European stocks slide as traders returned from a 4-day Easter holidays, Asian equities likewise drop pressured by the ongoing rout in iron ore, while U.S. stock-index futures point to a lower open. British markets were roiled after U.K. Prime Minister Theresa May said she would seek an early election on June 8, in a move aimed at strengthening her hand going into Brexit talks; the FTSE 100 dropped 1.3%, on the news, hitting the lowest since Feb. 24 while 10Y Gilts dropped below 1% for the first time since October.
The British pound first tumbled then surged on the news. Tracking today's surprise announcement by the UK PM, sterling swung from gain to loss and back again versus the dollar before May set the vote for June 8. U.K. stocks fell by the most since January. The export-heavy FTSE 100 hits a seven-week low. The broader, more domestically focused FTSE 250, however, doesn't see this as much of a negative:
Meanwhile, the Stoxx Europe 600 Index dropped to the lowest level in about three weeks as mining shares plunged, and government bonds in the region mostly rose as the build up to the French election intensified. Iron ore reeled as Citigroup Inc. said it’s bearish on the raw material’s outlook.
The catalyst for the overnight selloff came from Asia, where the iron ore rout continued, and after the latest 5% drop, the commodity has plunged 32% from high point in Feb this year.
— YUAN TALKS (@YuanTalks) April 18, 2017
The drop pressured Australian stocks (ASX 200 -1.0%) which declined to a 2-week low, as recent losses in iron ore and gold weighed on mining names. MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.7 percent, while Tokyo's Nikkei closed up 0.4 percent on earlier yen weakness.
A bounce in U.S. stocks Monday failed to cheer investors in the European session, as the standoff over North Korea’s nuclear weapons program rumbles on and the French presidential vote looms: here two candidates who want to take the country out of Europe’s common currency remain in contention in the most unpredictable race in recent history. As a result, the spread between German and Italian bonds continued to widen. “Expect a lot of noise and probably elevated volatility this week" as the first round of voting approaches, Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a note.
The dollar dipped fractionally against a basket of major currencies. It earlier lifted off five-month lows versus the yen after U.S. Treasury Secretary Steven Mnuchin told the Financial Times a strong dollar was a positive in the long term while agreeing with U.S. President Donald Trump that it hurt exports in the short term.
Investors were also watching trade talks between the United States and Japan, whose deputy premier, Taro Aso, said the two sides agreed to combat unfair trade practices. "There was quite strong thinking in the market that the U.S. would maybe put pressure on Japan in terms of currency manipulation," said Neil Jones, head of hedge fund FX sales at Mizuho in London.
Investor nervousness ahead of Sunday's French election made itself felt in currency and debt markets. French 10-year government bond yields initially rose while ultra-safe German equivalents dipped, taking the gap between the two close to six-week highs. But French yields later fell and the spread with Germany narrowed to its tightest since April 13 after an opinion poll put centrist Emmanuel Macron first in the first round of voting, just ahead of far-right, anti-euro candidate Marine Le Pen with a bigger gap to far-left representative Jean-Luc Melenchon.
The cost of hedging against big moves in the euro against both the dollar and the yen over the next month jumped on Monday to their highest levels since Britain's vote to leave the European Union.
"(Euro government bond) investors are going to be very careful this week and clearly the only thing that's going to be on their minds is what happens in France," said Chris Scicluna, head of economic research at Daiwa Capital Markets. Implied volatility in the STOXX 600 index hit its highest since early November 2016.
Oil prices fell after a U.S. government report indicated U.S. shale production was rising. Brent, the international benchmark crude, fell 29 cents a barrel to $55.07. Copper was down 0.6 percent at $$5,655 a tonne. Gold was marginally higher on the day at $1,283 an ounce, having touched a five-month high of $1,295 on Monday.
Economic data include March housing starts, industrial production. Scheduled earnings include J&J, Bank of America, IBM, UnitedHealth, Goldman Sachs.
