Futures Rebound Fizzles As “Markets Are Running Out Of Reasons To Stay Optimistic”

It is the fourth consecutive day in which global stocks have rebounded from overnight lows, seemingly ignoring growing trade tensions and breathing a sigh of relief amid a break in the recent global trade war newsflow, which  helped lift European stocks and cooled demand for safety plays.

It is also the fourth consecutive day in which S&P futures have rebounded from overnight lows, and while off session highs, remain in positive territory.

But a bigger question is whether like on the previous three days all the early gains fade and the S&P closes at or near the lows, a recent pattern which yesterday prompted Dennis Gartman to “stake his reputation” and make a “watershed call”  that the equity markets have hit a multi-year top.

Indeed, as Deutsche Bank notes this morning, “markets appear to be running out of reasons to stay optimistic this week. The White House reshuffle and concerns about a more protectionist US policy agenda is certainly at the heart of that however yesterday’s soft retail sales report also seemed to put the brakes on the ‘Goldilocks’ data scenario which was pushed after last Friday’s employment report.”

Besides the odd trading pattern, which may or may not recur, markets remain at a crossroads right now as they struggle with a number of concerns: how US trade policy will play out, broader geopolitical tensions and potentially slowing economic growth in the US. As a consequence, price action has become rather erratic as we wait for the next catalyst which as of now seems to be the Fed March 21 meeting.

“The big questions the market has is about politics in the United States at the moment and about trade policy,” said Julien-Pierre Nouen, Chief Economic Strategist at Lazard Frères Gestion. “Exporters have been a bit weak and you can see there are some worries about whether other countries will retaliate… but you really have to stick to the economic outlook and in fact we think the economic outlook remains very good.”

Aside from the usual suspects (global trade wars and President Trump’s White House staff reshuffling), two Central Bank policy meetings were also in focus, and while the SNB trimmed its inflation forecasts virtually everything else remained unchanged from the previous quarterly assessment; meanwhile the Norges Bank more than lived up to hawkish expectations by bringing forward its hike forecast to after Summer from after Autumn in December, and more precisely August or September, according to Governor Olsen.

European stocks rose in early trade in a broad rally led by tech stocks, bouncing after a two-session slide, while H&M drops after it reported stagnating sales for the first quarter. Strong results from insurance heavyweights Munich Re , Generali and Old Mutual also helped Europe’s mood. But it was mainly relief that, for now at least, Donald Trump’s trade war drum wasn’t beating any harder, although all that can change with one tweet. The Stoxx 600 is up 0.3% after losing 1.1% in the past two sessions. Europe’s benchmark index trades below both its 50-DMA and 200-DMA. The real estate sector bucks the trend, falling 0.3%. 17 out of 19 Stoxx 600 sectors rise; retail sector has the biggest volume at 114% of its 30-day average.

The 0.3 percent bounce in European stocks came after a subdued Asian session in which there were a few notable standouts such as Japan’s Nikkei, which erased early losses to finish up 0.12% despite a stronger yen and an ongoing scandal surrounding Prime Minister Shinzo Abe and Finance Minister Taro Aso. Japan’s equity market “has been holding up relatively well, but it will have to decline some more if U.S. shares deepen their losses,” said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo.

Japan’s equity market “has been holding up relatively well, but it will have to decline some more if U.S. shares deepen their losses,” said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo. There was also some speculation that the BOJ was aggressively buying up ETFs on Thursday.

And speaking of government intervention, there definitely was some in China where shares wiped out early losses with an afternoon turnaround that was due to Chinese state funds buying shares in the open market in the afternoon because authorities want markets to be stable during annual legislative meetings in Beijing, said Shen Zhengyang, Shanghai-based analyst with Northeast Securitie.  ChiNext Index closes up 0.4% after sliding 1.6%. The Shanghai Composite Index wipes out a 0.6% loss to end unchanged. Hang Seng Index and Hang Seng China Enterprises Index both rose 0.3%.

