US equity futures were flat, European stocks rose and Asia was mixed after the dollar posted a modest rebound overnight despite Mnuchin's "strong dollar" comments, while oil was flat and gold fell, as investors focused on President Donald Trump’s plans to boost growth. The pound fell after a U.K. court ruled that Parliament must vote on triggering Brexit.
The dollar struggled in Asia on Tuesday as U.S. President Donald Trump's focus on protectionism ahead of fiscal stimulus fueled suspicions his administration might be content to gain a competitive advantage through a weaker currency. However, early European trading saw modest gains in the USD, which rose to 113.4 in the USDJPY after dropping as low as 112.52, while the EURUSD declined to 1.73 after rising as high as 1.77 in Asian trading. The talk of trade wars came even as more data pointed to a welcome revival in activity worldwide. A survey of Japanese manufacturing out Tuesday showed the fastest expansion in almost three years as export orders surged. Indeed, sentiment took an early knock when Mnuchin told senators that he would work to combat currency manipulation but would not give a clear answer on whether he views China as manipulating its yuan.
Still, the recent euphoria surrounding the Trumpflation trade now appears largely gone: "It's interesting that markets did not respond positively to a reaffirmation of lower taxes and looser regulation, reinforcing the impression that all the good news is discounted for now," wrote analysts at ANZ in a note. "As week one in office gets underway, there is a growing sense of scepticism, not helped by the tone of Friday's inaugural address and subsequent spat with the media."
Doubts about exactly how much fiscal stimulus might be forthcoming helped Treasuries rally. Yields on 10-year notes eased to 2.39 percent, having enjoyed the steepest single-day drop since Jan. 5 on Monday. “The driver of a shift higher will be optimism that President Trump’s policies deliver more growth,” Juckes said. “If he starts tweeting about fiscal policy instead of trade policy maybe the bond bears can come out of hibernation again.” As the chart below shows, the dollar continues to trade in lockstep with 10Y TSY yields.
As traders arrive at their desks in the US, the greenback has managed to advance against most major currencies, reversing declines sparked after Treasury Secretary nominee Steven Mnuchin said on Monday afternoon that a strong U.S. currency could have a negative short-term effect on the economy. In written answers to a Senate Finance Committee, Mnuchin also reportedly said an excessively strong dollar could be negative in the short term.
The pound extended losses after judges ruled Prime Minister Theresa May must ask Parliament to trigger the two-year countdown to the U.K.’s departure from the European Union, handing lawmakers a chance to soften the plan. Gold fell after touching the highest since November while oil climbed above $53 a barrel.
MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.4 percent, while Shangahi was flat and the Nikkei slipped 0.4 percent. European stocks halted a three-day decline, led by Italian shares amid reports that Assicurazioni Generali SpA may get investment from Intesa Sanpaolo SpA and Allianz SE.
S&P500 futures were lower by 1 point at publication.
The yield on the 10-year Treasury rose three basis points to 2.42 percent.
Market Snapshot
- S&P 500 futures down less than 0.1% to 2261
- Stoxx 600 up 0.2% to 362
- FTSE 100 up 0.2% to 7167
- DAX up 0.2% to 11567
- German 10Yr yield up 2bps to 0.38%
- Italian 10Yr yield up 1bp to 2%
- Spanish 10Yr yield up 3bps to 1.46%
- S&P GSCI Index up 0.7% to 401.5
- MSCI Asia Pacific down less than 0.1% to 140
- Nikkei 225 down 0.5% to 18788
- Hang Seng up 0.2% to 22950
- Shanghai Composite up 0.2% to 3143
- S&P/ASX 200 up 0.7% to 5650
- US 10-yr yield up 2bps to 2.42%
- Dollar Index up 0.12% to 100.28
- WTI Crude futures up 0.9% to $53.22
- Brent Futures up 0.9% to $55.75
- Gold spot down 0.4% to $1,213
- Silver spot down 0.6% to $17.13
Top News
- Mnuchin Says Excessively Strong Dollar May Hurt U.S. Economy
- Australia Pushes for TPP Without U.S. After Trump Exits Deal
- Trump Said to Tell Lawmakers ‘Illegals’ Cost Him Popular Vote
- Brexit vote
- Goldman Hails Global Rebound as Currie Sees Commodity Demand
- Emirates Stokes Ire of U.S. Airlines With Flights Through Greece
- OPEC Helps Cheap U.S. Oil Find Its Way to Group’s Top Buyers
- Nike and Ford Caught in Crossfire of Trump’s Trade Overhaul
