Dollar Rebound Continues, Europe Stocks Pressured By Banks As Much Of Asia Goes On Holiday

US equity futures are unchanged, trading near record highs after digesting a spate of earnings results on Thursday. The dollar pared its weekly loss as the yen and pound slid, while gold headed for its longest slump in three months. European equities fell and markets in Asia were mixed, while markets in China, South Korea, Taiwan and Vietnam were closed Friday for the start of Lunar New Year. Hong Kong, Malaysia and Singapore had shortened sessions.

The dollar continued its recovery against a basket of other currencies on Friday, while banks dragged European shares slightly lower following underwhelming results from Swiss major UBS. The two-day recovery comes after the dollar suffered a 4 percent drop in the three weeks from Jan. 3 as doubts emerged about how Trump's policies will play out for the currency, particularly after both Trump and Treasury Secretary-designate Steven Mnuchin hinted at concerns over its strength. The yen extended its biggest decline in a week and Japanese bonds rose as the BOJ stepped in to buy more debt than expected. The pound also slid ahead of British Prime Minister Theresa May’s meeting with Donald Trump.

"The (dollar) has experienced a powerful rebound re-establishing post-U.S. election relationships between the performance of risk assets and U.S. bond yields on the one hand and the (dollar) on the other hand," said Morgan Stanley FX strategists led by Hans Redekker, in a note to clients.

Trump suggested overnight he would push ahead with a 20 percent border tax on Mexico, spurring a slump on the peso and refocusing market expectations on his pro-business policies which, along with healthy corporate results, helped stocks on Wall Street to fresh record highs. However, the peso has since rebounded after the White House backtracked on its border tax proposal, when Sean Spicer said it was only "theoretical."

On the political calendar, all eyes will be on the upcoming meeting between UK PM Theresa May and Donald Trump today. She will be the first leader to meet the President and a lot of attention will be placed on the outcome. May wants to try to pave the way for a free trade deal with the US post-Brexit and Mr Trump, in spite of his protectionist biases, would probably like to help the UK prosper if for no other reason than to help prove his point that the EU is flawed and the UK is better off outside of it. So although it's a very early meeting where nothing will be decided it'll be interesting to hear from the leaders afterwards. Trump's ability to be confrontational on the global stage was demonstrated yesterday as we saw US-Mexico trade relations continue to grow strained as Mexico’s President Enrique Pena Nieto officially cancelled a planned meeting with Trump as the latter continued to signal intentions of building "the wall" and substantially increasing border security. He said that if the Mexicans had no intention of paying for the wall they should cancel next week's trip. This is precisely what they've done.

Back to markets, where the global equity rally fizzled modestly after U.S. benchmarks reached all-time highs this week, as corporate results from Caterpillar Inc. to Microsoft Corp. delivered a mixed picture on the state of the American economy ahead of the Federal Reserve meeting next week. The Bank of Japan also meets and is expected to leave policy unchanged as recovering exports, strength in production and buoyant oil prices support reflation. The MSCI Asia Pacific Index fell 0.1%, while Japan’s Topix climbed 0.3%, bringing it near its highest point in more than a year. Australia’s S&P/ASX 200 Index rose 0.8 percent as the nation’s markets reopened after a holiday. India’s Sensex, also back from a holiday, gained 0.7 percent. Hong Kong’s Hang Seng Index slipped 0.1 percent, while Singapore’s Straits Times Index added 0.4 percent for its highest close since October 2015.

European stocks were headed for a weekly gain of about 1 percent though were slightly lower on Friday as weakness in the banking shares weighed. The Stoxx Europe 600 fell 0.3% following three days of gains.  A fall in profits sent UBS shares down more than 3% as investors locked in some gains following a strong rally in financials stocks following the U.S. election. The European banking index fell 1.2 percent.

In the UK, the FTSE was also slightly lower but outperformed other regional benchmarks supported by merger activity as leading supermarket operator Tesco struck a deal to buy up wholesaler Booker to create what it claims will be Britain’s “leading food business”. The deal values Booker at 205.3p a share, or £3.7bn, a premium of 12 per cent over its closing price of 183.1p a share on January 26 according to the FT. Booker acquired grocery chains Budgens and Londis in 2015 and has over 170 cash and carry locations in the UK. Tesco said Booker shareholders will receive 42.6p in cash and 0.86 in new Tesco shares. The merger will result in Booker shareholders owning 16 per cent of the combined company. Tesco shares surged 10 percent.

Futures on the S&P 500 Index were down less than 0.1 percent. The benchmark slipped 0.1 percent Thursday after rising past 2,300 for the first time, while the Dow Jones Industrial Average extended an all-time high.

