In the final day of the week, it has again been a story of currencies and commodities setting stock prices, however instead of yesterday's Yen surge which slammed the USDJPY as low as 107.67 and led to a global tumble in equities, and crude slide, today has been a mirror imoage after a modest FX short squeeze, which sent the Yen pair as high as 109.1, before easing back to the 108.80 range. This, coupled with a 3.5% bounce in WTI, which is back up to $38.54 and up 4.9% on the week as speculation has returned that Russia and OPEC members can reach a production freeze deal on April 17, led to a global stock rebound which will see the S&P open back in the green for 2016.
This is the "unchanged for 2016" line:
And while it may seem that markets haven't really gone anywhere this week, and we are back almost where we started off, it has been anything but a smooth ride because, in Bloomberg's words, "markets whipsaw and currency volatility approach the highest since 2011" as shown in the chart below.
European equities trimmed a fourth weekly decline, their longest streak since October 2014, and U.S. index futures signaled the Standard & Poor’s 500 Index will climb after the biggest plunge since February. The yen’s first drop in six days buoyed Japanese shares, while Spanish 10-year bonds pared their worst week this year. Gold and Treasuries fell as demand for havens eased.
“Markets are so unpredictable right now - there are risk-on days and there are times when everyone exaggerates the negatives,” Dirk Thiels, head of investment management at KBC Asset Management in Brussels, told Bloomberg. “The rebound was just about bringing valuations back to average, and not really a sign that any bearish sentiment is easing. Maybe a better earnings season can change that, but right now you don’t need a lot for markets to get nervous.”
Late yesterday afternoon, the four Fed chairs sat down, in a session in which the Fed's mission to be " central planner of the world" was greenlight, after Alan Greenspan said global developments must inevitably be taken into account by U.S. policy makers, which Yellen, who was also on the panel, said she and her colleagues carefully consider the impact of their actions on the rest of the world.
In any case, for now it seems that futures and stocks will close off the week on a positive note and green for the year.
Market Wrap
- S&P 500 futures up 0.6% to 2048
- Stoxx Europe 600 up 0.5% to 329.77
- MSCI Asia Pacific up 0.2% to 126.15
- US 10Yr yield up 2 bps to 1.71%
- Dollar index little changed at 94.48
- WTI oil futures up 3.4% to $38.51/bbl
- Gold spot down 0.4% to $1235.19/oz
Global News
- Verizon Is Said to Plan Bid for Yahoo as Google Weighs Own Offer; Yahoo Said to Extend Bid Deadline by a Week to April 18: Re/Code
- Gap Tumbles After Its March Sales Miss Already-Low Expectations
- Uniqlo Parent Fast Retailing Plunges After Profit Outlook Cut to 5-Year Low
- Oil Set for Weekly Gain as U.S. Output Falls Before Freeze Talks
- ‘Batman v Superman’ Seen Earning Less Profit Than Superman Alone
- Alibaba Affiliate Said to Lift Target in Record Tech Funding
- Bill Ackman Says Valeant Not Selling Bausch & Lomb Unit: CNBC
- Jessica Alba’s Honest Co. Said to Consider Sale: WWD
Looking at regional markets, we start in Asia where equities traded lower mostly across the board following similar weakness on Wall St. where a decline in energy and losses in financials dampened sentiment. Nikkei 225 (+0.5%) initially underperformed on the significant JPY strength allied with index giant Fast Retailing declining to its lowest level since 2013 after poor earnings and cutting its guidance. However, Japanese stocks then recovered in late trade amid short-covering alongside a rebound in USD/JPY. Elsewhere, mainland China conformed to the dismal tone with the Shanghai Comp (-0.8%) weighed following a lacklustre PBoC liquidity injection of CNY 20bIn for a total net weekly drain of CNY 275b1n. 10yr JGBs traded higher following the risk-averse tone in Asia and managed to retain gains despite improving risk appetite in Japan, while the BoJ were also in the market to acquire JPY 470b1n in government debt.
