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Trading  | March 27, 2018

Just as Trump sent stocks into a tailspin last week with his bellicose trade overtures against China, so the near record (point) rebound in the Dow on Monday is being attributed to a much more diplomatic tone out of the Trump administration, when first Mnuchin, then Peter Navarro played down the threat of a trade war and instead said that the administration is “actively” involved in talks with China to resolve the recent trade tensions between the two nations. Various unconfirmed media reports then also suggested that trade war with China may never materialize (of course, as Mark Cudmore explained this morning, it very well still may). It culminated with a “happy” tweet from Trump himself on Monday night, in which the stock-picking president, hours after confirming his delight with the spike in the market, tweeted “trade talks going on with numerous countries that, for many years, have not treated the United States fairly. In the end, all will be happy!

And so, just like yesterday morning, this morning global markets and US equity futures are a sea of green, which once again is being attributed to fading chances of an “all-out global trade war.”

The fresh surge in risk appetite emerged as the Trump administration was said to be urging China to lower tariffs on cars and open its market to U.S. financial services as part of talks to resolve trade tensions. Treasury Secretary Steven Mnuchin and his Chinese counterpart have been discussing the trade deficit between the two countries and were committed to finding a mutually agreeable way to reduce the gap and help China avoid tariffs on $50 billion of exports to the U.S. Ironically, after yesterday’s upside rout, US and global stocks are almost unchanged since March 1, with the bulk of assets since March 1 now positive.

Only, unlike yesterday when the dollar was tumbling, serving as a key component of the risk-on narrative, today the USD has rebounded and erased almost all of yesterday’s losses. At the same time, the euro weakened as economic confidence in the region continued to slide in March.

“Our base case is that there won’t be an all-out trade war,” Aberdeen Standard Investments’ global head of fixed income, Craig MacDonald, , told Bloomberg. “It’s a way of applying pressure to get some wins by Trump.” Still, it will lead to more volatility, MacDonald added. “Our sense is that they will get some wins rather than all out war, but it’s not something you can just dismiss. The tail risk is higher.”

Meanwhile in the aftermath of yesterday’s massive US rally, the euphoria was everywhere, as European shares headed for their first gain in five sessions, with the Stoxx 600 Index jumping the most in six weeks, up 1.4% and joining the global relief rally seen between US and Asia overnight as, what else, “trade tensions ease.”  19 out of 19 Stoxx 600 sectors rise; technology sector has the biggest volume at 111% of its 30-day average; 584 Stoxx 600 members gain, 7 decline. In terms of sector specifics, materials (+2.0%) are the outperformers, enjoying a strong rebound from yesterday’s losses. Looking at individual movers, Casino (+3.4%) spiked at the open after its Monoprix chain has agreed to sell products on Amazon, GSK (+6.0%) is a top performer in the FTSE 100 after it announced to purchase a 36.5% stake in Novartis’ healthcare unit for USD 13bln.

Earlier in Asia shares were green across the board, with Japan’s Topix Index jumping the most since November 2016. South Korea’s won was the best performer among major currencies as Kim Jong Un was said to be making an unannounced visit to Beijing, his first known trip outside North Korea since taking power in 2011. The ASX 200 (+0.7%) and Nikkei 225 (+2.7%) were higher with mining names and financials leading Australia, while the Japanese benchmark outperformed as the index coat-tailed on gains in USD/JPY and following the testimony by former tax office chief Sagawa who declared there were no instructions made by PM Abe or his close circle to alter the documents related to the land sale scandal.

Specifically, Japan’s former tax agency chief Sagawa said there was no report to the PM’s office of documents being altered and added that there were no instructions from PM Abe, his wife, Finance Minister Aso or their aides to doctor the documents. In related news, there were also comments from Finance Minister Aso that PM Abe’s office was not involved with document alterations in the controversial land sale.

Mainland China and Hong Kong shares advance along with other equity markets on hopes that talks with the U.S. will resolve trade tensions. Hang Seng Index rises 0.8%; Hang Seng China Enterprises Index adds 0.9%; Shanghai Composite Index closed up 1.1% after weathering some downward pressure in the last hour of trade; it was its first gain in five sessions.

