World stocks pulled back from all time highs, and European bourses initially followed U.S. futures and Asian shares lower, however both European risk sentiment as well as E-Minis rebounded after an Odoxa poll showed Macron overtaking Le Pen in the 1st round for the first time, and that the addition of Juppe instead of Fillon may see a 2nd round run-off between Macron vs Juppe, leading to a slump in Bund futures to session lows, and a bounce in European stocks. The Bloomberg Dollar Index (BBDXY) was set to break its longest winning streak since May, as Janet Yellen prepared to weigh in on the path for interest rates at 1pm today.
— Europe Elects (@EuropeElects) March 3, 2017
Meanwhile, as reported yesterday, the Fillon presidential campaign is all but over, after authorities raided his home, many Republicans disavowed him, and earlier this morning his spokesman announced his resignation.
However, today’s main even is not in Europe, but in Chicago, where at 1pm all eyes will be on Fed chair Yellen to see if she will confirm the recent dramatic hawkish turn in Fed sentiment. As DB’s Jim Reid puts it, there is no doubt that this week’s main story has been the big rates repricing. President Trump’s speech was hotly anticipated and closely watched but ultimately has still left many questions unanswered. Instead markets have been busy scurrying to reassess Fed tightening expectations following a chorus of hawkish Fed commentary over the last few days.
As a result, since the close last Friday the market has gone from essentially pricing in a low-ish probability of a March Fed rate hike to now debating when the second rate hike of 2017 might be with March now not far off fully priced. The final nail in the coffin might could be Yellen’s speech this afternoon when she is due to speak on the economic outlook at an event in Chicago. The speech is due at 1pm ET and it would be a very bold move to contradict the recent guidance provided by her Fed colleagues this week. In addition to Yellen, we will also hear from Vice-Chair Fischer at 12:30pm ET, as well as Evans, Lacker and Powell prior to that. So there’s plenty to get through.
Asia started off weka, with South Korean equities tumbling with the won on reports that China will curb tourism to the country. The euro and the yen initially strengthened, paring weekly losses caused by increasing confidence that the Federal Reserve will raise rates this month, however the Yen has since slumped on the abovementioned risk-on news out of Europe. The 10-year Treasury yield was flat after climbing for the past four days and gold edged lower.
Investors are awaiting justification from Yellen for the recent advance in the dollar and stocks suggesting increasing odds for tighter monetary policy. Rallies in equities and commodities predicated on stronger economic growth failed to keep pace even as reports showed a pickup in European inflation and a tighter U.S. jobs market. A report from Japan showed a gauge of consumer prices rose for the first time since December 2015.
“After the gains in the past few days, people are happy to wait to see what next week holds,” said Ben Kumar, a London-based investment manager at Seven Investment Management, which oversees about 10 billion pounds ($12 billion). “The narrative is that we’re in a rate hiking cycle now and any disruption to that will be perceived negatively.”
The dollar index was poised for its fourth straight weekly gain, though it was about 0.1 percent lower on Friday. “The U.S. dollar has been snapped up across the board as a March Fed hike is heavily priced in,” said Sean Callow, a senior currency strategist at Westpac. “All it took was about a hundred comments from Fed officials, but markets have finally decided that “fairly soon” means less than two weeks and that perhaps 3 hikes this year means 3 hikes this year.”
Expectations of a Fed rate hike soured the party on Wall Street, however, as financials led major U.S. indices lower. That weakness spilled over to Europe where the benchmark STOXX 600 fell for a second day dragged lower by industrials and consumer-related stocks.
The total market value of global stock markets hit an all-time high of $56.7 trillion earlier this week, having added more than $4 trillion since Donald Trump’s election as U.S. president last November. More than half of those gains were down to the rally in U.S. stocks, into which investors have pumped money for four of the past five weeks, according to the latest data from Bank of America Merrill Lynch and fund tracker EPFR.
In Europe, economic data continued to point to a brightening recovery as activity in euro zone businesses grew at its quickest pace in nearly six years in February and job creation reached its fastest in almost a decade. Rising euro zone inflation, along with easing anxieties over elections in France and growing talk of a March U.S. rate rise, put Germany’s benchmark 10-year government bond yield on track for its biggest weekly rise since November’s U.S. election.
Yields on 10-year Treasuries rose 2 bps to 2.450percent. The two-year yield, the coupon most sensitive to Fed actions, touched 1.336 percent on Thursday, the highest since 2009.
In commodities, oil prices rose as the dollar edged away from a multi-week high, though gains were held in check by unchanged Russian output for February, a sign of its weak compliance on a global deal to cut supplies. Benchmark Brent crude futures were up 0.4 percent at $55.29 a barrel after closing down 2.3 percent in the previous session. WTI futures gained 16 cents, or 0.3 percent, to $52.77.