Asia stocks traded mixed following a subdued lead from Wall St. where US indices finished mostly lower amid investor uncertainty during Trump's first day in office. ASX 200 (+0.7%) outperformed led by mining names following gains across the metals complex on the back of a weaker USD, while Nikkei 225 (-0.6%) was pressured by recent JPY strength in which USD/JPY declined below 113.00. Shanghai Comp. (+0.2%) and Hang Seng (+0.2%) traded with an indecisive tone following a weaker liquidity operation by the PBoC and as participants look ahead to Lunar New Year. 10yr JGBs were higher and tracked the gains seen in T-notes amid outperformance in the long-end, while participants also digested the latest results of the 40yr auction which resulted in a slightly higher b/c
Top Asian News
- Australia Pushes for TPP Without U.S. After Trump Exits Deal
- Trump Withdrawal From Asia Trade Deal Could Boost China Clout
- BOJ Is Said to Be Wary of Yield Target Hike Even If CPI Hits 1%
- China Small-Cap Stocks Extend January Slump on Liquidity Squeeze
- Toshiba to Report Writedown Amount on Feb. 14 With Earnings
- Top Goldman Forecaster Urges China to Tighten Monetary Policy
- $12,000 Trips Abroad Replace Chinese New Year Treks to Grandma’s
European equities trade mostly higher with some mild underperformance in the FTSE 100 with BT Group on track for its biggest ever intra-day drop after cutting profit forecast for 2017, 2018 amid Italian accounting scandal. EasyJet fell in the wake of its earnings update, in which they stated that the fall in GBP will likely reduce PBT by over GBP 100mIn. Intesa Sanpaolo falls in the wake of reports that the bank may be considering a share swap offer for Generali. Notable US pre-market earnings today include 3M, Alibaba, Du Pont, Johnson & Johnson, Kimberly Clark, Lockheed Martin, Travelers and Verizon. Gilts slipped after the aforementioned Article 50 Supreme Court ruling in favour of parliament. Eurozone debt sees a marginally pull back from yesterday's gains with bond yields creeping higher. Slight outperformance in peripheral bonds with focus for Italy on the constitutional court hearing regarding the new electoral reform for the lower, which may increase expectations of an early snap election.
Top European News
- Supreme Court Rules Brexit Trigger Needs Parliamentary Vote
- Euro Area Starts 2017 on Strong Note as Price Pressures Build
- Generali Jumps on Report That Intesa Plans to Mount Takeover Bid; Generali’s Move Defensive, Intesa Unlikely Buyer: Citi
- BT Plunges After Cutting Outlook, Tripling Writedown in Italy
- Philips Falls After Disclosing DoJ Talks on Defibrillators
- EasyJet Drops After Weak Pound, Fuel Costs Hurt 2017 Outlook
- Busch Seeks Rest of Vacuum Peer in Deal Valued at $1 Billion
- Etihad CEO Hogan to Go as Carrier Struggles With Investments
- EU Courting of London Banks May Derail 5-Year Tobin Tax Push
In FX, the UK supreme court ruling was pretty largely as expected, barring a few last minute jitters which saw the latter (devolution) qualification in question. Cable initially rallied towards the Asian highs just ahead of 1.2550, but held off these levels to dip back under 1.2500 figure. Bids seen ahead of 1.2400 to support, but the USD perspective takes over from here. EUR/GBP has seen choppy trade either side of 0.8600, but 0.8500-0.8700 looks safe for now. Elsewhere USD/JPY shows clear signs of basing out in the mid 112.00's having targeted this level twice now and finding yield-play dip buyers. We are unlikely to get a major push north just yet, but we sense any form of sobriety from president Trump could facilitate a modest push back to 114.00-115.00 for now. However, EUR/USD is pretty unrelenting alongside this, with the corrective moves perhaps not yet exhausted despite some softness in the German PMIs this morning.
In commodities, consolidation prices across the board is the dominant theme, with the wait-and-see approach on president Trump's agenda going forward puts much of the market on the sidelines for now. Gold is the first point of focus in direction relation to the greenback, but with equity markets fading a little, the risk element is also proving supportive for now. The yellow metal still trades on a USD 1200 handle, but has come off slightly in recent trade. $50.00 remains the comfort zone for Oil prices, with the backdrop of the OPEC agreement maintaining stability for the foreseeable future here. Copper outperforms Iron ore. West Texas Intermediate crude was unchanged, erasing earlier gains as Iraq said it’s close to implementing its share of pledged output curbs agreed with OPEC to trim bloated global inventories and stabilize the market. Oil slid 0.9 percent the previous session after U.S. drillers added the most rigs in more than three years.