As noted above, in FX, the dollar reversed earlier losses, with demand picking up amid month-end flows as the London session gets under way. EUR/USD rallied briefly in early London trading to a five-week high of 1.2476 on dollar supply and euro demand against crosses, before reversing the move; in the Asian session, the pair had traded in a very narrow range. Sterling led losses in G-10, partly driven by strong demand in euro-pound, and weighed by EUR/GBP bids amid month-end flows supportive of the greenback. The yen slid as much as 0.3% against the dollar after heavy buying in the U.S. currency across the Tokyo fix took the pair to session high of 105.75 as trade tensions between the U.S. and China eased. The Aussie fell with local bond yields as capital flows are redirected back into emerging markets; the South Korean won rallied as much as 1.2% and the onshore Chinese yuan briefly touched the strongest level since the 2015 devaluation before gains were erased Elsewhere, China’s currency touched the highest level in almost three years.

In geopolitical developments, the Russian Deputy Foreign Minister warned of ‘harsh’ response to expulsion of diplomats from the US, but still open to cooperation.

Euro-area bonds traded in the green, as do longer-dated Treasuries. Bunds initially rallied to make another test of 50bps in yield before fading; TSYs in a tight range with curve marginally flatter amid focus on this weeks heavy supply, with large early buying seen in white eurodollars, leading to a tightening in the FRA/OIS spread further from recent blowout.

In commodities, crude futures unchanged, spot gold weighed by USD rally and industrial metals hold Asian session gains. Bitcoin edged higher, nearing the $8,000 level. And copper broke out of a three-day trading slump, climbing as much as 1.8%.

Market Snapshot

  • S&P 500 futures up 0.6% to 2,676.00
  • STOXX Europe 600 up 1.2% to 367.37
  • MSCI Asia Pacific up 1.4% to 175.31
  • MSCI Asia Pacific ex Japan up 0.9% to 573.94
  • Nikkei up 2.7% to 21,317.32
  • Topix up 2.7% to 1,717.13
  • Hang Seng Index up 0.8% to 30,790.83
  • Shanghai Composite up 1.1% to 3,166.65
  • Sensex up 0.5% to 33,224.00
  • Australia S&P/ASX 200 up 0.7% to 5,832.30
  • Kospi up 0.6% to 2,452.06
  • German 10Y yield fell 0.8 bps to 0.516%
  • Euro down 0.01% to $1.2443
  • Italian 10Y yield rose 3.4 bps to 1.656%
  • Spanish 10Y yield fell 2.0 bps to 1.241%
  • Brent futures up 0.4% to $70.38/bbl
  • Gold spot down 0.3% to $1,350.16
  • U.S. Dollar Index up 0.3% to 89.25

Top Overnight News

  • The Trump administration is urging China to lower tariffs on cars and open its market to U.S. financial services as part of talks to resolve a rise in trade tensions that has shaken global markets, according to a person familiar with the matter
  • President Donald Trump ordered 60 Russian diplomats the U.S. considers spies to leave the country and closed Russia’s consulate in Seattle in response to the nerve-agent attack on a former Russian spy in the U.K., as European allies and Canada took similar measures.
  • Federal Reserve Governor Randal Quarles says “our economy is performing well, and unemployment is low. However, many households and communities continue to face financial challenges.”
  • Federal Reserve Bank of Cleveland President Loretta Mester says she doesn’t see excessive financial imbalances, but the need to avoid them building up is another argument for “gradually taking away accommodation.”
  • Kim Jong Un made a surprise visit to Beijing on his first known trip outside North Korea since taking power in 2011, three people with knowledge of the visit said.
  • The ECB can only have “deeper discussions” about the next policy changes when its projections are published in June, Governing Council member Vitas Vasiliauskas says in a news conference in Vilnius
  • Euro-area economic confidence dropped for a third month in March as the region showed signs of entering a period of more moderate growth. Optimism slipped in the region’s five biggest economies, taking the overall index to its lowest in six months
  • The ECB alerted auditors that lenders could try to take advantage of the transition to new accounting standards to spread the hit on loan losses over years instead of reflecting them in their 2017 financial results, three people familiar with the matter said
  • The U.K.’s withdrawal from the European Union poses “material risks” to the availability of financial services, especially in areas where fixes must be put in place by both British and EU authorities, the Bank of England said

Central bank speakers:

