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Trading  | March 21, 2018

Global shares traded in the red, and the dollar slumped before a hike in US interest rates, while awaiting key guidance on how many more to expect for this year. S&P futures were little changed, while markets in Europe and Asia dropped; Japan’s Nikkei was closed for holiday.

MSCI’s all-country equity index flatlined and is now 6 percent off record highs hit at the end of January, pressured by fears of a global trade war ignited by President Trump and the possibility that the Fed could end up raising interest rates more than three times this year. Markets are also on edge because of the selloff in U.S. tech shares, which has wiped almost $50 billion off the value of Facebook this week amid uproar over the alleged misuse of users’ data. The Facebook losses have filtered through other tech shares in the United States and overseas, with shares in Twitter falling more than 10%.

The losses are likely to have hit investors hard, with Bank of America Merrill Lynch’s monthly survey showing global funds heavily positioned in tech shares just before the rout began.

“There are tensions between potential bad news and good news in the market. The bad news is the problem facing the tech sector, which has been the leading light of U.S. and Asian equity markets for over a year,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. “The good news is we must recall why the Fed is tightening policy. It’s because of the underlying strength of the U.S. and global economy.”

Europe slumped in early trading after Asian shares dropped into the close and copper sagged again. Adding to Europe’s uncertainty was the report in La Repubblica that Italian ex-premier Silvio Berlusconi is open to possible center-right coalition pact with anti-establishment Five Star Movement which is spooking markets. The Stoxx 600 fell 0.2%, led lower by travel and leisure sector with airlines hurt by a surge in oil prices: the SXTP was down 0.7%, with Air France-KLM down 2%, easyJet down 1.7%, Lufthansa down 1.2%.

Earlier, Asia stocks followed the US example where the major indices rebounded from the recent tech sell-off. ASX 200 (+0.2%) and KOSPI (+0.1%) were marginally positive as Australia’s energy sector tracked the outperformance seen in its US counterparts, although gains were contained approaching today’s FOMC and with Japan closed for Vernal Equinox national holiday. Elsewhere, Hang Seng (+1.1%) and Shanghai Comp. (+0.4%) led the region as focus turned to earnings with the top performers in Hong Kong spurred by recent financial results. However, as China closed local market slumped, with the China’s ChiNext Index of small caps and tech stocks sliding 1.9% Wednesday afternoon, wiping out earlier 0.7% gain. PC makers, pharmaceutcial stocks led the losses. Insurers surged in morning session but tumbled before close following a bearish S&P report on a crackdown.

As previewed overnight, today’s highlight will be the FOMC decision, where there market implied odds of a rate hike are above 90%. Analysts are split over whether the Fed will raise policy tightening expectations until more price pressures are clearly evident, especially given outside risks to the economy such as a possible global trade war.

“A prudent institution would probably give more weight to the facts, at least for the moment,” Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro, wrote in a note predicting the Fed would stick with three projected rate increases for this year.

With futures markets anticipating another increase in June, Powell’s Fed could leave its rate outlook unchanged until then to see how the economy absorbs the $1.8 trillion in stimulus expected from the Trump administration tax cuts and planned spending.

“We might have significant changes in communication compared with what we’ve seen under (previous chair Janet) Yellen,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “The economic situation post tax cuts also justifies a significant shift upwards in the dot plot,” he added, referring to fears the Fed’s de facto policy forecast chart could signal four rate rises rather than three, due to the economic boost delivered by Trump’s tax reforms.

The dollar extends its slide and now stands lower on a weekly basis as traders seem less confident that the Fed will signal four rate hikes this year and may not sound as hawkish as previously thought. As Bloomberg notes, leveraged names were seen trimming their long-dollar as Powell could adopt a more balanced stance. The greenback fell against all of its peers apart from the kiwi after Tuesday’s rally when U.S. benchmark yields gained for a fourth session.