In macro, risk sentiment continues to look poor. The DXY dollar index barely budged at 89.698 and at $1.2364 per euro in European trading, having fallen almost 1.5 percent so far this month. Most commodity currencies and EM FX trades in the red against USD and the JPY bid overnight makes sense in this environment. Still, there are a number of outliers worth highlighting. NOK is the outperformer of the day after the Norges Bank shifted its rate hike path forward, suggesting a hike is most likely after summer 2018. RUB markets aren’t concerned about worsening UK/Russia relations while TWD may herald a new era of FX flexibility with the new central bank governor. Also outperforming was the Swedish krona, which rallied approaching the 21-DMA at 10.0809, after unemployment unexpectedly fell to 6.3% in February, compared with a Bloomberg median survey estimate of 7.0%. Sterling was at a day’s low at just under $1.40 the day after Britain said it was expelling 23 Russian diplomats over the poisoning of former Russian spy living in Britain last week. Russia’s foreign ministry spokeswoman Maria Zakharova told a news briefing that Moscow would soon retaliate.

As Bloomberg adds, one-week implied volatility in dollar crosses climb higher as the tenor captures FOMC meeting risk, while demand further out the curve is subdued as the SNB stays in the camp of global central banks that remain cautious about unwinding stimulus.

Key FX moves via BBG:

• The euro held steady against the dollar, with the Bloomberg Dollar Spot Index little changed
• Norway’s krone surged to a four- month high against the euro after the central bank signaled it will move faster in raising interest rates, with a first increase likely after the summer of 2018; EUR/NOK dropped below 9.50 and breached the 200-DMA for the first time since April last year
• Sweden’s krona rallied, approaching the 21-DMA at 10.0809, after unemployment unexpectedly fell to 6.3% in February, compared with a Bloomberg median survey estimate of 7.0%
• The Swiss franc was little changed after the SNB kept rates on hold and said currency market still fragile and that franc remains highly valued
• The yen advanced for a second day, strengthening past 106 per dollar at times, as concern over trade protectionism and weaker-than-forecast U.S. economic data spurred demand for safer assets, with intraday clients taking cues more from stocks and stock futures than Treasuries
• New Zealand’s dollar pared losses that occurred following a 4Q GDP miss

Looking at key geopolitical news, China’s widely-read and state-run tabloid the Global Times had added to the trade war talk overnight saying the U.S. was trying to play the victim. Germany’s economic ministry then said a trade war could “cause tangible damage”.  In an ominous sign for Trump’s Republicans eight months before national mid-term elections meanwhile, a moderate Democrat candidate looked to have won what should have been a shoo-in congressional election for Republicans in Pennsylvania.

Other notable geopol/macro developments:

• New NEC Director Larry Kudlow commented that he would like to see the USD slightly stronger than it currently is, and that he would buy USD and sell gold.
• US President Trump’s lawyers are to prepare for an interview with Special Counsel Mueller, according to sources.
• US Senate voted 67 to 21 in favour of the bill to roll back parts of Dodd-Frank Act and ease regulations for banks.
• Canadian PM Trudeau said he is confident on reaching a NAFTA agreement and that Canada is happy to speed up NAFTA discussions if required.
• According to reports in the Times, EU negotiators have accepted the UK’s demands that it should be able to pursue an independent trade policy while remaining inside the customs union and single market. Elsewhere, Brexit Minister David Davis has signalled that he is prepared to accept a shorter transition period than the UK wanted.
• Italy’s League leader Salvini and 5-Star leader Di Maio discussed options

In metals markets, safe-haven gold lost some of its appeal, with spot prices dipping 0.1 percent to $1,326.16 an ounce. Oil prices held steady though with Brent crude futures at $64.91 per barrel and U.S. West Texas Intermediate (WTI) crude futures CLc1 fractionally higher $61.05 a barrel.

The market is being supported by healthy global demand but that is being offset by a relentless rise in U.S. production that is undermining efforts led by OPEC to cut supplies and prop up prices.

