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Trading  | April 2, 2018

Global markets started the new week and quarter with very muted trading in Asia as most key markets including Australia, New Zealand , Hong Kong, Canada, UK and most parts of Europe remain closed for Easter holidays. US stock futures are lower…

…and equities in Asia have given up the gains seen early in the session amid fears of escalating trade wars, while European markets remain offline.

As a reminder, overnight China announced that that starting Monday it would impose tariffs on U.S. products including frozen pork, wine and certain fruits and nuts in response to U.S. duties on imports of aluminum and steel.

MSCI’s world equity index ended up 1.2% last week, but it lost about 1.5% in the first quarter, pushed away from record highs as tensions over global trade escalated, turmoil in the White House deepened and market-leading technology firms wobbled on fears of regulation and other issues. Still, so far the S&P 500 has tested and held the 200d MA twice and has again begun to bounce / stabilize, as all eyes remain on this key technical support level.

“We expect strong and broad-based growth to continue globally,” wrote strategists at Barclays who warned that there were looming risks: “Trade protectionism, U.S. economic policy uncertainty, concerns about higher cross-market volatility and risk premium in core rates markets call for a more tactical approach to risk assets.”

With FX markets on a standstill (more below), the key focus of note today will be China’s new tariffs on 128 US products which officially start today, as well as  softer manufacturing PMI data from many countries in Asia.

The main themes remain the same: trade tensions, a dovish start to life under Powell at the Fed, soggy wages and potentially further changes to the Trump administration, Brexit headline risks, rate hike outlooks being pushed forward in the antipodeans, uncertainty around ECB, JPY’s volatility and political risks in EM and for Oil.

What Asian markets were open saw aggressive profit-taking into the close: Chinese stocks erased gains to end Monday at session lows, following their worst quarter in two years. Brokers bucked broad market declines after the central government announced a trial program for Chinese Depositary Receipts. The Shanghai Composite closed down 0.2%, wiping out an earlier advance of 0.7%.

Similarly in Japan, the Topix closes down 0.4%, erasing gain of as much as 0.4%, with volume 20% below 30-day average. Banks were the biggest drag on benchmark, outweighing gain in “other products” gauge. The Nikkei also slumped 0.3% after wiping out a 0.7% rise. Ovenright we got the latest Japan Tankan data: large manufacturers tankan came at 24 (expected 25), with the Japan Tankan manufacturing outlook disappointing at 20 (vs expected 22). The budget rate for USDJPY was lowered a bit from 110.67 to 109.66 during FY2018. CitiFX Strategist Osamu Takashima says, “I believe most of manufacturing companies have lowered it further toward 105 more recently.”

Asian manufacturing PMI for March have mainly disappointed today and while this is not having an impact on the immediate price action, it is something to keep an eye on. Of note, China’s March Caixin manufacturing PMI data came lower than expected at 51.0 versus exp. 51.7.

It has been a quiet start to the FX week as well, with the Bloomberg Dollar Spot Index falling 0.1%, extending the three-day slide to 0.4% although staying within a tight range, amid muted trading due to the Easter holiday. The pound led gains among G-10 currencies at the start of a week flooded with tier-one data releases out of the U.S, while the yen was marginally weaker after Tankan survey slips.

Of note: for Monday, the The People’s Bank of China raised the daily reference rate for the yuan to strongest since Aug. 11, 2015, aka the “day of the devaluation”, as the dollar weakened: PBOC raised the yuan reference rate by 0.19% to 6.2764 per dollar. The fixing was in line with expectations: average estimate in Bloomberg survey of 17 traders and analysts was 6.2762. Some of the other notable FX moves, from Bloomberg:

  • The Bloomberg Dollar Spot Index falls 0.1%; the measure declined for a fifth straight quarter, ended March 30, its worst run since March 2008
  • The pound is the biggest mover amid thin trading as some markets in Asia and Europe remained shut for Easter holidays
  • Sterling rises for the first time in five days versus the dollar, climbing 0.4% to $1.4064; rises 0.3% to 87.67 pence against the euro
  • The Japanese yen is little changed during London hours after weakening slightly in Asia; analysts project it will weaken against all its G-10 peers this quarter; USD/JPY is forecast to climb to 108 by the end of June, from the current level of 106.35, the median estimate in a Bloomberg survey shows
  • U.S. 10-year Treasury yield climbs 2bps to 2.76% after its third straight quarterly advance in the period through March 30

Crude oil prices extended gains, lifted by a drop in U.S. drilling activity as well as by expectations that the United States could re-introduce sanctions against Iran. U.S. drillers cut seven oil rigs in the week to March 29, bringing the total count down to 797. It was the first time in three weeks that the rig-count fell. U.S. crude futures rose 0.3 percent to $65.14 a barrel and Brent advanced 0.5 percent to $69.67 a barrel.

