Session Highlights (with NewsSquawk):
- S&P futures are above 3,300 with European equities little changed at present, as newsflow has slowed since the Phase One signing
- Chinese VP Liu He says it is unwise to rush into the Phase Two negotiations, stating Beijing has little interest in immediately doing so
- US Senate Majority Leader McConnell said the impeachment trial will begin on Tuesday and the Senate will complete USMCA trade deal today
- USD is slightly softer as antipodeans benefit on the trade deal, other G10 currencies little changed/mixed at present
World stocks resumed their rally, trading at record highs on Thursday, after the United States and China signed the first phase of an agreement to end their 18-month trade war. The centerpiece of the truce is a pledge by China to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years, over a baseline of $186 billion in purchases in 2017 although it remains unclear how it can do so without disrupting global supply chains, and without any firm commitments to do so.
As usual there were many hot takes, ranging from the skeptical to the optimistic and everything inbetween:
- "There’s no question from a psychological viewpoint it’s a big relief for the market,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "There are still CEOs that are dubious, but this might help capital investments, and that was the biggest missing link to the economy over the last few years."
- “We believe the agreement underpins a positive outlook for risk assets, especially emerging-market stocks,” said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management. “But it is also important for investors to understand the limitations of the deal. So we see the deal as representing a partial calming rather than an end to trade tensions.”
- “While the trade deal has provided a relief, there wasn’t any positive surprises for markets. For shares to rise further, we need more evidences of improvement in the real economy and earnings,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.
Trump also said he would remove all U.S. tariffs on Chinese imports as soon as the two countries complete the Phase 2 trade agreement, on which negotiations will start soon.
So perhaps in anticipation of "Phase 2 optimism", following a modest hiccup as US stocks dipped in the immediate aftermath of the signing, the global rally has returned after the Dow Jones Industrial Average closed above 29,000 for the first time.
S&P500 futures rebounded overnight, and pointed to an open above 3,300 for the cash index.
Nasdaq 100 futures also continued their tremendous ascent after tech bellwether Taiwan Semiconductor projected quarterly revenue well above analysts’ estimates. Morgan Stanley climbed in early trading after results beat expectations. Bank of New York Mellon slipped after matching estimates.
MSCI’s broadest index of world stocks rising 0.1% on Thursday. London, Frankfurt, Paris helped Europe start stronger, after China’s biggest stocks dipped overnight. The Stoxx Europe 600 Index swung between gains and losses after a mixed session in Asia.
Earlier in the session, Asia shares traded close to their highest level since June 2018 although markets in the region were mixed, with South Korea and Australia rising - the S&P/ASX 200 Index extended a record - while Japan’s Topix and the Shanghai Composite Index were lower. The trade deal signed Wednesday commits China to do more to crack down on the theft of American technology and corporate secrets by its companies and state entities, while outlining a $200 billion spending spree to try to close its trade imbalance with the U.S.
That said, market participants remain cautious about U.S.-China relations in future. While the agreement provides "a narrow and temporary relief, geopolitical pressure will continue and take on other forms, notably in the technology and financial realm," Andy Wong, senior investment manager at Pictet Asset Management wrote in an email. “Asia’s tech supply chain could see increased pressure on this front.” Technology shares reversed an earlier decline. The region’s chip giant Taiwan Semiconductor Manufacturing Co. announced a stronger-than-expected sales outlook for the first quarter after the market closed, underscoring hopes that the rollout of fifth-generation-enabled smartphones in 2020 will galvanize growth for Apple Inc.’s main chipmaker.
Even as stocks hit new all time highs, bond yields dropped as a boost from the trade deal failed to offset low U.S. producer price data, which highlighted persistently low inflationary pressure. The price index rose less than expected in December to cap 2019 with rise of 1.3%, the lowest since 2015.
Ten-year U.S. Treasury yields slipped to one-week low of 1.780% compared with a high of 1.900% last Thursday and last stood at 1.80%. Most euro zone bond yields were little changed, with German Bund yields just below two-week highs. The UK’s 10-year gilt was yield near a two-and-a-half-month low at 0.65% on the talk of rate cuts.
In FX, the dollar slipped against its G-10 peers yet was little changed as measured by the Bloomberg Spot Index as ranges are tight amid a thin data calendar out of Europe. The euro was supported through options demand while a short squeeze in sterling unfolds, and the Swiss franc held firm. It had reached its highest against the dollar in over a year and its highest against the euro in almost three years after the United States added Switzerland to its watchlist of currency manipulators. Washington’s decision led traders to think it will become harder for the Swiss National Bank to intervene to weaken the franc in the future. The Swiss currency last stood at 0.9626 franc per dollar, near Wednesday’s high of 0.9631. Finally, the Chinese yuan was just below the five-and-a-half-month high it touched earlier this week after Washington dropped its currency manipulator label for China.