Expected data include jobless claims and Empire State Manufacturing Survey. Adobe, Broadcom, Dollar General, Ulta Beauty and Turquoise Hill are among companies reporting earnings

Market Snapshot

• S&P 500 futures up 0.2% to 2,760
• STOXX Europe 600 up 0.2% to 375.80
• MSCI Asia Pacific up 0.04% to 178.69
• MSCI Asia Pacific ex-Japan down 0.02% to 588.41
• Nikkei up 0.1% to 21,803.95
• Topix up 0.02% to 1,743.60
• Hang Seng Index up 0.3% to 31,541.10
• Shanghai Composite down 0.01% to 3,291.11
• Sensex down 0.3% to 33,748.01
• Australia S&P/ASX 200 down 0.2% to 5,920.80
• Kospi up 0.3% to 2,492.38
• German 10Y yield fell 0.2 bps to 0.591%
• Euro up 0.01% to $1.2369
• Italian 10Y yield rose 2.0 bps to 1.757%
• Spanish 10Y yield fell 1.0 bps to 1.389%
• Brent futures down 0.1% $64.80/bbl
• Gold spot down 0.2% to $1,322.60
• U.S. Dollar Index up 0.1% to 89.76

Top Overnight News

• Incoming White House economic adviser Larry Kudlow signaled President Trump would support a strong dollar, pursue a second phase of his tax overhaul to make cuts permanent and take a tougher line on trade with China
• Britain steeled itself for President Putin’s reaction Thursday after Prime Minister May threw out 23 Russian diplomats in retaliation for the poisoning of a former spy and his daughter on U.K. soil
• OPEC is forecasting new oil supplies from its rivals will exceed growth in demand this year as the U.S. industry thrives. It raised expectation for supply growth from the U.S. and other producers for a fourth month, according to its market report
• Japanese Prime Minister Shinzo Abe got a warning sign that a ballooning scandal won’t go away any time soon: a rare interrogation from lawmakers from his own party
• Japanese Finance Minister Taro Aso won’t attend a gathering of global economic leaders in Argentina next week amid calls for his resignation, according to people familiar with the matter, costing him the chance to push back against U.S. tariffs and voice his views on currencies
• “We see a welcome alignment of stars against a background of robust recovery across Europe and gradual progress on inflation. There is a convergence of market views and our outlook”, Bank of France Governor and ECB Governing Council member Francois Villeroy de Galhau says on CNBC

Key Economic Developments from Bloomberg

• Canadian Prime Minister Justin Trudeau said he’s willing to accelerate Nafta talks, striking an upbeat tone on the fate of the trade pact
• Norway’s central bank signaled faster interest rate increases to come, while the Swiss national bank kept alive its threat to intervene in currency markets
• Mario Draghi’s promise to avoid surprising investors as the European Central Bank heads for the stimulus exit will require him to be clear on his plans for interest rates
• There’s more political strife in eastern Europe. Slovenian Prime Minister Miro Cerar unexpectedly resigned just months before elections. That comes after Slovak Prime Minister Robert Fico offered to resign if his party is allowed to remain in charge of the government
• President Xi Jinping’s pick to lead the People’s Bank of China will finally be announced March 19, five months after incumbent governor Zhou Xiaochuan said he’d retire “soon.” Bloomberg has short profiles of five contenders in the mix to replace Zhou, who has led the PBOC for 15 years
• Japanese Finance Minister Taro Aso won’t attend a gathering of Group of 20 finance chiefs in Argentina next week, according to people familiar with the matter, costing him the chance to push back against U.S. tariffs and voice his views on currencies
• Rural India is providing signs of a revival for the overall economy with a Bloomberg Economics indicator showing shows tractor and two-wheeler sales are up and the government is spending more

