In recent days, we have observed a distinct trading pattern: a ramp early in the US morning, usually triggered by some aggressive momentum ignition, such as today's unexplained pump then dump in the EURUSD...
... with stocks rising after the European open, rising throughout the US open, then peaking around the time the US closed at which point it is all downhill for the illiquid market.
So far today, the pattern has held, and after trading flat for most of the overnight session, with Europe initially in the red perhaps on disappointment about the Italy bank bailout fund, a bout of early Europe-open associated buying pushed US futures up, following the first rebound in the USDJPY after 7 days of declines which also helped the Nikkei close 1.1% higher (even though as BBG notes, investors in the options markets don’t seem to share enthusiasm that the USDJPY will rebound as the premium for USD/JPY puts over calls is 164 bps versus 161 bps yesterday; has climbed about 94 bps in favor of puts in just this month).
Oil, likewise, has continued to climb and earlier hit new 2016 highs when WTI rose just 9 cents shy of $41 on the same recurring catalyst: the Doha OPEC meeting (where even Russia admitted yesterday nothing will happen), and hopes shale production will contract even as many companies reactivate DUCs and quite the opposite may in fact happen.
Brent crude was up 50 cents at $43.33 a barrel at 0842 GMT and earlier in the session reached a 2016 high of $43.53. U.S. crude gained 39 cents to $40.75 a barrel. "The weak dollar is one important reason," said Eugen Weinberg of Commerzbank. "Also, the fact that we are above $40 and at multi-month highs is also contributing to the price increase as it is prompting some speculative buying."
As Reuters adds, also supporting prices was rising vehicle sales in China - a further sign of strong gasoline demand in the No. 2 consumer - and a plan by thousands of oil and gas workers in Kuwait to go on strike from Sunday. "If it is not clear if the strike will last long and will have any meaningful impact on exports or domestic production (including refineries), it does illustrate further the amount of pain that (Gulf) oil producers are also facing at current price levels," said Olivier Jakob, analyst at Petromatrix.
For now, however, as Bloomberg puts it, "crude oil’s advance above $40 a barrel boosted economic optimism" and the MSCI All-Country World Index advanced for a third-straight day and Russia’s ruble joined the Australian dollar and Norway’s krone among the best-performing currencies. Metals prices jumped, helping push the Bloomberg Commodity Index to the highest this month.
The key catalyst preserving stability for the time being are emerging markets which are "strong, mainly on the back of the weak U.S. dollar and strong oil," Maarten-Jan Bakkum, a senior strategist at NN Investment Partners, told Bloomberg. "Flows have clearly improved, Chinese risks are lower for the short term, but we do not see a convincing improvement in growth momentum yet."
Here is a snapshot of where markets stand right now:
- S&P 500 futures up 0.3% to 2040.6
- Stoxx 600 up 0.1% to 333.1
- Euro Stoxx 50 up 0.1%
- FTSE 100 up -0.2%
- DAX up 0.4%
- Euro up 0.21% to $1.1432
- Italian 10Yr yield up 1bps to 1.35%
- Spanish 10Yr yield up 1bps to 1.52%
- US 10Yr yield up 3bps to 1.76%
- Dollar Index down 0.17% to 93.79
- German 10Yr yield up 4bps to 0.15%
- MSCI Asia Pacific up 1% to 127.9
- Nikkei 225 up 1.1% to 15928.8
- Hang Seng up 0.3% to 20504.4
- Kospi up 0.6% to 1981.3
- Shanghai Composite down 0.3% to 3023.6
- Gold spot up 0.2% to $1260.4/oz
- Brent Futures up 1.4% to $43.4/bbl
- WTI Futures up 0.6% to $40.62/bbl
Top Global News
- ‘Brexit’ Akin to Unilateral Disarmament, David Miliband to Say: Miliband will be speaking in London today
- Nomura Said Planning to Exit European Equities, Cut 1,000 Jobs
- Italy Forms $5.7b Fund to Shake Off Doubts in Banks: Atlante fund managed by Quaestio Capital investment firm
- Spain Heading for Fresh Elections as Podemos Targets Socialists: lawmakers must choose leader by May 2 or new vote triggered
- Roche Sees Superior Efficacy of Ocrelizumab in Relapsing MS: comments in emailed statement
- Vivendi to Acquire Equity Interest in Fnac of About 15%: move is part of strategic partnership for cultural activities
