Futures Wipe Out Early Gains In Volatile Session As Dollar Resumes Climb; Oil Slides

After a few days of dollar weakness due to concerns that the Fed's rate hike intentions have been derailed following some undisputedly ugly economic data (perhaps the Fed should just make it clear there will never be rate hikes during the winter ever again) the USD has resumed its rise, and as a result risk assets, after surging early in the overnight session driven by the Nikkei225 and the Emini, the "strong dollar is bad for risk" trade has re-emerged, with the Nikkei dropping almost 500 points off its intraday highs, with US equity futures poised to open lower once more, sliding nearly 20 points in the overnight session, and surprising the BTFDers who have not seen five consecutive days of "risk-off" in a long time.

Not helping the risk case is oil, which having soared this week on geopolitical concerns and fears the Yemen conflict may spread and closing higher for five consecutive days rebounding 13% off last Thursday’s levels with the five-day streak the highest since February 2014, has realized that  there still is no excess demand, and inventory keeps building, as a result WTI has slid and is eyeing $50 support once more. According to Bloomberg, Brent, WTI fall ~$1 during early trading as fears over impact of Yemen conflict ease on low trading volume. Today we get another Baker Hughes U.S. oil rig count update, which may show the recent slowdown in rig shutterings has picked up. "Yesterday's price rise was a knee-jerk reaction to events in Yemen and mkt participants are now making a more sober assessment of the situation,” says Commerzbank commodity strategist Carsten Fritsch. “The risk of a supply disruption resulting from Saudi-led bombing in Yemen is very small."

An extension of the USD’s gains this morning caused another slide in EUR/USD, which first caused stops to be taken out at 1.0850 before a test of 1.0800 and EUR/GBP to fall below 0.7300. Some noted that further EUR selling could be seen into month-end as investors maintain hedge ratios for European assets that they hold, and the fall in the EUR caused a temporary lift for European stocks however the indices have drifted lower given a distinct lack of news this morning. Crude futures have seen selling overnight and into the European open as concerns over the situation in Yemen dissipate and a stronger USD caused further selling across the commodity complex, leading to a break below USD 1,200 in spot gold. This commodity selling has caused the FTSE to underperform its European peers and is the only major index in European to trade in the red.

Although Europe has been quiet with no tier 1 data releases, there will be tier 1 releases from the US with the 3rd reading of Q4 GDP due for release and is expected to be revised up to around 2.5%. Fed’s Yellen is also due on the docket and markets will be looking out for any reaction to recent speeches made by her Fed colleagues.

Asian stocks traded mixed following a lacklustre Wall Street close which saw the S&P 500 fall for a fourth consecutive session. The Nikkei 225 (-1.2%) saw some selling late on in the session as JPY strengthened for a third consecutive day, although this was not fully sustained. This also followed tame Japanese CPI data, which when discounted from last year’s sales-tax hike, printed flat for the first time since May 2013 (Y/Y 2.0% vs. Exp. 2.1% (Prev. 2.2%). Elsewhere, both the Hang Seng (-0.03%) and Shanghai Comp (+0.6%) rose after shrugging off poor earnings from PetroChina and ICBC, the latter reporting its first Q/Q profit decrease since 2011.

Gilts are seen underperforming once again this morning as focus remains firmly fixed on May’s general election but also as profit taking into the weekend is noted, and ahead of today’s March future expiry. Given the recent comments from several BoE members ahead of their self-imposed election blackout period from March 30th, and comments this morning from Governor Carney who supported the idea that the next rate move will likely to higher, short-term rates have seen a small lift. Bunds have seen no direction this morning after a quiet Asian session which saw light flows particularly ahead of the Japanese fiscal year-end.

