Unlike yesterday's overnight session, which saw some substantial carry FX volatility and tumbling European yields in the aftermath of the TSY's anti-inversion decree, leading to a return of fears that the next leg down in markets is upon us, the overnight session has been far calmer, assisted in no small part by the latest China Caixin Services PMI, which rose from 51.2 to 52.2 (even if the employment index dropped to a three year low, suggesting China's labor problems are only just starting).
Adding to the overnight rebound was crude, which saw a big bounce following yesterday's API inventory data, according to which crude had its biggest inventory draw in 2016, resulting in WTI rising as high as $37.15 overnight. The oil market is now looking at today’s more definitive EIA report, which is also expected to show an inventory build. "The API surprised the market at a time when it was looking to move higher after several days of losses; the API provided this trigger," says Saxo Bank head of commodity strategy Ole Hansen. "Kuwait saying a deal is still a possibility at the Doha meeting has also helped."
Curiously, the rebound in oil took place even as the BBG Dollar index saw a sharp increase overnight.
But while the dollar rose, the Yen failed to drop, and as a result, the USDJPY has remained just barely above 110, leading to another session in the red for Japan's Nikkei: surely by now Abe and Kuroda must be asking themselves if complying with the Shanghai Accord was really worth it. A few more percent drop, which wipes out a few dozen trillion in local pensions, and the Japanese people may ask themselves too.
“It is still difficult to buy stocks because of the yen. There are hardly any positive factors for stocks,” Chihiro Ohta, general manager of investment information at SMBC Nikko, told Bloomberg. “Investors are concerned about the global economy again and are turning to risk-off as the IMF may downgrade its growth forecasts."
Meanwhile in China, good news was bad, as the better than expected Services PMI led to a 0.1% drop in the Composite after the benchmark index hit a three-month high on Tuesday. Data released on Wednesday by Caixin Media and Markit Economics showed their services purchasing managers’ index increased to 52.2 in March. An official factory gauge last week showed improving conditions for the first time in eight months, while industrial profits halted a seven-month losing streak.
E-mini futures on the S&P 500 Index rose 0.3 percent. The underlying U.S. equity benchmark index slipped 1 percent on Tuesday. The rally that lifted the S&P 500 as much as 13 percent from a 22-month low in February has started to lose momentum, with sentiment shifting as investors assess whether central banks can fend off weakness in the global economy. The U.S. central bank releases the minutes from its latest meeting on Wednesday.
E-mini futures on the S&P 500 Index rose 0.3 percent. The underlying U.S. equity benchmark index slipped 1 percent on Tuesday. The rally that lifted the S&P 500 as much as 13 percent from a 22-month low in February has started to lose momentum, with sentiment shifting as investors assess whether central banks can fend off weakness in the global economy. The U.S. central bank releases the minutes from its latest meeting on Wednesday.
This is where all key markets stood as of this moment.
- S&P 500 futures up 0.2% to 2042
- Stoxx 600 up 0.4% to 329
- FTSE 100 up 0.5% to 6122
- DAX down less than 0.1% to 9563
- German 10Yr yield up 3bps to 0.13%
- Italian 10Yr yield up less than 1bp to 1.27%
- Spanish 10Yr yield up less than 1bp to 1.5%
- S&P GSCI Index up 0.9% to 313.2
- MSCI Asia Pacific down less than 0.1% to 124
- Nikkei 225 down 0.1% to 15715
- Hang Seng up 0.1% to 20207
- Shanghai Composite down less than 0.1% to 3051
- S&P/ASX 200 up 0.4% to 4946
- US 10-yr yield up 3bps to 1.75%
- Dollar Index up 0.25% to 94.87
- WTI Crude futures up 2.8% to $36.88
- Brent Futures up 2% to $38.64
- Gold spot down 0.5% to $1,226
- Silver spot down 0.1% to $15.12
