Furious Rally Fizzles Overnight As Futures Follow Oil Lower

Following yesterday's torrid 2.4% March opening rally, which resulted in the biggest S&P gain since January and the best first day of March in history on what was initially seen as very bad news, and then reinterpreted as great news, overnight futures have taken a breather, and erased a modest overnight continuation rally to track the price of oil lower.

Futures on the S&P 500 expiring in March fell 0.2 percent to 1974, erasing an earlier rise of as high as 0.3 percent as Donald Trump and Hillary Clinton solidified their positions in the race to their parties’ presidential nominations following yesterday's Super Tuesday primaries. As the chart below shows, the oil/equities correlation is once again dominant...

... which has meant an initial weakness for both the Emini and WTI following yesterday's gargantuan API build. However, with official DOE data on deck in a few hours, all that will take for oil to jump higher is for the announced inventory build to be just fractionally less than the 9.9 million barrels the API reported, and the HFT algos will be off to the races again, chasing Brent and WTI higher.

AS Bloomberg notes in its Super Tuesday recap, Clinton dominated Democratic Party primary contests held on Tuesday, beating rival Bernie Sanders, and Trump boosted his chances of securing the Republican Party nomination. The impact on trading was muddied as global equities rebounded on the U.S. economic data and amid stability in China markets that spurred risk-taking.

The eighth year of a presidency typically ranks last in terms of equity returns, and the first half of an election year is often even worse. Add everything else that has been weighing on markets in 2016, from China to oil and the Federal Reserve, and few money managers see a return to the calm that reigned from 2012 to 2015.

Among the other top overnight news, fracking pioneer McClendon accused of rigging Oklahoma bids, Pimco’s Jon Short leaving to join Zwirn’s Arena hedge fund, Starbucks former COO Alstead permanently resigns from company, and China's rating outlook was put on negative by Moody's.

Global market snapshot:

  • S&P 500 futures down 0.2% to 1974
  • Stoxx 600 up 0.4% to 340
  • FTSE 100 up 0.2% to 6167
  • DAX up 0.3% to 9742
  • German 10Yr yield up 5bps to 0.2%
  • Italian 10Yr yield up 2bps to 1.4%
  • Spanish 10Yr yield up 2bps to 1.51%
  • MSCI Asia Pacific up 2.8% to 123
  • Nikkei 225 up 4.1% to 16747
  • Hang Seng up 3.1% to 20003
  • Shanghai Composite up 4.3% to 2850
  • S&P/ASX 200 up 2% to 5021
  • US 10-yr yield up 2bps to 1.84%
  • Dollar Index up 0.13% to 98.48
  • WTI Crude futures down 2% to $33.72
  • Brent Futures down 0.8% to $36.50
  • Gold spot down 0.2% to $1,230
  • Silver spot down less than 0.1% to $14.82

Top News:

  • Fracking Pioneer McClendon Accused of Rigging Oklahoma Bids: Facing allegations he worked with an unidentified competitor to keep the price of leasing drilling rights artificially low.
  • Pimco’s Jon Short Leaving to Join Zwirn’s Arena Hedge Fund: Will be president at Arena, which specializes in lending to companies that are unable to get bank loans.
  • Starbucks’ Former COO Alstead Permanently Resigns From Company: Had been on unpaid sabbatical for a year to spend more time with his family. Before that was considered a contender to succeed Chief Executive Officer
  • Super Tuesday Wins Tighten Clinton, Trump Grasp on Nominations: Clinton takes seven states helped by women and black voters. Blue-collar anger fuels Trump’s victories over Cruz, Rubio


Looking at regional markets, as usual we start in Asia where equities took the impetus from the strong close on Wall St. where strong data and gains in the energy complex bolstered sentiment. Nikkei 225 (+4.1%) outperformed with exporters lifted by a weaker JPY and strong performances in automakers after encouraging US auto sales results, while the ASX 200 (+2.0%) was underpinned by the resurgence in the energy sector as well as better than expected domestic GDP data. Shanghai Comp (+4.3%) conformed to the upbeat tone as material names spurred the index after cement capacity reduction plans and several regional measures were announced to support the property industry. 10yr JGBs declined amid spill-over selling from USTs after firm US data bolstered risk sentiment and US economic confidence, to the detriment of safe-haven assets. As reported last night, Moody's affirmed China's Aa3 rating, but revised its outlook to negative from stable.