- Shell CEO Van Beurden Sees Iran as Investment Opportunity: Van Beurden speaks to reporters in Perth, Australia
- AB InBev Offers Remedies to EU in Review of SABMiller Deal: EU sets new deadline of May 24 to rule on beer deal after getting commitments offer
Looking at regional markets, we start in Asia where equities shrugged off Wall St.'s weak lead with the region's bourses mostly positive on short-covering. Nikkei 225 (+1.2%) recovered from opening losses to trade higher by over 1% as participants found a reprieve from a pause in JPY strength and took the opportunity to bargain hunt following yesterday's declines. ASX 200 (+0.6%) traded higher led by financials and materials with the latter underpinned by strength across commodities in which iron ore rose nearly 5%. Elsewhere, Chinese markets saw mixed trade after the PBoC upped its liquidity injections and China released a negative list for investment which included steel and coal as off-limit sectors. 10yr JGBs traded marginally higher despite heightened risk appetite in Japan with today's 10yr inflation-linked auction printing a higher than prior b/c, while yields in the super-long-end were also under mild pressure with the 30yr yield falling to a fresh record low.
Top Asia News
- CIC, Ormat, Malakoff Said to Weigh Bids for Chevron Asian Assets: Bids due end-May for $3b of Asian geothermal fields
- Chinese Debtors Have Never Faced Such Hard Times Paying Interest: Oper. profit double interest costs, down from ratio of six
- Strengthening Yen Leaves Kuroda Facing More Radical Options: Credit Agricole joins those forecasting action in April
- Indian Bankers Said to Be Wary of Solar as SunEdison Totters: Financial risks seen from rock-bottom Indian solar power rates
An air of caution swirls in European equities ahead of the forthcoming slew of US earnings as the Eurostoxx oscillated between gains and losses, with luxury names lower this morning amid soft earnings from large cap LVMH. However, EU bourses pared the entirety of their earlier declines amid the upside in the commodities complex supporting miners with Anglo American also driving higher on the back of higher diamond sales from their De Beers unit. Elsewhere, pull back in European stocks saw Bunds trip below yesterday's low situated at 163.74, with the long end weighed given the long-duration supply, including a Buxl auction and the 20 and 50 dual tranche from France.
European Top News
- Asos 1H Retail Gross Margin Beats, On Track to Achieve Outlook: 1H retail gross margin up 40bps, est. up 7bps
- Lonmin CFO to Step Down, Sucessor Search at an Advanced Stage: Simon Scott to stand down as CFO and director
- Mercedes Sales Climb Twice as Fast as BMW in 1Q: Daimler is closing in on goal of overtaking German rival
- EPH Utility Plans Infrastructure Unit IPO in Prague, London: Czech utility expects to complete unit offering this quarter
- Al-Thani Private Bank KBL to Buy Dutch Firm From BNP Paribas: KBL plans Insinger de Beaufort & Theodoor Gilissen combination
- BayWa in Talks With U.K., European Investors to Sell Solar Farms: BayWa still to short-list candidates
In FX, stronger than forecast UK inflation has given GBP a fresh bid, with Cable having extended through a series of resistance levels, but topping out at 1.4320 as yet (last week's high). EUR/GBP was knocked back under .8000, and with EUR/USD holding 1.1465-70 resistance in another test higher (traded 1.1464), the pullback has added some fresh momentum in the cross rate. The USD as a whole has lost yet more ground on the day, with the commodity rates all benefitting. NZD has traded to within a few ticks of .6900 again, while AUD/USD has tipped .7670. USD/CAD has fallen to just shy of 1.2850, matching the recent lows, but a clean break below here required to suggest a deeper move towards 1.2500-1.2600. The USD index now not too far off stronger support levels in the mid 92.00's, with the more cautious approach by the Fed still keeping the greenback offered. USD/JPY is digging in a little though, but 107.60-108.40-45 still containing trade here for now — stocks keenly watched. Swedish inflation also stronger than expected, and giving the SEK a fresh bid — long term highs vs the USD matched just under 8.0300.
