Asian stocks hit their highest level in 18 months, with positive momentum lifting European shares which were helped by Societe Generale earnings. Yields fell on some of the euro zone’s battered low-rated bonds as investors put aside the political risks that have dominated markets this week. After trading flat, S&P futures bounced as US traders walked boosted by a spike in the USDJPY, ahead of earnings reports from Coca-Cola, Reynolds American, CVS Health, Nvidia and Twitter.
Rising oil prices pushed energy company shares higher in Europe on a busy day of corporate earnings while Asian stocks hit their highest in one and a half years. “The stabilization of the oil price after its recent wobbles, together with solid earnings, for example, Soc Gen today, is driving the positive sentiment,” said Andy Sullivan, portfolio manager with GL Asset Management UK in London.
The Euro STOXX 600 index rose 0.4 percent. Bank shares also rose after French lender Societe Generale reported lower fourth-quarter net income that nonetheless beat analysts forecasts. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3 percent to their highest since July 2015 with Hong Kong, Taiwan and China among the region’s best performing markets. Japanese shares, however, fell 0.5 percent, hit by earlier yen strength the day before Japan’s Prime Minister Shinzo Abe meets U.S. President Donald Trump.
“We have some relief with investors shrugging off some of their concerns with a feeling that things went too far, too fast,” said Martin Van Vliet, senior rates strategist at ING.
With much attention recently on global rates, yields on Spanish and Italian 10-year government bonds fell. Earlier this week, concern over the impact of elections this year in countries including France and Germany saw investors sell bonds of lower-rated euro zone countries. Spanish 10-year yields fell 4 basis points to 1.66 percent while Italian equivalents fell 3 bps to 2.2 percent. French yields dipped 1 bps to 1.01 percent. The premium investors demand to hold French rather than German debt hit its highest in four years on Wednesday, three months before the final round of a presidential election expected to include far-right, anti-euro candidate Marine Le Pen. Yields on German 10-year bonds, seen as among the world’s safest assets, rose 0.5 bps to 0.31 percent.
In addition to political worries, bond investors are contemplating the impact of the ECB eventually winding down its bond-buying stimulus scheme, which has driven down borrowing costs in the bloc for the past two years. ECB President Mario Draghi and German Chancellor Angela Merkel, bidding for re-election later this year, meet on Thursday. A number of German officials have called on the ECB to unwind its monetary stimulus.
The euro steadied just below $1.07 after falling on Wednesday to a two-week low of $1.0640. The yen fell 0.3 percent to 112.39 per dollar, having earlier traded as strong as 111.70. The dollar index was unchanged.
In the US, 10Y yields fell to their lowest since mid-January on Wednesday as investors re-assess how many interest rate rises can be expected from the Federal Reserve and look for clarity over whether Trump will make good on his campaign pledges for tax cuts and infrastructure spending. Ten-year Treasuries yielded 2.36% in European trade on Thursday, up 1.2 bps.
Oil prices rose after an unexpected draw down in U.S. gasoline inventories. Brent crude, the international benchmark, rose 51 cents a barrel, or 0.9 percent, to $55.63. In a sign that political risks are still on the radar, gold held close to three-month highs touched on Wednesday. Spot gold rose 0.1 percent to $1,243 an ounce, compared with from Wednesday’s high of $1,244.67.
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Asia equity markets continued its recent choppy trade following a mixed lead from the US where stocks closed mostly higher, although the DJIA underperformed amid weakness in financials. ASX 200 (+0.2%) pared opening losses and finished marginally higher as gains in defensive stocks overshadowed weakness in mining names, while Nikkei 225 (-0.5%) was dampened by recent JPY strength although the index finished off worse levels alongside a recovery in USD/JPY. Chinese markets ignored the absence of a PBoC’s liquidity injection for the 5th consecutive day as Shanghai Comp. (+0.5%) and Hang Seng (+0.1%) traded positive with the latter led by financials and gambling names. 10yr JGBs were uneventful with prices relatively flat throughout the session, while today’s 30yr JGB auction failed to inspire as b/c, prices and the tail-in price deteriorated from the prior month. PBoC refrained from open markets operations for the 5th consecutive day due to high liquidity conditions, which brings the total amount of funds drained so far this week to CNY 715bn.