The Bloomberg Dollar Spot Index slipped 0.3%, the most in two weeks; the Fed is expected to raise rates by 25bps on Wednesday, according to median estimate in a Bloomberg survey.

Traders will also focus on whether policy makers change their wording about the near-term economic risks are “roughly” balanced, as well as on any commentary about protectionism and the long-term federal funds rate. Strategists see it as a close call whether U.S. policy makers will add a fourth dot to the rate-hike path at the Federal Open Market Committee review.

Volumes in the currency market were low in anticipation of Powell’s first post-decision press conference and as Japan was closed for a holiday.  The pound was boosted by wage data, while the euro approached the $1.23 handle once more.

A summary of notable overnight FX moves from BBG:

  • EUR/USD rises toward the 55-DMA at 1.2293 amid broad dollar weakness, with volumes staying low after London open while Tokyo holiday kept Asia volumes contained
  • GBP/USD climbs as much as 0.6% to 1.4075 as data showed U.K. wages rising at their fastest pace since the end of 2016; EUR/GBP reverses its advance and drops 0.2% to 0.8725, the lowest since Feb. 1
  • USD/JPY edges lower after testing the 21-DMA at 106.50 and with Japanese markets closed; large option strikes due to expire in New York and before the Fed decision include $3.22b at 106 and $1.25b at 107
  • The Mexican peso and the Canadian dollar advance against the greenback following the Globe and Mail report that Trump administration dropped a demand that all vehicles made in Canada and Mexico for export to the U.S. contain at least 50% U.S. content

In other global news, Treasury Secretary Mnuchin said he has had very direct talks with China and that dialogue will continue, while he added that the general G20 view is to see China open its markets. China Vice Commerce Minister said the nation will actively take steps to safeguard interests of its domestic industries following US trade investigations.

South Korean President Moon suggested that a 3-way summit between US, South Korea and North Korea is possible, while there were separate reports that South Korea offered to hold a high-level meeting with North Korea on March 29th.

In the UK, Trade Secretary Fox said that a FTA is not the UK’s only approach to relationships and that the government will also look at incremental steps to improve trade. Separately, three of the nine members of the The Times’s BoE shadow monetary policy committee called for an immediate quarter-point increase. Two said they would raise rates in May and two others added that the Bank should lay the groundwork for rises this year.

Market Snapshot

  • S&P 500 futures down 0.05% to 2,722.25
  • STOXX Europe 600 down 0.2% to 375.47
  • MSCI Asia Pacific down 0.07% to 176.60
  • MSCI Asia Pacific Ex Japan down 0.2% to 583.63
  • Nikkei down 0.5% to 21,380.97
  • Topix down 0.2% to 1,716.29
  • Hang Seng Index down 0.4% to 31,414.52
  • Shanghai Composite down 0.3% to 3,280.95
  • Sensex up 0.5% to 33,162.61
  • Australia S&P/ASX 200 up 0.2% to 5,950.27
  • Kospi down 0.02% to 2,484.97
  • German 10Y yield rose 0.7 bps to 0.592%
  • Euro up 0.4% to $1.2286
  • Brent Futures up 0.2% to $67.58/bbl
  • Italian 10Y yield fell 6.7 bps to 1.641%
  • Spanish 10Y yield rose 1.0 bps to 1.318%
  • Gold spot up 0.5% to $1,317.29
  • U.S. Dollar Index down 0.3% to 90.14

