European and Asian stocks, S&P futures, bond yields, the dollar and commodity metals are rose, in some cases making new all time highs, lifted by the latest reemergence of the “Trump trades” as hopeful investors once again bet that the U.S. president’s tax reform plans will boost economic growth and corporate profits, despite another warning from Goldman that the president’s fiscal plan is about to be derailed.
Global stocks continued to rally ahead of this week’s key US CPI data, and ahead of speeches from a range of Federal Reserve officials including the all important Yellen testimony in Congress. The dollar extended gains after its first weekly advance since December, and Treasuries fell. Iron ore surged and copper climbed, buoying commodity producers.
Mrs Yellen will be busy on Valentine’s Day as the highlight this week is her semi-annual monetary policy testimony on Tuesday and Wednesday. There are probably too many unanswered questions about the new Trump administration’s fiscal plans and not enough additional hard data for her to deviate too much from her January 19th speech and the February 1st FOMC statement. Nevertheless the testimony is always a big event. Perhaps Trump’s plan to address a joint session of Congress on February 28th overshadows this especially as last week he discussed how he is going to announce a ‘phenomenal’ tax plan within 2-3 weeks. So even though we’re unlikely to hear much new from Yellen, DB believes she will use it as an opportunity to emphasise that the economy is reaching Congress’ legislated mandates of full employment and price stability. While Yellen will reiterate the “every meeting is live” mantra, she is not expected to strongly signal a March rate hike, although according to BofA it is possible she makes the March meeting “live.” Yellen will likely address Fed balance sheet strategy in broad terms as it does not appear that the FOMC has formed a consensus around the details.
Back to US stocks, where “the market is betting that Mr. Trump will succeed in cutting taxes and therefore we can have an increase in U.S. Corporate earnings without needing a significant shift in the economic environment itself,” James Bevan, chief investment officer at CCLA Investment Management Ltd., said in a Bloomberg TV interview. “For me the big issue is his announcement on taxation and then the amount of support he gets for the reduction in corporate tax.”
Continuing the US euphoria which has the S&P trading in record high territory, up 0.1% from Friday’s close, at 2.316, Asian stocks rallied to 18 month highs and European stocks rose for the fifth consecutive session on Monday, the longest winning stretch for two months. The Japanese yen was the biggest loser among DM currencies, as always happens when risk is bid. The weakness followed the Trump-Abe summit which comforted investors after ending smoothly without President Donald Trump talking tough on trade, currency and security issues. More importantly, Trump held off from repeating harsh rhetoric that accused Japan of taking advantage of U.S. security aid, stealing American jobs and “playing money markets.”
Those apparently cordial discussions drove the dollar as much as 0.9 percent higher against the yen to 114.17 yen. It last stood at 113.70 yen, up 0.4 percent on the day and extending its rebound from a 10-week low of 111.59 yen touched last week. “The U.S. president has shown further signs of conformity in U.S. foreign policy during his weekend summit with Japan’s prime minister Abe,” Rabobank analysts said in a note on Monday.
“Markets have continued Friday’s upbeat theme,” said Kathleen Brooks, research director at City Index in London, quoted by Reuters noting that the VIX measure of U.S. stock market volatility closed last week below 11 for the third week in a row. The last time this happened was over a decade ago. “This is another sign that, for now, the Trump trade is still on. It also suggests that even with the controversy Trump has caused since he took office, financial markets are still willing to give him the benefit of the doubt,” Brooks said.
Comments from Trump on Thursday that he plans to announce what he said would be the most ambitious tax reform plan since the Reagan era in the next few weeks rekindled hopes for big tax cuts. Economic data from major economies has also been upbeat, including Friday’s Chinese trade figures, while U.S. corporate earnings have been also solid so far.
Europe’s benchmark index of leading 300 shares was up 0.3 percent at 1453 points, lifted by the mining and basic resources sectors. Basic resources rose 2.5 percent to their highest since August 2014. Germany’s DAX was up 0.4 percent, led by a 15 percent rise in drugmaker Stada after the company said it had received two offers for the acquisition of the company, one of which is private equity group Cinven Partners LLP.
MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.5 percent, with resource-related stocks again the driving force, while Japan’s Nikkei rose 0.4 percent. Figures on Monday showed that Japan’s economy grew for a fourth straight quarter in the final three months of last year as a weaker yen supported exports, but doubts over the sustainability of the recovery persisted.
U.S. futures pointed to a higher open on Wall Street. The S&P 500, Dow Jones Industrials and Nasdaq Composite all posted record closing highs on Friday.
The euro’s rise of 0.5 percent against the yen to 121.00 yen, helped lift the European currency slightly against the dollar. The euro was last up 0.1 percent at $1.0650, inching further away from Friday’s three-week low of $1.0608. The euro has been dogged by fears about a strong showing for French far-right leader Marine Le Pen ahead of a presidential election.
Ten-year U.S. Treasury yields rose 3 basis points to 2.44 percent.
In commodities, copper hit its highest levels since May 2015 after shipments were shut off from the world’s two biggest copper mines – due to a strike in Chile and an export’s ban by Indonesia. It last traded at $6,129 per tonne, up 0.7 percent on the day. On Friday it jumped more than 4 percent, its biggest one-day rise in almost four years. Oil prices dipped slightly after strong gains on Friday on reports that OPEC members delivered more than 90 percent of the output cuts they pledged in a landmark deal that took effect in January.
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Bulletin Headline Summary From RanSquawk:
Top Global News
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Asia equity markets rose on the momentum of another record Wall Street high where the major US indices printed fresh all-time highs amid a continuation of the reflationary trade and strength across commodities. This saw similar outperformance in materials and energy names in the ASX 200 (+0.7%) following a near-5% rally in copper and advances in WTI crude which briefly broke above USD 54/bbl last week. Nikkei 225 (+0.4%) was underpinned by a weaker currency, although gains were capped following a miss on Q4 GDP, while KOSPI (+0.1%) somewhat lagged following the geopolitical concerns in the Korean peninsula after North Korea conducted a missile test. Hang Seng (+0.5%) and Shanghai Comp. (+0.6%) completed the positive tone in the region following several encouraging results updates and as participants welcomed the PBoC’s resumption of liquidity injections for the first time in over a week. 10yr JGBs were marginally lower as demand for the safe-haven was dampened amid heightened risk appetite and the BoJ’s absence in the market, while the curve flattened amid outperformance in the super-long end. The PBoC injected CNY 20bIn via 7-day reverse repos, CNY 30bIn in 14-day reverse repos and CNY 50bIn in 28-day reverse repos, the first time it has done so after a six day halt
Top Asian News
European markets likewise are mostly in the green as FTSE 100 trades flat. The only noticeable laggard is the Swiss SMI which underperforms due to voters looking for tax reforms indicating they feel the country’s largest corporates are not taking their fair share of the tax burden. In terms of sectors, materials lead the way again as copper prices continue push higher and telecoms underperform after Deutsche Telekom issue a write-down on its BT shareholding. The peripheral bonds play catch up this morning with 10 PGB’s outpacing their peers eyeing the psychological resistance level of 4.20%. Elsewhere, in terms of fixed income events this morning, the main highlight has been the Italian 5-part offering which saw the Italian Tesoro hit the mid-point of their targeted range and led Italian paper to be bought up once the auction had been absorbed by the market.
Top European News
Currency markets remain very quiet at the start of the week, with the JPY the only headline grabber after Tump and Abe failed to make any comments regarding JPY undervaluation and any trade agreements. EUR and GBP also gained some ground against the USD this morning after heavy losses seen last week. In regards to GBP/USD the only real resistance is seen at 1.2550. The Bloomberg Dollar Index added 0.1 percent after last week’s 0.7 percent advance. The yen slid the most among major currencies, weakening 0.5 percent to 113.75 per dollar, after its biggest weekly decline since mid-December. The euro slipped 0.1 percent to $1.0635.
