At the end of the day, it was all about the dollar.
Starting March 18, the Bloomberg Dollar Spot had risen as much as 1.9% as Fed officials including Lacker, Williams and Bullard noted upside risks on rate-hike projection and suggested a rate hike may be imminent as soon as April. And then Yellen unleashed the latest round of dovishness, when she made it very clear that the Fed is no longer just the U.S. central bank, but that of the world (but mostly China) and as such its prerogative is to not only keep stocks high, but to also assure there is no currency crisis in Beijing (where a month ago she met other G-20 central bankers to decide precisely this).
The result of Yellen's much discussed speech, was an immediate plunge in the Dollar spot index of 1.2% to 8 month lows, its worst month in 5 years, a drop which has continued this morning, and is on par to equal the dollar's tumble from the first week of March when Bill Dudley likewise came out very dovish, and when the index dropped 1.7% within a week.
What is notable about these two crying doves is that both have roundly ignored the simmering "mutiny" by the Fed's hawks (remember Hilsenrath's humorous "The Decline of Dissent at the Fed" last week) advice of central banker incubator Goldman Sachs, that it is in the US interest to push the dollar higher (it had a report just last week titled "Inflation Finally Begins to Firm"). It will be very interesting to see how this particular conflict is resolved.
For now, however, the die has been cast, and the result is a surge in risk assets around the globe: stocks jumped in Asia (except in Japan where the Yen strength pushed the Nikkei lower by 1.3%, however the Shanghai's 2.3% jump just over 3000 should more than make up for that) and Europe, with US equity futures 0.6% higher at this moment. Commodities climbed as the dollar extended its worst month in more than five years.
The reason for this stock surge, as we noted last night, is absurdly delightful: Yellen signaled "weakening world growth" and "less confidence in the renormalization process." In other words, the "bad news is good news" mantra is back front and center. As such, calls for a slow approach to tightening policy ignited gains for shares from Shanghai to Frankfurt after U.S. equities erased their losses for the year. Diminishing prospects for a first-half Fed rate increase sent the Bloomberg Dollar Spot Index toward the lowest since June and drove emerging-market currencies toward their best month since 1998. Credit markets rallied and U.S. oil gained for the first time in five days.
"We have seen European markets broadly head higher on Yellen’s dovish note last night," said Michael Hewson, the London-based market analyst at CMC Markets Plc. “It’s the only factor driving them up today."
Indeed, the worse the global economy gets from this point on, the better for risk assets, even if it means that the S&P's GAAP P/E is north of 23x as of this morning.
As Bloomberg adds, futures show traders now see no chance of Yellen changing policy next month, a roughly 20% chance of a June hike as of this moment, and only a 54% likelihood of an increase by November after she dialed back some of the commentary made by other officials the past two weeks. The Fed chair emphasized during her appearance at the Economic Club of New York that the central bank remains wary of raising rates amid threats to American growth from a slowing global economy.
The MSCI All-Country World Index added 0.8 percent as of 10:29 a.m. London time for a fourth-straight advance. The Shanghai Composite Index gained 2.8 percent and Germany’s DAX Index added 1.6 percent. The Bloomberg Dollar Spot Index fell 0.2 percent.
Global Market Snapshot
- S&P 500 futures up 0.5% to 2057
- Stoxx 600 up 1.2% to 341
- FTSE 100 up 1.5% to 6199
- DAX up 1.5% to 10034
- German 10Yr yield down less than 1bp to 0.14%
- Italian 10Yr yield down 1bp to 1.23%
- Spanish 10Yr yield down less than 1bp to 1.44%
- MSCI Asia Pacific up 0.9% to 129
- Nikkei 225 down 1.3% to 16879
- Hang Seng up 2.1% to 20803
- Shanghai Composite up 2.8% to 3001
- S&P/ASX 200 up 0.1% to 5010
- US 10-yr yield up less than 1bp to 1.81%
- Dollar Index down 0.26% to 94.91
- WTI Crude futures up 1.7% to $38.94
- Brent Futures up 1.4% to $39.69
- Gold spot down 0.2% to $1,239
- Silver spot up 0.2% to $15.39
Top Global News
- Boeing to Trim 4,000 Jobs Amid Makeover of Commercial Jet Unit: part of a broader effort to reduce costs amid fierce competition from Airbus Group SE
- Amazon Assembly, Installation Services Bolster Big-Product Sales: retailer has put together an army of workers who can handle everything from mounting flat TVs on walls to assembling treadmills
- Exxon Climate Science Probe Expands as New York Gains Allies: Massachusetts joins New York in investigating Exxon Mobil
- Yellen Spurs Global Stock Rally as Dollar Tumbles for Second Day: Stocks jumped around the world after Yellen reasserted the central bank’s gradual approach to raising interest rates
- Earnings Optimism Drawing Short Seller Wrath in U.S. Equities: Short interest in ETF tracking industry highest in 20 months
Looking at regional markets, we start in Asia, where in the aftermath of yesterday's dovish deluge stocks traded mostly positive as the region cheered Fed Chair Yellen's dovish remarks, which had already underpinned the S&P 500 to its highest close YTD. However Nikkei 225 (-1.3%) underperformed, weighed by a stronger JPY and poor Industrial Production figures which declined the most since 2011, while Shanghai Comp (+2.8%) outperforms amid upbeat earnings results and prospects China's pension fund could start investment in the nation's stock markets this year. 10yr JGBs tracked T-notes higher following the aforementioned dovish Yellen and amid weakness in Japanese stocks, while the BoJ were also in the market for JPY 1.2trl of government debt.