In commodities, oil rose from Wednesday’s six-week low, amid data showing big increases in U.S. refined products and hopes for more Chinese purchases of U.S. oil and gas. Brent crude futures rose 0.7% to $64.45 a barrel. West Texas Intermediate crude gained 0.73% to $58.23 per barrel. Gold was little changed at $1,555 an ounce.
Looking at the day ahead, the highlight in terms of data comes this afternoon with the December retail sales report in the US. Also due out is the January Philly Fed index, December import price index, jobless claims, November business inventories and January NAHB housing market index prints. In Europe we got the final December CPI revisions in Germany while in the UK the BoE bank liabilities and credit conditions survey will be released. Away from that it’s worth keeping an eye on the ECB minutes today before the ECB’s Lagarde speaks in Frankfurt this afternoon. Earnings highlights include Morgan Stanley, which smashed FICC trading expectations, and CSX.
- S&P 500 futures up 0.3% to 3,302.50
- STOXX Europe 600 up 0.2% to 420.39
- MXAP up 0.2% to 173.94
- MXAPJ up 0.4% to 570.76
- Nikkei up 0.07% to 23,933.13
- Topix down 0.1% to 1,728.72
- Hang Seng Index up 0.4% to 28,883.04
- Shanghai Composite down 0.5% to 3,074.08
- Sensex up 0.1% to 41,930.99
- Australia S&P/ASX 200 up 0.7% to 7,041.78
- Kospi up 0.8% to 2,248.05
- Gold spot down 0.1% to $1,555.01
- U.S. Dollar Index down 0.03% to 97.20
- German 10Y yield fell 1.4 bps to -0.214%
- Euro up 0.03% to $1.1153
- Brent Futures up 0.7% to $64.43/bbl
- Italian 10Y yield rose 0.6 bps to 1.23%
- Spanish 10Y yield fell 0.7 bps to 0.447%
Top Overnight News from Bloomberg
- The Bank of England urged financial businesses to accelerate their transition away from Libor. Market makers will be encouraged to shift pound-denominated interest-rate swaps on March 2 from Libor to its replacement, the Sterling Overnight Index Average, the central bank said
- The Federal Reserve had a little help from its friends in preventing a year-end squeeze in funding markets. A $276 billion surge in the use of so-called sponsored repo from money market funds in December helped banks open their lending taps and add to the $256 billion in year-end liquidity provided by the Fed. Overall usage of the once-niche facility peaked at $524 billion during the month, ensuring September’s funding turmoil had little chance of repeating.
- China’s promise to buy nearly $95 billion of additional U.S. commodities means that the state-run giants that dominate imports may be asked to do national service and absorb losses to make good on Beijing’s pledge to purchase as much as $42 billion in American farm goods and about $52 billion in energy products. Private buyers may need more incentives
- A former top official in India’s Finance Ministry claims the government is understating the fiscal deficit, raising questions about the figures weeks before the annual budget is due to be released
- Oil supplies from Iraq, the Middle East’s second-biggest producer, are “potentially vulnerable” amid rising political risks in the country and the broader region, the International Energy Agency warned
- After spending an estimated $40 billion on gold in the past five years, Russia’s central bank is starting to rein in spending. It bought 149 tons of gold in the first 11 months of 2019, 44% less than the year before. Annual purchases are expected to be the lowest in six years
- China brought forward the planned opening of its $21 trillion capital market by eight months, swinging the door open for global investment banks such as Goldman Sachs Group Inc
Asian equity markets traded mostly higher but with gains capped as the euphoria from the US-China Phase 1 trade deal signing, which had buoyed Wall St to record highs and the Emini S&P to an unprecedented 3300 level, began to wane amid some doubts concerning the implementation of the deal. Nonetheless, ASX 200 (+0.7%) outperformed as it forayed above 7000 for the first time ever led by notable strength in tech and financials, while Nikkei 225 (+0.1%) was indecisive and stalled ahead of 24k despite strong Machinery Orders which showed the first M/M expansion in 5 months, as well as its largest increase on record for the series. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (-0.5%) failed to take advantage of another substantial PBoC liquidity injection and the eased tensions from the US-China trade deal, as there were lingering doubts regarding China’s caveat of purchasing agricultural goods “based on market conditions”, while the unilateral dispute settlement mechanism which allows US to reimpose tariffs for non-compliance and doesn’t permit China to retaliate but instead can quit the agreement, fuelled some concerns on whether the deal will hold. Finally, 10yr JGBs were marginally higher and briefly reclaimed the 152.00 level with prices supported as the momentum in stocks began to wane and with the BoJ also in the market for JPY 350bln of JGBs in the belly.