In commodities, copper continues to climb as there appears to be no end to the strikes at the world’s largest copper mine. Prices continued to accelerate past the 2.800 level after breaking the key 2.750 last week. Iron ore futures were up 4.9 percent. The raw material used to make steel is trading at the highest in more than two years, climbing 16 percent over the past five sessions. WTI and Brent crude oil have sold off amid no real fundamental catalyst although today we are due to see the latest monthly OPEC report (1205GMT). Gold speculators increased their net long positions by 3.660 contracts in the latest COT report data and this come in the wake of a strong rally last week.
It’s a very quiet start to the week today with nothing of particular note due out aside from CPI revisions in the US.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
Mrs Yellen will be busy on Valentine’s Day as the highlight this week is her semi-annual monetary policy testimony on Tuesday and Wednesday. There are probably too many unanswered questions about the new Trump administration’s fiscal plans and not enough additional hard data for her to deviate too much from her January 19th speech and the February 1st FOMC statement. Nevertheless the testimony is always a big event. Perhaps Trump’s plan to address a joint session of Congress on February 28th overshadows this especially as last week he discussed how he is going to announce a ‘phenomenal’ tax plan within 2-3 weeks. So even though we’re unlikely to hear much new from Yellen, DB’s Joe LaVorgna believe she will use it as an opportunity to emphasise that the economy is reaching Congress’ legislated mandates of full employment and price stability. He thinks that while Yellen will reiterate the “every meeting is live” mantra, he does not expect her to strongly signal a March rate hike. Joe also thinks that Yellen will likely address Fed balance sheet strategy in broad terms as it does not appear that the FOMC has formed a consensus around the details.
In terms of weekend news it was interesting that there was another quasi antiestablishment vote which again defied opinion polls as Switzerland voted to reject a corporate tax reform that the Government and big businesses had backed. Polls had suggested an even split amongst the electorate but in the end the reforms were rejected by a 59/41 split. It does make you wonder how accurate the recent polls are in the French elections which show that Le Pen is between 20% and 30% behind Fillon and Macron in a potential second round run-off (based on the latest OpinionWay poll from 7-9th February).
Talking of France, Friday saw a return of OAT underperformance with 10y yields finishing 6.5bps higher at 1.044%. That compares to a small 0.7bp move higher for similar maturity Bunds although the spread between the two at 73bps is just off the recent high mark of 77bps. Over the course of the week OAT’s finished 2.6bps lower in yield which was actually the first time yields have closed lower since the second week of January. Still, that was a reasonable underperformance versus Bunds with the latter 9.3bps lower over the week, closing at 0.318%. In fact, aside from Greece, there was also a decent reversal for other periphery bonds too on Friday. 10y yields in Italy (+9.8bps), Spain (+7.5bps) and Portugal (+6.9bps) all closed sharply higher. It was a similar story in equities too with the Stoxx 600 closing +0.16% but IBEX and FTSE MIB finishing -0.64% and -0.45% respectively.
It was a different story for Greek bonds on though where 2y and 10y yields finished 131bps and 46bps lower respectively. That appeared to reflect the various news articles doing the rounds suggesting that creditors were said to be preparing a proposal for a bailout deal but still we sit here this morning again in familiar territory with seemingly little new material progress made over the weekend. Indeed PM Tsipras accused the IMF and Germany of “playing with fire” over the weekend at the expense of the Greek people while also remaining confident that the second review will end positively and debt relief for Greece is inevitable. European Commission President Juncker did however warn that bailout talks are “on shaky ground in the sense that we don’t see how the IMF could manage this problem”. Regardless of whether or not the creditors are coming close to an agreement on a list of fiscal demands, the ball will still come back to the Greek side of the court. The next key date is the February 20th Eurogroup meeting but should Greece still refuse to any of the measures put forward, it’s likely that talks get delayed to Q2 with the ultimate deadline realistically being the July bond maturities Greece faces.
