US Dollar Surge Returns, Pushes Equity Futures Lower

As noted several hours ago, the main story overnight is not that Greece once again narrowly averted a Grexit when it was reported it would make its scheduled payment to the IMF today (adding that next month is a "different story") a development that was met with yet another ultimatum by its "partner", the Eurozone, but the dot com bubble deja vu-esque move in Hong Kong stocks, where the Chinese, seemingly tired of pushing up their local market into the stratosphere have turned their attention southward and are desperate to buy up every single Hong Kong stock.

As a result, the Hang Seng (+2.7%) jumped to its highest level since 2007, gaining as much as 6.4%, with volume turnover on the Index ~400% above the 30-day average. Gains were led by Chinese regulators allowing mainland Chinese funds to buy shares in HK and as analysts see HK stocks as undervalued relative to their Chinese peers, due to the out performance of the Shanghai Comp. vs. HSI. Despite opening above 4,000 for the first time since 2008, the Shanghai Comp (-0.9%) moved lower given the flows away from Chinese equities into Hong Kong stocks. Nikkei 225 (+0.75%) extended on its 15-year highs and is now in close proximity to the key 20,000 level, further underpinned by JPY weakness. JGBs rose with the curve notably flatter after today’s 30yr auction which despite a lower than prev. b/c, saw the yield in price narrow significantly to 0.19% vs. prev. 0.34%.

European equities started the session on the front foot, taking the lead from the positive Wall Street close and Asia-Pacific session overnight. Furthermore, sentiment has also been bolstered by confirmation that Greece are to make their scheduled repayment to the IMF Later today, which has subsequently seen the GR/GE spread tighter by 21bps. On a sector specific basis, auto-names outperform and have helped support the DAX after bouncing back from yesterday’s declines and also being assisted by lower aluminium prices in the wake of Alcoa’s after-market report yesterday. Elsewhere, fixed income markets trade in a relatively directionless manner with things otherwise quiet from a European perspective. However, heading into the North American crossover, Gilts have moved higher after breaking above yesterday’s highs with volumes otherwise light.

In FX markets, the USD-index trades higher with no stand out news supporting the move higher, with price action instead led by a technical break below 1.4850 in GBP/USD which triggered stops along the way, with EUR/USD extending further losses and the next level of support said to be at 1.0714 - its March 31st low. With regards to GBP, GBP/USD has pared the entire gains from yesterday which were attributed to the large M&A deal between Royal Dutch Shell and BG Group. Elsewhere, Antipodeans remain supported as carry trades continue to come back in favour amongst investors stirred by yield demand, with NZ and AU yields notably higher across the curve, while NZD faded earlier losses, after PM Key said he expects the currency to fall further against USD.

And while the USD has indeed been higher all night without any material catalyst, the snapback is starting as can be seen below, in what has now become a standard market fixture before the US open, i.e., the infamous stop hunt. Case in point: a 30 pip move in the biggest FX pair in seconds and on no news.

In the commodity complex, both WTI and Brent crude futures trade higher in a pullback of yesterday’s heavy losses which were triggered by the latest API and DoE inventory data which revealed a substantial build for the headline figures and an increase in US oil production. The result was the biggest drop in WTI in 2 months.

Elsewhere, precious metals continue to weaken as gold retreats for a third consecutive session as the USD trades higher, subsequently seeing the yellow metal remain below the USD 1,200 level. Furthermore, Aluminium underperforms industrial metals amid revised forecasts from Alcoa that now sees a surplus of aluminium compared to a previous deficit, which consequently weighed on aluminium prices.

In summary: European shares rise a third day with the media and construction sectors outperforming and basic resources, telcos underperforming. The Swiss and French markets are the best-performing larger bourses, Spanish the worst. The euro is weaker against the dollar. German 10yr bond yields fall; Greek yields decline. Commodities gain, with Brent crude outperforming and silver, gold underperforming. * U.S. jobless claims, continuing claims, Bloomberg consumer  comfort, wholesale inventories, due later.