WTI and Brent futures saw selling overnight in a pull back from yesterday’s strong rally and as concerns over the situation in Yemen begin to dissipate a little. A rally in the USD this morning has also led to selling in precious metals, leading to a break below USD 1,200/oz in spot gold and USD 17/oz in spot silver. It is worth noting there are several expiries this morning:

• Palladium March'15 Futures Expiry (1700GMT/1200CDT)
• Platinum March'15 Futures Expiry (1705GMT/1205CDT)
• Copper March'15 Futures Expiry (1720GMT/1220CDT)
• Silver March'15 Futures Expiry (1725GMT/1225CDT)
• Gold March'15 Futures Expiry (1730GMT/1230CDT)
• Henry Hub Natural Gas April'15 Futures Expiry (1830GMT/1330CDT)

In summary: European shares rise with the health care and travel & leisure sectors outperforming and basic resources, oil & gas underperforming. European shrs trade higher as euro weakens for 3rd day this week. U.K. house-price growth eased for 7th month; oil pares  surge from earlier this week. The Swiss and French markets are the best-performing larger bourses, Dutch the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; German yields increase. Commodities decline, with nickel, WTI crude underperforming and wheat outperforming.U.S. Michigan confidence, GDP, personal consumption, core PCE due later.

Market Wrap:

• S&P 500 futures down 0.2% to 2043.9
• Stoxx 600 up 0.5% to 396.4
• US 10Yr yield little changed at 1.99%
• German 10Yr yield up 1bps to 0.22%
• MSCI Asia Pacific down 0.6% to 146.6
• Gold spot down 0.5% to $1198.3/oz
• 42.8% of Stoxx 600 members gain, 55% decline
• Eurostoxx 50 little changed, FTSE 100 -0.5%, CAC 40 +0.3%, DAX +0.1%, IBEX -0.1%, FTSEMIB -0.3%, SMI +0.5%
• Asian stocks fall with the ASX outperforming and the Nikkei underperforming.
• MSCI Asia Pacific down 0.6% to 146.6
• Nikkei 225 down 1%, Hang Seng little changed, Kospi down 0.1%, Shanghai Composite up 0.2%, ASX up 0.7%, Sensex little changed
• RBS Sells Coutts International to UBP in Swiss Retreat
• Chevron Seeks Over $3.6 Billion for Caltex Australia Stake
• TeliaSonera Expects Extended EU Probe of Danish Phone Merger
• Euro down 0.6% to $1.0819
• Dollar Index up 0.3% to 97.73
• Italian 10Yr yield little changed at 1.31%
• Spanish 10Yr yield up 1bps to 1.27%
• French 10Yr yield up 1bps to 0.5%
• S&P GSCI Index down 0.9% to 409.7
• Brent Futures down 1.2% to $58.5/bbl, WTI Futures down 1.8% to $50.5/bbl
• LME 3m Copper down 0.9% to $6117/MT
• LME 3m Nickel down 2.1% to $13415/MT
• Wheat futures up 0.4% to 501.3 USd/bu

Bulletin Headline Summary From RanSquawk and Bloomberg:

• European markets trade in quiet conditions but strength in the USD leads to selling pressure in the EUR and a slide in commodities prices
• Recent comments from BoE's Carney, who said that that he thinks it is likely for the next move in rates is likely to be higher, has led to strength in GBP against other major currencies
• Treasuries higher overnight, headed for weekly decline amid weak 5Y and 7Y auctions; market’s focus on Yellen speech at 3:35pm ET today, ISM Manufacturing and payrolls reports next week.
• Saudi-led coalition forces struck an air force base near an oil field east of Yemen’s capital on Friday, destroying a radar station as the offensive against Shiite rebels in the country entered its second day
• China’s biggest banks are accelerating cuts to their dividend payouts as bad debts pile up from struggling exporters in the Pearl River Delta, coal companies in the nation’s west and manufacturers in the Bohai Rim near Beijing
• China’s second-largest loan-guarantee company has halted operations and replaced its chairman as managers probe past deals for evidence that it took on too much financial risk, said people familiar with the matter
• ECB Governing Council member Jens Weidmann says in speech in Frankfurt that “sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor”
• The Fed is now focusing on the $25t shadow banking system as tighter bank regs prompts more borrowers to seek funding through  money-market mutual funds, hedge funds, brokerages and other entities that face fewer restrictions
• BOJ’s key inflation gauge ground to a halt as consumer spending slumped, highlighting weakness in the nation’s recovery from recession
• Longer-dated JGBs slid after demand to sell the securities to the central bank strengthened on Friday, driving 30Y yields toward their steepest jump in two months
• The U.S. Senate adopted a fiscal 2016 budget that calls for $5.1 trillion in spending cuts to achieve balance in 10 years, while avoiding proposals to partially privatize Medicare as many Republicans brace for re-election
• Investigators are focusing on whether a “personal life crisis” led a Germanwings pilot to intentionally crash a plane into the French Alps on Tuesday, Bild Zeitung reported, citing unidentified security officials
• Sovereign 10Y yields higher. Asian, European stocks mostly lower, U.S. equity-index futures decline. Crude, gold and copper rise

