's, but then recovered following a strong enhanced liquidity auction later in which the b/c rose to 3.92 vs. Prey. 2.87 and saw 92% allotted at the highest spread. Japan's parliament has confirmed Sakurai as replacement for outgoing BoJ board member Shirai.
Top Asian News
- Biggest Currency Trader Backs Rupee Amid Best Rally in Two Years: Citibank’s Vohra sees 66-69 a dollar range in medium term
- China Inc. ‘Bleeding’ From Yuan Devaluation Seeks Hedging Help: KVB Kunlun Global Capital says hedging rose >50% this year
- Woodside Scraps $40 Billion LNG Project After Price Collapse: Australian producer won’t go ahead with floating LNG development
- Thailand Holds Rate a 7th Time as Government Bets on Stimulus: Bank of Thailand waits to gauge success of fiscal efforts
- Pimco Sees China Debt in Global Gauges by 2018 - With Caveat; Timing will depend on addressing settlement concerns, Spajic says
- Citigroup Asia-Pacific Prime Finance Head Joseph Chang Leaves: Chang left to pursue other opportunities, according to memo
European equities have seen somewhat subdued price action amid light news flow with the Eurostoxx (+0.5%) residing in the green, albeit mildly so. Softness has been observed in energy names in tandem with WTI and Brent futures following the latest API crude oil inventory which produced a substantially higher than expected build ahead of today's DoE report. Elsewhere, Credit Suisse (+3.2%) has outperformed after reports that the company is to cut an additional 2000 jobs as well as deepen their cost cutting measures. With the upside in European equities, Bunds have tracked USTs lower, which comes ahead of supply from UK, Germany and Portugal while early month-end flows could potential come into play due to the holiday shortened week. Additionally, the 10-30yr curve held steady around 70bps before the 30yr reopening.
Top European News
- Brussels Attacks Hurt Cameron’s Europe Pitch, Merkel’s Open Door: Bombings seized upon by proponents of Britain leaving the bloc to argue that EU membership puts the U.K. more at risk.
- Italy’s Popolare, BPM Said to Edge Toward Merger After ECB Talks: Banks edging closer to merger that would create Italy’s third-largest bank after adjusting terms of an agreement to satisfy ECB: people familiar.
- Hungary Succumbs to Economic Reality in Restarting Easing Cycle: Hungarian central bankers surprised market by bringing forward cuts to combat persistently below-target inflation.
- Premier Foods Rejects Approach From McCormick: Says McCormick all-cash approaches at 52p, 60p/share rejected; significantly undervalues Premier’s growth prospects.
- Sparkle Roll Says Shareholder, Not Itself, in Talks to Buy B&O: Private company owned by Qi Jianhong is in talks to buy Bang & Olufsen.
- Hermes Profit Rises as Bag Maker Copes With Paris Attacks: Operating profit rose 19% to 1.54b euros vs est. of 1.52b euros
In FX, the Bloomberg Dollar Spot Index, a gauge of the greenback’s strength, rose 0.2 percent to a one-week high. Chicago Fed chief Evans said Tuesday that projections for two rate hikes this year were “a pretty good setting” for him. South Korea’s won dropped 0.6 percent, its biggest loss in two weeks.
"Evans’s comments are taken hawkishly by the U.S. dollar,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “If we continue to hear comments along those lines, then the market will see one reason to perhaps adjust its pricing for a hike from the end of this year, to something earlier.” The pound weakened 0.1 percent to $1.4188, having slid 1.1 percent on Tuesday amid speculation the Brussels terror attacks will boost the case of campaigners who want to see Britain out of the European Union. Pro-“Brexit” politicians argued that migration leaves the nation vulnerable to attack, while figures in the opposing camp, including Prime Minister David Cameron, have said that being part of the economic and political union aids security.
In commodities, brent crude fell 0.7 percent to $41.48 a barrel, having rebounded over the past two months from a 12-year low of less than $28. U.S. stockpiles increased by 8.8 million barrels last week, the industry-funded American Petroleum Institute reported Tuesday, according to a document obtained by Bloomberg. Libya will skip a meeting between major oil exporters in Doha next month to freeze output, according to a person familiar with the situation.
“The large U.S. crude stockpiles will act as a headwind to price gains,” David Lennox, an analyst at Fat Prophets in Sydney, said by phone. “If producers can agree to remove some incremental supply from the market at the Doha meeting, what they lose in production, they gain in a price rise and additional revenue. Just talking about a freeze has helped oil move higher.”
Gold for immediate delivery fell 1.1 percent, following a 0.4 percent advance in the last session, while platinum lost 1.3 percent. Bullion jumped as much as 1.3 percent during trading on Tuesday following the Brussels bombings.
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Bulletin Headline Summary
- Treasuries steady overnight, European equity markets rally, Asian markets drop, U.S. dollar spot index up 1% since hitting YTD low on March 17; economic data today includes new home sales.