Bahrain said it has discovered its biggest oil field in more than 80 years. The “highly significant” oil and deep gas resource is thought to dwarf the Gulf kingdom’s current reserves, according to an official announcement on Sunday. It is located in the Khaleej al-Bahrain basin, located off the country’s west coast. “Initial analysis demonstrates the find is at substantial levels, capable of supporting the long-term extraction of tight oil [light crude] and deep gas,” said Bahrain’s minister of oil, Shaikh Mohamed bin Khalifa al-Khalifa.

This week, Fed Chairman Jay Powell will be giving his first speech since the FOMC March meeting. He will be giving a speech on the economic outlook on Friday, April 6 during a visit to Chicago. The speech is at 12:30 Chicago time, which is 11:30 EST and 16:30 BST. This will come just after the latest payrolls and AHE report.

U.S. data due this week include Monday’s Institute for Supply Management (ISM) manufacturing index, Wednesday’s ISM non-manufacturing index and the non-farm payrolls report on Friday.

Below is a list of the top Bloomberg Economics news to start the week:

  • Turkish President Recep Tayyip Erdogan was on a tear in a series of speeches Saturday, attacking supporters of high interest rates, Israel for its actions in Gaza and Kosovo’s leader for protecting Turkey’s political enemies
  • Electricite de France SA is among companies that have warned the U.K. government about the business threats of Brexit, according to a report in the Mail on Sunday that cites confidential documents
  • More trade spats. While China’s retaliatory tariffs on 128 kinds of U.S. imported goods take effect Monday, U.S. President Donald Trump renewed his threat to dump Nafta if Mexico didn’t stem the flows of drugs and people from Central America into the U.S.
  • Opening the wallets. Japanese businessmen say they’ll boost investment this year even as the stronger yen puts a dent in their confidence
  • China’s Caixin PMI eased in March, in contrast to a rebound in the official PMI released over the weekend, clouding the growth picture for the end of the first quarter
  • Music diplomacy. K-Pop girl band Red Velvet on Sunday headlined the first of two concerts packed with South Korean music groups to an audience that included North Korean leader Kim Jong Un and his wife

Market Snapshot

  • S&P 500 futures down 0.3% to 2,635.25
  • STOXX Europe 600 up 0.4% to 370.87
  • MSCI Asia Pacific unchanged at 172.76
  • MSCI Asia Pacific ex Japan up 0.3% to 565.48
  • Nikkei down 0.3% to 21,388.58
  • Topix down 0.4% to 1,708.78
  • Hang Seng Index up 0.2% to 30,093.38
  • Shanghai Composite down 0.2% to 3,163.18
  • Sensex up 0.7% to 33,195.21
  • Australia S&P/ASX 200 down 0.5% to 5,759.37
  • Kospi down 0.07% to 2,444.16
  • Brent Futures up 1% to $70.02/bbl
  • Gold spot up 0.5% to $1,331.70
  • U.S. Dollar Index down 0.08% to 89.90
  • German 10Y yield unchanged at 0.497%
  • Euro up 0.05% to $1.2330
  • Brent Futures up 0.8% to $69.91/bbl
  • Italian 10Y yield fell 5.4 bps to 1.532%
  • Spanish 10Y yield unchanged at 1.164%