Asian markets were a subdued session in which there were a few notable standouts such as Japan’s Nikkei, which erased early losses to finish up 0.12% despite a stronger yen and an ongoing scandal surrounding Prime Minister Shinzo Abe and Finance Minister Taro Aso. Japan’s equity market “has been holding up relatively well, but it will have to decline some more if U.S. shares deepen their losses,” said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo. There was also some speculation that the BOJ was aggressively buying up ETFs on Thursday. And speaking of government intervention, there definitely was some in China where shares wiped out early losses with an afternoon turnaround that was due to Chinese state funds buying shares in the open market in the afternoon because authorities want markets to be stable during annual legislative meetings in Beijing, said Shen Zhengyang, Shanghai-based analyst with Northeast Securitie.  ChiNext Index closes up 0.4% after sliding 1.6%. The Shanghai Composite Index wipes out a 0.6% loss to end unchanged. Hang Seng Index and Hang Seng China Enterprises Index both rose 0.3%.

Top Asian News

• Chinese Lab Operator Adicon Is Said to Prepare $500 Million Sale
• Goldman Bets on Unprecedented Economic Overhaul in Saudi Arabia
• The Next PBOC Chief’s Hands May Be Tied — by Xi, BNP Says
• State Ownership Impedes Supervision of India Banks, RBI Says

In Europe, equities were broadly in the green shrugging off the subdued close in Asia and the US amid the lingering trade war concerns. Focus has been on the insurance sector this morning with strong guidance for Munrich Re lifting shares this morning, while firm financial results from Generali have also supported the sector. Elsewhere, SocGen are among the underperformers after the unexpected departure of the Deputy Chair.

Top European News

• Nestle Backs New Food-Tech Fund That’s Swapping London for Paris
• Lufthansa Sees Harder 2018 as Rivals Rush to Fill Air Berlin Gap
• ECB Gets Tougher on Bad Loans Amid Banks’ $1 Trillion Pile
• SNB Keeps Intervention Threat as Key Interest Rate at Record Low
• Norway Signals Faster Rate Increases After Price Target Shakeup

In FX, aside from the usual suspects (global trade wars and President Trump’s White House staff reshuffling), 2 Central Bank policy meetings were in focus, and while the SNB trimmed its inflation forecasts virtually everything else remained unchanged from the previous quarterly assessment. Hence, Eur/Chf was essentially static and rangebound between 1.1680-1.1700, while Usd/Chf held within a 0.9460-35 range despite broader Usd weakness (Usd/Jpy sub-106.00 and DXY still under 90.000). However, the Norges Bank more than lived up to hawkish expectations by bringing forward its hike forecast to after Summer from after Autumn in December, and more precisely August or September, according to Governor Olsen. 2018 non-oil GDP is now seen at 2.6% vs 2.3%, and the output gap closing quicker, so inflation also to target sooner (now 2% vs 2.5% prior to March 2nd). Eur/Nok duly dumped, albeit somewhat belatedly, through the 200DMA at 9.5300, then bids at 9.5000 and down to around 9.4746. Elsewhere, Eur/Usd was rangy from 1.2350-85, while Aud/Usd and Nzd/Usd are softer after the former failed to sustain 0.7900+ levels on Wednesday and following weaker than anticipated NZ GDP data overnight. Conversely, Cable fell quite sharply and abruptly, with Eur/Gbp rallying around the same time on nothing obvious, so perhaps order/flow/stop-related rather than fundamental. 

In the commodity complex, crude futures trade relatively flat with WTI trading just south of the USD 61/bbl mark. Additionally, the IEA published their monthly oil report and much like yesterday’s OPEC report, they revised higher demand forecasts, but did maintain non-OPEC supply forecasts.

Looking at the day ahead, we are due to receive March empire manufacturing, February import price index, the latest weekly initial jobless claims, March Philly Fed business outlook and March NAHB housing market index data. Brexit-related headlines will likely be a focus too with EU ambassadors wrapping up their four-day meeting, which is expected to conclude with an approval of text for the EU’s future relationship with the UK. The ECB’s Lautenschlaeger is also due to speak.

