Quiet Start To Quad-Witching St. Paddy’s Day: Futures Flat, Global Stocks Mixed

A quiet start to today’s quad-witching St. Patrick’s day, with European stocks mixed, Asian shares and U.S. index futures (-0.1%) little changed ahead of industrial production data with just Tiffany’s set to report earnings.

Emerging markets headed toward the best week in eight months even as the global equities rally spurred by the Federal Reserve’s outlook lost momentum. The lack of a more hawkish tone in the FOMC’s statement meant the dollar was poised for its biggest weekly loss since February. As Bloomberg observes, markets from Malaysia to Turkey climbed, while Jakarta’s benchmark touched a record before erasing gains. Shares in Tokyo dropped weighing down the MSCI Asia Pacific Index after it posted its biggest gain since November. Chinese stocks slipped 1 percent as investors sought more evidence of a sustainable economic recovery, but indexes were set for a 1 percent increase for the week. Hong Kong’s Hang Seng index touched its highest level since August 2015 on Friday. While up only marginally on the day, it was on track for a 3.2 percent gain for the week, its biggest since September. The MSCI Emerging Markets Index rose 0.2 percent, bringing its rally for the week to 4.2 percent, far outpacing a 1.3 percent advance for the MSCI All-Country World Index.

European shares opened lower although have since rebounded into the green, while futures on the S&P 500 Index retreated some more following Thursday’s modest decline, after climbing to within 0.5% of an all-time high. The Bloomberg Dollar Spot Index was little changed after a two-day loss, while Treasuries recovered some of the previous day’s declines.

“The story in global markets over the past 24 hours has centered on a broad-based tightening of monetary policy conditions (and the perception of future tightening),” Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.

Global stocks are on course for the best week since January in a week full of central bank announcements but none more improtant thatn the Fed raising its benchmark lending rate a quarter point without accelerating the timetable for future hikes, a move which according to Goldman and RBC was misinterpreted by a market which no longer believes that the Fed could possibly do anything to harm equities according to SocGen’ Albert Edwards.

“A less hawkish monetary policy in the U.S. is more likely to push assets outside of the U.S. into higher-risk, higher-return markets,” James Woods, a Sydney-based investment analyst at Rivkin Securities, said in a phone interview. “A weaker dollar is supportive of those emerging markets generally. I’m not sure whether its going to be long-lived though. People are going to get back to focusing on the next Fed hike, and also Trump’s policies which would be dollar supportive.”

The Stoxx Europe 600 Index was unchanged in early trading, holding on to a modest weekly gain after reaching the highest closing level since December 2015 on Thursday. The MSCI Asia Pacific Index retreated 0.2 percent, after closing Thursday at the highest since June 2015. Japan’s Topix fell 0.4 percent, capping its biggest weekly decline in more than a month. The MSCI Emerging Markets Index rose 0.2 percent, bringing its rally for the week to 4.2 percent, far outpacing a 1.3 percent advance for the MSCI All-Country World Index.

The Jakarta Composite Index gained as much as 0.7 percent to a record before erasing gains. India’s Sensex Index climbed 0.3 percent, taking its gains for a holiday-shortened week to 2.6 percent. South Korea’s Kospi and Taiwan’s Taiex jumped 0.7 percent. Hong Kong’s Hang Seng and the Hang Seng China Enterprises Index were little changed after soaring the most since May on Thursday.

Futures on the S&P 500 slipped 0.1 percent, after the benchmark gauge fell 0.2 percent Thursday. MSCI’s all-country world stock index held near Thursday’s all-time high on Friday, on track to end the week 1 percent higher.

The pound was unchanged on Friday after strengthening Thursday as some Bank of England policy makers said they may not be far behind Kristin Forbes who’s leaning toward raising interest rates. The dollar index, which tracks the greenback against a basket of six trade-weighted peers, retreated 0.2 percent to 100.18. It hit a five-week low on Thursday, and is down 1 percent for the week. The dollar was steady at 113.32 yen but is on track to post a 1.2 percent loss for the week.