Top Asian News
- China Said to Accelerate Financial Regulatory Overhaul Plans: Proposals for new system of oversight could come in summer
- China’s Large Banks Wary on Li Keqiang’s Plan for Bad Loans: Higher risk weights for equity stakes would weaken banks
- Fortunes Reverse for Hedge Funds That Won in Past Selloffs: Hao’s China hedge fund lost 6.1% after last year’s 149% gain
- Takata Said to Put Worst-Case Recall Costs at $24 Billion: Supplier said to peg total recall at 287.5m inflators
- Antibiotic Apocalypse Fear Stoked by India’s Drugged Chickens: Feeding chickens antibiotics may speed diseases costing $100t
In Europe, risk on sentiment dominated the price action this morning as dovish comments by Fed's Yellen on Tuesday prompted market participants to reassess their expectations of further rate hikes by the Fed. Consequently, USD index remained under pressure for the much of the first half of the EU session. Looking elsewhere, despite the upside in stocks and supply related positioning, Bunds traded little changed, though prices moved off the best levels after it was reported that inflation in German states edged back into positive territory. Also of note, peripheral bond yield spreads continued to tighten, supported by large quarter-end negative supply in April.
Top European News
- Metro Plans to Split in Two in Move to Boost Company’s Value: Shares jump as much as 10% in Frankfurt on demerger plan. Split should take place by middle of next year, company says
- Swedbank Chairman Fails to Win Re-Election After CEO Scandal: development follows the dismissal earlier this year of Chief Executive Officer Michael Wolf
- Tata Steel Will Study Sale of Its U.K. Unit as Market Worsens: Producer says its holding talks with British government. Slump in global prices has forced it to consider selling its U.K. business
- Europe’s Bond Shortage Means Draghi Is About to Shock the Market: ECB’s monthly debt purchases rise by 20 billion euros in April. Ten-year bunds headed for biggest quarterly gain since 2011
In FX, the early European session continued to the North American sell off in the wake of Fed Chair Yellen's speech in NY yesterday, where the level of dovish rhetoric took the market by surprise. All the majors saw significant moves against the greenback, and these have all been extended, after a relatively quiet Asian session which was largely consolidative. EUR/USD has now pushed up to 1.1333 while USD/JPY printed a 112.00 low to push the USD index down towards key mid-March support.
The commodity currencies have also made some gains, but giving back some of this more recently, with USD/CAD meeting strong demand at 1.3000. NZD/USD took out key resistance around .6900 to suggest some much stronger gains ahead, though AUD/USD through the recent .7680 highs has only generated modest momentum since, with .7700 still intact.
Bloomberg’s dollar index, which tracks the greenback against 10 major peers, has lost 3.7 percent in March, set for a second straight monthly drop and the biggest decline since September 2010. The U.S. currency slipped 0.3 percent to $1.1321 per euro and weakened 0.4 percent to 112.27 yen as it dropped against all of its major counterparts.
The Fed would act “cautiously” as it looks to raise rates against a backdrop of deteriorating global growth, Yellen said. Policy makers including St. Louis Fed President James Bullard and San Francisco Fed boss John Williams said last week that higher borrowing costs were possible as soon as next month.
"Yellen indicated that core Fed members take into account the global context more than regional officials," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. in New York. “A June rate hike would be difficult as global financial turmoil earlier this year affects the real economy with a time lag.”