- S&P 500 futures down 0.4% to 2,336.00
- STOXX Europe 600 down 0.6% to 378.44
- MXAP down 0.5% to 146.17
- MXAPJ down 0.8% to 476.46
- Nikkei up 0.4% to 18,418.59
- Topix up 0.4% to 1,471.53
- Hang Seng Index down 1.4% to 23,924.54
- Shanghai Composite down 0.8% to 3,196.71
- Sensex up 0.3% to 29,512.93
- Australia S&P/ASX 200 down 0.9% to 5,836.74
- Kospi up 0.1% to 2,148.46
- Brent Futures down 0.6% to $55.03/bbl
- Gold spot little changed at $1,284.90
- U.S. Dollar Index little changed at 100.31
- German 10Y yield fell 0.9 bps to 0.178%
- Euro up 0.07% to 1.0650 per US$
- Brent Futures down 0.6% to $55.03/bbl
- Italian 10Y yield rose 1.7 bps to 2.022%
- Spanish 10Y yield fell 2.0 bps to 1.687%
Top Overnight News
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- Blackwater Founder Erik Prince Said to Have Advised Trump Team
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- HP CEO Says Import Tax May Boost Prices for Users in Industry
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- Cemex to Sell Pacific Northwest Unit to Cadman for $150M
Asian equity markets dropped, failing to keep up with the positive momentum from Wall Street, where stocks rebounded as focus shifted to earnings and financials outperformed. ASX 200 (-1.0%) declined to a 2-week low, as recent losses in iron ore and gold weighed on mining names. Conversely, Nikkei 225 (+0.3%) was positive as exporter names benefited from a weaker JPY, while the financial sector performed similarly to its US counterparts. Shanghai Comp. (-0.8%) and Hang Seng (-1.4%) were subdued despite the PBoC resuming liquidity operations and firm Chinese Property Prices, as a continued rampant property sector could attract funds away from stocks. 10yr JGBs traded lower amid spillover selling from USTs and a somewhat positive risk tone in Japan, although losses were stemmed following a 5yr auction in which the b/c and accepted prices were higher than prior. Chinese House Price Index (Mar) Y/Y 11.3% (Prey. 11.8%). China house prices increased M/M in 62 out of 70 cities (Prey. 56) and increased Y/Y in 68 out of 70 cities (Prey. 67). PBoC injected CNY 40bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos.
Top Asian News
- Stock’s 9,800% Rise Shows Hong Kong Billions Exist Just on Paper
- Drugs and Booze Shares Benefit as China Investors Turn Defensive
- Japan, U.S. Eco Talks Should Have Near-Term, Concrete Results
- Hongqiao Drops $1.6 Billion Loften Purchase Citing New Rules
European equities have failed to hold on to opening gains and trade lower across the board with the FTSE 100 the laggard throughout the session. The commodity-heavy FTSE 100 bucked the trend at the open and started the week off on the backfoot alongside softness in energy and materials names with losses in gold overnight and iron ore prices hitting two week lows. Thereafter, European equities followed suit and shed their opening gains amid ongoing key risk factors as participants eye Sunday's first round of voting for the French Presidential election with polls showing an increasingly narrow margin between the four main candidates. Elsewhere, downbeat comments from US treasury secretary Mnuchin on the fate of tax reform and mounting geopolitical tensions have also added to the sombre tone. In fixed income markets, prices saw a relatively tentative start to the session before then being lent a helping hand by some of the softness in European equities. The focus however has been on French paper which trades relatively flat ahead of the 1st round election in which the election polls have narrowed somewhat, indicating the 1st round is a now a 4-horse race amid the surge in support for far-left Melenchon. Additionally, the shock announcement by PM Theresa May that the UK will hold a snap election on June 8 has thrown local traders for a loop, unleashing volatility both in sterling and the FTSE100, which hit its lowest level since Feb. 24
Top European News
- French Race Up for Grabs Days Before First Ballot Is Cast
- Bank Brexit Exodus Seen Hastened by Close Regulator Scrutiny
- London House-Price Growth at Five-Year Low as Luxury End Slumps
- Deutsche Bank Sees 2017 High-Yield Market Defying Political Risk