European equities have pared some of yesterday's losses as risk-on sentiment returns to the fray following the gains in energy prices as WTI crude futures surges above USD 38/bbl. Allied with this, gains in financials has also attributed to the upbeat tone, with Italian banks leading the charge. Subsequently, notable outperformance has been observed in the FTSE MIB after source reports noting that a solution to the systemic weakness in Italian banks could be hatched as soon as Monday. As a result of the gains across EU bourses, Bunds have grinded lower throughout much of the morning, while peripheral bonds gain on the back of the aforementioned optimism surrounding plans to resolve NPLs in the Italian banking sector.
In FX, the yen weakened 0.5 percent to 108.78 per dollar after surging to 107.67 last session, its strongest level since October 2014. Despite Friday’s pullback, the currency is still up more than 2.5 percent this week as the Fed’s dovish approach to U.S. interest-rate policy weighs on the greenback and traders speculate that Japanese officials are reluctant to intervene in the market. Early London trade has seen a follow-up of the JPY retracement, where we have managed to extend the USD/JPY move through 109.00 temporarily. Ultimately, Japanese officials will be happy to see the 110.00 handle again, but near term, any major moves here are likely to be capped ahead of this. Even so, much of the JPY buying has been spec based, so pre-weekend trade is likely to include a heavy bout of position squaring.
Finance Minister Taro Aso said Friday in Tokyo that rapid yen movements -- whether strengthening or weakening -- are undesirable, especially if they’re abrupt. Recent movements have been one-sided and the government will act appropriately if necessary, he said.
The major data release however, came out of the UK.The major data release however, came out of the UK. Trade and manufacturing stats for Feb were both notably weak, but after a brief downturn, both Cable and EUR/GBP have calmed significantly. Ahead of this, early Cable sales were turned back aggressively, pushing up to 1.4140 before topping out.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was little changed. The Aussie gained 0.4 percent to 75.36 U.S. cents, while the rand strengthened 0.6 percent.
A JPMorgan Chase & Co. index measuring price swings in Group-of-Seven currencies rose for the five days through Thursday to just below its highest level since December 2011. It climbed above a gauge for emerging-market currencies for the first time since August.
In commodities, WTI and Brent crude futures trade higher today after extending gains through USD 38.00/bbl and USD 40.00/bbl respectively in a move driven by the broader risk-on sentiment seen throughout the market place today. In terms of energy specific newsflow, things are relatively light on this front with Doha-centric headlines largely a reiteration of previous rhetoric.
West Texas Intermediate crude rallied 3.6 percent to $38.60 a barrel. Futures are on track for a 4.9 percent weekly advance. Brent was up 3.1 percent to $40.66 a barrel on Friday.
Speculation has returned that Russia and OPEC members can reach a deal on freezing oil output when they meet in Doha on April 17. Saudi Arabia has said it will only agree if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Iran’s support. An unexpected drop in U.S. crude inventories in data out this week also helped crude’s recovery.
Copper for three-month delivery added 0.5 percent, with aluminum, nickel and tin also climbing. Copper slumped the most in six months on Thursday, wiping out its gains for 2016, as miners and investors gathering at an industry conference in Chile expressed concern over demand for the metal. Nickel rallied after sliding 2.3 percent Thursday. Gold (-0.17%) trades relatively flat with prices just off yesterday's high as the USD recovered from its worst levels, with the precious metal still on course for its largest weekly gain in over a month. Elsewhere, copper and iron saw dampened demand following a risk-averse tone across Asia with the latter on course for a 3rd consecutive weekly decline.
It’s another reasonably quiet day over in the US with just the February wholesale inventories and trade sales report. Away from the data we’ll hear from the Fed’s Dudley this afternoon when he is due to give a speech on the US economy. German Chancellor Merkel is also due to address a regional convention of her CDU party this afternoon which may be worth keeping an eye on.
Bulletin Headline Summary from Bloomberg and RanSquawk
- European equities have pared some of yesterday's losses as risk-on sentiment returns to the fray following the gains in energy prices as WTI crude futures surges above USD 38/bbl.