In commodities, WTI and Brent have both traded positively with WTI currently trading higher by USD 0.72/bbl just above the USD 39.00/ bbl level. Gold has also seen moves higher during European trade but has now started consolidating after reaching highs of 1244.27/oz. Meanwhile in base metals copper and iron ore price action was subdued with the red metal remaining at its lowest level since early March. Nickel for three-month delivery advanced 0.8 percent to $8,520 a metric ton on the London Metal Exchange. Gold declined 0.3 percent to $1,238.22 an ounce in the spot market following a 1.7 percent jump last session.
West Texas Intermediate crude snapped a four-day, 7.7% tumble to rise 1.7 percent Wednesday, to $38.94 a barrel. Brent crude gained 1.2 percent to $39.59. The weaker dollar makes crude and other commodities cheaper in other currencies.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities remain elevated on the back of dovish commentary from Fed Chair Yellen who stresses need to hike rates slowly.
- USD index remained under pressure consequently supporting flows into higher yielding currencies such as AUD and NZD.
- Going forward will see the latest US ADP report, weekly DoE inventories data, comments Fed's Evans and also the US Treasury will sell USD 28b1n in 7y notes.
- Treasuries little changed in overnight trading, global equity markets rally on post-Yellen euphoria; this week’s auctions conclude with $28b 7Y notes, WI yield 1.59%, compares with 1.568% awarded in Feb., lowest 7Y auction stop since 1.496% in May 2013.
- U.S. Treasuries are poised for their best quarter in almost four years as bond traders cut the probability of a rate boost at the April meeting to zero after Yellen’s warning Tuesday about global economic risks; The dollar headed for its worst month in more than five years, the yen strengthened
- Boeing plans to cut about 4,000 jobs from its commercial airplanes division by mid-year as part of a broader effort to reduce costs amid fierce competition from Airbus Group SE. The U.S. planemaker doesn’t plan any involuntary layoffs, for now
- ECB Governor Draghi prepares to increase and broaden his bond-buying program, leaving investors to face even higher demand for government bonds with supply unable to keep up and some of Europe’s biggest banks are predicting yields are headed for even more record lows
- The European Central Bank isn’t discussing directly financing government stimulus, or “helicopter money,” Executive Board member Benoit Coeure said
- Euro-area economic confidence fell to the lowest level in more than a year just as the European Central Bank deployed fresh stimulus to spur growth and quash the threat of deflation
- Japan’s industrial production dropped 6.2% in February, the most since the March 2011 earthquake as falling exports sapped demand and a steel-mill explosion halted domestic car production at Toyota Motor Corp
- $6.45b IG credit priced yesterday, WTD $11.1b, MTD $155.905b, YTD $450.155b; $1.07b HY priced yesterday, WTD 4 deals $2.57b, MTD 26 deals for $16.435b, YTD 51 deals for $31.29b
- Sovereign 10Y bond yields mixed; European and Asian equity markets higher; U.S. equity-index futures rise. WTI crude oil rallies, gold and copper fall
US Event Calendar
- 7am: MBA Mortgage Applications, March 25 (prior -3.3%)
- 8:15am: ADP Employment Change, March, est. 195k (prior 214k)
- 10:30am: DOE Energy Inventories
- 1pm: Fed’s Evans speaks in New York
DB's Jim Ried concludes the overnight wrap
Well after ten days or so of some surprisingly hawkish chatter from a handful of the regional Fed Presidents, it was back to the cautious FOMC script of two weeks ago for Fed Chair Yellen following her comments yesterday at the Economic Club of New York. In stark contrast to much of the rhetoric in the interim period since the last FOMC meeting to twenty-four hours ago from her colleagues, a dovish Yellen provided a firm and effective reminder that the Fed is clearly not going to be rushed into prematurely tightening further, while at the same time surely putting to bed any possibility that the Fed could move next month, as some of the previous Fedspeak comments had alluded to.
In terms of what Yellen said exactly, the main focus was on her comment that ‘given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy’. This was quickly followed up by the Fed Chair also making mention to the fact that ‘this caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric’. Yellen also highlighted that the outlook for US inflation had become ‘somewhat more uncertain’ and that recent readings on the US economy are ‘somewhat mixed’. The Fed Chair even went as far as to say that the committee has ‘considerable scope’ to ease policy if necessary and that ‘while these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed’. Both China and volatility in Oil prices were also made mention to several times as risks to the US outlook.