Market Wrap

  • S&P 500 futures down 0.3% to 2070.5
  • Stoxx 600 up 0.6% to 407
  • US 10Yr yield down 1bps to 1.89%
  • German 10Yr yield little changed 0.16%
  • MSCI Asia Pacific up 0.6% to 152
  • Gold spot down 0.5% to $1196.8/oz
  • Eurostoxx 50 +0.5%, FTSE 100 +0.7%, CAC 40 +0.8%, DAX +0.4%, IBEX +0.2%, FTSEMIB +0.5%, SMI +1.2%
  • MSCI Asia Pacific up 0.6% to 152; Nikkei 225 up 0.7%, Hang Seng up 2.7%, Kospi little changed, Shanghai Composite down 0.9%, ASX down 0.5%, Sensex up 0.6%
  • Shell’s $70 Billion BG Deal Meets Shareholder Skepticism
  • Teva Mulls Next Move as Mylan’s Perrigo Bid Jolts Drugmakers
  • Burberry Outperforms; Daily Mail Cites Takeover Speculation
  • Chemicals M&A May Accelerate, Baader-Helvea Says; Lists Targets
  • Wincor Nixdorf M&A Not Without Risks, Analysts Say
  • Euro down 0.45% to $1.0733
  • Dollar Index up 0.52% to 98.45
  • Italian 10Yr yield up 2bps to 1.26%
  • Spanish 10Yr yield up 1bps to 1.21%
  • French 10Yr yield down 1bps to 0.44%
  • S&P GSCI Index up 1.5% to 410.1
  • Brent Futures up 2.8% to $57.1/bbl, WTI Futures up 2.6% to $51.7/bbl
  • LME 3m Copper up 0.5% to $6043/MT
  • LME 3m Nickel down 0% to $12575/MT
  • Wheat futures down 0.4% to 524.3 USd/bu


Bulletin Headline Summary

  • European equities take the lead from the US and Asia, with things otherwise quiet from a European perspective
  • The USD-index is providing a bulk of the price action in FX markets, subsequently weighing on EUR and GBP, with GBP paring yesterday’s M&A related advances
  • Looking ahead, today sees the BoE rate decision, US weekly jobs data, wholesale inventories and US 30yr auction.
  • Treasuries gain before week’s auctions conclude with $13b 30Y bonds; WI yield 2.525% vs. 2.681% in March. 10Y notes sold yesterday awarded at lowest yield since May 2013.
  • Greece has met its payment obligation to IMF that was due today, Greek Finance Ministry official says on condition of anonymity
  • German industrial production rose 0.2% in February, better than expected, vs a revised 0.4% drop in January
  • State action can help solve bad loan issue, Bank of Italy Governor Ignazio Visco said in an interview; public intervention can help free up resources for credit, even through “a direct participation in the management and the recovery of impaired loans”
  • Italy banks’ gross non-performing loans rose 15.3% in Feb. from yr earlier, Bank of Italy says in e-mailed statement today.
  • Kaisa Group Holdings said that a unit of shareholder Sino Life Insurance Co. agreed to lend it 1.38b yuan ($222m) as “financial assistance”
  • While Obama probably hoped an interview he gave to public radio would help sell Americans on a proposed nuclear accord with Iran, critics of the deal have seized on three sentences uttered by the president in their effort to scuttle it
  • Sovereign bond yields mostly lower. Asian stocks mixed, European equities gain. U.S. equity-index futures fall. Crude oil and copper higher, gold lower


US Event Calendar

  • 8:30am: Initial Jobless Claims, April 4, est. 283k (prior 268k)
  • Continuing Claims, March 28, est. 2.350m (prior 2.325m)
  • 9:45am: Bloomberg Consumer Comfort, April 5 (prior 46.2) ; Bloomberg April U.S. Economic Survey
  • 10:00am: Wholesale Inventories, Feb., est. 0.2% (prior 0.3%); Wholesale Sales, Feb., prior 0.3% (prior -3.1%, revised -3.3%)
  • 1:00pm: U.S. to auction $13b 30Y bonds in reopening


DB's Jim Reid concludes the overnight event summary

Yesterday we saw the first ever 10 year government bond auction issued at a negative yield with Switzerland's new deal clearing at -0.055%. With 500 years of bond market data to look back on we've never seen anything like this before. Will Switzerland be the only country that ever manages such a feat or will we see a few more in this cycle? On this, 10 year Bunds dropped another couple of basis points yesterday to now trade at 0.161%. So it’s not beyond the realms of possibility that Germany will be next.

Over on the other side of the Atlantic, the FOMC minutes showed that the Fed have not given up hope of returning markets to some kind of normality as "Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting?. Others on the committee thought energy weakness and a stronger dollar would continue to depress inflation and thus argued for a rate increase later in the year. A couple said the economy probably wouldn’t be ready for tighter policy until 2016. Although we were surprised June was still so much on the radar, these minutes pre-date last Friday's weak payroll print so one has to bear that in mind. It’s all to play for though over the coming months. Data will likely swing this debate a few times over the coming weeks and months.