Top Asian News:

  • China Rating Outlook Cut as Moody’s Warns of Debt, Reform Risks: Cites surging debt burden, questions the government’s ability to enact reforms
  • Aussie Economy Exceeds Forecasts as Households Open Wallets: Showing increased signs of transition to services; GDP growth fastest since early 2014
  • China Resources to Buy Out Snow Beer Unit for $1.6 Billion: Shares jump as deal gives company full ownership of world’s best-selling beer
  • Hong Kong Bourse Net Rises 54 Percent to a Record $1 Billion: 4Q net income and revenue little changed y/y, at HK$1.5b and HK$2.8b, respectively
  • Jack Ma’s Ant Financial Said to Be in Talks for Caixin Stake: Caixin has been discussing stake sale w/ Ma’s Zhejiang Ant Small & Micro Financial
  • Philippine Gaming Regulator Probes Money-Laundering Allegations: Up to $100m of suspicious funds were remitted to 3 casinos’ bank accounts
  • Japan Pension Whale’s $41 Billion Gain Masks Hard Time Ahead: Govt Pension Investment Fund heading for losses at start of 2016, councilor says

In Europe, the Stoxx Europe 600 Index added 0.4 percent, with banks leading gains. The equity benchmark closed above its 50-day moving average on Tuesday, capping its longest winning streak since October. MorphoSys AG climbed 6.7 percent after reporting better-than-estimated 2015 earnings. Virgin Money Holdings (UK) Plc jumped 7.3 percent after posting a fourfold increase in pretax profit for last year. Luxottica Group SpA slid 3.4 percent as Exane BNP Paribas noted that the Ray-Ban maker lowered its “rule of thumb” outlook for net income growth. Despite the upside seen in equities, energy names underperform today to weigh in the index, in tandem with energy prices coming off their best levels in the wake of yesterday's API crude oil inventory build.
Top European News:

  • EU Alternatives Won’t Help U.K. Post-‘Brexit,’ Government Says: Alternative trading arrangements with the European Union in the event of a British departure from the bloc pose “serious risks” to the prosperity of Britain, Prime Minister David Cameron’s government said.
  • Rolls-Royce Names ValueAct’s Singer to Board Amid Overhaul: Chief Executive Officer Warren East tries to revive earnings growth at the troubled aircraft engine maker
  • Swiss Economy Grows Most in a Year on Domestic Demand: Fourth-quarter GDP rose 0.4% vs estimate for 0.1% increase. SNB expects growth to accelerate in 2016 versus last year
  • CaixaBank Said to Be in Talks With Dos Santos on BPI Stake: CaixaBank SA, Spain’s third-largest bank, is in talks with Angolan investor Isabel dos Santos to acquire her stake in Portugal’s Banco BPI SA
  • Billionaire Fredriksen Sells $510 Million Marine Harvest Stake: Geveran Trading Co., a company controlled by shipping and oil billionaire John Fredriksen, sold a 4.42 billion krone ($510 million) stake in Marine Harvest ASA after a surge in prices

In FX, the yen weakened against 13 of its 16 major counterparts, sliding the most against the currencies of South Korea and Australia. It weakened 0.4 percent to 114.42 per dollar. The Aussie strengthened for a third day, climbing 0.5 percent versus the greenback. Australia’s commodity-dependent economy expanded 0.6 percent in the fourth quarter from the previous period, faster than the 0.4 percent growth forecast in a Bloomberg survey. South Korea’s won rose 0.8 percent, making it the best performer among major currencies.

Another weak PMI from the UK, this time in construction (54.2 vs. Exp. 55.5), added to fresh pressure on GBP, this coming through EUR/GBP which now looks set for a short squeeze higher despite the impending actions from the ECB next week. EUR/USD has also garnered a bid in this respect, though we expect the 1.0800 near term target close in proximity is limiting the downside from here. AUD gains post strong GDP overnight have stalled, with resistance in the mid .7200's deterring for now. All eyes on US ADPs later today.

A Bloomberg gauge of 20 developing-nation currencies was little changed after climbing 1.3 percent in two days. The Russian ruble and South Africa’s rand lost at least 0.6 percent, while currencies in Asia advanced.

The yuan traded in Hong Kong fell 0.09 percent to 6.5541 per dollar. The People’s Bank of China lowered its reference rate by 0.16 percent. China’s credit-rating outlook was lowered to negative from stable at Moody’s Investors Service, citing concerns about rising government debt and falling currency reserves in its decision to reduce the outlook.

In commodities, WTI crude future pared some of yesterday's gains after a larger than expected build in API crude inventories (9900K vs. Exp. 3600K, Prey. 7100K) to fall back below the USD 34/bbl level . Elsewhere, gold has seen modest declines as the heightened risk appetite dampened safe-haven demand, while copper and iron prices advanced to 3-month and near 6-month highs respectively, on the upbeat sentiment with the latter back above the USD 50/ton level.