Meanwhile, the fascination with volatility remains, as it continues to retreat after the central bank policy decisions, while at the same time, the defeat in this week’s Dutch elections of anti-immigration candidate Geert Wilders is being seen as a blow to populist political leaders, easing concerns ahead of French elections. A gauge of volatility on the Euro Stoxx 50 Index plunged 26 percent on Thursday, the most on record.

 “Volatility is scarily low and there’s just a lot of complacency out there,” James Audiss, a senior wealth manager at Shaw and Partners in Sydney, said in a phone interview. “After we get through the big macro events with governments and elections, we have to start to look to corporate earnings. That’s where it becomes not so much a systemic stock market move as stock selection.”

In commodities, U.S. and Brent crude held above a 3-1/2-month low breached early this week, supported by a weaker dollar. Gold was up slightly at $1,228 an ounce. It was poised to gain 1.8 percent for the week, its first in three, driven by the Fed’s more moderate monetary policy stance.

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Market Snapshot

• S&P 500 futures down 0.1% to 2,378.00
• STOXX Europe 600 up 0.02% to 377.81
• MXAP down 0.2% to 147.85
• MXAPJ up 0.3% to 478.99
• Nikkei down 0.4% to 19,521.59
• Topix down 0.4% to 1,565.85
• Hang Seng Index up 0.09% to 24,309.93
• Shanghai Composite down 1% to 3,237.45
• Sensex up 0.3% to 29,682.41
• Australia S&P/ASX 200 up 0.2% to 5,799.65
• Kospi up 0.7% to 2,164.58
• German 10Y yield rose 1.8 bps to 0.466%
• Euro down 0.01% to 1.0765 per US$
• Brent Futures down 0.04% to $51.72/bbl
• Italian 10Y yield rose 6.4 bps to 2.366%
• Spanish 10Y yield rose 3.5 bps to 1.934%
• Brent Futures down 0.04% to $51.72/bbl
• Gold spot up 0.1% to $1,228.05
• U.S. Dollar Index down 0.08% to 100.28

Top Overnight News

• Airbus Probed by French Authorities as U.K. Fraud Case Widens
• Amazon Seeks Nod to Invest, Partner in India Food Supply Chain
• Amec Foster Wheeler Wins Share of $950m U.S. Air Force Contract
• AstraZeneca Says FDA Issues Response for ZS-9 in Hyperkalaemia
• Morgan Stanley Veteran Wong Said to Leave to Help Set Up PE Fund
• Trump Adviser Gary Cohn Said to Sell Stake in China’s ICBC: NYT
• Apple Plans R&D Centers in China’s Shanghai and Suzhou
• Freeport Indonesia Axes About 2,100 Workers as Talks Continue
• Cerro Verde Says Union Could Start Indefinite Strike March 24
• U.K. Pulls YouTube Adverts, Summons Google Over Content: Times

In Asian markets equities traded mixed, following a weak lead on Wall St. with markets relatively calm following a tumultuous 2 weeks packed with key risk events and ahead of quadruple witching. ASX 200 (+0.2%) was buoyed by gold names as the precious metal held on to most of its post-FOMC gains, while strength in the largest weighted sector financials further underpinned the index. Nikkei 225 (-0.3%) lagged as USD/JPY languished, while Shanghai Comp. (-1.0%) and Hang Seng (flat) were mixed with the mainland underperforming after the PBoC conducted a net weekly drain of CNY 120bIn. 10yr JGBs were flat despite weakness in riskier Japanese assets, while a mixed enhanced-liquidity auction for 2yr, 5yr, 10yr and 20yr JGBs also failed to spur demand. The PBoC injected CNY 20bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos, for a net weekly drain of CNY 120bIn vs. CNY 110bIn net drain last week.