Top Asian News
- China Bonds Uninspired Even as Injections Top $100 Billion
- Deutsche Bank-Led Group a Step Closer to Jindal India Deal
- S&P Sees More Defaults in China in 2020 Amid Steep Maturity Wall
- China Speeds Up Opening of Market to Investment Bank Giants
Overall a mixed and choppy session thus far in the European equity space [Euro Stoxx 50 -0.2%] following a rather tepid APAC handover, as markets digested the nitty-gritty of the Phase One deal and with Phase Two talks on the horizon. Major bourses are swinging between gains and losses with no clear direction thus far, whilst the FTSE 100 (-0.5%) modestly underperforms regional peers amid unfavourable Sterling action coupled with losses in individual stocks. Sectors are also mixed and do not clearly reflect a specific risk sentiment; although, the energy sector leads the upside as oil prices crawl back from YTD lows. In terms of individual movers: Pearson (-9.8%) plumbed the depths following a profit warning and the announcement of the departure of its CFO. GlaxoSmithKline (-1.5%) extended on losses seen at the open following a negative broker move coupled with the rebuttal of reports that that there will be an IPO of its consumer JV with Pfizer. On the flip side, RWE (+2.0%) sees healthy gains after a German government spokesman said the Co. is to receive EUR 2.6bln compensation for higher electricity costs caused by a coal exit law which is to be drafted this month. Elsewhere Associated British Foods’ (+2.4%) shares remain supported by a lukewarm trading update in which the Co. reaffirmed guidance. Note, auto makers largely side-lined the Washington Post’s report that US President Trump issued a private warning to Germany, France and the UK that the US will impose a 25% tariff on European autos if Europe refused to initiate the dispute mechanism against Iran in the JCPOA deal, according to European sources.
Top European News
- Merkel Spends Big to Kickstart Germany’s Stalled Coal Exit
- Second-Biggest Diamond Ever Will Become Louis Vuitton Jewelry
- Hungary Gets Boost in EU Court Spat Over Tobacco Tax Suspension
- Putin’s Premier Pick Wins Backing Amid Overhaul Push
In FX, a rather underwhelming response to the official Phase One signing ceremony has left the Greenback languishing near or at new lows against most major counterparts and the DXY trying to defend the 97.000 level again within a 97.263-134 range. Technically, 97.105 and 97.091 supports from earlier in the month are still holding, but the Buck’s fate could ultimately lie with fundamentals and Thursday’s multiple US macro releases including retail sales for the festive period and more timely January Philly Fed survey.
- NZD/AUD - Another marked swing in sentiment of change in fortunes down under, as the Kiwi benefits from a short squeeze and paring of oversold positions amidst a less dovish RBNZ rate call via ASB to extend gains above 0.6600 against its US peer towards 0.6650 and through resistance at 0.6620, while paring loss vs the Aussie from 1.0450+ to almost 1.0400. Meanwhile, Aud/Usd is still struggling to overcome 0.6920 after multiple attempts and eyeing Usd/Cnh-Cny moves in wake of the initial trade deal allied to PBoC fixings and policy action ahead of next week’s Chinese Lunar New Year break and Australian jobs data.
- GBP/CHF/CAD/EUR - All firmer against the Buck, albeit marginally, as Pound pivots 1.3050 between 1.3025-65 parameters and fades just ahead of the 200 HMA (1.3067) after tripping stops at the aforementioned half round number, but not threatening more said to be poised between 1.3070-75. Elsewhere, the Franc remains firm across the board with Usd/Chf and Eur/Chf both hovering closer to 0.9625 and 1.0735 lows than 0.9650 and 1.0760 highs, even though the single currency is consolidating recent advances vs the Dollar around 1.1150 and more convincingly beyond the 200 DMA (1.1140). Similarly, the Loonie has advanced into a higher 1.3048-32 band vs its NA rival with some traction from comparative stability in crude prices.
- JPY/SEK/NOK - Marginally bucking the overall trend, Usd/Jpy has rebounded from Wednesday’s lows to retest offers around 110.00 where a hefty 1.8 bn option expiries roll-off, while Eur/Sek is straddling 10.5500 following 2020 Swedish growth and inflation forecast downgrades by the Government and Eur/Nok is flitting either side of 9.8800 in wake of the latest Norges Bank credit survey revealing little change in loan demand.