- Early London trade has seen a follow-up of the JPY retracement, where we have managed to extend the USD/JPY move through 109.00 temporarily
- Looking ahead, today sees the release of US Wholesale inventories, Canadian Jobs report as well as comments from Fed's Dudley (Soft Dove, Voter) and ECB's Nowotny (Neutral)
- Treasuries lower in overnight trading as global equity markets rally and WTI crude oil rebounds back above $38 a barrel; gold moved lower as safe haven demand eased.
- Fed chair Yellen stated last night during a panel with three of her predecessors that U.S. economy is “coming close” to full employment but that some slack remains
- More than $10 billion of high-yield debt is on track to be sold this week in the U.S., which would make for the busiest five consecutive days since November. In Europe, fund managers are increasingly willing to buy speculative-grade securities
- Iran ratcheted up its offense in the oil market after breaking a pricing tradition, signaling it’s seeking to win market share at a time when rival producers are trying to forge a deal on freezing output
- The yen advanced to 107.67 on Thursday, the strongest since before the central bank expanded monetary stimulus in October 2014. Some strategists say 105 is the level where Japanese policy makers would consider stepping in to sell
- China plans to ease risk management curbs on brokerages to release funds to develop capital-intensive businesses such as securities lending and margin financing that helped fuel a stock market bubble last year
- Italian government officials and bank executives are stepping up efforts to reach an agreement over a planned fund that may be state backed to help the cooperative lenders lure private investors in share sales
- U.K. Prime Minister David Cameron was accused of “hypocrisy” after he said he held a stake in an offshore fund set up by his late father until six years ago, an admission broadcast on national television following four days of questions over the investment
- Sovereign 10Y bond yields mixed; European, Asian equity markets rise; U.S. equity-index futures rise. WTI crude oil higher, copper and gold drop
US Event Calendar
- 8:30am: Fed’s Dudley speaks in Bridgeport, CT
- 10:00am: Wholesale Inventories, Feb., est. -0.2% (prior 0.3%, revised 0.2%)
- Wholesale Sales, Feb., est. 0.2% (prior -1.3%)
- 1pm: Baker Hughes rig count
DB's Jim Reid concludes the morning, and weekly, wrap.
Earlier in the week we highlighted that those assets that should in theory have been the main beneficiaries of the ECB's move 4 weeks ago are actually some of the worst performing global assets over the period. Well yesterday it was the same suspects which sold off sharply. European Banks closed -2.22% lower and in turn took the four-day loss this week to close to -6%. The Italian FTSE MIB finished -2.45% (and is down 5% this week so far) while the Spanish IBEX sold off -1.26% (down close to 4% on the week). It wasn’t much better in credit land with some sharp moves wider for CDS indices. The iTraxx Main and Crossover indices were 5bps and 18bps wider respectively, but again it was financials which caught the eye with the senior and sub fins indices 5bps and 20bps wider. It wasn’t much better across the pond where the S&P 500 eventually finished up with a -1.20% loss meaning the index has moved either up or down by at least 1% in the last three sessions.
A poor day for sentiment was also underscored by what appears to be an unrelenting rally for the Yen which is showing little sign of abating. Yesterday saw the currency break under 108 early in the morning, touching an intraday low of 107.67 before eventually hovering back around 108.5 (still +1.44% stronger on the day yesterday) which is roughly where it is this morning. Putting the recent moves in perspective, the Yen has now appreciated every day this month and is close to 4% stronger in that time. If we go back to the moments since the BoJ cut rates into negative territory in January, the Yen is nearly 11% stronger in that time. All of this is fuelling talk potential currency intervention from the BoJ and as a minimum we're setting up for an interesting meeting on April 28th.
Glancing at our screens this morning, most Asian bourses look like they’re closing out the week in the red. Markets in China are again leading the moves lower with the Shanghai Comp currently -0.90% and CSI 300 -0.79%. The Hang Seng is -0.70% while the ASX and Kospi are -0.45% and -0.33% respectively. Only the Nikkei (+0.54%) is up having recovered off an early drop lower. Credit indices are a couple of basis points wider.