In terms of the day ahead, we’ll also get the flash US manufacturing PMI for January while existing home sales and the Richmond Fed manufacturing survey will also be released.The Italian constitutional court is also due to rule on ex-PM Renzi’s electoral law for the Lower House known as Italicum. Central bank wise we’re due to also hear comments from the ECB’s Villeroy and Lautenschlaeger today. Meanwhile on the earnings front we’re due to get results from 21 S&P 500 companies today including Verizon and Johnson & Johnson at or prior to the open.
US Event Calendar
- 8:55am: Redbook weekly sales
- 9:45am: Markit US Manufacturing PMI, Jan. P, est. 54.5 (prior 54.3)
- 10am: Existing Home Sales, Dec., est. 5.51m (prior 5.61m)
- 10am: Richmond Fed Manufacturing Index, Jan., est. 7 (prior 8)
- 4:30pm: API weekly oil inventories
Government:
- President Trump meets with CEOs of Fiat Chrysler, GM, Ford
- 9:30am: Senate Energy and Natural Resources Cmte votes on nomination of Rep. Ryan Zinke for Interior secretary and Rick Perry for Energy secretary
- 10am: Senate Judiciary Cmte votes on nomination of Sen. Jeff Sessions for attorney general
- 10am: Senate Banking, Housing and Urban Affairs Cmte votes on nomination of Ben Carson for HUD secretary
- 10am: Senate Finance Cmte holds hearing on nomination of Rep. Tom Price for HHS secretary
- 10am: Senate Commerce, Science and Transportation Cmte to vote on nominations of Elaine Chao for Transportation secretary and Wilbur Ross for Commerce secretary
- 10:30am: House Ways and Means Cmte Chairman Kevin Brady details panel’s 2017 agenda
- 10:30am: Senate Budget Cmte holds hearing on nomination of Rep. Mick Mulvaney for OMB director
- 12pm: House considers H.R.7, which would amend Affordable Care Act to bar expenditure of federal money to purchase insurance that covers abortion services
DB's Jim Reid concludes the overnight wrap
Today sees the UK Supreme Court appeal ruling after the Government lost their case to trigger Article 50 without a parliamentary vote. The decision has lost some of its potential impact as the expected loss is likely to be followed by PM May attempting to pass a narrow bill (with no restrictions on the government’s negotiating position) through both houses. It’s expected that such a bill passes but there are risks that last week's speech where May admitted that leaving the single market was likely may have upset the moderates in her party and also that the Labour Party somehow manages to successfully unite behind a particular amendment that gets wider support but that the government won’t tolerate. This could lead to early elections if no bill can pass but is it really in the Labour Party's interest to have one now? Probably not so we would expect a bill to pass. The threat hanging over a rejection in the House of Lords is reform of the chamber that might remove their influence so PM May has got leverage over both the opposition and the House of Lords.
The potential curveball from today is whether the court extends the judgement to the devolved regional assemblies (eg Scottish and Welsh) thus creating a constitutional crisis. An equally big curveball would be the court referring the whole matter to the European Court of Justice which would be heavily ironic. So a lot to look for today albeit with a clear central scenario. We’re expecting the outcome of the case around 9.30am GMT.
From my side, thinking about Brexit and also Mr Trump at a very top level, it’s fascinating to contrast Theresa May’s and Donald Trump’s big speeches last week. Simplistically the UK PM accepted that the UK will leave the EU and the single market but wants Britain to be global and seems prepared to do free trade deals with everyone who would want and allow one. In contrast Mr Trump’s main theme was nationalistic and to put “America first”. The contrast was sharp. The interesting thing though is that most economists are pretty optimistic on US growth and concerned about UK growth going forward and yet if you take both leaders at face value then the UK will be far more open to the global economy than the US. However I suppose this masks the fact that a trade shock to the UK could be bigger than the US due to its larger reliance on trade. Also it’s all very well for the UK to look to be global but it’s another thing actually getting free trade agreements, especially with the EU. Nevertheless it is interesting that at face value the UK's official line is far more open to the rest of the world than the US at the moment. We'll see how this evolves over the coming months.
That leads us nicely into what was a very busy and eventful first 24 hours in the new Trump administration. The most significant news yesterday was the announcement that Trump had pulled the US out of the 12-nation Trans-Pacific Partnership, calling the move a “great thing for the American worker”. The withdrawal wasn’t a huge surprise given how vocal Trump had been about the TPP during his campaign but it still evoked a wide range of reactions from various business heads and political leaders. Indeed Republican senator John McCain said that the move was a “serious mistake” and that “it will create an opening for China to rewrite the economic rules of the road at the expense of American workers”. The President also appeared to target Japan as a country which makes it difficult to sell US products there. In any case the speed with which Trump moved may have been a bit of a surprise and it now means that the focus will turn over to a likely renegotiation of NAFTA with Canada and Mexico.