  • Fed’s Quarles (Voter, Neutral) said US economy is performing well and unemployment is at a low level, although he added that financial challenges remain for many households and communities.
  • Fed’s Mester (Voter, Hawk) said she sees further interest rate hikes this year and next despite seeing more slack, while Mester added that tariffs and NAFTA renegotiations pose risks to economic outlook.
  • Fed’s Bostic (Voter, Dovish) said he supports plans to gradually raise interest rates, but uncertainty over how the economy would respond next year to tax cuts and increased government spending could complicate monetary policy.
  • ECB’s Vasiliauskas (Hawkish) expects more detailed talks on policy changes in June and agrees with market forecast for a mid-2019 rate hike. This follows ECB’s Weidmann yesterday, saying he expects a mid-2019 rate hike.
  • ECB’s Liikanen (Neutral) says EZ inflation is sustainable when ECB’s objective can be met without very   accommodative monetary policy. He adds that the ECB needs patience as underlying inflation is lower than expected.
  • ECB’s Nowotny (Hawkish) believes asset purchases should be gradually reduce. Adding that If things continue as they are, they will be able to reduce asset purchases significantly and must decide by summer. Furthermore, stating we must be careful not to fall behind the curve.

Asian stocks were positive across the board as the region took impetus from the gains on Wall St where stocks rebounded with a vengeance from the prior week’s worst performance in 2 years. The sharp recovery was spurred by easing trade war concerns after reports of US and China negotiating on trade and saw the largest percentage increase in all US majors since August 2015, while DJIA also gained by the most points in nearly a decade. ASX 200 (+0.7%) and Nikkei 225 (+2.7%) were higher in which mining names and financials led Australia, while the Japanese benchmark outperformed as the index coat-tailed on gains in USD/JPY and following the testimony by former tax office chief Sagawa who declared there were no instructions made by PM Abe or his close circle to alter the documents related to the land sale scandal. Hang Seng (+0.8%) and Shanghai Comp. (+1.0%) conformed to the upbeat tone as trade war concerns eased and as corporate financial results took centre stage in China, with the big 4 banks underpinned after AgBank beat estimates as it kicked off the earnings releases amongst China’s banking behemoths. Finally, 10yr JGBs were weaker amid the gains in riskier assets and with demand also shunned following a mixed 40yr auction. Japan former tax agency chief Sagawa said there was no report to the PM’s office of documents being altered and added that there were no instructions from PM Abe, his wife, Finance Minister Aso or their aides to doctor the documents. In related news, there were also comments from Finance Minister Aso that PM Abe’s office was not involved with document alterations in the controversial land sale.

Top Asian News

  • China’s Risky Debt Heads Overseas as Deleveraging Rolls On
  • Troubled Chinese Firm to Put $3.2 Billion of Properties For Sale
  • Xiaomi’s CEO Disses the iPhone in Unveiling $500 Marquee Device
  • PBOC Signals Yi to Run China’s Monetary Policy, Guo in ‘Support’
  • China’s Yuan Jumps to Highest Since 2015 as Trade Tensions Ease

European equities have joined the global relief rally (Eurostoxx +1.4%) seen between US and Asia overnight as trade tensions ease. In terms of sector specifics, materials (+2.0%) are the outperformers, enjoying a strong rebound from yesterday’s losses. Looking at individual movers, Casino (+3.4%) spiked at the open after its Monoprix chain has agreed to sell products on Amazon, GSK (+6.0%) is a top performer in the FTSE 100 after it announced to purchase a 36.5% stake in Novartis’ healthcare unit for USD 13bln. Elsewhere, Akzo Nobel (+3.0%) received a boost after Carlyle has won the bid to acquire the chemical arm unit for approx. EUR 10bln

Top European News

  • Euro-Area Economic Confidence Extends Slide Into Third Month
  • Marubeni to Sell Stake in U.K. Offshore Wind Farm Near Yorkshire
  • Liikanen Urges Caution Against Tightening ECB Policy Too Soon
  • Japan Tobacco Said to Plan Poland Plant Amid Overseas Push
  • Painful Pivot West Starts to Pay Off for Ukraine’s Exporters