In European bourses, price action has been similarly uneventful as the week closes, with major indices failing to find a firm direction as participants keep one eye on the quadruple witching throughout the day. The FTSE has managed to hold near yesterday’s fresh all time highs, despite miners seeing some profit taking in the wake of recent strength. The softness in miners has been offset by the likes of Berkeley, who led the index at the open after their pre-market earnings. Yields continue to climb in the fixed income space, with bund prices lower today by around 50 ticks after the Nowotny comments yesterday. Elsewhere, Greek yields also continue to climb after yesterday’s commentary from an EU official suggesting it is likely the bailout review will be completed by early April.

In currencies, the Bloomberg Dollar Spot Index added less than 0.1 percent, after dropping 0.2 percent on Thursday on top of a 1.3 percent post-FOMC drop. The gauge is down 1.2 percent for the week, the most since the period ended Feb. 3. The yen was little changed at 113.25 per dollar, paring its biggest weekly gain in more than a month. The pound rose 0.2%, rebounding just shy of $1.24. The currency is up 1.6 percent for the week, its biggest gain since January. The euro was little changed at $1.0769, bringing its advance for the week to 0.9 percent, following yesterday’s hint by Nowotny that rate hikes in Europe may be coming. The USD continues to struggle this morning — this in spite of US Treasury yields balancing out after the sell off post FOMC. Both the EUR and GBP are still gaining ground against the greenback this morning, and both from an interest rate perspective, where yesterday’s MPC conclusion revealed the majority of the BoE see a case for a rate hike sooner on the timeline. This came alongside the dissenting Forbes who voted for a hike this time around, though tempered by the fact that she leaves the committee in Jun. Cable has pushed higher today to test the stronger resistance levels seen ahead of 1.2400, but has held for now. EUR/GBP was testing support ahead of 0.8650 late yesterday before the ECB’s Nowotny hit the newswires with hints towards a rate move ahead of tapering — distinguishing their exit strategy to that of the US. The cross rate turned tail to reclaim 0.8700, but has topped out ahead of 0.8750 before moving lower again. This has come in tandem with a EUR/USD move towards 1.0800, but selling intensifies the closer we get to this level.

In commodities, oil rose 0.2 percent to $48.84, heading toward its first weekly gain in three weeks thanks to a surge on Wednesday. Gold added 0.1 percent after a two-day gain, trading at $1,228.33 an ounce and poised for a 2 percent increase for the week. Oil prices have recovered courtesy of the latest inventory data from API, perhaps less so the DoE. Saudi Arabia have also alluded to a potential extension to production cuts beyond June, but this will be cause for consolidation more than anything else, and it is now surprise to see WTI struggling to get back into the $50-55 range — currently just under $49.00. The moderate retracement in the USD has also been supportive, as it has across the commodity spectrum, with the impact on base metals positive along with some fresh optimism over demand. Supply issues have also aided Copper and Zinc price, but levels still comfortably off the recent highs seen. Gold continues to track the USD, and with a tighter correlation in Treasuries, USD/JPY has been a good indicator, with some calls for a move back to $1250.00.

Looking at the day ahead in the US we’ll get the February industrial and manufacturing production prints for February where the consensus is for +0.2% mom and +0.5% mom respectively. The conference board’s leading index for February is also due along with the first estimate of the March University of Michigan consumer sentiment print. It’s worth noting that over the weekend China will also release February property prices data. There are a couple of other things to highlight starting today. One is the G-20 finance ministers meeting which continues into tomorrow and the other is the Scottish National Party conference which also continues into tomorrow, where clearly most will be looking for further debate on a possible second referendum.

US Event Calendar

• March 17-March 20: Labor Market Conditions Index Change, est. 2.5, prior 1.3
• 9:15am: Industrial Production MoM, est. 0.2%, prior -0.3%; Capacity Utilization, est. 75.5%, prior 75.3%; Manufacturing Production, est. 0.5%, prior 0.2%
• 10am: U. of Mich. Sentiment, est. 97, prior 96.3; Current Conditions, est. 111, prior 111.5; Expectations, est. 87.1, prior 86.5
  • U. of Mich. 1 Yr Inflation, prior 2.7%; 5-10 Yr Inflation, prior 2.5%
• 10am: Leading Index, est. 0.5%, prior 0.6%