"Any rally that we see will be subdued because of the large crude inventory,” David Lennox, an analyst at Fat Prophets in Sydney, said by phone. “We really need to see production cuts if we’re going to get any sustained gain in oil."

Copper climbed 1.5 percent in London. Codelco, the world’s biggest producer of the metal, expects a global surplus will persist through next year and that recent price gains are unlikely to be sustained, Chairman Oscar Landerretche said in an interview. Glencore Plc Chief Executive Officer Ivan Glasenberg said Tuesday that he now sees commodity prices bottoming.

On today's US calendar, we get the ADP employment change data for February due (expected: 188k), which should be watched closely ahead of the employment report on Friday. The Fed is also releasing the Beige book today. Aside from economic data, the release of the remaining results from Super Tuesday in the US should take centre stage.

Bulleting Headline Summary from RanSquawk and Bloomberg

  • Bunds fall today to reside firmly in the red as risk on sentiment remains, seeing equities trade higher for the 5th straight day
  • JPY is once again one of the most notable movers in FX markets, firmly back above 114.00 while AUD benefitted overnight from domestic GDP data
  • Today's highlights include US ADP, DoE Inventories, BoE's Cunliffe and Fed's Williams
  • Treasuries lower in overnight trading as world equity markets rally despite Moody’s downgrade of China’s outlook to negative from stable, citing the country’s rising debt burden. Today’s economic data includes Fed Beige Book and ISM New York.
  • China’s stocks rallied the most since November, led by property companies and commodity producers, on speculation the government will announce measures to boost growth at legislative meetings this week
  • The European Central Bank is monitoring the risk that negative rates will hurt bank profitability while sticking to its commitment to deliver price stability first, Executive Board Member Benoit Coeure said
  • French banks entered a tumultuous 2016 with the strongest earnings in almost a decade and pledged to reward shareholders with higher dividends
  • A drive to tighten rules over how much sovereign debt banks are allowed to own has led to Italy’s PM Matteo Renzi vowing to veto any attempt to cap holdings. Italian government securities account for 10.4% of the country’s bank assets
  • The Swiss economy returned to growth at the end of last year as gross domestic product rose 0.4% in the fourth quarter -- the most in a year -- after shrinking 0.1% in the previous three months
  • Australia’s gross domestic product advanced 0.6% in the fourth quarter from three months earlier, when it rose an upwardly revised 1.1% that was the biggest increase since early 2012
  • The pace at which earnings estimates are being cut is getting worse; analysts just reduced income estimates for the first quarter at a rate that more than doubled the average pace of deterioration in the last five years
  • Democrat Hillary Clinton and Republican Donald Trump emerged from Super Tuesday as the odds-on favorites to capture their party’s presidential nominations, setting them up for a White House showdown
  • As Trump continued to gather sweeping victories from New England to the Deep South, the urgent calls from establishment Republicans to stop him only grew louder and more apocalyptic.
  • $16.8b IG corporates priced yesterday, brings YTD to $311.05b; $1.5b HY priced, YTD $16.355b
  • Sovereign 10Y bond yields mixed with Greece 23bp lower; European, Asian markets mostly higher; U.S. equity- index futures lower. Crude oil drops, copper up, gold down

US Data Highlights

  • 7:00am: MBA Mortgage Applications, Feb. 26 (prior -4.3%)
  • 8:15am: ADP Employment Change, Feb., est. 190k (prior 205k)
  • 9:45am: ISM New York, Feb. (prior 54.6)
  • 11:00am: Fed’s Williams speaks in San Ramon, Calif.
  • 2:00pm: Fed releases Beige Book

DB's Jim Reid concludes the overnight wrap

We're definitely in a period where good news equals good news with no immediate concern about what it might mean for say Fed expectations. Indeed yesterday there was a notable relief rally on the back of signs of US manufacturing slightly improving in February. The S&P 500 closed +2.4% and to 7-week highs and WTI closed 1.9% higher at $34.40 - also around 7-week highs. Much of the improved sentiment was based around the all important ISM manufacturing (49.5 vs. 48.5 expected; 48.2 prior) beating expectations and on a similar note, the Markit manufacturing PMI also marginally surprising to the upside (51.3 vs. 51.2 expected; 52.4 prior) even if it signalled a slower rate of expansion as compared to January. The ISM prices paid index posted at 38.5 (vs. 35.0 expected; 33.5 prior) which also helped. Away from manufacturing, Construction spending was another bright spot as it rose by 1.5% mom in January (vs. 0.3% expected; 0.6% prior). Auto Sales rebounded in February after a softer start to the year where seasonally adjusted sales reached 17.5million (16-year high for the month). On a more negative note however, the IBD/TIPP Economic Optimism index for March fell below expectations (46.8 vs. 47.8 expected), with economic outlook falling to 41.2 (vs. 42.5 prior).