Meanwhile, late last night saw Fed Chair Yellen take part in a discussion with former Fed Chairs Bernanke, Greenspan and Volcker. Yellen in particular made mention to the fact that she believes that the US economy has continued to progress in a satisfactory way’, while also noting that she believes that the Fed is ‘coming close to our assigned congressional goal of maximum employment’. For the most part there was much agreement between the speakers, playing down concerns of financial bubbles and agreeing that fiscal policymakers should look to support the Fed’s economic stimulus.
Moving on. Away from the obvious focus on the price action yesterday, some attention was also paid to the release of the ECB minutes from that meeting four weeks ago. While the text revealed that there was some disagreement around some of the finer details of the announced package, it was noted that some officials were seemingly in favour of considering an even deeper rate cut last month. It was also revealed that incentives for banks that expand lending received ‘very broad support’ but that the expansion to including corporate bonds purchases received just ‘broad support’. Meanwhile in the ECB’s annual bank report yesterday, ECB President Draghi was quoted as saying that ‘we face continued disinflationary forces’ and ‘that we face questions about the direction of Europe and its resilience to new shocks’. However the President confirmed that in light of this ‘our commitment to our mandate will continue to be an anchor of confidence for the people of Europe’ and in a separate speech later on in the day noted that the Bank will do ‘whatever is needed’ to lift inflation.In fact it was a somewhat busy day for ECB chatter yesterday. Peter Praet made explicit reference to the fact that helicopter money is not being discussed ‘even informally’ by the ECB, which was a view also shared by Constancio and Visco too, although the latter also noted that no policy tool within the ECB’s mandate can or should be dismissed, while Praet highlighted that the ECB stands ready to ‘recalibrate’ its stimulus if need.
Unsurprising in the context of the risk-off move which enveloped markets yesterday, it was core government bond markets which came off the big winners. 10y Treasury yields finished the session nearly 7bps lower at 1.690% which is the lowest now since February 11th. Closer to home Bunds in particular extended their move lower after finishing down 3bps at a lowly 0.088%. That curve is in fact now back to being in negative territory up to 9 years in maturity. Those moves are in stark contrast to what we’ve been seeing in the periphery however. Spanish 10y bonds closed 9bps higher in yield yesterday at 1.601%. The losing streak there has now extended to six days which is the longest run since July 2012. The bigger move was seen in Portugal where similar maturity bonds were a sharp 23bps wider to 3.407% (they did go as high as 4% in February). The uncertain political situation there is still making investors nervous, likewise there are still lingering concerns around the domestic banking sector which remains fragile in light of the Novo Banco issue a few months ago.
In commodity land Gold (+1.47%) had a good session, while Oil markets took a rare back seat in the context of the rest of the moves, with WTI hovering around the $37/bbl mark. Speaking of Oil, yesterday our commodities team published a report highlighting that scepticism is the most rational response to the producer negotiations in the lead up to the Doha talks in nine days time. They note that while market expectations of a ‘freeze ex-Iran ex-Libya’ have risen, such an agreement would actually do little to change the supply outlook. Without the participation of Iran and Libya, production could extend its 1.6 mmb/d increase since the historic ‘quota hold’ in November 2014. The Kuwaiti suggestion that production could be held at a Jan-Fed average level does not help very much since February OPEC production was down only 90 kb/d from January, a seven-year high.
A quick wrap up of yesterday’s data which on the whole didn’t have much of an impact on markets. In the US we saw initial jobless claims back down to 267k last week and a touch lower than expected. That means that claims have now stood below 300k for 57 consecutive weeks. Meanwhile, consumer credit in February was said to have risen $17.2bn (vs. $14.9bn) with gains for both revolving and non-revolving credit. Away from this we heard from the San Francisco Fed President Williams who confirmed that he views two rates rises from the Fed this year as the ‘right course’.
It’s another reasonably quiet day over in the US this afternoon with just the February wholesale inventories and trade sales report. Away from the data we’ll hear from the Fed’s Dudley (at 1.30pm BST) this afternoon when he is due to give a speech on the US economy. German Chancellor Merkel is also due to address a regional convention of her CDU party this afternoon which may be worth keeping an eye on.