- With Britain’s referendum on the European Union exactly three months away, Bank of England officials are agonizing over the dangers from a vote to leave
- London’s finance industry would “flourish mightily” if Britain votes to leave the European Union in the referendum on June 23, London Mayor Boris Johnson told lawmakers
- Credit Suisse Chief Executive Officer Tidjane Thiam pledged to accelerate a restructuring amid a trading slump, targeting deeper cost cuts at the securities unit and eliminating an additional 2,000 jobs
- Energy producers clobbered by the worst price slump in decades have cut billions of dollars in spending, raising the potential for oil-supply shocks in the future, according to the International Energy Agency
- Strength in real estate and labor markets helped consumers in China’s biggest cities shrug off last year’s slowdown, according to a new survey based on 12,000 interviews
- Police captured the main suspect still on the run following Belgium’s worst terrorist attacks as heavy security persisted in Brussels after the strike by Islamic State
- $6.05b priced yesterday, WTD to $8.75b, MTD $138.555b and YTD to $432.805b; $2.3b HY priced yesterday, MTD 19 deals for $12.265b, YTD 44 deals for $27.12b
- Sovereign 10Y bond yields mostly steady; European, Asian equity markets mixed; U.S. equity-index futures mixed. WTI crude oil, gold and copper fall
US Event Calendar
- 7:00am: MBA Mortgage Applications, March 18 (prior -3.3%)
- 9:00am: Fed’s Bullard on Bloomberg TV and Radio
- 10:00am: New Home Sales, Feb., est. 510k (prior 494k)
- New Home Sales m/m, Feb., est. 3.2% (prior -9.2%)
- 11:30am: U.S. to sell $13b 2Y FRN in reopening
DB concludes the overnight wrap
It is difficult to focus our attention over to markets following yesterday’s tragic events in Brussels. The tragedy further complicates the already polarizing debate surrounding Europe’s security concerns and migration crisis. We have already seen some extreme parties point to the event to make their case against open immigration. Ahead of the EU Referendum in June, Brexit concerns arguably flared up with the pound declining the most among major currencies yesterday (GBPUSD -1.12% yesterday). In addition to these political ramifications, we may also see shocks to economic confidence weigh on Eurozone growth that has been steadily gaining momentum.
Looking at our screens this morning, Asian equity markets are generally softer this morning as we go to print. Chinese equities are down again (CSI -0.64%; Shanghai Comp – 0.51%) after posting losses yesterday that ended a seven day winning streak. Elsewhere the Hang Seng (-0.54%, Kospi (-0.24%) and Nikkei (-0.34%) are also all down. Oil has also traded lower this morning (-1.75%) ahead of US crude inventory data that is expected to show a build-up of stockpiles.
Now we review some of the price action from yesterday. European equity markets showed resilience following the events in Brussels, with the STOXX recovering from early losses of up to -1.6% to close the day only marginally down -0.15%. The DAX and FTSE tracked a similar path but pushed through into positive territory, ending the day up +0.42% and +0.13% respectively. After a weak start US equities rallied into positive territory but faded into the close to leave the S&P (-0.09%) and the Dow (-0.23%) marginally down for the day. Some of the early weakness can arguably be attributed to the stronger dollar (+0.38%) that followed some hawkish Fedspeak the day before. That said equities in both Europe and the US were supported by the generally positive economic data out yesterday (more on this later).
Looking now at credit markets while cash spreads edged tighter again, CDS indices were generally wider on the day. iTraxx Main and Crossover spreads widened by around 2bps and 7bps respectively; meanwhile CDX IG and HY widened by 3bps and 10bps respectively. Looking over at the other end of the risk spectrum, government bond markets saw 10yr Bund yields fall by 2bps on the back of some increased demand for safe haven assets. On the other hand, 10yr Treasury yields actually rose by just over 2bps despite a good start to the day which saw yields as much as 3bps lower. While gold (+0.37%) ended the day in positive territory it finished comfortably off the day’s highs having been up as much as +1.35% earlier in the day.
Turning attention to yesterday’s data. The focus was of course on the PMI numbers out in the Eurozone, France, Germany and the US. Starting out in Europe, we saw the Eurozone composite PMI for March clock in above expectations at 53.7 (vs. 53.0 expected) while the manufacturing PMI was in line with expectations at 51.4. France and Germany both saw positive surprises in their services PMI prints of 51.2 (vs. 49.5 expected) and 55.5 (vs. 55.0 expected) respectively. However, they also saw their manufacturing PMIs disappoint, as the Germany number came in at 50.4 (vs. 50.8 expected) while France fell into contractionary territory (49.6 vs. 50.2 expected; 50.2 prior). Nevertheless, composite PMIs for France beat expectations and swung into expansionary territory (51.1 vs. 49.7 expected) while the German composite PMI matched expectations at 54.1. German business confidence also improved for the first time in four months as showcased by the IFO business climate survey numbers (106.7 vs. 106 expected; 105.7 prior), which was driven by an improvement in business conditions across almost all sectors. The IFO current assessment (113.8 vs. 112.7 expected; 112.9 prior) and expectations (100.0 vs. 99.5 expected; 98.8 prior) indicators also beat expectations and demonstrated improving sentiment. The only negative data point was the ZEW survey indicator for Germany which failed to meet expectations, as the current situation indicator slipped from the previous month (52.3 prior) to 50.7 (vs. 53.0 expected). The expectations indicator also disappointed relative to expectations (4.3 vs. 5.4 expected) but rose from the previous print of 1.0. On the back of the largely positive data our European economists point out that DB’s proprietary SIREN-momentum indicator remains close to last week’s 5-year high while SIREN-surprise has almost bounced back into positive territory from a near four-year low less than a month ago.
Heading over to the US now, we also saw the latest US manufacturing PMI reading which disappointed at 51.4 (vs. 51.9 expected), but also rose slightly from February’s print of 51.3. New orders also rose to 52.8 (vs. 52.3 prior). More positive news came in the form of the Richmond Fed’s March Manufacturing Survey which clocked in well above expectations at 22 (vs. 0 expected; -4 prior). Inventory levels of finished and raw goods both decreased from the previous month. Finally we saw the FHFA House Price index rise in line with expectations at +0.5% mom.
The day ahead is a fairly quiet affair on the data front. The only data of note is from the US where we get the latest new homes sales numbers for February (510k expected; 494k prior). We do however have some further Fedspeak with St. Louis Fed President Bullard due to speak on Bloomberg TV in New York. We will also hear from the Nouy and Lautenschlager at the ECB.