Benchmark German bonds are headed for their worst week since the aftermath of November's U.S. election on Friday, as Trump's first week in office fuels expectations of inflation and growth-boosting policies in the world's biggest economy. The yield on 10Y Treasuries was up one basis point at 2.52%. It slipped one basis point Thursday after an auction of $28 billion in seven-year notes drew a record amount of buying from indirect bidders, signaling interest from foreign central banks and mutual funds. Japanese 10-year yields fell one basis point to 0.08%. As reported last night, the BOJ boosted the amount of 5-to-10-year bonds it buys in its outright purchase operations, underscoring a commitment to keep its yield-curve target.

In a report citing EPFR data, Bank of America reported that investor flows continue to point to a preference for so-called "reflation" trades. Funds investing in TIPS,  high-yield bonds and Japanese equities, attracted inflows over the past week, the data showed. "But the re-positioning feels grudging and flows have yet to show big asset allocation capitulation out of bonds into stocks," BofA's Michael Hartnett said.

In commodity markets, oil prices gave up earlier gains as rising crude output from the United States was seen offsetting efforts by OPEC and other producers to prop up the market by cutting supplies. Trading was choppy as volumes were lighter than average with much of Asia closed due to the start of the Lunar New Year holiday. Brent crude futures, the international benchmark for oil prices, were trading at $55.98 per barrel, down 0.5 percent from their last close. U.S. West Texas Intermediate (WTI) crude futures were down 0.2 percent at $53.67 a barrel

 

Market Snapshot

  • S&P 500 futures down less than 0.1% to 2292
  • Stoxx 600 down 0.5% to 366
  • FTSE 100 down 0.1% to 7152
  • DAX down 0.3% to 11816
  • German 10Yr yield down less than 1bp to 0.48%
  • Italian 10Yr yield up 2bps to 2.26%
  • Spanish 10Yr yield up less than 1bp to 1.58%
  • S&P GSCI Index down 0.4% to 399.2
  • MSCI Asia Pacific down less than 0.1% to 142
  • Nikkei 225 up 0.3% to 19467
  • Hang Seng down less than 0.1% to 23361
  • Shanghai Composite closed
  • S&P/ASX 200 up 0.7% to 5714
  • US 10-yr yield up less than 1bp to 2.51%
  • Dollar Index up 0.24% to 100.62
  • WTI Crude futures down 0.7% to $53.41
  • Brent Futures down 0.9% to $55.71
  • Gold spot down 0.3% to $1,184
  • Silver spot down 0.3% to $16.76

Top News

  • U.S. Edges Toward Trade War as Trump Clash With Mexico Escalates
  • Microsoft, Intel, Alphabet Results Buoyed by Cloud Boom
  • PayPal Has Been Talking With Amazon on Payments, CEO Says
  • Morgan Stanley to Reduce Wealth Fees Even With Rule Uncertainty
  • Resignation Threatens to Bring Federal Pipeline Rulings to Halt
  • Biggest U.S. Takeover in China in Decade Hangs on Board Spat
  • Tesco Agrees to Buy Wholesaler Booker for About $4.6 Billion
  • UBS Clients Pull Net $15 Billion in Quarter as Margins Decline
  • Wynn’s New Macau Palace Helps Chinese Unit Beat Estimates
  • Asahi Looks for China Beer Exit After Tsingtao Disappointment
  • Toshiba Outlines Plans to Raise Capital Via Chip Stake Sale
  • Hong Kong Yuan Deposits Post Record Monthly Drop in December
  • U.S. Steel to Negotiate With Hesteel on Sale of Slovak Unit: HN
  • Ford’s Farley Sees Up to $600m Impact From GBP Drop in ’17: Sky
  • Lions Gate in Talks to Sell Epix Stake to MGM, Viacom: Reuters
  • Digital Bridge Said to Buy Vantage Data Centers for >$1b: Reuters
  • Trump, Merkel Expected to Talk by Phone Saturday: Reuters

In Europe, shares trade lower but only marginally (EuroStoxx 50 -0.6%). The main equity story of the day is Tesco's (TSCO LN) GBP 3.7bIn merger with wholesaler Bookers (BOK LN). Elsewhere, the banking sector is the worst performing sector with UBS down after an earnings update this morning. Aside from stock specific stories, macro newsflow has remained light for the morning thus far. Bunds are trading sideways this morning stuck with a tight range between 161.35 to 161.80. Italian BTP's initially showed some weakness again, wider 3bps vs Bund: 10yr yield 2.26%, spread 178bps this after further weakness seen yesterday after the Italian court ruling regarding voting laws. However, Italian paper over the course of the morning has been able to reverse the initial downside to pare the move with little in the way of new fundamental catalysts to sway price action in what has been an erratic morning thus far. Of note, after market we see rating agencies rate Spain, UK and Turkey.

