European bourses advance and Asian share rose led by a surge in Hong Kong stocks which rose the most in three months as Japan hit 15 month highs. U.S. futures are little changed along while the dollar rebounded from session lows after Friday's selloff. Crude oil has continued its retreat, down 0.2% and sliding for a 6th straight day after breifly dropping below $48 in overnight trading.
The Hang Seng China Enterprises Index jumped the most since November amid easing concern that U.S.-China political tensions will weigh on the yuan after BlackStone's Steve Schwarzman, one of Trump's top economic advisers, said Sunday on CNN that Trump will likely temper his criticisms of China, including his campaign claim that the country manipulates its currency. South Korean equities rose to the highest since May 2015 following last Friday's impeachment of president Kim, while European shares headed for a fourth straight gain. The dollar fell against most major currencies, with the euro climbing for a third day. Oil kept sliding below $50 as U.S. drillers continued to boost activity, countering OPEC’s efforts to drain a global glut. Industrial metals advanced for a second day.
Traders are tentative out of the gate ahead of a pivotal week for global markets with the focus falling on Wednesday when there is a trifecta of catalysts between the Fed's upcoming rate hike, the debt ceiling expiration and the Dutch general elections which comes amid a growing diplomatic spat with Turkey. In addition to the Fed, we will also get announcements by the BoJ, BoE and SNB all of which are expected to keep rates on hold. It's also possible that the UK could invoke Article 50 this week so another story to watch. President Trump may also dish out his first budget outline for fiscal year 2018 on Thursday while G-20 finance ministers gather in Germany for a series of meetings so there’s plenty to keep markets busy.
Following last week's impressive payrolls reports, global equities are trading near a record high as indications of firming growth in the U.S. and Europe coincide with China’s economy showing signs of improvement. U.S. jobs data at the end of last week cleared the way for the Fed to raise interest rates without forcing it to accelerate the pace for future tightening. The euro built on gains from Friday, when European Central Bank policy makers were said to have considered their ability to raise rates before a bond-buying program comes to an end, although the common currency has erased all losses after the European open, and was back near session lows at publication time.
By now it is no secret that traders view a quarter-point Fed hike this week as a virtual certainty after Friday’s data showed U.S. employers added more jobs than forecast in February. They’ll be watching the central bank’s policy decision for signals on what will come next. Futures indicate the market is moving toward policy makers’ December projection of three rate increases in 2017. It would be the first year with multiple Fed hikes since 2006. Fed fund futures prices showed investors pricing in more than a 90 percent chance of an increase in U.S. overnight interest rates and the market's attention is now firmly on the scale of tightening further out.
"Improved growth and inflation prospects are allowing developed market central banks to sketch their exits from extreme accommodation at varying speeds," David Folkerts-Landau, group chief economist at Deutsche Bank wrote in a note to clients.
Overnight Goldman flip-flopped on its long-standing bearish position over Chinese stocks, and joined the rush on Chinese shares, becoming the latest major brokerage to upgrade the market. China’s macroeconomy stabilized in the beginning of 2017, Ning Jizhe, head of the National Bureau of Statistics, said at the sidelines of the annual legislature meeting in Beijing on Sunday.
Sterling rose 0.4% against the dollar ahead of a vote in Britain's lower house of parliament on legislation that will give the government permission to trigger Britain's exit from the European Union. "The push and pull between solid growth momentum and political risks look set to continue in the near-term," Folkerts-Landau said.
The world's most powerful finance ministers and central bankers convene in the German spa town of Baden-Baden on March 17-18, their first meeting since Donald Trump's U.S. election victory in November where his protectionist stance on international trade is likely to be a key issue.
The MSCI Asia Pacific Index advanced 0.7 percent as of 8:17 a.m. in London. The Hang Seng China Enterprises Index surged 1.9 percent, the biggest jump since Nov. 22. Japan’s Topix rose 0.2 percent, after the gauge rallied 1.2 percent on Friday to the highest level since December 2015. The Kospi index jumped 1 percent, led by a 1.1 percent gain in Samsung Electronics Co. Korean shares extended gains from last week, climbing as President Park Geun-hye’s ouster removes some uncertainty from politics in the nation. The Stoxx Europe 600 added less than 0.1 percent, after similar gains in each of the previous three sessions.