Top Global News
- Pfizer Said to Terminate $160 Billion Merger With Allergan: Pfizer decided to terminate largest-ever health-care acquisition as officials in Washington crack down on corporate inversions, according to a person familiar with the matter; Bankers Risk Losing Millions If Pfizer-Allergan Deal Falls Apart; Shire May Become Target If Pfizer-Allergan Deal Blows Up: BofAML; Shire/Baxalta Deal Risk Increased on U.S. Inversion Rules: HSBC
- Glencore Sells $2.5b Agriculture Stake to Canadian Fund: Canada’s largest pension fund to acquire 40% in unit; Glencore selling assets to help curb $25.9b of debt
- Cruz, Sanders Win Wisconsin Vote in Setback to Front- Runners: Trump’s loss makes delegate math for nomination more difficult; Clinton had downplayed contest as not affecting delegate math
- Mitel Networks, Polycom Said to Be in Advanced Merger Talks: agreement is said to be possible as soon as next week; deal would value Polycom at about $1.7b
- Staples Merger Hearing Ends With Skeptical Judge Urging Accord: office supply retailers ask judge to reject FTC injunction bid; government seeks to block merger, citing loss of competition
- Puerto Rico’s House Approves Moratorium on Bond Payments: general obligations, Cofina debt would stop paying investors; measure would give governor authority to suspend paymentsBill Ackman’s Pershing Square holds 1Q investor call; follow TOPLive for our blog coverage starting 10am
- Pfizer Wins Dismissal in Zoloft Birth-Defect Warning Cases: a federal judge in Philadelphia granted co.’s request to dismiss more than 300 lawsuits attempting to link the antidepressant Zoloft to heart defects in newborns
Looking at regional markets, we start as usual in Asia, where equities shrugged off the negative lead from Wall St. with the region mostly positive as an improvement in Chinese PMI data provided some reprieve. Nikkei 225 (-0.1%) saw choppy price action driven by JPY movements, with the index extending on its recent losing streak. ASX 200 (+0.4%) was underpinned by gains in energy following an unexpected drawdown in API Inventories, which pushed WTI crude futures towards the USD 37/bbl level. Elsewhere, Shanghai Comp (-0.1%) recovered off its worst levels following an improvement in Chinese Caixin Services and Composite PMI's with the latter returning to expansionary territory and matching a 1-year high. Finally, 10 year JGBs were flat amid similar range-bound trade in riskier Japanese asset classes, while the result of the BoJ's JPY 1.24tr1 buying operation also provided no surprises.
Asian top news:
- China Forex Losses Jump 13-Fold as Investors Brace for More: Air China, Agile Property to cut exposure to dollar debt
- Yen at Strongest in 17 Months Probing Limit of Japan’s Tolerance: More jawboning would be “meaningless,” JPMorgan’s Sasaki says
- Chinese Online Property Site Said Raising $1b in Funding: Beijing Homelink plans to expand its reach across China; Tencent, Baidu said to take part in Homelink fundraising
- Rajan Supercharges India Rate Cut by Easing Bank Funding Squeeze: Central bank lowers benchmark, takes measures to boost cash
- Samsung Rewrites Playbook to Juice S7 Sales Before IPhone: Estimates of S7 sales raised to 9m units from 7m
- Amid 1MDB Probes, BSI Suffers Exits and Wrangling Over Liability: Departing Asia staff said to include trio vetting big clients
European equities trade mostly higher with the move to the upside propelled by energy names after WTI crude futures reclaimed USD 37.00/bbl to the upside. Bucking the trend however, is the DAX which trades relatively flat given the lack of energy names in the index, with newsflow otherwise relatively light from a European perspective. Alongside the modest upside in European stocks, fixed income markets have ebbed lower with Bunds breaking back below 164.00 to the downside. Furthermore, prices have also edged lower in tandem with USTs as market participants continued to keep a close eye on the price action of USD/JPY where the BoJ is yet to stem the recent sell-off.