Top European News

  • Tesco Agrees to Buy Wholesaler Booker for About $4.6 Billion: CEO Lewis makes M&A debut, entering out-of-home food market
  • U.S. Regulators Hang Tough at Basel as Trump Rollback Looms: U.S. will push hard for consensus on output floor, Petrou says
  • Betting on Nordic Rain Pays Better Than Your Average Hedge Fund:Danish manager made 15 percent, 5 times commodity fund index

Asia equity markets traded mostly higher despite a mixed lead from Wall Street where earnings were in focus and the DJIA further extended above 20,000, although upside in the Asia-Pac region was reserved amid holiday-thinned trade. ASX 200 (+0.8%) outperformed as it played catch up on return from yesterday's public holiday and took its first opportunity to react to the DJIA conquering the 20k level, while Nikkei 225 (+0.3%) was kept afloat by a weaker JPY. Hang Seng (+0.1%) slightly lagged on early profit taking and position-squaring heading into the Lunar New Year, with a lack of demand also attributed to various market closures as mainland China, South Korea and Taiwan remained shut for holiday. 10yr JGBs were higher with outperformance in the long-end after the BoJ announced its bond buying operations, in which it increased purchases of government debt with 5yr-10yr maturities to JPY 450b1n from a previous JPY 410bIn.

Top Asian News

  • Jakarta Stocks Miss Gain as Governor Race Takes Islamic Turn: Indonesia is only SEAsian market to see stock outflows in 2017
  • Little Room to Beat India Cash Ban Gloom With Budget Goodies: Overspending triggers risk of downgrade due to wide deficit
  • Biggest U.S. Takeover in China in Decade Hangs on Board Spat: Majority board asks Air Products to proceed with due diligence

In currencies, the Bloomberg Dollar Spot Index rose 0.2 percent as of 8:17 a.m. in London, after jumping 0.6 percent Thursday. The measure is down 0.3 percent for the week, headed for a fifth straight weekly decline -- the longest stretch since May 2015. It hit the highest in more than a decade in early January.  The yen slid 0.5 percent to 115.13 per dollar after dropping 1.1 percent the previous session. The currency is down 0.4 percent for the week, its worst showing since Dec. 16. The pound fell 0.4 percent following a 0.3 percent decline Thursday, though it remains in line for a 1.4 percent weekly gain. The peso dropped 0.6 percent, extending Thursday’s 0.7 percent retreat. Mexico’s president scrapped his trip to Washington after Donald Trump doubled down on campaign pledges to rewrite the North American Free Trade Agreement and charge his southern neighbor to build a border wall.
The Turkish lira continued to touch new lows, falling 0.8 percent.

In commodities, West Texas Intermediate crude was little changed at $53.79 a barrel after surging 2 percent Thursday on optimism that OPEC and other producing nations would adhere to their pledged output cuts. The standout mover in commodities was Gold, which retreated 0.4 percent to $1,184.32 an ounce after dropping 1 percent Thursday. It is headed for a fourth straight loss, which would be the longest slump since October as the combined pressure from USD upside and risk on sentiment see the safe haven 'metal' offloaded. We still have room before we get to the Dec lows ahead of USD1120, but the pressure continues for now. USD based losses having limited impact on Copper, similarly Oil prices showing a small down in this respect also. A standout gainer is Nickel, which has been rising on strong demand out of China (see Copper also), whilst inventories have been falling.

Taking a look at some of the upcoming data today, in Europe we saw the December M3 money supply numbers (+5.0%, Exp. +4.9% YoY, vs. +4.8% previous) for the Euro area and the January consumer confidence indicator in France (100, vs 100 expected; 99 previous). In the US the advance Q4 GDP print (+2.2% QoQ annualized; +3.5% previous) will be closely watched alongside preliminary data on durable and capital goods orders in December, followed by the final University of Michigan sentiment reading for January (98.1 expected; 98.1 previous). So a fairly busy end to the week alongside the Trump/May meeting.

US Event Calendar

  • 8:30am: GDP Annualized QoQ, 4Q A, est. 2.2% (prior 3.5%)
  • 8:30am: Durable Goods Orders, Dec. P, est. 2.5% (prior -4.5%)
  • Capital Goods Orders Nondef Ex-Air, Dec. P, est. 0.2% (prior 0.9%)
  • 10am: U. of Mich. Sentiment, Jan. F, est. 98.1 (prior 98.1)
  • 1pm: Baker Hughes rig count