- Swiss Aren’t Manipulating Their Currency, Gasser Tells CNBC
- JPMorgan Stays Constructive Europe Banks Long Term; Nordics Best
- European Miners Post Worst Drop on Stoxx 600 as Iron Ore Tumbles
In currencies, a choppy morning for GBP as the early running saw near term 'radio silence' prompting a fresh push higher in Cable as we pierced 1.2600. This proved short lived however as news that UK PM May announced a snap election sent cable tumbling then rebounding sharply higher. The EURGBP will struggle for upside traction ahead of the French elections, with the first round voting set for Sunday 23 April. The polls are tight, but looking at the EUR across the board, there does not seem to be any major panic, with EUR/USD sticking close to 1.0650 (large expiry here today), and EUR/JPY finding some near-term demand below 116.00. EUR/CHF treads a very tight range under 1.0700, but no prizes for guessing what is behind this. The JPY 'relief' looks to be based on what some perceive to be a near term 'verbal' impasse between the US and North Korea. Further JPY strength may be unwarranted at this stage, but resuming to steady risk on is still further out on the horizon. USD/JPY is back under 109.00 though, but techs point to a strong support zone in the 107.00-108.00 which may be tempting in value buyers irrespective of the mood in equities. AUD has suffered on the RBA minutes overnight as their concerns over the labour market and household indebtedness edge a rate cut back into policy considerations. AUD/USD is languishing in the lower 0.7500's, but downside momentum has faded here for now as traders focuses on AUD/NZD, which has now taken out modest support at 1.0750. NZD/USD propped above 0.7000 as a result. Oil prices take a dip to push USD/CAD back above 1.3350, but as we have seen in recent weeks, selling interest through 1.3400 has been strong, so we may see orders marked down given the domestic data has been supportive in recent months.
In commodities, Gold has come off better levels in line with a modest uptick in the USD, with the key USD1300.00 having held amid last week's fall and heightened risk aversion. We see little which would have arrested the drop off in risk sentiment, but this is not an unfamiliar scenario, but the yellow metal is likely remain underpinned alongside Silver. The latter has comfortably established a foothold above USD18.00. Oil prices continue to turn up and down on inventory data and rig counts, but with WTI inside USD50-55, we again see little cause for concern unless the risk mood in equities turns sharply. The same can be said for base metals with Copper prices largely range bound after coming off better levels in recent weeks. Palladium and aluminium modest outperformers on the day.
US Event Calendar
- 8:30am: Housing Starts, est. 1.25m, prior 1.29m; MoM, est. -2.95%, prior 3.0%
- Building Permits, est. 1.25m, prior 1.21m; MoM, est. 2.8%, prior -6.2%
- 9:15am: Industrial Production MoM, est. 0.4%, prior 0.0%; Capacity Utilization, est. 76.1%, prior 75.4%; Manufacturing (SIC) Production, est. 0.0%, prior 0.5%
DB's Jim Reid concludes the overnight wrap
One wonders how many Italian Governments there will be in the next 117 years but in the near-term there will be more focus on this coming Sunday's first round in the French Presidential elections which will dominate a week that also includes the first busy week of US earnings season (46 S&P 500 companies report) and the influential flash PMIs on Friday. In our 2017 outlook written nearly 6 months ago now (how time flies) the French election was one of those events where we thought volatility would increase notably into it even though we thought there'd be a market friendly outcome at the end of it. So far this year vol has been much lower than we anticipated but it has been picking up of late ahead of this election and also due to geopolitical rumblings, some slightly disappointing data and market concerns that Mr Trump's growth agenda may be faltering. We still think 2017 will ultimately be ok from a growth and risk asset point of view but it might be that we're now past the calmest point of the year.