Following the release of the minutes, the Fed's Dudley yesterday reiterated his more dovish view of late. He said that the intention of the Fed should be conservative and that there are strong arguments for being a little on the late side before reiterating the dependency on data for the timing of liftoff. Fed Governor Powell, also speaking yesterday, was more hawkish however, saying that he expects a cycle of rate hikes to begin later this year and possibly start as early as the June meeting. Like other recent Fed commentary, Powell seemingly placed more importance on the pace of liftoff rather than the date however, saying that ‘from a macroeconomic perspective the precise timing of liftoff is less important than the path of subsequent additional rate increases’ and that ‘if the economy continues on its expected path, it will be appropriate for a time to increase rates fairly gradually’.

Staying with the Fed, our colleagues in the US yesterday took a look at the composition of this year’s FOMC, noting that the group is more dovish relative to the 2014 group. By assigning a ranking to each member based on a 1-5 scale (1 being dovish, 5 hawkish), they calculated the average ranking for the FOMC in 2014 was 2.6, so close to neutral. Now that the hawkish-leaning President’s Fisher, Mester and Plosser have rotated off the committee, they calculate a much more dovish 1.8 average ranking. Given the FOMC minutes showed some differing in opinion on liftoff between members, the slightly more dovish-tilt in the composition could become more of a factor if the committee remain divided on timing.

Elsewhere, the start of Q1 earnings season in the US was the other notable highlight yesterday as Alcoa reported post US-close. Despite delivering profit above analyst expectations, revenues grew less than expected and management pointed towards a somewhat challenging outlook which caused the shares to slide in extended trading.

Yesterday’s price action was fairly subdued for the most part as the S&P 500 (+0.27%) ended more or less where it started in the moments leading up to the release of the minutes. 10y Treasuries traded in a tight range for much of the session before eventually closing 2bps higher at the close to finish at 1.905%. Meanwhile the Dollar rebounded from earlier losses with the DXY ending +0.25% to mark its third consecutive day of gains. There were bigger moves in the commodity complex however as Gold closed 0.55% lower and oil markets sold off. Indeed, both WTI (-6.60%) and Brent (-6.01%) reversed some of the strong gains seen so far this week to close at $50.42/bbl and $55.55/bbl respectively on the back of reports that US crude inventories jumped the most in 14 years.

Closer to home yesterday, European equity markets weakened into the close to finish mostly in the red. The DAX (-0.72%), CAC (-0.28%) and peripheral bourses all closed lower, while the Stoxx 600 (+0.08%) posted a modest gain. Despite continued strength in core bond markets, peripherals were a touch softer yesterday as 10y yields in Spain (+1.7bps) and Italy (+0.8bps) closed higher. The small sample of data we got in the region yesterday reflected the mixed sentiment. February retail sales for the Euro-area surprised to the upside (+3.0% yoy vs. +2.8% expected), although German factory orders disappointed with the -0.9% mom print well below the +1.5% expected. Our colleagues in Europe noted however that the details continue to support their high Q1 German GDP forecast of +0.8% qoq. They point out that passenger car production was particularly strong in March and that consumer goods orders rose by +2.9% mom supporting their number.

Yesterday we also got confirmation of the news that Shell will pay £47bn for BG Group in the biggest deal for the sector for more than a decade with suggestions that this could spark a wave of further consolidation. The M&A theme also continued yesterday in the US pharma space as Mylan bid to take over Perrigo in a $29bn deal. The two announcements in fact place at 1st and 4th YTD by acquisition announcement size.

Elsewhere, as well as the aforementioned Swiss negative 10-year auction yesterday, it was interesting to see that in the EM space Mexico yesterday issued its first ever Euro-denominated 100 year ‘century’ bond, with the notes pricing at 4.2%. A report on Bloomberg noted that EM countries and company’s issued €20bn in the first three months of this year which marks the second busiest quarter for EM bond sales in a decade.

Refreshing our screens this morning, equity markets in Asia are mixed on the whole. The Nikkei (+0.64%) and Hang Seng (+3.67%) have firmed while markets in China have weakened, led by a 1.24% fall for the Shanghai Comp. In fact, the Hang Seng jumped as much as +6.7% earlier in trading and briefly touched the highest level since 2007 with volumes around 5x the average. The rally has been helped by inflows from China mutual funds in Hong Kong listed companies after Chinese regulators eased restrictions on the Hong Kong-Shanghai Connect. Shares in Hong Kong Exchanges and Clearing opened around 14% higher this morning following a 12% rise yesterday.

Taking a look at today’s calendar, the highlights in Europe this morning will be trade data and industrial production out of Germany while in France we get business sentiment. In the UK this morning we see the latest BoE decision (not much excitement expected) as well as trade data due. It’s quiet in the US this afternoon with just jobless claims and wholesale inventories expected. Attention will also likely be on Greece with the government due to repay a €440m IMF loan.