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Trading  | March 22, 2018

Yesterday, we showed that according to Wall Street, the biggest tail risk facing investors right now is a “trade war”…

… and that should trade tensions escalate, lower stock prices would be the immediate result (and that managers would sell stocks in advance).

Well so far this morning, they are being proven right (or simply selling), because a jittery overnight session for stock futures which saw the S&P close at session lows after yesterday’s Fed rate hike (due to the “snowstorm” according to a dead serious Marko Kolanovic), turned increasingly volatile just before dawn in New York, as investors prepared for today’s China trade war announcement from President Trump that could levy tariffs on more than 100 types of Chinese goods, and is due just after noon ET.

As a result, S&P futures slid for much of the session, dropping below 2,700 and hugging the key support level as we hit save (we wonder what weather phenomenon JPM will blame for today’s swoon).

“Investors are increasingly nervous about the escalation in the narrative towards a trade war between the U.S. and China, it makes markets quite volatile,” Stephane Ekolo, equity strategist at TFS Derivatives, told Bloomberg.

It wasn’t just US futures though, and it wasn’t just the imminent US trade war with China, as several other factors converged, leading to a sea of red in global stock markets, resulting from continued pressure on technology stocks led by Facebook, as well as a sharp deterioration in European PMI data, oh and of course asset valuations which remain at all time high; Nasdaq futures slide to below Monday’s low which was start of tech sector focus, while e-mini S&P futures testing 100-DMA.

The Fed did not help to boost sentiment, tightening financial conditions by raising its key rate another 25 basis points to 1.75 percent on Wednesday and flagged at least two more increases were likely this year. But it stopped short of pointing to the three that some economists had been predicting. China also nudged up its borrowing costs overnight, as Beijing braced for new tariffs from U.S. President Donald Trump on Chinese imports worth as much as $60 billion.

Not all Fed bulls were discouraged, though. “Over the balance of the year we do think they will move to four hikes,” said JP Morgan’s Seamus Mac Gorain, highlighting the impact of recent fiscal stimulus. “Trade tariffs are a risk, of course, but more open economies,” such as Mexico or the euro zone “could be more at risk than the U.S.”

European equities found some support through cash open before fading further, led by underperformance in the tech and bank sectors. The Stoxx Europe 600 Index dropped 0.9%, with 18 of 19 industry groups in the red. Technology, chemicals and lender shares are the worst sector decliners. Reckitt Benckiser rose 6.5% after the company ended discussions about buying a portion of Pfizer’s consumer health business.

Thursday’s European retreat worsened after latest PMI data showed the continent’s private-sector economy cooled in March as manufacturing growth contracted sharply. The Markit composite purchasing managers’ index dropped to 55.3 from 57.1, below the median estimate of 56.7, and a 14 month low.

  • EU Markit Manufacturing Flash PMI (Mar) 56.6 vs. Exp. 58.1 (Prev. 58.6)
  • EU Markit Comp Flash PMI (Mar) 55.3 vs. Exp. 56.7 (Prev. 57.1)
  • EU Markit Services Flash PMI (Mar) 55.0 vs. Exp. 56.0 (Prev. 56.2)

Meanwhile, economic confidence in Europe’s exporting powerhouse – Germany – continues to shrink as Europe is likely next on Trump’s deficit-shrinking, trade war radar. In today’s IFO Business Confidence reading, both current conditions and expectations continued to shrink.

“The threat of protectionism is dampening the mood in the German economy,” said Clemens Fuest, the chief of the Munich-based Ifo institute, which published the business sentiment data.

The MSCI Asia Pacific index rose for first time in five days although Chinese stocks declined sharply at the close after the PBOC matched the Fed’s rate hike, and raised interest rates on reverse repo operations and funding facilities by five basis points. The Shanghai Composite fell 0.5% while the ChiNext index dropped 0.7%. In Hong Kong, the Hang Seng Index fell 1.1% while the Hang Seng China Enterprises Index closes down 0.8%, wiping out 1.6% rise in morning. Tencent weighed on the Hang Seng Index, falling 5% – most since Feb. 6 – after posting results Wednesday evening; analysts lowered profit forecasts based on the company’s spending plans.

Meanwhile, Zuckerberg’s CNN appearance last night did little to calm the growing fears, and Facebook was down another -2.0% in pre-market.

In other overnight news, US House and Senate leaders agreed to USD 1.3TN spending bill which they hope to pass prior to the government shutdown deadline at midnight this Friday, although there were also reports that US House Freedom Caucus said it is against the omnibus spending measure. In Europe, the EU expects US President Trump to announce tariff waiver today according to sources.