US Event Calendar

• 8:30am: Empire Manufacturing, est. 15, prior 13.1
• 8:30am: Import Price Index MoM, est. 0.2%, prior 1.0%; YoY, est. 3.45%, prior 3.6%;
• 8:30am: Export Price Index MoM, est. 0.25%, prior 0.8%; YoY, prior 3.4%
• 8:30am: Initial Jobless Claims, est. 227,500, prior 231,000; Continuing Claims, est. 1.9m, prior 1.87m
• 8:30am: Philadelphia Fed Business Outlook, est. 23, prior 25.8
• 9:45am: Bloomberg Consumer Comfort, prior 56.8
• 10am: NAHB Housing Market Index, est. 72, prior 72
• 4pm: Total Net TIC Flows, prior $119.3b deficit;

DB’s Craig Nicol concludes the overnight wrap

Markets appear to be running out of reasons to stay optimistic this week. The White House reshuffle and concerns about a more protectionist US policy agenda is certainly at the heart of that however yesterday’s soft retail sales report also seemed to put the brakes on the ‘Goldilocks’ data scenario which was pushed after last Friday’s employment report. Indeed, the S&P 500 (-0.57% yesterday) is now down -1.33% in the three days this week, having fallen each day. It’s the same for the Dow (-1.00% yesterday and -2.28% this week) while 10y Treasuries are now back to testing 2.800% to the downside after closing down 2.6bps last night. Remember that they traded as high as 2.912% post payrolls and the talk was about how the next move might be to testing 3%. It hasn’t gone unnoticed too that the curve is a lot flatter with 2s10s and 5s30s flattening each day this week. It’s not much different in Europe with the Stoxx 600 down -0.87% this week and 10y Bunds closing below 0.600% for the first time since January 24th.So, markets have certainly hit a bit of skid and with politics playing such an unpredictable role at the moment it’s also making it a difficult period to really forecast near-term direction.

Just on that retail sales data yesterday, headline sales actually ended up declining -0.1% mom in February versus expectations for a +0.3% rise. Excluding autos, sales rose less than expected (+0.2% mom vs. +0.4% expected) while control group sales (which goes into the goods spending in GDP) were a significant disappointment at just +0.1% mom (vs. +0.4% expected). In fact, the three-month average of control retail sales is now negative and as a result the Atlanta Fed have now slashed their Q1 GDP forecast to 1.9%. The forecast was actually as high as 5.4% back in early February.

Staying with the US, we also had the February PPI report yesterday which, like Tuesday’s CPI report, was largely as expected. Headline PPI rose a little more than expected (+0.2% mom vs. +0.1% expected) while excluding food and energy, prices rose +0.2% mom as expected. Combined with the CPI data the general consensus was that the data is still consistent with a pickup in core inflation, which we’ll know for sure when we get the February PCE report at the end of this month.

As for the daily Washington update, as expected Larry Kudlow was announced as Gary Cohn’s successor for the role of Trump’s economic advisor. He was quick to jump straight into the tariff debate too, saying he was “on board” with Trump’s duties and also that China has earned a “tough response” by not adhering to the rules of trade. Kudlow also said that Trump’s position on tariffs is “not what people think”, while also chimed in on the currency debate by saying he would like to see a slightly stronger dollar. Away from that, the WSJ reported that the US is pressing China to cut its trade surplus with the US by $100bn.

Overnight, the tone in Asia is a bit mixed in reaction to Kudlow’s comments with the Nikkei (+0.02%), Hang Seng (+0.15%) and Kospi (+0.25%) modestly higher, but the Shanghai Comp (-0.09%) and ASX (-0.24%) a touch lower.  There’s not been much overnight news but Canada’s PM Trudeau noted he was “very optimistic we’re going to be able to get to a win-win-win” NAFTA deal and Canada is “happy to accelerate (talks) to accommodate” upcoming elections in the US and Mexico.

Moving on. In Europe yesterday there was some focus on an ECB conference which featured several ECB officials including President Draghi. The main message from Draghi’s speech was confirmation that “adjustments to our policy will remain predictable, and they will proceed at a measured pace that is most appropriate for inflation convergence to consolidate, taking into account continued uncertainty about the size of the output gap and the responsiveness of wages to slack”. Draghi did also mention potential risks to the inflation outlook through new trade measures announced by the US. Peter Praet was a bit more interesting, saying that “our forward guidance on the path of our policy rates will have to be further specified and calibrated as appropriate for inflation to remain on the sustained adjustment path toward levels below, but close to 2%”.