Turning to the Super Tuesday developments overnight, Bloomberg is reporting seven wins to Clinton and Trump who are dominating their respective fields. Senator Ted Cruz has claimed his home state Texas as well as Oklahoma which was key for him to stay in the race. Senator Rubio had a disappointing day where he was only able to win Minnesota and appears to already be focusing on his campaign in his home state Florida (does not vote until 15 March). Bernie Sanders managed to win in his home state of Vermont, Minnesota, Colorado, and Oklahoma.

In terms of key market development, Moody’s outlook change on China’s Aa3 rating to Negative was perhaps the main event. The outlook change was driven by concerns around weakening fiscal metrics, the ongoing fall in reserve buffers due to capital outflows and uncertainties around China’s capacity to implement key reforms.

Whilst China sovereign CDS is only 1bp wider at 134bp, it still marks a decent underperformance what has been a fairly positive tone for other risk assets overnight. Indeed the Asia and Australia iTraxx indices are around 8bp tighter, respectively. China IG benchmark cash spreads are around 2-3bps tighter. China equity markets are over 2% higher and the offshore RMB has been fairly stable anchored at around 6.553 against the Dollar. The Asian session this morning is definitely taking the lead from the positive US session overnight. The Nikkei (+4.4%) and the Hang Seng (+3.0%) indices are trading up strongly as we go to print.

Reviewing the European data yesterday. The Eurozone manufacturing February PMI clocked in marginally above expectations at 51.2 (vs. 51.0 expected/flash estimate) but still representing a 12 month low. While manufacturing PMI numbers signified growth in seven out of eight countries surveyed, all but two countries (Austria: 51.9; France: 50.2) saw PMIs slip from January’s numbers. The prints for Germany (50.5 vs. 50.2 expected) and France (50.2 vs. 50.3 expected) came in just above and below expectations respectively, but are hovering dangerously close to contractionary territory. Perhaps the most worrisome factor was the fact that purchase costs fell for the seventh straight month and posted their largest drop since July 2009. This data certainly adds to mounting deflationary fears following Monday's Eurozone inflation numbers, and all hopes will be pinned on ECB action next week. More positive news for the Euro Area was the unemployment rate for January dropping to 10.3% (vs. 10.4% expected) – the lowest level since August 2011.

The manufacturing PMI print out of the UK was a little alarming: the number clocked in at 50.8 (vs. 52.3 expected; 52.9 prior) and falling far more than expected to its lowest level since April 2013. Both input purchase costs and output charges saw further deflation off the back of lower commodity costs. While this certainly throws up some red flags, the reading for the larger services sector should be watched closely on Thursday before we get too concerned over a wider slowdown. European equity markets continued to shrug off soft/mixed regional economic data as the STOXX 600 (+1.44%) and the FTSE100 (+0.92%) posted gains for the fourth straight day.
As demand for safe haven assets fell, German government bond yields increased across all maturities with the 10yr yield increasing by +3.9bps (10Y: 0.146%). However, German yields continue to remain in negative territory up to the 8Y maturity. On the other hand, periphery yields dropped as Italian 10Y and Spanish 10Y yields were lower by -4.1bps and -4.2bps respectively. Credit markets benefited from the risk-on sentiment as iTraxx Senior and Sub spreads tightened by -4.9bps and -13.4bps respectively.

Finally before previewing the day ahead, DB's TheHouseView team published a special report yesterday titled “Searching for liquidity”, exploring the myth and reality about market trading liquidity. Their analysis shows that the overall level of liquidity does not appear low, with markets seeming to work reasonably well especially in periods of low stress. But they also find that seemingly ample liquidity has tended to evaporate during times of stress. The report includes a summary of liquidity conditions across markets as well as a look at the drivers behind the changes in liquidity conditions and at how markets are responding.

It’s a very quiet day ahead in Europe, with the only data of note being the Eurozone PPI number (expected: -2.9% YoY) for January and Spanish jobless claims (expected: 7.9k) for February. Data out of the US should spark more interest with ADP employment change data for February due (expected: 188k), which should be watched closely ahead of the employment report on Friday. The Fed is also releasing the Beige book today. Aside from economic data, the release of the remaining results from Super Tuesday in the US should take centre stage.