S&P futures rose further into record territory, European shares rose to within striking distance of their highest levels in more than a year while bonds fell and the dollar rose as investors cheered a surge in Chinese trade data amid hopes of "phenomenal" tax cuts by Donald Trump, all of which have rekindled the Trumpflation trade.
The main economic release overnight was China's trade data, which saw China post much stronger-than-expected exports and imports for January as demand picked up at home and abroad, however celebreations of a Chinese trade renaissance may be premature because as Goldman pointed out in a note, "the early Chinese New Year appears to have distorted January trade data (especially exports) on the upside." Reuters agreed, noting that China watchers warned the long Lunar New Year holidays may have distorted the data to some degree, with companies pumping up production or rushing to build inventories before the break, which can last for weeks.
Concerns aside, China's imports in January rose at the fastest pace since 2013, fueled by a continued construction boom which is boosting demand and global prices for resources from copper to steel, preliminary customs data showed on Friday. The 16.7% surge eclipsed the consensus estimate of 10.0%. China's imports from the United States rose 23.4 percent in January, the fastest pace in at least a year, while its monthly trade surplus with the U.S. dipped to $21.37 billion. Led by electronics, China's January exports climbed the most in almost a year, adding to evidence that Asia's long trade recession may be bottoming out. January shipments rose 7.9 percent, more than twice as much as expected, after 2016 exports slumped nearly 8 percent.
China had been lagging a recent export recovery seen in Japan, South Korea and Taiwan, dragging on the regional supply chain. Its integrated circuit shipments rose 14.5 percent last month, while exports of mobile phones rose 7.9 percent. That left the country with a initial trade surplus of $51.35 billion for the month, the highest in a year. Customs is due to release updated data for trade on Feb. 23.
A quick summary of China's trade data:
- Chinese Trade Balance (CNY) (Jan) 354.5bIn vs. bin Exp. 307.3bIn (Prey. 275.4bIn)
- Exports (CNY) (Jan) Y/Y 15.9% vs. Exp. 5.2% (Prey. 0.6%)
- Imports (CNY) (Jan) Y/Y 25.2% vs. Exp. 15.2% (Prey. 10.8%)
- Chinese Trade Balance (USD) (Jan) 51.35B vs. Exp. 48.50B (Prey. 40.82B)
- Exports (USD) (Jan) Y/Y 7.9% vs. Exp. 3.2% (Prey. -6.1%)
- Imports (USD) (Jan) Y/Y 16.7% vs. Exp. 10.0% (Prey. 3.1%)
"The export outlook for China is good, except for the potential risk of a Sino-U.S. trade war. The most important risk for China is what the Trump administration will do," Jianguang Shen, chief economist at Mizuho Securities in Hong Kong.
China's strong trade growth lifted shares of commodity-related sectors, in particular blue chip mining, across Europe helping regional indexes inch higher back towards last month's peaks.
Aside from China, the positive tone was driven by a return of the "Trump reflation trade", following Trump's comments on Thursday that in coming weeks he would announce something "phenomenal" in terms of tax although he offered no further details. Renewed speculation that Trump's economic policies will help boost economic growth and inflation pushed U.S. Treasury yields higher and lifted the dollar.
"President Trump promising tax reform in 2-3 weeks (potentially at the Feb 28 address to Congress) has added to risk bullish sentiment," said Morgan Stanley strategists in a note to clients.
In early trading, Europe's Stoxx 600 rose 0.2% and was poised to end the week about 1% higher helped by healthy corporate profits and a continued uptick in regional dealmaking which is seeing its strongest start to the year in more than a decade also helped underpin valuations.
Futures on Wall Street's three main indexes all notched record highs overnight. As Bank of America highlighted overnight, the broad bullish sentiment was evident in investment flows too with investors pumping $13 billion into bonds, $6 billion into equities and even $2 billion into gold, in the past week according to latest data, although US equities continued to see outflows in 4 of the past 5 weeks.