With regards to other markets on Friday it was a decent end to the week for US equities with the S&P 500 (+0.36%) and Dow (+0.48%) both reaching new record highs. A big part of that was the rally for commodities after China’s decent trade data and the comments from Trump stating that he is willing to honour President Xi’s “one China” policy. A rally for metals stood out in particular with Copper (+4.60%), Iron Ore (+3.32%), Aluminium (+1.30%), Zinc (+3.32%) and Gold (+0.43%) all finishing the week on a high. WTI Oil (+1.62%) also closed up back near $54/bbl and firmed for the third consecutive day. Interestingly that is despite the 8th consecutive daily gain for the Greenback (+0.15%) culminating in the Dollar index having its first positive week since the first week of January. This morning in Asia we’ve seen the positive sentiment continue for the most part with the Nikkei (+0.61%), Hang Seng (+0.63%), Shanghai Comp (+0.63%) and ASX (+0.65%) all kicking off the week on the front foot. The Yen has weakened -0.60% after Japan’s Q4 GDP came in a little short of market expectations at +0.2% qoq (vs. +0.3% expected). Meanwhile the Dollar has continued to track higher after Fed Vice-Chair Fischer said that “we’re very nearly there” with regards to the Fed’s dual mandate, although he did also signal that there is some “significant uncertainty” over what to expect from Trump’s proposed fiscal policy. Speaking of the Fed, it’s worth also noting that Governor Tarullo announced on Friday that he will step down from his role in charge of financial regulation. That strips the Fed of one of its most dovish members and perhaps further strengthens Trump’s hand to reshape financial regulation.
Wrapping up the rest Friday’s session. With regards to the data the preliminary February headline University of Michigan consumer sentiment reading was reported as falling more than expected (95.7 vs. 98.0 expected; 98.5 previously) falling -0.9% mom in December (vs. -0.7% expected) while the in the UK production rose a much better than expected +1.1% mom (vs. +0.2% expected). Manufacturing production (+2.1 % mom vs. +0.5% expected) was also significantly better than expected in the UK.
To the week ahead now. It’s a very quiet start to the week today with nothing of particular note due out aside from CPI revisions in the US this afternoon. Tomorrow we kick off in China with the January CPI and PPI prints before we then get industrial production data in Japan. During the European session we’ll get Q4 GDP data in Germany as well as the final CPI revisions for January and the February ZEW report. In the UK the January CPI/PPI/RPI data is out, while the other data due out is Euro area Q4 GDP and industrial production. Over in the US we’ll get the NFIB small business optimism survey as well as January PPI. It looks set to be a busy day on Wednesday too. In Europe we’ll get the December and January labour market data in the UK, as well as the December trade balance for the Euro area. Over in the US the highlights are the January CPI report and January retail sales data. Empire manufacturing, business inventories, industrial and manufacturing production, and the NAHB housing market index reading will also be released. Things quieten down again on Thursday with just unemployment data in France and housing starts, building permits, Philly Fed business outlook and initial jobless claims in the US. We end the week in Europe on Friday with retail sales data in the UK. In the US the only data due out is the Conference Board’s leading index for January.
As discussed at the top, arguably the biggest event this week is reserved for Tuesday when Fed-Chair Yellen is due to deliver her semi-annual congressional testimony before the Senate. She will then speak before the House Financial Services Committee on Wednesday. Away from that, the Fed’s Lacker, Lockhart and Kaplan also speak on Tuesday, while Rosengren and Harker speak on Wednesday. The ECB’s Coeure speaks on Thursday, which is also the same day the ECB minutes will be released. Earnings wise we’ve got 56 S&P 500 companies reporting accounting for 8% of the index market cap. In Europe we’re due to hear from 56 Stoxx 600 companies accounting for 10% of the market cap. Away from all that President Trump is also due to meet with Canadian PM Trudeau today and Israeli PM Netanyahu on Wednesday.