Trump didn’t just stop with the TPP though. Indeed there was plenty of focus on a meeting with various business leaders in which he said that he would impose a “very major border tax” on US companies that move overseas and export back into the US. The President also said that regulations have “gotten out of control” and that he wanted to reduce regulation by at least 75%. According to the WSJ among the CEO’s in attendance at the meeting were those from Ford Motor, Lockheed Martin, Under Armour, Dow Chemical and Whirlpool. The article also suggested that Trump had asked the various leaders to come back within 30 days with ideas aimed at boosting manufacturing in the US. Away from that Trump also ordered a federal hiring freeze excluding the military while Treasury Secretary Steven Mnuchin reignited the Dollar debate again by saying that “from time to time, an excessively strong dollar may have negative short-term implications on the economy”.
While that comment sent the Greenback down further in later trading in reality it had been a fairly rough day from the get go for the US Dollar with the market clearly jittery in the face of the early protectionist policies being put through by Trump. The Dollar index ended the day down -0.58% with the index closing at the lowest level since December 5th. It’s down another -0.14% this morning. Risk assets got the jitters too although in fairness a late bounce into the close limited the decline for the S&P 500 to only -0.27% compared to -0.64% at the day’s lows. That said it’s clear that equity markets continue to remain fairly directionless. If you exclude the 0.00% return on January 10th then the index has now bounced between a gain and a loss day-to-day for 12 consecutive sessions. Meanwhile it had been much the same in Europe with the Stoxx 600 ending -0.43% while it was rates which really benefited from the risk off tone with 10y Treasury yields rallying 7.0bps to close below 2.400% again and 10y Bund yields finishing down 6.0bps at 0.358%. Gold (+0.65%) also continued its remarkable start to the year which has seen it rally over +6% already this month.
This morning in Asia we’ve seen bourses get off to yet another mixed start. While the Nikkei (-0.46%) and Kospi (-0.11%) have followed the lead from Wall Street, the Hang Seng (+0.29%), Shanghai Comp (+0.18%) and ASX (+0.37%) have edged higher. Meanwhile most Asian currencies are stronger reflecting the latest leg lower for the Dollar while Oil has largely pared yesterday’s decline. Moving on. There wasn’t much in the way of economic data out yesterday with the sole release being the flash January consumer confidence reading for the Euro area which improved a touch to -4.9 from -5.1. More notable was the latest CSPP holdings data out of the ECB. The data revealed that total holdings now stand at €56.886bn which implies net purchases settled last week of €2.876bn or an average daily run rate of €575m in that week. Not only is that well above the daily run rate since the programme started (at €362m) but it is also the strongest CSPP week since the start of the programme. We would guess though that given December was a softish month for purchases as a result of the holiday season, we may be seeing a bit of catch up in last week’s numbers.
Staying in Europe, in yesterday’s EMR we highlighted the Socialist Primary result in France where Hamon came out on top with a little over 36% of the vote. In addition, our economists noted that the turnout was disappointing on Sunday with between 1.5 and 2 million voters. They go on to say that without a higher turnout next Sunday the Socialist candidate's campaign in the Presidential race could be called into question and senior centre-left politicians may reconsider their support. They also note that since the beginning of December, Hollande's execonomy minister Macron has surprised many with the momentum and support he has been gathering as an independent Presidential candidate. As far as the polls are concerned they note that Le Pen is just ahead of Fillon in the first round, with both slightly above 25%.
However, based on the polls, Fillon would defeat Le Pen in the second round of the Presidential election. However, Macron could benefit from wider support of left-wing supporters and beat Le Pen as well as Fillon in the second-round. That is, the potential re-alignment of political forces in the centre and centre-left should be monitored carefully in the next few weeks as it could turn the first-round of the election campaign from a two-person to a three-person race.
In terms of the day ahead, this morning in Europe the focus will be on the January flash PMI’s where we’ll get manufacturing, services and composite readings for the Euro area, Germany and France. The UK will also release December public sector net borrowing data. Over in the US this afternoon we’ll also get the flash manufacturing PMI for January while existing home sales and the Richmond Fed manufacturing survey will also be released. Away from the data the key event today is the aforementioned Supreme Court ruling in the UK concerning the ability of the UK government to trigger article 50 without parliamentary approval. The Italian constitutional court is also due to rule on ex-PM Renzi’s electoral law for the Lower House known as Italicum. Central bank wise we’re due to also hear comments from the ECB’s Villeroy and Lautenschlaeger today. Meanwhile on the earnings front we’re due to get results from 21 S&P 500 companies today including Verizon and Johnson & Johnson at or prior to the open.