The ECB released its economic bulletin, which showed that Indicators suggest strong growth momentum with possible better expansion in the near term, adding that developments support a gradual upward trend in wage growth. Also overnight, Riksbank’s Floden said sticking to the current interest rate path is the fastest way to get interest rates up adding that the latest inflation outcomes are clearly lower than expectations.

In FX, the British pound was the notable mover, surging to its highest in more than a month after British wage data published on Wednesday bolstered expectations the Bank of England would signal a May rate increase after its monetary policy meeting due in just over an hour.

Meanwhile, the dollar initially weakened further in follow-through from FOMC digestion and unchanged 2018 median dots; however the risk-off environment leads to slow grind higher against G-10, except for USD/JPY, which goes through Asian low. As Bloomberg adds, the dollar erased its decline, holding steady as President Trump readies to announce about $50 billion of tariffs against China over intellectual-property violations.  The pound maintains its bullish momentum, while the euro erases gains as PMI data out of Germany and France missed forecasts. Some highlights of key FX pairs below, from BBG:

  • The Bloomberg Dollar Spot Index was little changed, close to a one-month low, and most G-10 crosses traded in narrow ranges
  • The euro edged up toward 1.24 against the dollar before erasing gains; the pound rose amid speculation that the BOE will pave the way for an interest-rate increase in May while gilts rallied on profit taking
  • USD/JPY slipped amid Japan’s political uncertainty and concern about U.S. protectionism; the yen was also boosted by seasonal demand by Japanese operators ahead of the fiscal year-end book closing and a softer dollar after the Fed’s rate decision was considered less hawkish than what some traders expected
  • The Aussie reversed earlier gains and a test of the 100-DMA at 0.7778 after February jobs data missed estimates and with traders are also waiting on expected U.S. announcement levying $50 billion of tariffs against China

Meanwhile, Treasuries extended their gains from Wednesday, with gilts pushing higher ahead of the Bank of England decision, as global bond yields fell broadly. Borrowing costs on 30-year German debt hit their lowest level of the year. Two-year U.S. yields slipped to 2.304% from 9 1/2-year high of 2.366%. The 10-year yield fell below 2.85%, its biggest move in three weeks.

In commodities, crude drifted sideways near $65.30 while iron ore traded in China was 1.5% stronger. WTI (-0.8%) and Brent Crude (-0.6%) took a breather from yesterday’s post-DOE rally with both benchmarks hovering just below their highest level since early February amid rising concerns of US output threatening to disrupt the tightening market; WTI has recently given back the USD 65/bbl handle. Moving onto metals, despite a softer USD and general risk-aversion thus far, gold prices are seen modestly lower after spot gold hit highs of USD 1334.8/oz overnight. Elsewhere in base metals, copper climbed off its lowest level in three months, Dalian iron ore rose 0.9% after recouping recent losses, steel futures were seen lower overnight as demand concerns continue to hamper sentiment.

Economic data on Thursday include initial jobless claims, Markit PMI data. Nike, Micron and Accenture are among companies due to release results

Market Snapshot

  • S&P 500 futures down 0.8% to 2,696.25
  • STOXX Europe 600 down 0.4% to 373.59
  • MSCI Asia Pacific up 0.3% to 177.01
  • MSCI Asia Pacific ex Japan down 0.3% to 581.48
  • Nikkei up 1% to 21,591.99
  • Topix up 0.7% to 1,727.39
  • Hang Seng Index down 1.1% to 31,071.05
  • Shanghai Composite down 0.5% to 3,263.48
  • Sensex down 0.07% to 33,114.27
  • Australia S&P/ASX 200 down 0.2% to 5,937.15
  • Kospi up 0.4% to 2,496.02
  • German 10Y yield fell 2.4 bps to 0.568%
  • Euro up 0.2% to $1.2360
  • Brent Futures down 0.5% to $69.16/bbl
  • Italian 10Y yield rose 3.5 bps to 1.676%
  • Spanish 10Y yield fell 3.4 bps to 1.301%
  • Gold spot down 0.1% to $1,330.94
  • U.S. Dollar Index down 0.3% to 89.54

Top Overnight Headlines

  • U.S. will announce China tariffs today; to target more than 100 different types of Chinese goods totalling $50b, according to people familiar
  • EU expects that it will be exempted from U.S. import tariffs on steel and aluminum, according to people familiar
  • European Mar. P Composite PMIs: France 56.2 vs 57.0 est; Germany 55.4 vs 57.0 est; 55.3 vs 56.8 est.
  • Riksbank Deputy Governor Martin Floden says inflation data below Riksbank’s forecast, weaker krona than expected lately are “two developments that speak in different directions in terms of what should happen with monetary policy”
  • German Mar. IFO Business Climate: 114.7 vs 114.6 est; Expectations 104.4 est; Current Assessment 125.9 vs 125.6 est.
  • U.K. Feb. Retail Sales y/y 1.5% vs 1.4% est;ONS notes underlying three-month picture is one of falling sales, mainly due to strong declines across all sectors in December
  • PBOC hikes reverse repo rate by 5bps to 2.55% in reaction to Fed