As we approach the election, the polls are now incredibly close with all four main candidates within a few percentage points of each other. Indeed the last 3 polls (Elabe, Ifop-Fiducial and OpinionWay) have an average high-low range amongst the top 4 candidates of 4.5% with the most notable trend now being a slight dip in support of Le Pen to around 22-23% from closer to 25% earlier this month. Market friendly candidate Macron remains well ahead of his 3 main rivals in a straight head-to-head run-off (16-26% lead) but obviously there'll be some concern with the first round getting tighter that he'll fail to be in that run-off with the worst case market scenario a Le Pen/Melenchon battle. So expect a lot of noise and probably elevated vol this week. The VSTOXX index closed at 23.39 on Thursday (double where it was back in mid-March) which as a reminder is the highest level this year and also the highest level since November 8th. Meanwhile the VIX closed at 14.66 last night which is down from Thursday’s YTD high of 15.96 but still well above the 2017 average of 12.01.
That move lower in the VIX yesterday reflects what was a fairly calm session on Wall Street last night. Coming off the back of a -1.13% weekly loss last week the S&P 500 bounced back +0.86% yesterday on low volumes while there was a similar rebound for the Dow (+0.90%) and Nasdaq (+0.89%) as well. Ahead of today’s results it was the Banks that led the way with the sector up just over 2% - as a recap both JP Morgan and Citigroup set a decent pace last week with Q1 revenue and earnings both coming in slightly ahead of the consensus estimate. Geopolitics was less of a factor yesterday despite that weekend news of the failed North Korea missile launch. Instead some decent data out of China including the Q1 GDP report helped to support a strong start to the week.
Indeed China’s Q1 GDP print of 6.9% came in one-tenth ahead of the consensus estimate and also improved from 6.8% and 6.7% in Q4 and Q3 of 2016 respectively. At the same time all headline activity indicators in March were supportive. Industrial production came in at 7.6% yoy (vs. 6.3% expected) from 6.0% in February. Retail sales stabilised at 10.9% yoy (vs. 9.7% expected) and fixed asset investment grew to 9.2% yoy (vs. 8.8% expected) from 8.9%. It’s worth noting that the latter was driven by property investment growth as opposed to infrastructure investment. Our economists in China also highlighted that property sales growth moderated slightly in March on a monthly basis but was still picking up if you look at the 3-month moving averages. At the same time growth of land sales and new housing starts also continued to grow. As a result of the data our economists have now revised up their GDP growth forecast to 6.7% in 2017 and 6.3% in 2018 (6.5% and 6.0% before revision). Importantly though, our team believe that growth has likely peaked in Q1 as credit growth slows and indeed they maintain the view that growth will drop on a quarterly basis to 6.8%, 6.6% and 6.5% in Q2, Q3 and Q4 respectively.
That data in China yesterday was attributed to the leg up for Copper (+1.14%), Aluminium (+0.58%) and Zinc (+0.88%) prices although the rest of the commodity complex was a little softer with Gold (-0.08%) and WTI Oil (-1.00%) both easing – although that does follow a decent rally last week. In sovereign bond markets 10y Treasury yields initially dipped below 2.200% at the open before steadily rising back as the session progressed to finish up just over 1bp at 2.251%. The focus in FX meanwhile was on the Turkish Lira which was as much as 2.5% stronger at the open before paring gains into the close. The rally came after President Erdogan secured victory in Turkey’s referendum which will now hand him sweeping powers including economic and monetary policies. Notwithstanding a possible recount as demanded by the opposition parties, our economist in Turkey notes that the bulk of the amendments, including a formal shift to an executive presidency, will kick in with the next dual elections (Parliamentary and Presidential) scheduled to be held in November 2019. The immediate changes post referendum are (i) removal of the current constitutional ban on the President's formal association with a political party, (ii) restructuring of the Supreme Council of Judges and Prosecutors, and (iii) abolishment of military courts. The Parliament will now have six months to make subsequent amendments in the related laws, including the electoral law, as well as Parliamentary bylaws.