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In Europe this morning, major indices trade positively and general sentiment leans toward risk on. In terms of sectors, healthcare is the best performing up 1.1% with materials retracing some of yesterday’s gains. Energy names started off on the front foot after Total posted a strong set of results better than those seen by BP earlier on in the week and in the financial sector Commerzbank also reported well but subsequently shares have fallen and are now trading lower by around 3%. In Fixed income markets, UST are in demand due to geopolitical risks hitting the belly with 5YR yield eyeing 180bps and 10 YR yield struggling around 235bps. German paper still in demand due to the internal EU demand away from periphery. Interestingly the GE/FR spread has tightened to 66bps a move of 14bps over the last two day. In terms of this morning’s Gilt auction, the line provided a solid bid/cover and smaller tail than previous, although failed to sway Gilts.
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In currencies, the USD continues to trade in limbo, and while traders continue to look across the spectrum of major counterparts, we see there is reluctance to reinstate the US reflation trade, with USDJPY notably restricted. As such, geopolitical risk dominates, and the lead (risk on) trade maintains a tight range below 112.50. EURUSD has also managed to brush off the EU wide political risks weighing on the single unit. This comes with the Bund spreads (with France) narrowing, but through 1.0700, we are seeing plenty of supply coming in with initial resistance at 1.0715-20 holding. The big move in Asia was NZD on the back of the exchange rate related comments from the central bank, but after a series of losses which saw 0.7200 eventually taken out, we have seen some moderation since as the USD continues to flounder. Comments from RBA gov Lowe was a little more non committal on the AUD exchange rate, saying it is hard to say whether the AUD is overvalued or not, and this gave the spot rate some support and saw a modest, but tentative move higher through 0.7650. Some modest outperformance in GBP, as EURGBP is pressed back down to 0.8500, and given the above flow, Cable through 1.2550. Resistance in the latter seen ahead of 1.2600, allies with real money and tech based demand in the cross rate below the above mentioned figure level.
In commodities, oil rose 1.2 percent to $52.94 per barrel. The global oil market’s march to equilibrium won’t be deterred by the increasing volume of crude being poured into U.S. storage tanks, according to Goldman Sachs. Copper three-month forwards fell 0.4 percent. The metal jumped 1.7 percent Wednesday after workers at the biggest mine in Chile vowed to strike. Goldman Sachs Group Inc. forecast what would be the first deficit of the metal since 2011. Gold was flat at $1,241.93 an ounce, after touching the highest level since November on Wednesday. Oil prices are back to the fore as the significant rise in inventory (Cushing) caused a moderate sell off in WTI in relative terms, with the latest rise potentially signalling the longer term impacts of the OPEC agreements on supply made last year. WTI tested towards USD53.00 earlier today, but this just puts us back into the middle of the near term range. Natural Gas higher though due to US seasonal factors. Elsewhere, base and precious metals all modestly higher in response to USD caution.
Looking at the day ahead, the calendar continues to remain fairly sparse for the most part today. The highlight this morning in Europe is likely to be the December trade data in Germany, where exports declined by -3.3%, well below the -1.10% expected (down from +3.9%) while over in the US the only data of note is the latest weekly initial jobless claims reading and the December wholesale trade and inventories report. Away from the data we are due to hear from the Fed’s Bullard and the Fed’s Evans. BoE Governor Carney is also scheduled to speak in London this evening at 6.30pm GMT. Finally on the earnings front we’ve got 27 S&P 500 companies due to report including Coca-Cola and CVS Health Corp.
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DB’s Jim Reid concludes the overnight wrap
Yesterday saw a big rally in global bonds especially in the European periphery and France. Indeed 10y OAT’s finished the day 10.8bps lower in yield at 0.998%, the strongest day in fact since September 2015. In the periphery we also saw yields in Italy (-11.7bps), Spain (-7.2bps) and Portugal (-12.8bps) finish sharply lower while 10y Bunds (-5.5bps) – while underperforming – closed below 0.300% for the first time since January 10th. That meant the OAT-Bund spread eased back to 71bps from the recent 77bps wide mark. The rally really kicked into the gear straight from the open and steadily continued over much of the session. While much of the suggestion was that it was just an unwinding of some of the recent selloff, boosted also by strong auction demand in Germany and Portugal, there was a story also doing the rounds on Bloomberg concerning an internal ECB meeting in which Draghi supposedly said that he sees the ECB maintaining an accommodative policy until the end of his mandate in 2019. Given the imminent taper is a big part of the recent sovereign underperformance then one can see why markets responded to this.