Meanwhile Villeroy noted that “what we see now is a welcome alignment of the stars: against the economic background of a robust expansion with gradual progress on inflation, there is a broad convergence of market expectations with the views within our Governing Council”.

Meanwhile, there was a confusing few hours in Italy yesterday following comments from Matteo Salvini, leader of the Northern League. Initially, Salvini said that a government with the Five Star Movement is “possible” and that he was  open to all possibilities of forming a majority party aside from with the Democratic Party. The market would envisage some form of Northern League/Five Star alliance as the least market friendly outcome so this obviously got some attention however a short time later Salvini appeared to somewhat walk back on his comments by saying that he wouldn’t break with his centre-right partners for a deal with Five Star. That left the market suitably confused and the FTSE MIB, which had already tumbled on the initial headline, closed last night -1.05%. BTP yields also rose 1.9bps which was in contrast to the rest of Europe which was generally speaking 2-3bps lower. In fact, the 10y BTP-Bund spread is now back to the highest (142bps) since mid-January so clearly there is some risk premium being priced in.

Over in Germany, Ms Merkel noted she “cannot predict” whether the EU will win exemptions from the US tariffs. She added negotiations are the preferred course to resolve trade disputes but the EU “is ready to act if talks fail”. Elsewhere on Brexit, there appears to be more support from German industry groups for a customs union between Germany and the UK. The GM of Germany’s BDI industry federation Joachim Lang noted the ideal outcome for German companies is if the UK remains “within a customs union” post Brexit while EU leaders should commit to a transition period soon “otherwise some companies will be forced to activate their emergency plans”. Similarly the GM of the VDMA, Mr Brodtmann, noted “a customs union between the EU and Britain would ease much of the horror of Brexit”.

Staying with the UK, the main non-Brexit story (Bloomberg) yesterday was UK PM Theresa May announcing that she was ejecting 23 Russian Diplomats out of Britain and will freeze some Russian state assets in response to the poisoning of the former spy along with his daughter. On the other side, the Russian Foreign Ministry noted “…our response measures will not be long in coming”. The rising diplomatic tension has likely added to the flight to safety with Gilts slightly outperforming (10y yields -5.0bp vs. Bunds -2.7bp).

Over in the US, the Senate has voted 67-31 to roll back some of the Dodd-Frank Act impacts on smaller lenders, with one of the changes including raising the asset threshold for banks to be designated as systemically important financial institutions from $50bn to $250bn, while banks with assets less than $10bn will be exempt from the Volcker rule. The draft bill now goes to the lower House.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January business inventories print was in line at +0.6% mom. The Euro area’s January IP fell more than expected at -1.0% mom (vs. -0.5% expected) leading to an annual growth rate of +2.7% yoy (vs. +4.4% expected), weighted down by a -6.6% mom decline in energy production as well as weaker production of consumer and intermediate goods. Elsewhere, the final reading for Germany’s February CPI was confirmed at +0.5% mom and +1.2% yoy.

Before we wrap up and look at the day ahead, a quick mention that we have the third speaker in DB’s Professional Speaker Series next Thursday with DB’s Chief EMEA Economist Elina Ribakova outlining the case for Emerging Markets in 2018. The event is open to all clients subscribing to DB research and should you wish to attend, place click here to register your details.

Looking at the day ahead, the final February CPI revisions in France are due. Across the pond in the US, we are due to receive March empire manufacturing, February import price index, the latest weekly initial jobless claims, March Philly Fed business outlook and March NAHB housing market index data. Brexit-related headlines will likely be a focus too with EU ambassadors wrapping up their four-day meeting, which is expected to conclude with an approval of text for the EU’s future relationship with the UK. The ECB’s Lautenschlaeger is also due to speak.