In FX markets, it’s been a very choppy session with month end flows/positioning in evidence, but far from one-way or clear cut. The Eur outperformed during early trade and was a broad gainer vs G10 counterparts with the marginal exception of the Chf as that cross traded sideways within a confined 1.1760-75 range. Eur/Usd extended gains beyond near term resistance around 1.2446 to circa 1.2475, while Eur/Gbp and Eur/Jpy got close to 0.8800 and 132.00 respectively on stops and buy orders that appeared to be fix-related. However, dovish ECB comments coincided with a loss of impetus and retreat in the single currency to the benefit of the Greenback and other peers, with a French bank noting ‘strong’ Dollar demand for month end re-balancing (according to Newswires, Credit Agricole). Indeed, the DXY managed to reclaim 89.000+ status, as Cable recoiled to the 1.4125 area from 1.4240 highs, Aud/Usd pulled back from 0.7750+ to 0.7715 and Nzd/Usd topped out around 0.7300 again. Usd/Cad bounced ahead of strong chart support at 1.2803 and the psychological 1.2800 level as the Loonie lost some of its NAFTA related positive momentum (after US reports that a ‘good’ deal is in the offing), while the Jpy continues to track overall risk sentiment and suffered on a sharp global stock market recovery – falling to 105.75 vs the Usd and testing resistance in the 105.70- 75 zone (200 HMA)

In commodities, WTI crude futures are flat after failing to breach the USD 66/bbl level to the upside ahead of this week’s inventory releases and with Russia’s Energy Minister reiterating it is too early to discuss an exit from the output cut deal. Elsewhere, spot gold is trading marginally lower as it tracks fluctuations in the dollar index, while fears of trade wars recede after yesterday’s reports of talks between US and China. In base metals, copper strengthened overnight amid the recovery in risk appetite and with upside spurred on the open of Chinese metals trade.

 

US Event Calendar

  • 9am: S&P Case Shiller 20-City NSA Index, MoM SA, est. 0.6%, prior 0.64%
    • Case Shiller 20-City YoY NSA, est. 6.15%, prior 6.3%
    • Case Shiller CS US HPI YoY NSA, prior 6.27%
  • 10am: Richmond Fed Manufact. Index, est. 22, prior 28
  • 10am: Conf. Board Consumer Confidence, est. 131, prior 130.8; Present Situation, prior 162.4; Expectations, prior 109.7

DB’s Jim Reid concludes the overnight wrap

Let’s be honest, given the events of recent weeks, when we did get a rebound in markets it was only ever going to be in style. Last night the S&P 500, Dow and Nasdaq notched up gains of +2.72%, +2.84% and +3.26%, respectively – the biggest one-day gains since August 26th 2015. For the S&P 500, that is the third consecutive session where we have seen a move of at least 2% in either direction. The last time that happened was also in late August 2015. It’s also the 19th occasion since the start of February that we’ve seen a move of at least 1%. It took 17 months to notch up that many moves of that magnitude before that.

Yesterday’s rally was helped by a much more diplomatic tone out of the White House. Indeed, on the back of Mnuchin’s comments over the weekend about being “cautiously hopeful” that China will reach a deal to avoid tariffs,  the White House trade advisor, Peter Navarro, extended the narrative by playing down the threat of a trade war and instead said that the Trump administration is “actively” involved in talks with China to resolve the recent trade tensions between the two nations.

To be fair the day wasn’t without its ups and downs as US markets did their best to nearly wipe out early gains of some +2% and the VIX swung in a 4pt range. The news (Bloomberg) that the FIC had opened a probe into Facebook’s recent privacy practices sparked a big wave of selling across the technology complex and while they eventually recovered, European markets closed at their lows. The Stoxx 600 finished -0.72% after being up as much as +0.62% and on an intraday basis it now means that the index is officially in correction territory having dropped over 10% from the January highs. Currency moves didn’t help as the Euro rallied +0.74%. Meanwhile bond moves were also a bit all over the place. Benchmark 10y Treasuries closed 3.8bps higher yesterday at 2.853% and so clocked up the 22nd day in a row that they’ve finished with a 2.8%-handle. A 2y auction passed smoothly with a 5y and 7y auction still to go in another busy week for supply.  European rates for the most part closed unchanged.

Overnight, Japan’s Kyodo News reported that North Korea’s Kim Jong Un may have made a surprise visit to China, marking his first offshore trip since taking power in 2011. For now, White House Deputy Press Secretary Raj Shah said about the reports “we don’t know if they’re necessarily true”. Markets in Asia have followed the positive US lead and are trading higher, with the Nikkei (+2.19%), Hang Seng (+0.92%), Shanghai Comp. (+0.97%) and Kospi (+0.56%) all up as we type. US equity index futures have also nudged a bit higher.