Jim Reid concludes the overnight wrap, with the announcement that his wife is expecting twin boys

What have Amal Clooney, Beyoncé and my wife got in common? Please don’t spill your coffee when reading the following but shock of all shocks they are all expecting twins. We had our 12 week scan yesterday – which I just managed to get back in time for after storm Stella delayed me – and it all went well. Ours are identical which are a 1 in 300 occurrence, and totally hit us for six when we found out a few weeks ago. I knew nothing about twins beforehand but apparently identical ones are totally random across age, region, religion and family history. There are absolutely no clues to their likelihood. Indeed given our age and a long time trying we thought Maisie was a miracle. What this qualifies as we’ve no idea. However poor Trudi has been suffering from extreme morning sickness for the last 2 months and has been on medication to help combat it. Apparently it’s twice the hormones with twins and can be twice the sickness. Homelife has been a bit of a nightmare over this period and I’ve had to step up to the plate a lot and also get care for poor Maisie. She is still sick and exhausted but is slowly getting slightly better. So please feel for her growing two replicas of us inside of her. Also it being twins and our geriatric age (combined 87 years old around delivery… and I’m the toy boy!) make it a risky pregnancy so hopefully everyone will have their fingers crossed for us. To build some suspense there will be a gender reveal in today’s PDF. I’ve no idea how gender reveal parties have caught on in recent years but luckily I’ve avoided going to all I’ve been invited to. All you have to do is open the PDF for all to be made apparent. Oh and I’m sure there are some twins or parents of twins out there reading this. Any advice will be gratefully received – especially with identicals. It’s fair to say we’re still in shock. We certainly don’t know how to tell poor Bronte!!

Talking of sickness, tracking bond yields over the last 36 hours has left you in danger of experiencing quite bad motion sickness as Wednesday night’s fierce rally partly and suddenly reversed yesterday. 10y Treasury yields rose +4.7bps to 2.541% and in doing so reversed just under 50% of the post Fed move. 2y yields also darted back up +3.3bps to 1.334% and unwound a similar percentage of the prior day rally. I had a lot of clients email me yesterday wondering why bonds should have rallied so much in the first place when the Fed had hinted that they could let inflation run symmetrically around their target which might mean a period where’s it’s allowed to run a little hot. The relatively dovish dots seemed to dominate activity Wednesday night but perhaps there was some acknowledgment yesterday that this actually could mean 10 year yields should rise not fall. Anyway there are many ways of interpreting the Fed and at the moment yields are still notably lower than before the decision.

That said in Europe bond markets yesterday did pretty much complete the post Fed u-turn. 10y Bund yields backed up +3.4bps to finish at 0.443%, yields in the periphery were up to +6.7bps higher while similar maturity Dutch yields were +2.6bps higher at 0.683%. Indeed the biggest driver appeared to be that market-friendly Dutch election result and specifically the defeat for the populists, helping to lower expectations of a possible Le Pen shock in France. ECB board member Praet also spoke and sounded generally upbeat on European growth prospects although did still sound some caution on the inflation outlook. Later in the evening and after the European close the ECB’s Nowotny also caused a bit of a hawkish buzz after being quoted in the Handelsblatt saying that the ECB doesn’t necessarily need to follow the US model of completing QE before raising rates, and also that the ECB could raise the deposit rate before the main refinancing rate. We’ll see the reaction in the front end this morning.

The Euro spiked on Nowotny’s comments having traded flat for most of yesterday, closing up +0.30% versus the Dollar and it’s up a little bit more this morning at 1.078. Generally positive sentiment in Europe was reflected in a decent session for risk assets yesterday with the Stoxx 600 closing +0.70%, with European Banks +0.94% and to a new 15-month high. The iTraxx Main and Crossover indices were 2bps and 7bps tighter respectively. In contrast the S&P 500 (-0.16%) and Dow (-0.07%) both eased back, albeit very modestly with the S&P 500 still up about +0.30% versus the pre-Fed level. EM on the other hand surged again with the MSCI EM index up a bumper +2.09% and to the highest since July 2015.