European top news:
- H&M Sees Dollar Sourcing Headwinds Easing by End of Year: headwinds from strong dollar will ease by end of year as co. reported 1Q profit that slightly beat analysts’ estimates
- Panama Secrecy Leak Claims First Casualty as Iceland PM Quits: decision follows protests that drew thousands of Icelanders
- Air France-KLM Shares Fall as De Juniac Steps Down: shares decline after surprise departure of CEO, who’s stepping down to take IATA job
- BTG Pactual, Generali at Odds on Indemnity Linked to 1MDB Case: cos. in disagreement over which firm should bear potential losses tied to Swiss bank BSI’s dealings with a Malaysian fund
In FX, in the absence of any data or news, it is no surprise to see FX markets in range bound mode today. Commodities have seen a small recovery, while equities stabilise, but this has failed to spark any significant moves in the majors. The FOMC minutes this evening is the perfect excuse to stand pat on for now, and in that respect, USD/JPY is holding off any notable recovery, despite having held the key 110.00 level in Asia. More warnings from Japanese government spokesmen that markets are being monitored, but to little effect. Some signs that the market is primed for fresh GBP weakness, but EUR/GBP continues to hold off the top end of the .8030-65 resistance zone, with Cable defensive against the key support area at 1.4050-55. EUR/USD naturally tight in the mid 1.1300's, with the broader USD perspective key here today, but also likely to hold off committing to any major direction ahead of the ECB meeting account Thursday. DoE report later today could see a little Cad shakeout — API last night saw an unexpected drawdown.
In commodities, oil prices have extended on yesterday's advances following an unexpected drawdown in API Inventories which lifted WTI crude futures above the USD 37/bbl level with prices shrugging off upside seen in the USD-index this morning. Gold (-0.2%) trades modestly lower alongside broad strength in the USD with newsflow otherwise relatively light thus far. Elsewhere, copper prices benefited from the improvement in risk-sentiment while iron-ore remained pressured on rising stockpiles as Chinese port inventories are at its highest level in a year.
There’s no data out of the US expected but the main focus will of course be on the release of the March FOMC minutes which we’ll get at 2.00pm. Yellen’s dovish comments last week mean the minutes perhaps take on slightly less importance than usual, particularly with the Fed Chair due to speak tomorrow, but it’s still worth keeping a close eye on any interesting snippets. Away from this the Fed’s Mester is due to speak along with Bullard later on.
Bulletin Headline Summary from Ransquawk and Bloomberg
- European equities trade modestly higher as upside in energy prices supported sentiment with newsflow otherwise relatively light
- FX markets have been largely rangebound with USD/JPY holding off any notable recovery, despite having held the key 110.00 level in Asia
- Looking ahead, today sees the release of the FOMC Meeting Minutes and potential comments from Fed's Mester (Voter, Soft Hawk) and Bullard (Voter, Neutral)
- Treasuries drop in overnight trading as global equity markets mostly higher along with crude oil after Kuwait claims producers can reach an agreement to arrest output even if Iran doesn’t join in.
- Global regulators are considering how to raise capital requirements for the world’s biggest banks as they implement tougher debt-financing limits designed to rein in too-big-to fail lenders
- Germany is on a collision course with the European Commission over enforcing bank-failure rules the EU introduced two years ago to end an era of taxpayer bailouts. The finance ministry in Berlin is warning against “watering down” the rules
- Negative rates have become counter-productive, since they have produced uncertainty by signaling that something is wrong with the economy. Moreover, the Riksbank’s unprecedented government bond buying program has also sparked liquidity concerns
- Puerto Rico’s Government Development Bank is on the verge of a collapse as the lender in recent years saw politicians turn it into a piggy-bank that lent to the government and its agencies
- Puerto Rico’s House of Representatives approved a bill calling for a moratorium. The measure would give Governor Padilla authority to suspend payments on debt backed by the government