Top Overnight News from Bloomberg
Asia equity markets traded lower across the board following the losses on Wall St. where all 3 major US indices pulled back from record highs and notable profit taking was observed in financials. ASX 200 (-0.8%) closed in the red after weakness in commodities while Nikkei 225 (-0.5%) was pressured as exporters felt the brunt of a firmer JPY. Shanghai Comp. (-0.4%) and Hang Seng (-0.7%) conformed to the soured sentiment after the PBoC conducted a net weekly drain of CNY 280b1n vs. a net injection of CNY 155b1n the prior week, while mixed Caixin Services and Composite PMIs also failed to inspire. 10yr JGBs were mildly supported amid the negative risk sentiment, although upside was capped in government bonds after the BoJ reduced its purchases in the super-long end.
Top Asian News
In Europe, equities initially traded lower on Friday as markets saw profit taking after the ramp higher seen so far through 2017. On a sector specific breakdown, the defensive Utilities sector was in the green, with materials among the worst performers as the complex continues to be weighed upon by the stronger USD. However, as noted above, risk staged a sharp rebound following the release of the Odoxa poll which showed Le Pen fading fast in both the first and second round of the French election. Elsewhere in commodities, energy has experienced a quiet session so far with no notable newsflow and tight price action Fixed income markets continue to see a divergence between Gilts and Bunds, with the former outperforming in a similar fashion to yesterday amid touted short covering. Elsewhere the periphery yields sit around parity, with price action appearing particularly contained.
Top European News
In currencies, the Bloomberg Dollar Spot Index retreated less than 1 percent after a five-day rally. the euro strengthened 0.1 percent to $1.0518 as of 10:02 a.m. in London. The British pound slipped 0.3 percent, falling for a sixth day, its longest losing streak since Dec. 2015. The yen rose 0.1 percent to 114.29 per dollar. The currency is still down 1.9 percent this week, its biggest decline this year. The big data release this morning was the UK services PMI, which fell against expectations from 54.5 to 53.3. The market was already looking for some moderation here, but the larger than expected fall heightened the nervousness over the Brexit impact on the economy’s leading driver. Cable pushed through 1.2250 with a little more verve, while EUR/GBP has pushed above 0.8600, but there is plenty of interest to buy the Pound at these levels, so the path lower should not be as aggressive as seen in previous episodes. Tight trade in EUFt/USD and USD/JPY, as the hawkish Fed mood continues to keep the USD on the front foot. Flow based resistance contain further USD upside to a modest degree, as Japanese exporters sit in front of 115.00 (114.50-80), while option bids from 1.0500 deter specs from attacking 1.0500 for now. USD bulls have also turned their attentions onto the commodity currencies, where the AUD and NZD were notable losers yesterday. Pressure on the AUD has relented a little to produce some stabilisation in the mid 0.7500’s, while NZD/USD continues to hold off 0.7100 for now. USD/CAD has already pushed through 1.3400, and we anticipate the market to continue to trade off the cautious BoC tone this week to grind higher to 1.3500 initially.
In commodities, gold slipped 0.5 percent to $1,228.16 an ounce. It’s down 2.3 percent for the week, after four straight weeks of advances. Oil gained less than 0.1 percent to $52.63 a barrel. Copper was little changed, after Thursday’s 1.4 percent drop. Iron ore fell 2.9 percent. Gold and Silver have made some notable losses as the March Fed rate hike propels the USD higher, and Treasuries lower. The yellow metal is now below USD1230.0, dropping close to USD20.0. However, losses in Silver have eclipsed this, having fallen from circa USD18.40 to USD17.70 or so, where we trade at present. Base metals have also taken a dip, but to a more modest degree, but Copper has dipped under USD2.70 again. These moves are modest in context, given the strikes in Chile, but supply issues having more of a positive on Nickel specifically as the Philippines looks at bans on iron ore exports to encourage domestic processing. Nickel up 1.0% today. Zinc gains are not too far behind. WTI is back in the middle of the USD50-55 range, with the compliance issue (among non OPEC members) back at the forefront of market sentiment.
Looking at the day ahead, we will get service and composite PMIs in the US along with the February ISM nonmanufacturing print which is expected to hold steady at 56.5. The Fedspeak will arguably be the bigger focus however with Yellen’s speech at 1pm GMT set to be watched closely. Evans and Lacker both speak in a panel at 3.15pm GMT, Powell speaks at 5.15pm GMT and Fischer at 5.30pm GMT.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
There is no doubt that this week’s main story has been the big rates repricing. President Trump’s speech was hotly anticipated and closely watched but ultimately has still left many questions unanswered. Instead markets have been busy scurrying to reassess Fed tightening expectations following a chorus of hawkish Fed commentary over the last few days.