In commodities, energy prices enter the US session in positive territory with WTI holding above the USD 40/bbl handle. In terms of energy specific newsflow, this has been somewhat light this morning but according to a spokesman of KNPC, Kuwait has stopped exporting oil from all ports due to bad weather. Elsewhere gold rose in European trade remain around 3-week highs amid the softness in the USD-index, while iron ore extended on its advances alongside strength in steel prices, which posted 10-month highs.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities pare their opening losses while luxury names fall on the back of soft LVMH sales.
- UK CPI drives GBP higher, with GBP/USD breaking above the 1.4300 level with gains further exacerbated by the weaker greenback.
- Looking ahead, highlights include US Import Price Index, API Crude Oil Inventories and Fed's Harker.
- Treasuries lower in overnight trading as global equity markets, WTI crude oil and metals rally; week’s auctions begin with $24b 3Y notes, WI 0.86%; sold at 1.039% in March, was second straight 3Y auction to tail after all but one of previous 19 stopped through.
- Alcoa Inc. cut forecasts for its largest manufacturing unit as the biggest U.S. aluminum producer prepares to split itself in two amid slumping profit, 1Q net income fell 92 percent to $16 million
- Italian officials and bank executives agreed to create a multibillion-euro fund to help troubled lenders raise capital and offload bad loans, as the nation tries to assuage investor jitters. The new vehicle will be named Atlante
- Nomura plans to shut down its European equity operations and cut 1,000 jobs as it reduces costs after years of failing to become profitable overseas, a person with knowledge of the matter said
- At its annual investor conference in San Francisco in May 2014, with oil trading at $102 a barrel, Wells Fargo boasted that in just two years it had almost doubled its energy exposure and seized the title of Wall Street’s top oil and gas banker. The timing couldn’t have been worse
- U.K. inflation accelerated to a 15-month high in March as an early Easter boosted air fares and clothing prices increased. Consumer prices rose 0.5% from a year earlier, the fastest pace since December 2014
- Just as monetary easing is pushing Chinese bond yields to record lows, firms generated just enough operating profit to cover the interest expenses on their debt twice, down from almost six times in 2010
- The Bank of Japan is reducing the share of funds financial institutions keep at the BOJ that will be subject to the new negative interest rate policy
- Brazilian lawmakers pushed President Dilma Rousseff a step closer to impeachment after a committee in the lower house voted for her ouster in the first formal test of sentiment in Congress
- Sovereign 10Y bond yields mostly higher; European, Asian equity markets higher; U.S. equity-index futures rise. WTI crude oil, gold and copper rally
US Event Calendar
- 6:00am: NFIB Small Business Optimism, March, est. 93.5 (prior 92.9)
- 8:30am: Import Price Index m/m, March, est. 1% (prior -0.3%)
- Import Price Index y/y, March, est. -4.8% (prior -6.1%)
- 2:00pm: Monthly Budget Statement, March, est. $104b (prior $52.9b)
Central Banks
- 9:00am: Fed’s Harker speaks in Philadelphia
- 3:00pm: Fed’s Williams speaks in San Francisco
- 4:00pm: Fed’s Lacker speaks in Wilmington, N.C.
Supply
- 11:30am: U.S. to sell $35b 4W bills
- 1:00pm: U.S. to sell $24b 3Y notes
DB's Jim Reid wraps up the overnight summary
yesterday saw the starting whistle blown for Q1 with Alcoa unofficially getting things started after the closing bell. The numbers were fairly mixed. While earnings came in above consensus, a miss on revenues and a downgrade to full year aluminium demand saw shares down 3% or so in extended trading. Prior to this it had felt like markets were in a bit of a wait and see mode with little else to particularly drive sentiment. That said, momentum certainly faded as the US session in particular wore on with the S&P 500 eventually finishing last night with a -0.27% loss. This came after performance for most European bourses had been relatively positive (Stoxx 600 +0.30%, DAX +0.63%) and after further gains for Oil, with WTI rising +1.61% and closing back above $40/bbl again.