- A funny thing has happened in the U.S. stock market, where rather than loosen their grip bears have grown ever-more impassioned. They’ve sent short interest to an eight-year high and above $1 trillion
- When the next corporate default wave comes losses on bonds from defaulted companies are likely to be higher than in previous cycles because U.S. issuers have more debt relative to their assets
- The Chinese central bank’s appetite for trade-weighted weakness in the yuan appears to be increasing, according to Australia & New Zealand Banking Group Ltd., spurring warnings of increasing risks to emerging-market currencies
- India’s central bank governor renewed his criticism of unorthodox monetary policy. “I don’t think this is a stable situation,” Governor Rajan said. “Either we need stronger growth or we need to recognize we’ve reached the limits of monetary policy”
- Pfizer Inc. decided to terminate its $160 billion merger with Allergan Plc, a person familiar with the matter said, marking an end to the largest-ever health-care acquisition as officials in Washington crack down on corporate inversions
- Sovereign 10Y bond yields mostly higher; European and Asian equity markets rise; U.S. equity-index futures rise. WTI crude oil rallies; gold and copper drop
US Event Calendara
7:00am: MBA Mortgage Applications, April 1 (prior -1%)
Central Banks
- 12:20pm: Fed’s Mester speaks in Cleveland
- 2:00pm: Fed Releases Minutes from March 15-16 FOMC Meeting
- 6:30pm: Fed’s Bullard speaks in St. Louis
- 8:00pm: Fed’s Kaplan speaks in Dallas
- 8:30pm: Bank of Japan’s Kuroda speaks
DB's Jim Reid concludes the overnight wrap
Notwithstanding the current weaker sentiment we'd conclude that a softer dollar is probably better for reducing global systemic risk (not least as it helps China), even it causes headaches for the likes of Europe and Japan. Much attention was yesterday focused on the fact that the Yen briefly strengthened below $110 for the first time since October 2014 and also that the Nikkei is now down -16.7% YTD. The chatter is increasingly that this is a strong signal Japanese policy isn't currently working in spite of seemingly aggressive action. Recent economic data out of Japan has been soft (Tankan and PMI’s in particular) and the question everyone is starting to ask is what the policy response from the BoJ may be. Further equity purchases have been mentioned while yesterday the former BoJ Governor Iwata suggested that the Central bank will hit its limit of government bond purchases in 2017 and suggested that further deeper negative rates would be more likely instead. The next BoJ meeting is the 28th of April and away from that another key decision is on the fiscal side and whether PM Abe will delay the upcoming hike in the consumption tax, a decision he has sounded ambivalent on so far.
Meanwhile the Stoxx 600, the DAX and European banks are now down -9.5%, -11.0% and -23.7% respectively YTD so there is a fear that Japan and Europe are becoming more resistant to central bank policies. Before getting too concerned, despite a -1.01% fall yesterday we should remember that the S&P 500 is +0.7% YTD and was at YTD highs only 2 days ago. So a softer dollar helps the US, leads to lower systemic risk but causes growth and asset return problems elsewhere.
Indeed the moves yesterday underscored what was a pretty rough day all round for risk assets with some soft European data, downbeat comments the IMF’s Lagarde and concerns emanating from the new US Treasury Department rules on corporate inversions. European DM bond markets were the biggest winners in the risk-off move with evidence no more obvious than the move across the Bund curve where 10y Bunds closed yesterday at 0.098% and the lowest in nearly 12 months. That all-time intraday low of 4.8bps this time last year is creeping closer.
Before we deep diver on some of the above, this morning in Asia we’re seeing a bit more of mixed performance relative to that of the past 24 hours. The Nikkei (+0.04%), Hang Seng (+0.35%), Kospi (+0.56%) and ASX (+0.37%) are all up modestly with just China currently unchanged. That’s despite some improvement in the March Caixin PMI’s for China where the services number has increased 1pt to 52.2, helping to take the composite up to 51.3 from 49.4 in February and to the highest level since April last year.