Before we recap the rest of the news since we’ve been away, this morning in Asia it’s been a fairly mixed start to the day with most major bourses open again following the long weekend. While the Nikkei (+0.23%) and CSI 300 (+0.08%) have edged a bit higher, the Hang Seng (-0.96%), Kospi (-0.18%) and ASX (-1.13%) are all lower while US equity index futures are also slightly in the red. There’s not been much new newsflow to report overnight although the latest house price data is out in China with house prices reported as rising in 62 of the 70 cities tracked by the government in March. That compares to 56 cities in February.
Moving on. Another story which attracted a bit of attention yesterday was US Treasury Secretary Steven Mnuchin’s interview with the FT. In it he said that the target to get tax reforms through Congress by August was “highly aggressive to not realistic at this point” and that “it is fair to say it is probably delayed a bit because of the healthcare (reform pushback)”. Mnuchin also responded to Trump’s statement about the strength of the dollar last week by saying that “the President was making a factual comment about the strength of the dollar in the short term” and that there is “a big difference between talk and action”. Mnuchin also suggested that the border-adjustment tax plan is not off the table but that there may be other ways of raising revenues.
Before we look at the week ahead, it’s worth quickly wrapping up what has been a busy last couple of days for US data. The significant release on Friday was the March CPI report where headline inflation came in at a well below market -0.3% mom (vs. 0.0% expected). The core was also softer than expected at -0.1% mom (vs. +0.2% expected). The end result of that is a drop in the annual rates for both the headline (to +2.4% from +2.7%) and core (to +2.0% from +2.2%). Also out on Friday was the March retail sales figures where headline sales were reported as retreating -0.2% mom as expected. Excluding autos and gas, pending was up +0.1% mom while the control group component was up a more robust +0.5% mom (vs. +0.3% expected) removing the impact of building materials. Meanwhile yesterday we learned that the NY Fed’s empire manufacturing index fell 11.2pts to 5.2 in April and the lowest since November, while the NAHB housing market index declined 3pts to 68 from what had been a 12-year high. It’s worth noting that the Atlanta Fed is now forecasting for Q1 GDP growth of just +0.5% (from +0.6%).
Moving now to this week’s calendar. With no data due out in Europe this morning the focus will instead be on the US this afternoon where March housing starts and building permits data is due out alongside the March industrial and manufacturing production reports. Turning to Wednesday, data due out in Europe includes the March CPI report for the Euro area along with the latest trade balance print. In the US tomorrow there is no data due out although in the evening the Fed’s Beige Book will be released. Japan kicks things off on Thursday with the March trade data due out. In Europe we’ll get PPI in Germany as well as the April consumer confidence reading for the Euro area. In the US on Thursday initial jobless claims, Philly Fed business outlook and Conference Board’s leading index are the scheduled releases. We end the week on Friday with a first look at the global flash April PMI’s including the manufacturing print in Japan and manufacturing, services and composite readings in Europe and the US. Also due out is retail sales data in the UK and existing home sales data in the US. Away from the data, this week’s Fedspeak includes George today, Rosengren on Wednesday, Powell on Thursday and Kashkari on Friday. Over at the ECB Hansson, Coeure and Praet are amongst the speakers this week while the BoE’s Carney speaks on Thursday. Also worth highlighting this week is US Vice- President Mike Pence’s meeting with Japan PM Abe and the release of the IMF’s World Economic Outlook today, Italy PM Gentiloni’s meeting with President Trump on Thursday and the annual Spring Meetings of the World Bank Group and IMF kicking off on Friday. Earnings wise this week we’ve got 46 S&P 500 companies accounting for 10% of the index market cap. The highlights include Goldman Sachs, Bank of America, Yahoo, Johnson & Johnson and IBM today, eBay and Morgan Stanley on Wednesday, Verizon on Thursday and Schlumberger on Friday.