This morning in Asia and outside of a slight reversal for markets in China, the tone is relatively positive with Japan in particularly leading the way. The Nikkei is currently +1.23% and gaining as the session wears on, with the move coinciding for a softer day for the Yen (-0.26%) which is coming off the back of seven consecutive days of gains. The Hang Seng (+0.20%), Kospi (+0.44%) and ASX (+0.68%) are all following suit, while credit markets are generally posting modest gains. It’s China which is the relative underperformer however with the Shanghai Comp -0.65%. Despite Alcoa shares dropping last night, US equity index futures are currently flashing green on our screens.
The modest weakening for the Yen this morning has seen it hover just north of 108 meanwhile. Yesterday, DB’s George Saravelos published a note highlighting that Japan’s biggest problem with the recent Yen rally is that it is justified by fundamentals, with the bulk of metrics suggesting that USDJPY is still expensive or just approaching fair value. George highlighted that taking the average of three of DB’s FX valuation models, he and his team come up with a USD/JPY equilibrium rate of 97, more than 10% below current levels. There are two implications of this. Firstly, it is unlikely that Japanese FX intervention is going to be very successful in pushing USD/JPY significantly higher - there is no misalignment to correct in the first place. The very public commitments the G20 have made against competitive devaluations make large-scale, sustained intervention even less likely. Second, unless the BoJ can convince the market that it is able to bring inflation expectations back up (and real yields down) it is unclear what can be done to reverse the yen rally. On the one hand, the market is likely to challenge the reflationary impact of further rate cuts into negative territory. On the other hand, an expansion of JGB purchases seems more straightforward, but it is not clear how many more marginal JGB holders are left to squeeze out into other (foreign) assets.
Back to yesterday. One notable snippet of news was out of Italy with the announcement from PM Renzi that following drawn out talks, Italian officials and financial institutions have agreed on the terms for a €5bn bailout fund aimed at shoring up the weaker banks through raising capital and unloading bad loans. According to the FT the deal apparently defied expectations that it could have been softened at the last moment, while the terms of the deal show that in return for providing private funds, the Italian government has agreed to align Italy’s laws around bankruptcy (previously seen as being behind the times) with the rest of Europe. Unsurprisingly it was Italian equities which were the relative outperformer yesterday in anticipation of the news with the FTSE MIB gaining +1.25%, driven by big moves higher for the Banks with the likes of Banco Popolare and also Banca Monte dei Paschi gaining +10.30% and +9.78% respectively.
Staying in Europe, sovereign bond yield curves were generally a bit steeper by the close yesterday with 10y Bunds in particular back above 10bps in yield after moving nearly 2bps higher to 0.109%. With the shorter end of the curve dipping lower however, it was interesting to note that the average yield for all outstanding German Bunds fell to 0% yesterday for the first time in history. The Bundesbank once-a-day quoted rate (also known as the Umlaufrendite) had been testing that level for some time but notably failed to quite reach the historic level in April last year (when it got as low as 5bps) during the big rally across rates markets.
With regards to some of the macro, while there was a complete lack of economic data for investors to dig their teeth into, we did hear from the Dallas Fed President Kaplan who played down the possibility of a hike this month (which won’t come as a surprise) but highlighted that ‘it is worth in this environment being patient and basically being willing to be cautious and let events unfold’ before suggesting that he is open minded to the possibility of possible tightening at the June meeting. Kaplan also made mention to what is likely to be a soft Q1 GDP report for the US, indicating that this is ‘probably inconsistent with the job numbers’. Kaplan did however suggest that his forecasts have growth bouncing back in the next couple quarters.
Looking at the day ahead, after a fairly sparse calendar yesterday, the diary is a little busier today. This morning in Europe and shortly after we go to print we’ll get the final revisions to the March CPI report in Germany. Following this and later this morning in the UK we get the latest inflation report including the CPI/RPI/PPI data docket. This afternoon in the US we get last month’s import price index reading, as well as the latest data from the NFIB small business optimism survey. Later on this evening we’ll get the March Monthly Budget Statement. Away from the data, the next round of Fedspeak comes out of Harker (2pm BST), Williams (8.00pm BST) and Lacker (9.00pm BST).