Gains in mining stocks and continued corporate deal-making activity helped European shares offset weakness in oil-related shares, with the benchmark STOXX 600 up 0.2 percent in early trades. The FTSE 100 was up slightly where along with mining blue chips a 1 percent gain for shares of HSBC supported the index. HSBC shares rose after Europe's biggest bank tapped an outsider, Mark Tucker, for its top job.
In bond markets, euro zone government bond yields pulled back from multi-week highs, as nervous investors turned their focus to this week's Dutch parliamentary elections, the next key gauge of populism in Europe. Although the risk of a eurosceptic party coming to power in the Netherlands is small, a strong election performance could renew concerns about the popularity of the far-right in French presidential elections in April and May, said Erin Browne, head of macro investments at UBS O'Connor, a hedge fund manager within UBS Asset Management.
"If you see a eurosceptic party gains a significantly larger share of the vote than current polls suggest that could spill over into concern about the French elections and the National Front doing better in the second round of voting than is currently being predicted," she said. "That's the risk for markets with a view to the Dutch elections."
The yield on 10-year Treasuries fell one basis point to 2.56 percent, after falling three basis points in the previous session. The yield on 10-year Australian government bonds slid four basis points to 2.94 percent, tracking Friday’s Treasury rally.
A sharp pullback in oil prices which fell to their lowest in three months and are on track for a fifth day of losses also kept investor confidence in check. The slump in prices has occurred as more rigs are deployed to look for oil in the United States and as crude inventories in the United States, the world's biggest oil consumer, have surged to a record.
Market Snapshot
- S&P 500 futures down 0.01% to 2,371.50
- STOXX Europe 600 up 0.1% to 373.59
- MXAP up 0.7% to 145.41
- MXAPJ up 0.9% to 467.01
- Nikkei up 0.2% to 19,633.75
- Topix up 0.2% to 1,577.40
- Hang Seng Index up 1.1% to 23,829.67
- Shanghai Composite up 0.8% to 3,237.02
- Sensex up 0.06% to 28,946.23
- Australia S&P/ASX 200 down 0.3% to 5,757.35
- Kospi up 1% to 2,117.59
- German 10Y yield fell 2.4 bps to 0.461%
- Euro up 0.05% to 1.0678 per US$
- Brent Futures up 0.08% to $51.41/bbl
- Italian 10Y yield rose 5.5 bps to 2.367%
- Spanish 10Y yield fell 0.4 bps to 1.885%
- Brent Futures up 0.08% to $51.41/bbl
- Gold spot up 0.3% to $1,208.62
- U.S. Dollar Index up 0.02% to 101.27
Top Overnight News via BBG
- ECB Said to Have Discussed Whether Rates Can Rise Before QE Ends
- Oil Extends Decline as U.S. Drilling Accelerates Amid OPEC Cuts
- Libya Crude Oil Output Said to Fall 11% on Field, Port Closings
- Schwarzman Sees Donald Trump Dialing Back Criticisms of China
- BlackRock May Bid for U.K. Student-Loan Portfolio: Sunday Times
- Johnson Controls Said to Explore Sale of Scott Safety: Reuters
- Boeing Wins 5-Year Contract to Sustain South Korea’s F-15k Fleet
- Shuaa Capital to Buy Integrated Capital, Integrated Securities
- AES Plans $750m Solar Power Project in Vietnam
- EPAM Systems, Innophos Postpone Investor Days Due to Weather
Asia equity markets trade mostly higher after the positive US close last Friday, although gains have been modest ahead of the looming FOMC. Conversely, ASX 200 (-0.3%) was weighed by a struggling energy sector after WTI crude futures extended on last week's 9.0% losses to briefly slip below USD 48/bbl, while Nikkei 225 (+0.2%) was initially subdued after poor Machine Orders data, but then recovered amid upside in JPY-crosses. Shanghai Comp. (+0.8%) and Hang Seng (+1.1%) traded higher after the PBoC resumed liquidity injections, while the KOSPI (+1.0%) continued the strength seen from last week's impeachment ruling as participants welcomed a fresh start. 10yr JGBs were uneventful with prices flat after the mildly positive sentiment in Japan was counterbalanced by the BoJ's presence in the market for JPY 520b1n of government debt. PBoC injected CNY 10bIn 7-day reverse repos, CNY 10bIn in 14-day reverse repos and CNY 10bIn in 28-day reverse repos.