Top Overnight News from BBG

  • Trump administration has dropped demands that all vehicles made in Canada and Mexico for export to the U.S. contain at least 50% U.S. content, Globe & Mail reports, citing people familiar
  • Federal offices in Washington area closed all day due to weather
  • U.K. Jan. Avg. Weekly Earnings 2.8% vs 2.6% est (prev. revised to 2.7% from 2.5%); Unemployment Rate 4.3% vs 4.4% est.
  • Italian ex- premier Silvio Berlusconi open to possible center-right coalition pact with anti-establishment Five Star Movement, according to newspaper La Repubblica, raising the chance of populist parties taking power
  • API inventories according to people familiar w/data: Crude -2.7m, Cushing +1.6m, Gasoline -1.1m, Distillates -1.9m
  • A newspaper affiliated with China’s ruling Communist Party urged “strong restrictive measures” against alleged U.S. soybean dumping, underscoring concern that trade disputes pressed by President Donald Trump could extend into other sectors
  • EU President Donald Tusk sought to play down the impact of potential U.S. tariffs on steel and aluminum imports as Europe braces for more conflict with President Donald Trump

Asian stocks took impetus from Wall St. where the major indices rebounded from the recent tech sell-off. ASX 200 (+0.2%) and KOSPI (+0.1%) were marginally positive as Australia’s energy sector tracked the outperformance seen in its US counterparts, although gains were contained approaching today’s FOMC and with Japan closed for Vernal Equinox national holiday. Elsewhere, Hang Seng (+1.1%) and Shanghai Comp. (+0.4%) led the region as focus turned to earnings with the top performers in Hong Kong spurred by recent financial results.

Top Asian News

  • Chinese Insurance Stocks Slide After S&P Report on Crackdown
  • Hong Kong Exchange’s Big Bet on China Is Suddenly Under Threat
  • Tencent Profit Beats Estimates as WeChat Games Drive Growth
  • Volvo Owner’s Chinese Unit Sees Overseas Deals Fueling Growth

European equities opened with a lack of firm direction, before edging lower (Eurostoxx 50 -0.3%) ahead of the FOMC meeting. The utilities sector is boosted following upgrades of Italy’s A2A (+2.3%) and Germany’s E.ON (+1.9%) by Kepler Chevreux. The FTSE 100 is weighed on by a firmer sterling. Simultaneously, UK retailers are taking a hit amid signs of consumer spending downturn; Moss Bros (-19.8%) crashing after the issue of a profit warning. Carpetright (-0.3%) has taken a loan from a significant shareholder to cover short-term capital requirements, Kingfisher (-6.8%) amongst the laggards following the Co. reporting a fall in earnings and expressing concerns on the outlook for the retail sector, warning that the UK market is tough. On the flip side, LSE (+0.9%) is at the top of the FTSE 100 amid talks that the 21-month Brexit transition deal agreed this week could prompt Intercontinental Exchange (ICE) of the US to make another bid approach.

Top European News

  • BofA’s Pullback on Margin Loans Followed Sweeping Internal Probe
  • Deutsche Telekom to Buy Hellenic Telecom Stake for EU284m
  • BMW’s Muted Forecast in Step With Daimler Amid E-Car Stretch
  • Telenor to Sell Central, East Europe Units for $3.4 Billion

In FX markets, CAD and MXN were the biggest overnight movers with the currencies lifted on news that the US dropped the contentious auto-content proposal in NAFTA discussions last week. Elsewhere, the rest of currency markets were uneventful ahead of the upcoming Fed decision and dot-plot projections, in which EUR/USD faintly nursed losses and hovered near 1.2250 where there are large option expiries for today’s New York cut. Furthermore, GBP/USD just about held on the 1.4000 handle after the prior day’s losses which were triggered by the CPI miss, while USD/JPY was relatively unchanged amid the absence of market participants in Japan.

In commodities, crude prices held on to the gains from yesterday’s rally in which prices rose above USD 63/bbl and also briefly tested USD 64/bbl to the upside. The advances were attributed to ongoing Saudi-Iran tensions and further Venezuelan output declines, while the latest API inventory report was also supportive with headline crude stockpiles at a surprise drawdown. Elsewhere, gold found mild support as the USD pared back some of the strength heading into the FOMC decision later, while copper traded sideways and failed to benefit from the improvement in risk appetite. OPEC are said to be discussing a change of measures for success for the OPEC cut deal and that the Vienna meeting looked at a change to its inventory target.