- EM - In keeping with no real rise in risk appetite post-US/China Phase One trade deal signing, most regional currencies are largely idling, the Try felt some tailwinds in the aftermath of the CBRT rate decision despite a deeper-than-forecast cut to its weekly repo rate, bringing it down to 11.25% from 12.00%, although some vendors were forecasting a 75bps cut – which would be in-line with the Central Bank’s action. The Lira may have derived strength given the slowing pace of the cuts (reductions since July 2019 have each been deeper than 100bps). Further, from an inflation perspective, the Bank also noted that inflation is judged to be broadly in line with the end of 2020 inflation projection. Whereas, in December it was seen that inflation is likely to materialise close to the lower bound of the October inflation projections. Usd/Try immediately fell to test 5.8500 to the downside vs. a pre-announcement level of ~5.8750, albeit the move did largely pare back, potentially on geopolitical developments after the Turkish President announced that troops will be deployed to Libya. Next up, Zar will be eyeing the SARB’s rate announcement from 13:00GMT after somewhat mixed SA gold and overall mining output data.
In commodities, the IEA Monthly Report founds that 2020 world oil demand growth estimate unchanged at 1.2mln BPD, due to subdued prices. Global oil demand increased by 955k BPD to 101.1mln BPD in October; supply in December decreased by 780k BPD due to Saudi Cuts. OPEC crude production fell in December by 180k BPD to 29.44mln BPD; Demand for OPEC crude to fall to 28.5mln BPD in H1 2020. Notes, even in the event OPEC adheres strictly to the output pact a strong global oil inventory build is likely in Q1
US Event Calendar
- 8:30am: Retail Sales Ex Auto and Gas, est. 0.4%, prior 0.0%
- Retail Sales Advance MoM, est. 0.3%, prior 0.2%
- Retail Sales Ex Auto MoM, est. 0.5%, prior 0.1%
- Retail Sales Control Group, est. 0.4%, prior 0.1%
- 8:30am: Philadelphia Fed Business Outlook, est. 3.7, prior 0.3
- 8:30am: Import Price Index ex Petroleum MoM, est. 0.1%, prior 0.2%; Import Price Index YoY, est. 0.5%, prior -1.3%
- 8:30am: Export Price Index MoM, est. 0.2%, prior 0.2%; Export Price Index YoY, prior -1.3%
- 8:30am: Initial Jobless Claims, est. 218,000, prior 214,000; Continuing Claims, est. 1.75m, prior 1.8m
- 9:45am: Bloomberg Consumer Comfort, prior 65.1
- 10am: Business Inventories, est. -0.15%, prior 0.2%
- 10am: NAHB Housing Market Index, est. 74, prior 76
- 4pm: Net Long-term TIC Flows, prior $32.5b
DB's Jim Reid concludes the overnight wrap
US equities peaked for the day just around the start of the phase one signing press conference yesterday before fading into the close even if they did still hold In positive territory. The S&P 500 ultimately ended +0.19% and NASDAQ +0.08%. Just on the trade signing, there wasn’t much in the way of surprises. China is committed to cracking down on American intellectual property theft while also committing to spend $200bn to bridge the trade imbalance. The fade into the close for markets perhaps reflected some of the more contentious issues not being addressed such as commercial cyber theft or addressing China’s use of industrial subsidies. In more details, the Phase one deal says that China has to deliver an action plan within 30 days of the deal taking effect on how it intends to meet its commitments on intellectual property. So we will have to wait to see what follow through we get on this. On the enforcement mechanism, the agreement allows the US to move to punish China with tariffs or other measures within 90 days if officials decide it was breaking its promises.
Prior to the trade signing it was comments from White House economic advisor Larry Kudlow which seemed to initially propel markets to fresh highs. Speaking to CNBC, Kudlow said that “I am still running a process of Tax Cuts 2.0” and that a plan will be unveiled sometime later in the summer. Such a plan would require bi-partisan approval and will therefore be difficult (but not impossible) to agree.
Back to markets, where 10y Treasuries also nudged down another 3bps following a disappointing PPI report (more on that below) while the 2s10s curve flattened back towards 22bps. There were more substantial moves in Europe though with the big mover being Gilts where 10y yields rallied 6.7bps to 0.651% and the lowest since November. That followed a very soft CPI report which has thrown the cat amongst the pigeons for the BoE, with a cut this month now becoming more and more of a talking point. Elsewhere, 10y Bunds were -2.9bps lower with BTPs the only one to buck the trend, with yields sharply higher into the close to finish up 0.6bps on the day. That was despite an oversubscribed 30y auction, continuing the theme of strong demand for this staggering run of issuance we’re on.