DB's Jim Reid concludes the overnight wrap

The state rooms at the White House will no doubt be prepared for UK PM Theresa May's visit to see Donald Trump today. She will be the first leader to meet the President and a lot of attention will be placed on the outcome. Mrs May wants to try to pave the way for a free trade deal with the US post-Brexit and Mr Trump, in spite of his protectionist biases, would probably like to help the UK prosper if for no other reason than to help prove his point that the EU is flawed and the UK is better off outside of it. So although it's a very early meeting where nothing will be decided it'll be interesting to hear from the leaders afterwards. Mr Trump's ability to be confrontational on the global stage was demonstrated yesterday as we saw US-Mexico trade relations continue to grow strained as Mexico’s President Enrique Pena Nieto officially cancelled a planned meeting with Mr Trump as the latter continued to signal intentions of building "the wall" and substantially increasing border security. He said that if the Mexicans had no intention of paying for the wall they should cancel next week's trip. This is precisely what they've done. The Peso was down over 1% after the news and the Bovespa -1.4% yesterday. The story took a further twist later as after US markets closed White House Press Secretary Sean Spicer suggested that "When you look at the plan that’s taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico, if you tax that $50 billion at 20 percent of imports......... we can do $10 billion a year and easily pay for the wall just through that mechanism alone." After only 4 days of Mr Trump's presidency this is escalating pretty quickly. Despite volatility being very low now I can't see this being a permanent feature of 2017 even if overall growth is eventually higher.

Over to markets and global equity bourses were largely mixed yesterday. Broader US equities ran out of steam with the S&P500 -0.07% on the day although the Dow edged up +0.16%. European equities maintained momentum with the Stoxx up +0.25% on the day, driven largely by the healthcare sector (+1.6%). At the other end of the risk spectrum, bonds generally sold off for most of the day although a late US rally led to UST 10yr falling 1bps (4-5bps off the highs) after German 10yr yields climbed +2bps earlier, while UK 10yr yields rose by +4 bps. Euro periphery bonds also sold off with 10yr Italian BTP yields rising by +12bps likely on the back of Wednesday's court ruling which our own Marco Stringa thinks encourages fragile coalition governments going forward with little chance of serious structural reform. It also perhaps increases the chances of an early election. See yesterday's EMR with a link to Marco's piece for more on this.

On the commodity spectrum, crude rose by +1.9% and to around 3-week highs and actually fairly close to 18-month highs. In Asia the BoJ have been active again this morning buying 450bn of 5-10 year paper which has been seen as an attempt to prevent the 10 year climbing further. We hit 0.085% yesterday and many think that the BoJ zero yield target for 10 years has an upper bound of around 0.1%. The  10yr has rallied 1.4% today to 0.067% as we type. We think this area of the curve could face pressure as the year progresses if we're right on global yields. Remember that the BoJ implemented their change of direction (yield and yield curve targeting) in September last year which was pretty much the lowest level for government bond yields at a global level in history. Elsewhere in Asia the Nikkei is +0.2% and the Hang Seng was slightly lower before the early close with Chinese markets off for Lunar New Year. Many other markets in Asia have closed early with China extending the closure next week.

Staying with Asia, it is worth highlighting that our Chinese economists have published the first edition of a new monthly publication entitled China Macro in Charts. This report aims to provide a comprehensive set of charts tracking, amongst other things, developments in economic activity, trade, inflation, financial markets and fiscal policy.

The data out of Europe yesterday was broadly positive. The GfK consumer confidence reading from Germany for February improved more than expected (10.2 vs. 10 expected; 9.9 previous). We also saw the advance Q4 GDP reading for the UK which beat expectations at +0.6% QoQ (vs. +0.5% expected; +0.6% Q3), although there were concerns about the unbalanced nature of the growth – services accounted for nearly the entire expansion while production and construction sectors dragged on growth.

We had a busy day over in the US where we saw a more mixed bag of data. First we saw the advance goods trade balance data for December where the deficit decreased (-$65.0b vs. -$65.3b expected; -$65.3 previous) while preliminary wholesale inventories unexpectedly grew at +1.0% mom in December (vs. +0.1% expected). The Chicago Fed National Activity Index reading for December was also unexpectedly positive (0.14 vs. -0.05 expected) while the conference board leading index came in line with expectations (+0.5%). Flash PMIs for January beat expectations with the services PMI ticking up to 55.1 (vs. 54.4 expected) and thus driving the flash composite up to 55.4 (vs. 54.1 previous). Labour market data was on the weaker side as initial jobless claims rose more than expected to 259k (vs. 247k expected; 237k previous), and new home sales for December disappointed at 536k (vs. 588k expected; 598k previous). The claims number may still have seasonal distortions in after a strong Xmas period.

Taking a look at some of the upcoming data today, in Europe we will see the December M3 money supply numbers (+4.9% YoY expected vs. +4.8% previous) for the Euro area and the January consumer confidence indicator in France (100 expected; vs. 99 previous). Over in the US the advance Q4 GDP print (+2.2% QoQ annualized; +3.5% previous) will be closely watched alongside preliminary data on durable and capital goods orders in December, followed by the final University of Michigan sentiment reading for January (98.1 expected; 98.1 previous). So a fairly busy end to the week alongside the Trump/May meeting.