Asian stocks traded mixed as the region digested the fallout from the FOMC. ASX 200 (-0.2%) and Nikkei 225 (+1.0%) were varied with commodity-related stocks underpinned by gains in crude and the metals complex due to a softer USD, while the KOSPI (+0.4%) also gained amid US tariff exemption hopes after US Trade Representative Lighthizer named South Korea as one of the countries likely to be exempted. Conversely, Hang Seng (-1.1%) and Shanghai Comp. (-0.5%) underperformed with the US set to announce tariffs on China later today and after both the HKMA and PBoC raised rates in response to the Fed. Finally, 10yr JGBs were higher by around 10ticks as they tracked the gains seen in T-notes which found relief from the unchanged 2018 Fed rate hike projections, while the BoJ were also in the market for JPY 710bln of JGBs in the belly to super-long end with its Rinban amounts kept unchanged.

The PBoC stated that the increase in reverse repo rates meets market expectations and is a normal response to the Fed rate hike, while the Hong Kong Monetary Authority also raised rates by 25bps to 2.00% in lockstep with the Fed.

Top Asian News

  • China’s Central Bank Raises Borrowing Costs After Fed Hikes
  • Philippines Keeps Key Rate at 3% as Seen by Most Economists
  • Tencent Among Top Decliners After Margins Warning: Asia Movers
  • UBS Sees India’s External Finances at Risk Despite High Reserves
  • Tesla to Supply Batteries for Solar Project in Australian State

European equities kicked the session off on the backfoot (Eurostoxx 50 -1.1%) with losses emanating largely from the fallout of yesterday’s FOMC release and proposed US tariff measures today on China which are set to be unveiled at 1630GMT. Equities then staged a mild recovery before once again taking another turn lower in what has been a choppy session of trade thus far since  the open. In terms of sector specifics, all ten sectors trade lower with some modest outperformance in energy names in-fitting with price action in the complex as WTI held onto the USD 65/bbl level (has since lost this level). Individual movers include Reckitt Benckiser (+5.5%) who have confirmed they have dropped out of the running for Pfzier’s consumer health business which has subsequently paved the way open for GSK (-1.0%) to make an approach.

Top European News

  • Rio Tinto to Sell Winchester South to Whitehaven for $200m
  • Ted Baker Sees Challenging Market Conditions After Bad Weather
  • StanChart Is Said to Start Sale Process for Private Equity Unit
  • Volatile Volatility Leaves Europe’s Investment Banks Whipsawed
  • Deutsche Bank Raised ‘A Lot of Money,’ Needs to Deploy It: CEO

In FX: USD: Initially a choppy reaction from the FOMC’s rate hike decision yesterday, however the greenback ultimately softened after members maintained 2018 rate path view of 3 rate hikes (1 member away from median projection at 4). Additionally, the central bank steepened the path of rate hikes for 2019-2020, however the council did soften language around activity. DXY trading above mid-89 with losses stemmed after finding support at the March lows of 89.40. Trade wars remain at the forefront of investors’ minds amid reports that Trump will announce China tariffs today (1230EDT) with the value said to be around USD 50bln (lower than the previously touted USD 60bln). Retaliation from China is likely, as evidenced by yesterday’s WSJ report. Subsequently, the increased uncertainty could take USD/JPY back down to the 2018 low (105.23) prompting a test of the 105 handle. Antipodeans (AUD,NZD): RBNZ kept interest rates unchanged at 1.75%, as expected. Market pricing for a rate hike is not seen until mid-19. As such, NZD saw a muted reaction upon release, the central bank struck a rather balanced tone after remaining upbeat over global growth, but highlighted downside risks to inflation. NZD currently trading in a tight 40pip with price action likely to be driven by risk. A firm break above 0.7260 could see the spot price back at 0.7350, however, trade war uncertainty may see gains tempered. Elsewhere, AUD has been pressured by the jobs report overnight with the headline employment change falling short of expectations (17.5 vs. Exp. 20k), while the unemployment rate saw an unexpected uptick.