This morning in Asia markets are mixed with Chinese bourses leading the declines with the CSI (-0.25%) and Shanghai Comp (-0.25%) both down. Meanwhile, the Nikkei (+0.02%) and Hang Seng (+0.01%) are trading flat but with the Kospi (+0.45%) being up. Elsewhere, futures on the S&P 500 are up +0.14% and in commodities, soybean prices are down c. -0.27% likely due to China signalling that purchases would be based on demand, rather than a pre-set amount while crude oil prices (both WTI and Brent) are up c. +0.70% this morning. In other news, China’s Vice Premier Liu He said that the country’s 2019 growth is projected to be above 6%. China’s 2019 GDP figures are due to be released tomorrow.
Overnight, The Financial Times carried an interview with German Chancellor Angela Merkel which warned the EU that Brexit is a wake-up call and the EU must respond by upping its game and becoming more attractive. The interview also mentions that the US focus on Europe is declining and that its likely to remain the case under any president while sounding generally positive on the UK’s trade negotiations with the EU. On the Banking Union, Merkel said that Germany is still “slightly hesitant” on a banking union for Europe to go alongside its monetary union as it believes that every country first needs to reduce their own risks before risks can be mutualized. Also, as a reminder, DB’s Group Chief Economist David Folkerts-Landau wrote an op-ed in the German daily Frankfurter Allgemeine Zeitung last week, with the title “Brexit should be a wake-up call” and the English translation can be read here.
Back to yesterday, where there was some disappointment in the latest earnings reports from Goldman Sachs and Bank of America. That of course followed what were impressive results from JP Morgan and Citi. Share prices for Goldman and BofA declined -0.18% and -1.84% respectively, with the wider S&P banks index -1.81%. Elsewhere, Bloomberg reported that the House sent two articles of impeachment against Donald Trump to the Senate yesterday and the trial is expected to begin from Tuesday. With a two-third majority required to impeach this is highly likely to be defeated by the Republican controlled chamber.
In the EM world there wasplenty of focus on Russia yesterday following the news that Prime Minister Medvedev’s government had resigned, with President Putin later nominating Mikhail Mishustin as Medvedev’s successor. This followed Putin’s annual state-of-the-nation address where the highlights included proposed Constitutional change including a possible referendum that could allow Putin to move into a new role to maintain a high degree of power when his President term ends in 2024. Russian assets appeared non-fussed with the Ruble little changed and Russia’s main equity market up +0.09%. See our economists note on the news here for more.
In other news, Dow Jones reported yesterday that the White House will send to the Senate two nominations for the Fed’s Board of Governors soon. These nominations were announced by President Trump over six months ago and included economists Judy Shelton and Christopher Waller. The same newswire suggested that Shelton is “likely to face scrutiny from the Senate Banking Committee over her past advocacy for returning to a gold standard” as well as defending Trump for pressuring the Fed to lower rates.
Meanwhile, the data that was released yesterday was focused on the US where, much like the CPI report the day prior, PPI data for December also came in on the softer side. The headline reading of +0.1% mom was below consensus for +0.2% while the various core components include ex food, energy and trade also missed by one-tenth. In the details it was noted that the healthcare component slipped about 15bps in year over year terms which suggests a softer read through for core PCE. Elsewhere, the January Empire manufacturing reading improved 1.5pts to 4.8 (vs. 3.6 expected) – the highest since May last year – and with the details also mostly upbeat.
In Europe, as mentioned earlier the UK CPI report for December was soft, with the core reading dropping three-tenths to 1.4% yoy after expectations were for no change. That is the lowest print now since November 2016. So ,more ammunition for some of the doves in the MPC. In France, CPI was unrevised at +0.5% mom while the German economy was confirmed as growing +0.6% yoy in 2019, as expected. Finally Euro Area industrial production rose +0.2% mom in November, one-tenth lower than expected.
Looking at the day ahead, the highlight in terms of data comes this afternoon with the December retail sales report in the US. Also due out is the January Philly Fed index, December import price index, jobless claims, November business inventories and January NAHB housing market index prints. In Europe we’ll get the final December CPI revisions in Germany while in the UK the BoE bank liabilities and credit conditions survey will be released. Away from that it’s worth keeping an eye on the ECB minutes today before the ECB’s Lagarde speaks in Frankfurt this afternoon. Earnings highlights include Morgan Stanley and CSX.