Looking at the day ahead, the big highlight is of course the FOMC meeting outcome at 6pm GMT. Shortly after that Fed Chair Powell will also deliver his first post-meeting press conference as Chair. Away from that it’s another fairly quiet day for data with January/February employment data and February public sector net borrowing data due in the UK, while in the US the Q4 current account balance and February existing home sales data will be released.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 0.9%
  • 8:30am: Current Account Balance, est. $125.0b deficit, prior $100.6b deficit
  • 10am: Existing Home Sales, est. 5.4m, prior 5.38m;  MoM, est. 0.37%, prior -3.2%
  • 2pm: FOMC Rate Decision

DB’s Craig Nicol concludes the overnight wrap

With markets really struggling to build up any sort of momentum at the moment, today’s Fed meeting should be seen as a welcome distraction. The meeting takes on a little bit more focus as it’s of course Fed Chair Powell’s debut in the hot seat. So there will be plenty of eyes on what he has to say and what changes in style or messaging he might signal. Indeed, with a 25bp hike as good as certain today our US economists believe that Powell’s performance, along with the answers to whether or not the Committee still sees risks as “roughly balanced” and if the median dots move up, are the three key questions that investors should be looking out for.

As a reminder, our colleagues expect the Committee to sound a bit more upbeat (though not yet worried) about inflation developments, and while consumer spending indicators have softened a bit recently, their message about economic activity can remain little changed. They also expect FOMC participants to likely raise their growth forecasts and reduce unemployment forecasts. With regards to the hotly anticipated dots, the team believe that it makes sense to raise the path of rates sooner rather than later. On this basis, they expect the median forecast to move up to four rate hikes this year, from three, although caveat that it could be a close call. Perhaps of more significance for the market though, they expect the entire path of rate hikes to shift up modestly including the terminal rate forecast to  3.3% in 2020 from 3.1% in December. With regards to Powell, the team expect his message to centre on the signs of an overheating economy, and that the Fed’s current tightening action is clearly in order, which would signal that  another rate hike is on the way in June.

Markets are going into today’s Fed meeting coming off the back of a difficult week and a half. Yesterday the S&P 500 (+0.15%), Nasdaq (+0.27%) and Dow (+0.47%) held their heads above water although were routinely tested with the tech sector again seemingly at the centre of things. Monday’s main culprit – Facebook – fell another -2.56% yesterday (although bounced well off the intraday lows) and is down -9.15% in the last two days. That story seemed to kick up another gear yesterday with the news that the social network company is being probed by the US Federal Trade Commission over the possible violation of a 2011 consent decree, while company officials have also supposedly agreed to brief members of the House Judiciary Committee, possibly as soon as today. The VIX actually edged down less than 1pt yesterday to 18.20. European bourses were broadly higher with the Stoxx 600 (+0.51%), DAX (+0.74%) and FTSE (+0.26%) all up, partly aided by the lower Euro (-0.75%) and energy stocks as WTI Oil rose to the highest in nearly 3 weeks (+2.27%).

Bond markets have been a bit more contained by comparison in recent days which is probably as much to do with anticipation over today’s Fed meeting. 10y Treasuries finished 4.1bps higher yesterday at 2.897% and continue to be stuck in this 2.80-2.90% range where they’ve been for most of the last month. 10y Bunds were also +1.5bps yesterday although there was a notable outperformance in the periphery despite no obvious drivers with Italy (-6.7bp), Spain (-3.1bp) and Portugal (-1.6bp) all down.

Overnight, the WSJ has reported that the Trump administration will release a punitive package on Thursday aimed at China that includes tariffs on imports worth at least $30bn as well as proposing investment restrictions on Chinese firms in the US. Notably the measures will have a grace period and the final details are still evolving. Elsewhere, Reuters has reported that the European Commission  ill propose new tax rules today that will make large digital  companies with material revenue in Europe pay a 3% tax on their turnover, largely consistent with reports over the weekend. This morning in Asia, markets are broadly firmer thanks to the rise for the Oil complex with the Hang Seng (+1.14%), ASX 200 (+0.26%) and Kospi (+0.16%) all up. It’s worth noting markets in Japan are closed for a public holiday.