In commodities, WTI (-0.8%) and Brent Crude (-0.6%) are taking a breather from yesterday’s post-DOE rally with both benchmarks hovering just below their highest level since early February amid rising concerns of US output threatening to disrupt the tightening market; WTI has recently given back the USD 65/bbl handle. Moving onto metals, despite a softer USD and general risk-aversion thus far, gold prices are seen modestly lower after spot gold hit highs of USD 1334.8/oz overnight. Elsewhere in base metals, copper climbed off its lowest level in three months, Dalian iron ore rose 0.9% after recouping recent losses, steel futures were seen lower overnight as demand concerns continue to hamper sentiment.

Looking at the day ahead, EU leaders will today meet in Brussels to sign off on Brexit guidelines (continuing through to Friday). Meanwhile it’s a busy day for data, highlighted by the release of those flash March PMIs in Europe and the US. The BoE monetary policy meeting outcome is the other big highlight. Other notable data releases include March confidence indicators in France, the January current account balance reading for the Euro area, Germany’s IFO survey
for March, UK retail sales for February and weekly initial jobless claims, January FHFA house price index, February leading index and March Kansas City Fed PMI in the US. Late in the evening we’ll also get the February CPI report in Japan.  ECB speak will also be a focus with Lautenschlaeger and Nouy due to speak at separate events. German Chancellor  Merkel is also due to deliver a speech in parliament likely outlining her policy goals.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 225,000, prior 226,000; Continuing Claims, est. 1.87m, prior 1.88m
  • 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.3%
  • 9:45am: Bloomberg Economic Expectations, prior 54.5; Consumer Comfort, prior 56.2
  • 9:45am: Markit US Manufacturing PMI, est. 55.5, prior 55.3
    • Markit US Services PMI, est. 56, prior 55.9
    • Markit US Composite PMI, prior 55.8
  • 10am: Leading Index, est. 0.5%, prior 1.0%
  • 11am: Kansas City Fed Manf. Activity, est. 17, prior 17

DB’s Jim Reid concludes the overnight wrap

Unsurprisingly, the big focus over the past 24 hours has been the Fed and to be honest, we’ve been left scratching our heads a little as how best to sum up the meeting. By the end of day the market was seemingly left feeling a little 
bit underwhelmed given that Treasury yields closed well off their highs and the Greenback tumbled by the most in nearly two months. However, it feels like that was perhaps just reflective of what were elevated hawkish expectations going into it as the message for us was one that while economic data for now is not necessarily strong enough to justify a faster hiking cycle this year, the Fed does appear to be a lot more upbeat further down the line.

 Indeed, that was reflected initially in the statement with the addition of the line “the economic outlook has strengthened in recent months”. The hotly anticipated dot plot projections revealed that the median for 2018 was left at a total of three rate hikes, however only just as it would have only taken one more voter below the median to have moved higher in order to shift the median to four. Further out, the median for 2019 is now at 2.9% which implies three rate hikes, an increase of one from December, while the 2020 median is now at 3.4% which is up from 3.1% in December.

Meanwhile the stronger outlook was reflected in the more optimistic median projections for growth, unemployment and inflation. Indeed, GDP has been revised up by two-tenths this year to 2.7% and by three-tenths in 2019 to 2.4% while unemployment was revised down one-tenth this year to 3.8% and down three-tenths next year to 3.6%. As for inflation, the median committee member still expects core inflation this year of 1.9% which was perhaps a small surprise given the data so far, however median readings for 2019 and 2020 were both lifted to 2.1% and a tenth more than previously expected. That’s interesting as it also implies that the Fed is willing to accept a slight overshoot which is something that Evans has emphasized with regards to the symmetry of the 2% target.

As for new Fed Chair Jerome Powell, well in golfing terms it felt like he struck it straight down the middle of the fairway. That’s to say that he largely gave away an impression of one of continuity under his new role as Chair, and an emphasis still on the Fed sticking with its gradual approach to tightening. In other words, he didn’t appear like he was willing to deviate off the well beaten path and into the rough. Indeed, his tone was fairly balanced while he sought to down play the importance of the median dot plots as well as adding “there is no sense in the data that we’re on the cusp of an acceleration in inflation”.

Overall, DB’s Peter Hooper noted that the FOMC statement and Powell’s inaugural press conference were close to his expectations, marking a shift in a hawkish direction relative to December, although perhaps slightly less so than he had anticipated given recent Fed rhetoric. More specifically, he thought Powell’s debut performance was strong and highlighted that the Committee is likely going to need to see evidence that wage and price inflation are picking up meaningfully before becoming concerned about significant overheating associated with the tightening labour market. For more details, refer to Peter’s note.