US Event Calendar

• 8:30am: GDP Annualized q/q, 4Q revised, est. 2.4% (prior 2.2%)
  • Personal Consumption, 4Q, est. 4.4% (prior 4.2%)
  • GDP Price Index, 4Q, est. 0.1% (prior 0.1%)
  • Core PCE q/q, 4Q, est. 1.1% (prior 1.1%)
• 10:00am: University of Michigan Consumer, March final, est. 92 (prior 91.2)
  • UMich Current Conditions, March (prior 103)
  • UMich Expectations, March (prior 83.7)
  • UMich 1 Yr Inflation, March (prior 3%)
  • UMich 5-10 Yr Inflation, March (prior 2.8%)
• 3:45pm: Fed’s Yellen speaks in San Francisco

DB's Jim Reid completes the overnight event recap

Just as the market seems to be pushing back on themes that have worked in 2015 so far prompting a difficult few days for markets, geopolitical developments over the last 36 hours have added to the confusion. Indeed yesterday’s headlines have brought the oil market back into the headlights, as air strikes in Yemen has caused a surge in oil prices over the last two days. Starting with the price action, WTI (+4.51%) and Brent (+4.80%) yesterday rallied to $51.43/bbl and $59.19/bbl respectively. WTI in particular has now closed higher for five consecutive days and has rebounded 13% off last Thursday’s levels with the five-day streak the highest since February 2014. The streak hasn’t been enough to push WTI (-3.72%) back into positive territory YTD just yet, however yesterday’s move did help Brent move +3.24% for the year so far. A Saudi-Arabia led coalition had launched the attacks against Shiite Houthi rebels in the Yemen capital Sanaa, which have come in response to a request from the Yemen President Hadi. Yemen’s foreign minister, Yassin, was reported as saying that the airstrikes were welcome in comments on Saudi TV, while the Houthi rebels have since responded by releasing rockets into Saudi territory (Bloomberg). The BBC has since reported that President Hadi has fled to Saudi Arabia.

Despite being a relatively small oil producer by global standards (39th largest producer according to Bloomberg), the country is geographically located next to the Bab el-Mandeb straight which attracts a more significant number of oil shipments, with the FT reporting that almost 7% of global oil maritime trade passes through the Strait. Concern in the market is emanating from worries of disruption in oil movement along the Strait, however news that the US is providing logistical and intelligence support is leading to hopes that the route will be secured (Bloomberg). Clearly, however, geopolitical tensions are rising in the area and will likely stay elevated in the near term.

US equities were choppy yesterday as the S&P 500 closed 0.24% lower, having crossed between gains and losses 20 times during the session. The fourth consecutive day of losses meanwhile takes the index back into negative territory YTD (-0.13%). Despite the rally in oil markets, energy stocks (-0.20%) were little moved. Treasury weakness was also a theme yesterday, supported in part by a particularly weak auction. 10y benchmark yields closed 6.4bps higher yesterday at 1.989% while 30y yields closed up 7.2bps. Yesterday’s $29bn sale of 7y notes meanwhile attracted the lowest demand since May 2009. This in fact follows a weak 5y auction on Wednesday with similar low levels of demand. The Dollar closed firmer yesterday, with the broader DXY 0.47% higher.