Top Asian News
- China H-Shares Advance the Most in Three Months; ChiNext Climbs
- Gulf Central Banks Want to Lower Visa, Mastercard Fees: Alrai
- Posco CEO Meets GE CEO Immelt to Discuss Ways to Strengthen Ties
- Indonesia Human Rights Agency to Review Freeport’s Record: Post
- China Moves to Make $9 Trillion Domestic Bond Market Global
- China Huarong’s Lai Expects Annual Profit Growth of 20%-30%
- Rupee Climbs on Modi’s Victory in State Election: Asia NDFs
- Singapore Bans Ex-Goldman Banker Leissner, Seeks Bar on Others
- Yingde Off-Exchange Trade of 79.67m Shares Crosses at HK$6 Each
- Hong Kong Regulator Said to Probe CCB International’s IPO Work
European equities are modestly higher although with no clear direction in a quiet start to the week. Materials lead the way higher this morning while financials kicked off on the back foot, although have pared some of the early softness by mid-morning. The initial downside came in the wake of Friday's ECB source reports suggesting the central bank discussed hiking rates before the end of the QE program. Amec Foster Wheeler and John Wood Group are the two best performers in the Stoxx 600 after pre market reports of their tie up for GBP 2.23Nn. Away from equities, fixed income markets continue to rise across the board, with Bunds and Gilts both higher by almost 50 ticks this morning after some of the significant downside seen last week. Focus will continue to fall on central banks with ECB's Draghi Lautenschlaeger, Praet and Constancio all scheduled to speak today, ahead of several rate decisions later this week, including the FOMC, BoE, SNB and BoJ.
Top European News
- Bayer CEO Sees EU6b Sales From 6 Pipeline Drugs: Welt am Sonntag
- HSBC Shares Gain After Bank Names AIA’s Tucker as Chairman
- Bovis Shares Jump After Amid Takeover Talks With Galliford Try
- Wood Group Acquires Amec in 2.2 Billion-Pound All-Share Deal
- Europe ‘Political Circus’ Has SNB Bracing for Stronger Franc
- U.K. House Prices Rise Fastest in a Year as London Rebounds
- Bund Futures Erasing Loss After ECB Report as Smets Pushes Back
- Le Pen Says Falling Currency Would Help More Than It Hurts
- Aryzta Sweeps Management Out Early After First-Half Loss
- Scotland Braced for ‘Important’ Speech as Brexit Process Looms
In currencies, the Bloomberg Dollar Spot Index fell 0.1 percent, after dropping 0.6
percent on Friday. The yen rose 0.2 percent to 114.63 per dollar. The euro was unchanged 0.1 percent to $1.0685, extending its 0.9 percent surge on Friday. The British pound climbed 0.4 percent to $1.2221. The South Korean won jumped 1.1 percent. The Australian dollar advanced 0.5 percent, following Friday’s 0.5 percent gain. Monday morning action in the FX markets are largely a function of some repositioning ahead of the multitude of event risk this week. The FOMC meeting takes centre stage, as the Fed is expected to hike rates by 25bps, but the market is looking past this now and considering the impact on the future rate path from the accompanying statement. The USD has been reined in a little since, losing ground across the board, but less so against the JPY. The EUR has also been pulled back a touch, with the 1.0700+ push in EUR/USD running into offers to pull the lead rate back into the mid 1.0600's. The retracement has followed through in the crosses also, and perhaps more notably so against GBP, where exposure remains significantly skewed to the downside as we head closer to triggering Article 50. The amendments to the Brexit bill voted on by the House of Lords continue to cause headwinds for PM May and her government, who remain adamant that A50 will be triggered by the end of the month. Even so, EUR/GBP has found some resistance ahead of 0.8800, while Cable buyers from the mid 1.2100's stood resolute through last week's USD advance.