Meanwhile, with China’s NPC now wrapped up our China Chief Economist Zhiwei Zhang concluded with his thoughts in a note yesterday. Zhiwei highlights that the market will be surprised by policy changes from China in 2018, in part as the government will focus more on sustainability than stability. Overall, he believes that growth will likely slow, infrastructure and property cycles may cool off and adversely affect commodity demand, while the government favours the new economy such as the services sector and consumption. Elsewhere, macro policies may lead to short term pain but conducive to growth in the long term.

With regards to other big meeting in recent days, over at the G20, talks appear to have ended with no clear developments with the joint statement indicating that “we recognize the need for further dialogue and actions”. More significantly, the statement did little to dispel concerns around a potential trade war and rising protectionism.

Closer to home, Brexit headlines continue to trickle through despite Monday’s positive announcement. The newsflow was a little odd with Irish PM Leo Varadkar saying that he welcomed the headway made in Brexit negotiations, but Deputy PM Simon Coveney suggesting that there is an option to extend the Brexit transition period, although that wasn’t disclosed in Monday’s withdrawal text. It’s worth adding that yesterday DB’s Oliver Harvey shifted his view to tactically bullish Sterling in light of a Brexit muddle through being confirmed, Bank of England risks being tilted towards more hawkish repricing, seasonality and long positions being pared back.

Staying with the UK, yesterday’s CPI data for February was for the most part slightly softer than expected. Headline CPI rose +0.4% mom compared to expectations for +0.5%, with base effects meaning that the annual rate fell a tenth more than expected to +2.7% yoy from +3.0%. The more significant core print also retreated three-tenths to +2.4% yoy, putting it back to the lowest level since last July. RPI also eased from its previous print of +4.0% yoy to +3.6%. Whether or not that staves off some of the hawks from a rate hike remains to be seen but today’s wages data will perhaps be of more interest with expectations being for a slight increase in average weekly earnings to +2.6%.

In other news, we wanted to point readers’ attention to a report by our European economists yesterday looking ahead to the EU Summit this Thursday and Friday. They believe that there are three main market sensitive topics on the agenda: Brexit, EMU institutional reforms and trade. With Brexit now largely ticked off, focus will be on the latter two issues. Our economists note that Macron’s election and the emergence of a Grand Coalition in Germany with an SPD finance minister has raised expectations for what might be achieved in terms of EMU reform. The team expect a statement acknowledging progress but caveat that a lot of work is still likely needed to be done prior to hitting the June deadline. The team also note that trade is the unexpected element on the agenda this week with the EU now facing the dilemma of knowing how to respond to the US threat of tariffs. They expect a middle path to be taken. You can find more in the report by clicking here.

Quickly wrapping up the remaining economic data yesterday. Germany’s February PPI was lower than expected at -0.1% mom (vs. +0.1% expected) and +1.8% yoy (vs. +2.0% expected). The Euro area’s March consumer confidence index (+0.1 vs. 0.0 expected) and Germany’s March ZEW survey on current situations (90.7 vs. 90 expected) were both above market. However, the ZEW survey expectations index (5.1 vs. 13.0 expected) was well below expectations and fell to the lowest reading since the latter part of 2016, which could make for an interesting read-through in tomorrow’s PMIs.

Looking at the day ahead, the big highlight is of course the FOMC meeting outcome at 6pm GMT. Shortly after that Fed Chair Powell will also deliver his first post-meeting press conference as Chair. Away from that it’s another fairly quiet day for data with January/February employment data and February public sector net borrowing data due in the UK, while in the US the Q4 current account balance and February existing home sales data will be released.

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