As for markets then, as we noted at the top US Treasuries ended the day lower in yield across the curve with the 2y, 10y and 30y down -4.0bps, -1.3bps and -1.1bps respectively. However, they were down anywhere from -3.6bps to  -5.1bps versus the intraday yield highs as the initial reaction was a spike higher, before that move was quickly reversed. Meanwhile the USD index closed -0.65% while equities also weakened and tumbled from their highs. The S&P 500 ended -0.18% after being up as much as +0.82% while there was similar price action for the Dow (-0.18%) and Nasdaq (-0.26%). In fairness early gains were helped by a rally for Oil (WTI +2.57%) while the ongoing alleged issues with users privacy at Facebook still seems unresolved so equity markets were certainly kept busy.

This morning, markets in Asia are a bit mixed with the Nikkei (+0.71%) and Kospi (+0.53%) up slightly while the Hang Seng (-0.49%), ASX 200 (-0.22%) and Shanghai Comp (-0.84%) are all down as we type. Treasuries have continued to firm with yields another basis point or so lower. News (Reuters) has emerged overnight that the US is a step closer to avoiding another government shutdown with the release of a $1.3tn spending draft bill to fund the government through September with more funds for border security, infrastructure and the military. The lower House may vote on the bill today, then followed by the Senate. Elsewhere, China’s PBOC has raised the rates it charges on reverse repo agreements by 5bps following the Fed’s rate hike, with the PBOC noting that the move is “in line with market expectations and a normal reaction the Fed’s rate hike”.

So, one central bank down and one to go with the Bank of England decision due out at 12pm GMT today. The consensus is for no change in policy while market pricing also assigns a low 16% probability of a hike. The bigger question is whether or not we see a more hawkish BoE centre in light of yesterday’s stronger than expected wages numbers. Indeed, pricing for a May hike is over 80% and our UK economists yesterday changed their view to a rate hike (from a hold) for two months’ time. Yesterday, weekly earnings were reported as rising one-tenth to +2.6% yoy in the three months to January, while the broader measure of earnings jumped to +2.8% yoy, beating consensus by two-tenths. In addition, yesterday we had the announcement that the NHS is lifting the pay cap on staff with a 6.5% salary increase agreed over three years.

Also on the cards today are the flash March PMIs from across the globe. This morning we’ve already had Japan’s manufacturing PMI which came in at 53.2 versus 54.1 last month. For Europe, the consensus expects a 0.3pt decline in the composite to 56.8 driven by a 0.5pt decline for the manufacturing print (to 58.1) and 0.2pt decline for the services reading to 56.0. Both Germany (-0.8pts to 59.8) and France (-0.4pts to 55.5) are expected to see declines in their manufacturing prints too. The US in the afternoon is expected to buck the trend with a 0.2pt increase expected at the manufacturing level.

Back to yesterday, unsurprisingly it was hard to keep the tariff debate fully out of the headlines. The WSJ reported that China is planning countermeasures against Trump’s tariffs with US agriculture exports on the list. Reuters headlines in the afternoon also suggested that the White House will today make its announcement over China intellectual-property violations with suggestions it will be around $50bn of tariffs, however more significant is that there may also be investment restrictions based on Lighthizer’s comments. So that will no doubt be a focus for markets today too.

With regards to the remaining data yesterday, in the US, the Q4 current account deficit was slightly wider than expected at -$128.2bln (vs. -$125bln expected) or 2.6% of GDP. February existing home sales rebounded +3.0% mom to 5.54m (vs. 5.40m expected) while the median sales price rose +5.9% yoy. The inventory of available properties fell -8.1% yoy to 1.59m, the lowest for February since 1999. In the UK, the January unemployment rate edged back down to its 43-year low of 4.3% (vs. 4.4% expected). Also in the UK, February public sector net borrowing (ex-banking groups) was £1.3bln (vs. £1.8bln expected), while the March CBI trends total orders index fell 6pts mom to +4 (vs. +8 expected) – the lowest since October.

Looking at the day ahead, EU leaders will today meet in Brussels to sign off on Brexit guidelines (continuing through to Friday). Meanwhile it’s a busy day for data, highlighted by the release of those flash March PMIs in Europe and the US. The BoE monetary policy meeting outcome is the other big highlight. Other notable data releases include March confidence indicators in France, the January current account balance reading for the Euro area, Germany’s IFO survey
for March, UK retail sales for February and weekly initial jobless claims, January FHFA house price index, February leading index and March Kansas City Fed PMI in the US. Late in the evening we’ll also get the February CPI report in Japan.  ECB speak will also be a focus with Lautenschlaeger and Nouy due to speak at separate events. German Chancellor  Merkel is also due to deliver a speech in parliament likely outlining her policy goals.


A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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