In commodities, WTI crude dropped 0.2 percent to $48.39 a barrel. Crude has lost almost 10 percent over the past six days, breaking below the $50 a barrel level it had held above since OPEC and 11 other nations started trimming supply on Jan. 1. Gold climbed 0.5 percent to $1,210.18, adding to Friday’s 0.3 percent gain. Some say that the pull-back in Oil prices was to be anticipated, but with OPEC signalling near full compliance with the output agreement, the lack of upside may have inspired some profit taking given some of the heavy long positioning among the Hedge Fund community. Concerns over shale production has reared its head also, along with timing issues having a marginal impact in current inventory. WTI dipped below USD48.00 today, but remains heavy alongside Brent, which dipped below USD51.00. Fresh upside pressure for Copper as the striker union at Escondida rejects BHP Billiton. Peru's top copper mine Cerro Verde is also ground to a halt on strikes initiated on Friday so the combination of the above has seen prices recover through USD2.60. Gold has recovered through USD1200 on broad based USD trimming, with Silver reclaiming USD17.00.
It’s a fairly quiet start to the week data wise, with little of interest in Europe this morning and just the labour market conditions index in the US this afternoon.
US Event Calendar
- 10am: Labor Market Conditions Index Change, est. 2.5
DB's Jim Reid concludes the overnight wrap
Maybe someone forgetting the keys to the padlock at the Fed Reserve building in DC might be the only thing stopping the Fed from hiking rates this Wednesday evening in what is a busy week ahead of data, BoJ/BoE meetings and the Dutch elections which comes amid a growing diplomatic spat with Turkey. It's also possible that the UK could invoke Article 50 this week so another story to watch. President Trump may also dish out his first budget outline for fiscal year 2018 on Thursday so there’s plenty to keep markets busy.
Over the weekend it’s actually been relatively quiet for newsflow aside from a few smaller stories that are doing the rounds. In Japan there’s been some focus on a Bloomberg article suggesting that the BoJ’s bond-purchase plan for March is putting the Bank on track to miss the annual target (by about 18% if sustained) which in turn is throwing up questions about whether or not the BoJ is starting a ‘stealth tapering’. Meanwhile, in India PM Narendra Modi’s BJP has registered a sweeping victory in the state elections in Uttar Pradesh – the largest and most populous state of India. The victory should cement Modi’s stature within the BJP and may also be seen as a vote of support of Modi’s demonetisation exercise and his anti-corruption credentials which in turn should give a boost to pushing through domestic reforms. Finally there is one interesting piece of news to report in Europe and that comes from Iceland where, almost 9 years on from being imposed in 2008 following the collapse of its banks, the government has announced that all capital controls on its citizens, businesses and pension funds will be lifted from this Tuesday.
In terms of markets for the most part it’s been a fairly positive start to the week in Asia. The Nikkei (+0.23%), Hang Seng (+0.92%) and Shanghai Comp (+0.42%) are all higher while South Korea’s Kospi (+1.15%) and the Won (+0.92%) are both stronger post the news that Park Geun-hye has officially left the presidential palace after judges backed the impeachment. This morning’s gains are also coming despite WTI Oil trading down another -0.85% to around $48/bbl. That’s after Oil tumbled over 9% last week for the biggest decline since November. That appears to be weighing more on the ASX (-0.41%) while US equity index futures are also slightly in the red.
Before we look at the week ahead, a quick recap now of how markets ended on Friday. Unsurprisingly the big focus was the release of the February employment report in the US which, for those who missed it, saw nonfarm payrolls come in at a slightly stronger than expected 235k gain (vs. 200k expected) with 9k of cumulative upward revisions to prior months. We’d argue though that given the strong ADP reading earlier in the week, the print was probably in and around where the whisper number was sitting. Private payrolls also came in a little better than expected (227k vs. 215k expected) while the unemployment rate dipped one-tenth to 4.7% and the U-6 rate dipped two tenths to 9.2% and equalling the cyclical low made in December. The participation rate ticked up from 62.9% to 63.0% However if there was one soft element of the report it was the slight miss on wages growth with average hourly earnings reported as rising +0.2% mom versus expectations for +0.3%. Still, at +2.8% yoy the annual rate was up two-tenths from the prior month and only a shade below the recent +2.9% high of December.