Meanwhile the other breaking news this morning is that, according to the WSJ, Pfizer has announced that it intends to walk away from the proposed $150bn mega-merger with Allergan. This comes after the news out of the Treasury yesterday regarding the proposed inversion rules. The overall feeling was that the new rules were stricter than previously assumed. Specifically the rules focus on two main parts, the first focusing on a three-year lookback period in calculating the size of the inversion and disregarding assets acquired in the previous 36 months, while the second action would be to limit earnings stripping. Those changes had investors concerned about the putting the aforementioned merger in jeopardy which appears to now to be confirmed. US equity index futures are modestly firmer this morning.Back to yesterday and firstly those comments from Lagarde in the morning. The IMF Chief warned that global growth remains too slow, too fragile and risks to its durability are increasing. She also noted that downside risks have increased and that the Fund does not ‘see much by the way of upside’. Lagarde also made mention to threats of a geopolitical nature as also underlining the uncertainty globally at the moment. Specifically she referred to the uncertainty concerning Brexit which was something also mentioned by the Fed’s Evans too who highlighted this and also the US Presidential election race as complicating decisions for policymakers. While both events still have a way to run, the various headlines linking PM David Cameron with the Panama Papers have the potential to have an indirect bearing on the
Brexit debate, particularly from a credibility perspective.Meanwhile, yesterday’s economic data in Europe saw some disappointment in the final March PMI revisions. The Euro area composite reading was revised down 0.6pts to 53.1 after the services number fell to its softest since January 2015, down 0.9pts from the flash reading to 53.1. Much of the weaker read-through in the services number was attributed to a big downward revision for France (-1.3pts to 49.9) and a 2.6pt monthly decline in Italy. Our European economists noted that the Euro area composite PMI points to GDP growth of around 0.4% qoq in Q1 which is in line with their projection. Also of note was a much softer than expected February factory orders print out of Germany where orders were unexpectedly down -1.2% mom in the month (vs. +0.3% expected).
The US data was a little bit more mixed. Notably and for the first time since September, we saw the ISM non-manufacturing reading strengthen after rising 1.1pts last month to a slightly higher than expected 54.5 (vs. 54.2 expected). The details also showed encouraging gains for the employment and new orders components and it means the spread between the two ISM series is now 2.7pts which is the least since December 2014 (albeit the overwhelming contributor to that being a move lower in the services component). In any case yesterday’s data was also backed up by a slight upward revision in the final March services PMI to 51.3 (from 51.0). Away from that the February trade balance reading revealed a slightly wider than expected deficit in the month ($47.1bn from $45.9bn), while the IBD/TIPP economic optimism reading for April was down 0.5pts from March to 46.3 (vs. 47.0 expected). Finally the February JOLTS job openings showed openings fell to 5.45m in the month from an upwardly revised 5.60m in the month prior. Also of note was the news that the Atlanta Fed had revised down their Q1 GDP growth forecast by three-tenths to 0.4% although this appeared to be more of a reflection of that softer US auto sales data from Friday.
Back to bonds, along with those moves for Bunds, we also saw similar moves lower in yield for the bulk of DM sovereign bond markets in Europe, while 10y Treasury yields closed over 4bps lower at 1.721% and the lowest since the end of February. Peripheral assets were the notable underperformer (Italy 10y +3bps, Portugal 10y +21bps) with Greece back in focus. The latest news there being that German Chancellor Merkel has reinforced her position that the IMF should remain a part of the Greek bailout program and that a debt haircut for Greece is not possible. These headlines are all starting to feel a bit 2015 again.
Credit markets were not immune to be the risk off move yesterday and it was European indices in particular which were under most pressure. The iTraxx Main and Crossover indices finished 4bps and 14bps wider respectively with senior and subs fins underperforming and closing 5bps and 17bps wider respectively.
Bucking the weaker trend for risk yesterday were the moves into the close for Oil. In fact, after trading lower for the bulk of the day and contributing to part of the selloff certainly in Europe, WTI has rallied back close to $37/bbl this morning after hovering in the low $35’s yesterday. As well as some supportive output numbers, again the move has come about on the back of more headlines concerning the upcoming Doha meeting, this time out of Kuwait where the OPEC Governor there suggested that a production freeze pact is still possible between producers even without the agreement from Iran.
Looking at the day ahead, the calendar is a lot lighter this morning with the only data of note out of Germany where the February industrial production data is due (-1.8% mom expected). There’s no data out of the US expected but the main focus will of course be on the release of the March FOMC minutes which we’ll get at 7.00pm BST. Yellen’s dovish comments last week mean the minutes perhaps take on slightly less importance than usual, particularly with the Fed Chair due to speak tomorrow, but it’s still worth keeping a close eye on any interesting snippets. Away from this the Fed’s Mester (5.20pm BST) is due to speak along with Bullard (11.30pm BST) later on.