In the lead up another rough day for Oil markets, which we’ll touch on shortly, had seen US equity markets trend lower initially, but risk markets latched onto the dovish tone with sentiment swinging as Yellen spoke, culminating with the S&P 500 eventually finishing with a +0.88% gain and in turn reaching a fresh high for the year. Credit indices also took comfort in the comments with CDX IG (1bp tighter on the day) nearly 2.5bps tighter from the earlier intraday wides. Unsurprisingly the US Dollar was hit hard with the Dollar index (-0.82%) eventually concluding a second consecutive down day. Gold finished +1.62%, while elsewhere Treasury yields were already marching lower with the moves for Oil before the Fed Chair’s comments added an extra kick, the benchmark 10y eventually finishing the day over 8bps lower at 1.804%. The probability of a hike in June fell to a fresh post-FOMC low of 28% (around 10% lower than Monday’s close), although it’s worth reminding that we still have three employment reports to come before that meeting starting with the March report this Friday.
Refreshing our screens this morning, with the exception of Japan bourses in Asia are following much of the post-Yellen gains made in the US yesterday evening. The Shanghai Comp (+1.24%), Hang Seng (+1.38%), Kospi (+0.36%) and ASX (+0.26%) are all up while iTraxx credit indices in Asia and Australia are both tighter. US equity market futures are posting modest gains. The sell-off for the US Dollar has seen the Yen benefit the most and that’s weighing on Japanese equity markets with the Nikkei currently down -0.33%. A softer than expected industrial production report out of Japan (-6.2% mom vs. -5.9% expected) is also not helping sentiment there. Meanwhile there’s better news to come out of the latest Westpac consumer sentiment reading for March in China, with the index up nearly 7pts to 118.1 and the highest level since September.
Back to yesterday and specifically those moves for Oil. WTI closed down -2.82% yesterday and a shade above $38/bbl for its fifth consecutive daily decline. In fact prices are now $4 lower than the intraday highs of less than two weeks ago with much of this being attributed to the rising skepticism building for hopes of any material outcome from the upcoming April 17th meeting between major producers in Doha. The latest dent yesterday came out of Kuwait with the acting oil minister announcing that production is to restart in the Kharfi oil field, a 300k barrel-a-day joint operation by state owned Kuwait and Saudi Arabian oil producers which had been closed since October 2014. Oil had been rallying on hopes that the upcoming Doha meeting may bring about a production freeze but questions are being asked about the seriousness of such an outcome in light of news such as this.
With regards to the economic data yesterday, the main takeaway of note was a decent rise in the March consumer confidence index to 96.2 (vs. 94.0 expected) from an upwardly revised 94.0 last month. While the details showed the present situation index declining for the second consecutive month, the expectations index did retrace nearly its entire February decline. The only other data of note in the US was the S&P/Case-Shiller house price index which showed that house prices increased +0.8% mom during January (vs. +0.7% expected) in the 20 major cities. Prior to this in Europe we saw the ECB report its money and credit aggregates for February. The M3 money supply growth rate was unchanged at 5.0% yoy as expected, however there was a reported increase in loans to both households and non-financial corporates.
Staying in Europe, European equity markets reopened from the long weekend with broad-based gains yesterday, the Stoxx 600 (+0.50%) in particular snapping the four days of consecutive losses which had made up last week. Meanwhile sovereign bond yields in Europe continue to close in on their February lows. 10y Bund yields were over 4bps lower yesterday and at 0.136% are only just above the 0.107% we reached at the end of last month. It was noted that Spanish 5y yields struck a new record low yesterday at 0.318%.
Before we take a look at today’s calendar, there was actually some other Fedspeak away from Yellen yesterday although this was clearly overshadowed by the comments from the Fed Chair. San Francisco Fed President Williams said that the future pace of rate hikes will be gradual and thoughtful while offering a slightly more positive outlook for global growth relative to that of Yellen. Meanwhile Dallas Fed President Kaplan said that although he considers all eight Fed meetings to be ‘live’, the Fed President stressed the need for the Central Bank to move in a ‘cautious, deliberate and patient’ manner.
Looking at the day ahead now then, the early data out of Europe this morning will see the release of the March confidence indicators for the Euro area (where little change is expected in the economic confidence index) before we get the first read of the March CPI reading for Germany (expected at +0.6% mom). This afternoon in the US the focus will be on the ADP employment change reading for March as a prelude for the Friday employment report, with market expectations currently sitting at 195k. Away from this it’s fairly quiet although we are due to hear from Chicago Fed President Evans (at 6.00pm BST) where he is expected to speak in NY on the economy and monetary policy, with Q&A scheduled for after.