Taken together the data all but confirmed a more than likely Fed hike this week barring any unexpected surprises. Treasuries actually ended up a little firmer on Friday with 2y and 10y yields down 1.9bps and 3.1bps respectively – the latter bringing to an end 9 consecutive days of higher yields. That said we still saw 2y yields end the week 4.8bps higher and 10y yields 9.7bps higher. Meanwhile the Greenback also eased back a little on Friday with the Dollar index -0.59% while US equities nudged a little higher. The S&P 500 was +0.33% but still suffered the first negative week (-0.44%) since January.
In Europe equity markets were for the most part higher again, albeit very modestly, with the Stoxx 600 finishing +0.09%. The more interesting price action however came in bonds where selling pressure was evident once again. Indeed 10y Bund yields finished another 5.8bps higher on Friday and so putting them 12.9bps higher over the course of the week while yields in France and the periphery were also 3bps to 5bps higher on Friday. That largely seemed to reflect some of the ECB reports which emerged suggesting that the Bank could look to lift rates while still in the process of tapering QE, or before the QE programme ends. A Bloomberg report on Friday quoting ‘people familiar with the matter’ said that Governing Council members were said to have considered the matter at last week’s meeting although as we know Draghi did confirm last week that the forward guidance remains such that the ECB expects rates to remain at present or lower levels for an extended period of time and also past the horizon of net asset purchases. These sorts of articles always throw up the usual credibility questions but generally speaking there is no smoke without fire so worth keeping an eye on.
In terms of the remaining data in Europe, the latest trade numbers in Germany showed a narrowing of the surplus in January led by a bigger than expected rise in imports (+3.0% mom vs. +0.5% expected) which overshadowed a +2.7% mom rise in exports. In France industrial production was soft in January (-0.3% mom vs. +0.5% expected) while the same could also be said for the UK (-0.4% mom vs. +0.5% expected). The other data in the US was the February monthly budget statement which revealed a budget deficit about the same size as 12 months earlier.
With regards to the week ahead, it’s a fairly quiet start to proceedings this week with little of interest in Europe this morning and just the labour market conditions index in the US this afternoon. Tuesday kicks off in China where we’ll get the February retail sales, fixed asset investment and industrial production data. In Europe we’ll get the final February CPI revisions in Germany as well as the March ZEW survey and January IP for the Euro area. Over in the US tomorrow we’ve got February PPI and the NFIB small business optimism reading. Wednesday starts in Japan where the final January IP revisions are due. Over in Europe we’ll get the final CPI revisions for France in February along with the January/February employment numbers in the UK. Wednesday is a huge day in the US with February CPI, March empire manufacturing, February retail sales, January business inventories and the March NAHB housing market index all coming before the FOMC meeting outcome in the evening. Thursday’s early focus will then be on the BoJ policy meeting outcome before the BoE outcome is then due around lunchtime. Data on Thursday includes Euro area CPI and US housing starts, building permits, initial jobless claims, JOLTS job openings and Philly Fed manufacturing index. We end the week on Friday with Euro area trade data, US IP and the University of Michigan consumer sentiment index for March.
Away from the data the only notable central bank speak this week comes from Draghi this afternoon when he delivers the opening remarks at a conference. The draft Brexit law also returns to the House of Commons today following the House of Lords amendments so that is worth watching. President Trump is also due to meet German Chancellor Merkel at the White House on Tuesday. The other notable event is of course the Dutch election this Wednesday. China’s NPC also concludes on Wednesday while the US debt ceiling limit expires on Wednesday and is due to be reinstated on Thursday. The G20 finance ministers meeting also kicks off on Friday. So plenty to keep us busy.