Meanwhile it’s worth highlighting that President Trump’s budget came and went without causing too much of a ripple. The President proposed steep cuts to a number of domestic departments to pay for higher military spending, amongst other things. Indeed much of the chatter is that Congress will almost certainly reject most of the proposals. House Speaker Paul Ryan confirmed that the budget request is part of a “long, ongoing” process.

Overnight in Asia it’s been fairly quiet for the most part. Equity bourses are fairly mixed but moves have been modest with the Nikkei (-0.36%) and Shanghai Comp (-0.24%) a little softer but the Hang Seng (+0.28%), Kospi (+0.35%) and ASX (+0.37%) all slightly firmer. Rates and currencies are also fairly quiet while Oil and Gold are a little firmer.

Staying in Asia, after China’s mini tightening yesterday it was good timing from our chief economist Zhiwei Zhang who published a note looking at how the property bubble is getting bigger with policy behind the curve. Zhiwei thinks the root cause of this bubble is excessively loose monetary policy set to achieve growth above its potential. He thinks aggressive monetary tightening is unlikely in 2017 though and that the bubble might help the economy in the near term, partly through a large wealth effect for households as well the government. But it severely heightens macro risks, particularly for 2018-2020.  Talking of bubbles our asset allocation team published a note yesterday suggesting that US real yields are extremely misvalued if not actually in a bubble and are at levels comparable to those seen at the depths of the financial crisis.

So after a week of a Fed hike and a mini Chinese one, here in the UK there was some surprise that BOE member Kirsten Forbes dissented from the rest of the committee yesterday and voted for a 25bp hike. She does leave the committee in the summer which perhaps downplays the move but the tone in the minutes were on the hawkish side notwithstanding the MPC acknowledging that wage inflation was “notably weaker” than the expectations from the Inflation Report in February. As DB’s Mark Wall highlights, first there was a reference to “some members” (beyond Forbes) feeling that it would not take much upside relative to current growth and inflation expectations for an immediate tightening of policy to be warranted. Second, the MPC sees potential offsets against the baseline view that weaker consumption weakens GDP, for example, more supportive net trade. Mark’s baseline view is for an indefinite hold on rates but yesterday’s tone increases the risks of upcoming tightening.

Away from the central banks, yesterday’s data was largely second tier by nature in the US. The most notable was perhaps the Philly Fed manufacturing index which declined a bit less than expected in March (32.8 vs. 30.0 expected; 43.3 in February) albeit with the index still at fairly elevated levels. The details also revealed a small uptick in new orders by 0.6pts to 38.6. Away from that housing starts were reported as rising +3.0% mom in February (vs. +1.4% expected) however permits fell -6.2% mom (vs. -1.9% expected). On the employment front initial jobless claims held steady at 241k while the BLS JOLTS report for January showed a small lift in the quits rate to 2.2% which matches the post-recession high from December 2015. The hiring rate rose to 3.7% from 3.6% and was the first increase since July.

Finally the only notable data in Europe was the final February inflation report for the Euro area where headline CPI was confirmed at +0.4% mom and the YoY rate at +2.0%. There were no final revisions to the core either at +0.9% yoy. Away from that central bank decisions from Switzerland, Norway and Turkey saw benchmark rates left on hold.

Looking at the day ahead it’s a fairly quiet end to the week for data in Europe this morning with Q4 wages data in France and the latest trade balance reading for the Euro area the only releases of note. In the US we’ll get the February industrial and manufacturing production prints for February where the consensus is for +0.2% mom and +0.5% mom respectively. The conference board’s leading index for February is also due along with the first estimate of the March University of Michigan consumer sentiment print. It’s worth noting that over the weekend China will also release February property prices data so it’ll be worth seeing if the data backs up our aforementioned economists’ view. There are a couple of other things to highlight starting today. One is the G-20 finance ministers meeting which continues into tomorrow and the other is the Scottish National Party conference which also continues into tomorrow, where clearly most will be looking for further debate on a possible second referendum.

Meanwhile I’ll still be walking round in a state of shock.