Moving on. A bit of an eyesore to the broader trend in markets over the past 24 hours has been the underperformance for Italian assets. The FTSE MIB closed -1.24% yesterday while a sub-index of Italian banks closed down -1.72%. It was the same for bonds where 10y BTPs sold-off 3.6bps and the spread to similar maturity Bunds was 3.9bps wider at 139bps. That’s about 9bps wider than the post-election tights. Yesterday’s move appeared to be related to the political developments over the weekend with the election of the presidents of the lower and upper house of Italy’s parliament confirming the political strengths of the Five Star Movement and Northern League. As our economists highlight, Salvini (leader of the NL) and Di Maio (leader of 5SM) made an agreement over the weekend to obtain for each party or coalition one presidency of each of the two houses of parliament. Under such an agreement, the centre-right has proposed the presidency of the lower house to a 5SM candidate, while claiming for itself as the most voted coalition, the presidency of the senate.

Importantly, our colleagues now note that the success of the agreement shows that there is a clear line of communication between the two parties and mutual acknowledgement of a valuable political interlocutor. At the margin, it would appear that the chances of a NL/5SM government have increased. The caveat is obviously that there is still a long way to go if they use this as the basis to forming a stable and long-last government and there is still a possibility that Italy may repeat elections in the near term. For now, as our colleagues rightly note, the market reaction has still on the whole been fairly muted and as long as euro membership is not questioned, the cycle remains positive, ECB’s exit remains slow and the sustainability of public finances is not at risk, sentiment is unlikely to really change. For more, please see our economists’ note here.

In other news, President Trump confirmed yesterday that 60 Russian diplomats will be ordered to leave the US following the Russian spy poisoning incident in the UK. European Council President Tusk also announced that 14 EU countries would follow suit. Russia’s MICEX closed -1.62% yesterday following the news. In response, Russia’s foreign ministry noted “this unfriendly step won’t pass without impact and we will respond”. Interestingly the official twitter account of Russia’s US embassy have asked which US consulate should be closed in response.

Away from politics, in the US, the Fed’s Mester noted that “if the economy evolves as I anticipate, I believe further gradual increases in rates will be  appropriate this year and next year”. She noted that “gradual” hikes remain appropriate as they balance getting inflation back to target versus easy financial conditions and risks that the economy could overheat. She then added that this gradual path is consistent with the Fed’s median dot plots. Elsewhere, she noted the threat of trade wars hasn’t changed her economic outlook and that “this year is shaping up to be another good year for the economy”. The Fed’s Quarles echoed similar sentiment as he noted “our economy is performing well and unemployment is low”. In Europe, the ECB’s Weidmann reiterated that QE should be scaled back “soon” as inflation picks up and the market’s expectations for QE to end in 2018 and a first rate-hike in mid-2019 was “not unrealistic”. Elsewhere, he noted the EU’s exemption from the US metals tariffs reduces risks of escalation, but “it’s not a victory for free global trade”.

Before we take a look at today’s calendar, in terms of data yesterday, in the US, the February Chicago Fed national activity index was above consensus at 0.88 (vs. 0.15 expected) while the March Dallas Fed manufacturing index was below at 21.4 (vs. 33.5 expected) and down nearly 16 points from the month prior. Elsewhere, the final reading on France’s 4Q GDP was revised 0.1ppt higher to +0.7% qoq, leading to an annual growth of +2.5% yoy. Finally, the latest ECB CSPP/PSPP ratio was 40.6% (32.0% over last 4 weeks). As a reminder, before Apr 2017 when QE was still €80bn/m the ratio was 11.5%. Between Apr-Dec 2017 (QE €60bn/m) the ratio edged up to 12.7% but since Jan 2018 (QE €30bn/m) the ratio is now 27.9%. Indeed, the strength of corporate vs. government purchases as proxied by the CSPP/PSPP ratio continues to surpass our expectations of “roughly 20%”.

Looking at the day ahead, the main focus will likely be the March confidence indicators for the Euro area. In the US we’ll also get the March consumer confidence print, as well the March Richmond Fed manufacturing PMI and January S&P/Case-Shiller house price index readings. The Fed’s Bostic and the ECB’s Liikanen will speak, while the BoE is due to publish the record of its Financial Policy Committee meeting.


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