It was a better day data wise in the US yesterday. Employment indicators continue to impress, with initial jobless claims falling 9k in the week ending 21st March to 282k (vs. 290k expected). This lowered the 4-week average to 297k. The March services PMI reading was also impressive, rising 1.5pts from last month’s print to 58.6 (vs. 57.0 expected) to the highest level since September last year. The Kansas City Fed manufacturing index was the one disappointment however, with the March print of -4 falling 5pts from the previous reading and coming in below consensus. The Fed’s Lockhart followed on from his comments earlier this week by saying that the US economy is currently in a solid shape to deal with a tightening in monetary policy.

Before all this, data in the UK attracted a decent amount of attention yesterday, lending further support to the hawks in particular. Better than expected retail sales generated the headlines. The ex-auto reading of +5.1% yoy was well ahead of the +4.2% expected for February, while the headline print of +5.7% yoy was a full percentage point ahead of consensus. The result was a selloff in Gilts, as 5y (+9.4bps), 10y (+10.2bps) and 30y (+7.3bps) yields all climbed. Equities weakened also with the FTSE 100 closing -1.37%. Meanwhile, with one eye also on the upcoming elections in the UK, following last night’s televised debate between PM Cameron and Labour leader Miliband, an ICM poll conducted shortly afterwards for the Guardian newspaper said that 54% believed Cameron performed the stronger of the two. I stayed up late (for me) to watch it and the main conclusion I have is that I'm very tired now!

With one eye on the tensions in the Middle East, equity markets elsewhere in Europe closed softer yesterday. The Stoxx 600 (-0.86%), DAX (-0.18%) and CAC (-0.29%) all finished lower. Bond markets were firmer however bucking the big moves in the US and the UK as 10y Bunds finished 0.5bps lower while yields in the periphery were 2-4bps tighter. Data in the region offered few surprises. German consumer confidence (10.0 vs. 9.8 expected) printed a touch above market while the final Q4 GDP reading in France was unchanged at +0.2% yoy. Money supply data for the Euro-area meanwhile was softer than expected (+4.0% yoy vs. 4.3% expected).

Elsewhere, ECB President Draghi said yesterday that he’s confident that the QE programme is on target to reach its €60bn target in the first month of implementation, whilst also reiterating that so far ‘monetary policy is reinforcing the cyclical recovery’ (Reuters). Meanwhile, over in Greece the latest data out of the Bank of Greece underlined the stress in the domestic banking sector of late. Data provided until the end of February showed that bank deposits fell to their lowest in 10 years, with 5% withdrawn in February alone. In the three months ending February, 15% of deposits have been withdrawn. Given that the ECB has continued to raise the ceiling on the ELA facility in March, it’s likely that bank deposits have continued to remain under similar outflow pressure.

Turning to Asia, focus this morning has been on Japan where the latest inflation numbers are out. Headline CPI of +2.2% yoy for February was marginally below expectations of +2.3% while the core (ex. fresh food) and core-core (ex. food and energy) also both came in one-tenth of a percent below consensus at +2.0% each. Excluding the effect of the consumption tax hike, headline CPI was flat yoy, core was -0.1% yoy and core-core was +0.3% yoy. Our colleagues in Japan noted after the release that they remain skeptical that the fall in prices triggers additional easing for multiple reasons including the already sizeable QE programme in place, the temporary effect of falling energy prices, continuing economic expansion and the BoJ’s emphasis on a rise in purchasing power from the falling oil prices and on continuation of the virtuous cycle. The Nikkei (-1.67%) has reversed earlier gains on the back of the data, while the Hang Seng (-0.06%) and Shanghai Comp (+0.72%) are mixed. Credit markets generally across Asia are a couple of basis points firmer.

It’s a quiet calendar in Europe this morning with just the February import price index for Germany due, along with March house price data in the UK and French consumer confidence data. Attention will be on the US this afternoon however. The third reading of the Q4 GDP print for the economy is due, with the market expecting a +2.4% SAAR print while the associated personal consumption and core PCE will also be released. We round the week off with the final March reading for the University of Michigan consumer sentiment index.