The positive momentum for bonds kicked on into the US session too and we saw 10y Treasury yields end the day 5.7bps lower at 2.336%, despite a temporary move higher following a soft 10y auction which seemed to be overshadowed by comments from Larry Fink after he said that there’s a rising chance of 10y yields going back below 2% given that fiscal stimulus policies won’t be in place until 2018. Yesterday’s closing level means Treasury yields are nearly 13bps lower this week alone and are only just above the YTD low made intraday on the 17th January of 2.306%. Yields have also fallen for 4 days in a row now which is the longest run since June last year.
So while it was a busy day for bonds, it was once again another indifferent session for risk assets. In Europe the Stoxx 600 edged up +0.33%, meaning it is pretty much back to flat for the week, while European Banks (-0.77%) lagged with the move lower for bond yields. Meanwhile at the closing bell last night the S&P 500 finished +0.07%. Incredibly that’s yet another day where the index has moved up or down by less than 0.10%, taking the tally to 7 in the last 10 sessions. That isn’t the only remarkable stat however. Yesterday’s move means the index has now gone 82 sessions without falling more than 1% which is the longest streak since 2006. In addition, the index has now also gone 37 days in a row with an intraday range of less than 1% – the longest run that we can find. Needless to say then that equity vol stayed low again yesterday with the VIX at 11.45 (versus the 10.58 low at the end of January) and the VSTOXX at 16.83 (versus the recent low of 14.60). It was a similar story in credit too with the iTraxx Main just 0.5bps tighter despite the big moves in bonds, while CDX IG finished just over 1bp wider.
This morning in Asia we’ve seen a continuation of the bond rally for the most part. The most notable have been the moves for 10y yields in Australia (-5.6bps) and New Zealand (-9.5bps) with the latter outperforming after the RBNZ left rates on hold and the associated statement said that monetary policy would remain accommodative for some time. JGB’s are little changed but we’ve also seen yields fall in Hong Kong (-3.7bps), South Korea (-2.5pbs) and Singapore (-2.5bps). The Greenback is little changed as we go to print, as is Gold and Oil, while it’s been another fairly uninspiring session for risk assets. The Nikkei (-0.28%) and ASX (-0.11%) are a shade lower while the Hang Seng (+0.39%), Shanghai Comp (+0.37%) and Kospi (+0.20%) are up.
Truth be told there really wasn’t a great deal more that was interesting yesterday. Last night we got confirmation that MP’s in the House of Commons had voted overwhelmingly in favour of a draft law to trigger Article 50 by 494 votes to 122. The legislation now moves on to the House of Lords for further scrutiny with the FT highlighting that the peers are under big pressure to approve without any amendments.
Staying in Europe, yesterday we also got another political poll out of France, which largely confirmed some of the recent trends. The Elabe poll for BFMTV showed Le Pen coming out on top in the first round at 25.5-26% versus 22-23.5% for Macron, 17-18% for Fillon and 15-15.5% for Hamon. A second round vote between Le Pen and Macron had Macron coming out on top at 63% to 37% and a vote between Le Pen and Fillon showed the latter coming out on top at 56% to 44%.
Looking at the day ahead, the calendar continues to remain fairly sparse for the most part today. The highlight this morning in Europe is likely to be the December trade data in Germany while over in the US this afternoon the only data of note is the latest weekly initial jobless claims reading and the December wholesale trade and inventories report. Away from the data we are due to hear from the Fed’s Bullard at 2.05pm GMT and then the Fed’s Evans at 6.10pm GMT. BoE Governor Carney is also scheduled to speak in London this evening at 6.30pm GMT. Finally on the earnings front we’ve got 27 S&P 500 companies due to report including Coca-Cola and CVS Health Corp.