Top Overnight News

  • China urged trade talks with the U.S. to prevent greater damage to relations while saying that previously announced retaliatory measures on American imports took effect Monday
  • Trump administration to unveil the list of Chinese imports targeted for tariffs this week, according to unnamed officials: Reuters
  • Investors, strategists and traders remain bullish on emerging assets for the rest of 2018, a Bloomberg survey shows. Top picks are Asian stocks, followed by Latin American bonds, according to the survey of 15 participants conducted March 22-28; In currencies, Asia came top again, ahead of Europe, the Middle East and Africa and Latin America
  • With pressure escalating after one of the worst weeks in its almost 15-year-history, Tesla Inc. raced to manufacture and deliver its mission-critical Model 3 sedan to burnish the numbers it’s about to report to rattled investors
  • More American consumers than at any time in 27 years are convinced that it’s better to make big purchases now because retailer discounts and deals won’t be around much longer, according to the University of Michigan’s latest survey of consumer sentiment
  • The U.S. Treasury Department plans to meet with market makers and other electronic trading firms to discuss ways to bring more transparency to the $14.5 trillion market for government debt, according to a person familiar with the matter
  • President Donald Trump threatened to pull out of the North American Free Trade Agreement if Mexico doesn’t stop people and drugs from flowing into the U.S. from Central America
  • Japan 1Q Tankan index 24 vs 25 est, outlook 20 vs 22 est

Asia equity markets were mostly higher but with gains contained amid a holiday-quietened tone (Australia, New Zealand, Hong Kong, EU and UK are all closed) and as participants digested several key data releases including mostly better than expected Chinese PMI figures. Nikkei 225 (+0.7%) was positive as the index shrugged off a disappointing BoJ Tankan where large manufacturers’ sentiment deteriorated for the first time in 2 years and large industry numbers mostly missed forecasts, as the data also showed a strong all industry capex component and increased confidence across smaller businesses. Elsewhere, KOSPI (+0.2%) was also higher amid the improved geopolitical climate in the Korean peninsula, while Shanghai Comp. (+0.3%) was underpinned after better than expected Chinese Official Manufacturing and Non-Manufacturing PMI data over the weekend. Conversely, the Caixin Manufacturing PMI release was less inspiring and fell short of estimates while China also confirmed tariffs on US products in retaliation to US protectionist measures on steel and aluminium, which in turn capped advances in the mainland. Finally, 10yr JGBs were uneventful with price action range-bound amid gains in riskier assets as well as an unchanged BoJ Rinban announcement

Top Asian News

  • China Urges More Trade Talks as Tariffs on U.S. Goods Begin
  • Japan Stocks to Watch: Oriental Land, Retail, Shimamura, Toyota
  • Gold Climbs as Investors Weigh Rise in Trade Tensions
  • Indonesia May Need to Follow Fed Hikes, Ex-Finance Chief Says
  • Indian Road Builders Jump on Outlook After Year of Record Orders

Markets across Europe are closed for Easter Monday.

Top European News

  • Russian Stocks Are Cheap, And With Good Reason: Markets Live
  • Portugal’s CP Has Some Train Services Halted Due to Strike: TSF
  • UAE Weighs Investment in Baikonur Cosmodrome Upgrade: Interfax
  • Ukraine’s Privatbank Says It Sues PwC in Cyprus Court
  • Orthodox Policies May Boost Russian Bonds
  • Prosafe Says Standstill Pact With Cosco Extended to May 20
  • Russia Fintech Will Make Winners, Just Not for Stocks

In FX, the dollar was steady at 106.350 yen, while the euro was almost unchanged at $1.2317. The greenback had gained about 0.6 percent against a basket of six major currencies last week helped by a combination of factors including perceived progress on North Korea issues. The dollar index still lost more than 2 percent last quarter, marking its fifth straight quarter of declines. “A list of important indicators will be released this week, which could help steady market sentiment even though U.S.-China trade concerns and other geopolitical risks continue to linger in the background,” said Koji Fukaya, president at FPG Securities in Tokyo.

In commodities, crude oil prices extended gains, lifted by a drop in U.S. drilling activity as well as by expectations that the United States could re-introduce sanctions against Iran. U.S. drillers cut seven oil rigs in the week to March 29, bringing the total count down to 797. It was the first time in three weeks that the rig-count fell. U.S. crude futures rose 0.3 percent to $65.14 a barrel and Brent advanced 0.5 percent to $69.67 a barrel.

“Investors took their cue from falling U.S drilling counts,” Wang Xiao, head of crude oil research with Guotai Junan Futures said. “But increasing trade friction between China and U.S. is likely to rock global markets and tarnish bullish sentiment in crude oil markets.”

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, est. 55.7, prior 55.7
  • 10am: Construction Spending MoM, est. 0.45%, prior 0.0%
  • 10am: ISM Manufacturing, est. 60, prior 60.8;

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