Indeed since the close last Friday the market has gone from essentially pricing in a low-ish probability of a March Fed rate hike to now debating when the second rate hike of 2017 might be with March now not far off fully priced. The final nail in the coffin might well be Fed Chair Yellen’s speech this evening when she is due to speak on the economic outlook at an event in Chicago. The speech is due at 6pm GMT and you’d have to imagine that it would be a bold move to contradict the recent guidance provided by her Fed colleagues this week. That isn’t all though as we will also hear from Vice-Chair Fischer at 5.30pm GMT as well as Evans, Lacker and Powell prior to that. So there’s plenty to get through.
In summary the last 24 hours in markets has seen a continuation of bonds selling off. 2y yields closed last night at 1.308% and +2.4bps higher on the day although did actually touch 1.336% intraday. You would have to go back to June 2009 to find the last time we visited those lofty heights. 10y yields were up a similar amount to 2.478% and Bloomberg’s calculator (which as we’ve highlighted slightly overstates things) now has the probability of a March hike at 90% this morning from 80% a day ago and just 40% this time a week ago.
After one of the most dovish Fed member’s, Lael Brainard, talked up a hike as likely to be “appropriate soon”, Fed Governor Powell added yesterday afternoon that “we’re as close to our mandates as we’ve been in a very long time” and that “the case for a rate increase in March has come together and I do think it’s on the table for discussion”. Our US economists now expect the Fed to hike this month and also expect Yellen to likely indicate as much in her speech tonight. They expect the Fed to then pull the trigger again in June and September before holding off in December to announce the tapering of balance sheet reinvestments at the beginning of next year.
Back to markets. As well as those moves higher for Treasury yields there was a similar selloff for European bond markets yesterday too. 10y Bund yields closed up another 3.4bps at 0.313% while OATs and the peripherals were up between 1bps and 2bps. 2y Bund yields finished little changed but are still up nearly 12bps from last Friday’s low in yield of -0.956%. Where we did see some reversal though was in equities. The S&P 500 finished down -0.59% and the Dow finished -0.53% lower but still held in just above the 21,000 level. Those sectors that led the big rally on Wednesday were largely the culprits with financials, materials and industrials all underperforming. A decent selloff across commodities certainly didn’t help either. WTI Oil (-2.27%) fell by the most since January 18th following data which showed US stockpiles as rising while Gold (-1.24%) and Silver (-3.52%) were also much weaker. Base metals also had a rough time of it with Copper (-1.43%), Zinc (-2.80%) and Nickel (-2.27%) all sharply lower. EM currencies were also a big underperformer with currencies in Brazil (-1.86%), Colombia (-1.23%) and South Africa (-0.96%) in particular down sharply.
This morning in Asia we’re seeing most major bourses follow the lead from Wall Street and trade lower. The Nikkei (-0.45%), Hang Seng (-0.54%), Shanghai Comp (-0.37%), Kospi (-1.33%) and ASX (-0.82%) are all in the red as we go to print. Rates, with the exception of JGBs, have tracked the move higher in yield. There’s been some data released too this morning. In Japan the main news is a return to core inflation. Headline inflation has risen one-tenth to +0.4% yoy in January while the core excluding fresh food is now up to +0.1% yoy from -0.2%. That marks the first positive print since December 2015. The core-core came in at +0.2% yoy and up one-tenth. The Yen (+0.25%) is a shade firmer following the data. There’s also been plenty of focus on President Trump’s attorney general Jeff Sessions overnight. It was revealed late last night that Sessions would recuse himself from investigations involving the presidential campaign and failing to disclose meetings with Russia.
Moving on. It was a much quieter day for data yesterday but there were still a couple of releases which stood out. In Europe the main focus was on the Euro area CPI report for February where headline CPI was estimated as rising twotenths to +2.0% yoy as expected and the highest since January 2013. The core was however steady at +0.9% yoy which also matched expectations. The core has now held at that level for 3 consecutive months. Also out in Europe yesterday was the PPI print which came in at +0.7% mom for January while the unemployment rate was revealed as holding steady at 9.6% in the same month. In the US the sole release was the latest weekly initial jobless claims print which revealed a 19k decline in claims to 223k which is the lowest since March 1973. While notable, it’s worth highlighting that that is perhaps partly influenced by last week’s Presidents Day holiday.
Looking at the day ahead, in terms of data the early release this morning is Germany retail sales before focus then turns over to the final February services and composite PMI’s in Europe including a look at the data in the periphery. We will also get those PMI’s in the US along with the February ISM nonmanufacturing print which is expected to hold steady at 56.5. The Fedspeak will arguably be the bigger focus however with the aforementioned Yellen speech at 6pm GMT set to be watched closely. Evans and Lacker both speak in a panel at 3.15pm GMT, Powell speaks at 5.15pm GMT and Fischer at 5.30pm GMT.
Before we wrap up, this Sunday the National People’s Congress meeting is due to kick off in China which is set to include Premier Li Keqiang’s proposals for economic targets. It usually lasts about 10 days but it’ll be interesting to see if we get any early headlines.