As noted earlier, sentiment got a further boost on the political front when Trump seemed to change tack and said he would honor the longstanding "one China" policy during a phone call with China's leader, a major diplomatic boost for Beijing which brooks no criticism of its claim to neighboring Taiwan.
Geopolitical focus now shifts to a meeting later on Friday between Trump and Japan's Prime Minister Shinzo Abe in which Abe is expected to propose a new cabinet level framework for U.S.-Japan talks on trade, security and macroeconomic issues, including currencies.
The dollar was up 0.3 percent against the yen, up more than 1% for the week. The dollar index, which tracks the greenback against a basket of six major currencies, added 0.2 percent on the day to 100.8, on track to gain 0.8 percent for the week.
In commodities, oil jumped after the International Energy Agency said OPEC had achieved record initial compliance of 90 percent with their cuts agreement, while demand grew faster than expected. Futures gained as much as 1.1 percent in New York. In the first month of the Organization of Petroleum Exporting Countries’ agreement, key member Saudi Arabia reduced production by even more than it had committed, while higher demand is aiding the group’s bid to re-balance world markets, the IEA said.
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- S&P 500 futures up 0.1% to 2,306.50
- STOXX Europe 600 down 0.07% to 366.53
- MXAP up 0.9% to 143.82
- MXAPJ up 0.4% to 460.74
- Nikkei up 2.5% to 19,378.93
- Topix up 2.2% to 1,546.56
- Hang Seng Index up 0.2% to 23,574.98
- Shanghai Composite up 0.4% to 3,196.70
- Sensex unchanged at 28,328.92
- Australia S&P/ASX 200 up 1% to 5,720.61
- Kospi up 0.5% to 2,075.08
- German 10Y yield rose 0.8 bps to 0.32%
- Euro down 0.09% to 1.0645 per US$
- Brent Futures up 1.1% to $56.23/bbl
- Italian 10Y yield fell 7.2 bps to 2.174%
- Spanish 10Y yield rose 3.1 bps to 1.656%
- Brent Futures up 1.1% to $56.23/bbl
- Gold spot down 0.2% to $1,225.53
- U.S. Dollar Index up 0.1% to 100.76
Top Headline News via BBG
- Trump Tells Xi He’ll Honor “One China,” Japan’s Shinzo Abe will try to convince Trump today that Japanese monetary policy isn’t aimed at manipulating the yen
- OPEC implemented 90% of promised output cuts in January, the first month of its agreement, as key member Saudi Arabia reduced production by even more than it had committed
- A federal appeals court unanimously refused to reinstate President Donald Trump’s ban on travel from seven Muslim- majority countries, issuing a sharp rebuke in a ruling likely destined for the U.S. Supreme Court
- Reckitt Benckiser Group Plc agreed to buy Mead Johnson Nutrition Co. for $16.6 billion, taking the U.K. consumer- products maker into the baby-formula market and providing a catalyst for growth as its sales momentum slows
- President Trump said a “phenomenal” plan to overhaul business taxes may be released within the next “two or three weeks,” heightening expectations as House Republican lawmakers are raising objections to their own leaders’ favored plan
- Western Gas to buy William Partners’ 50% non-operated interest in assets of Delaware Basin JV Gathering in exchange for WES’s 33.75% non-operated interest in two natural gas gathering systems in northern Penn. and $155m cash
- Walt Disney Co. plans to take full ownership of its ailing theme park in Paris to get the resort under control after 25 years of ups and downs at its first and only outlet in Europe
- The U.S. Senate confirmed Tom Price, a congressman and physician, to head the Department of Health and Human Services, a post where he’ll have a leading role in Republican efforts to dismantle Obamacare and implement its replacement, and oversee a budget of more than $1 trillion
- Ben Melkman, a former partner at Brevan Howard Asset Management, is receiving capital from billionaire Steven A. Cohen for the hedge fund he plans to start next month with more than $400 million under management, according to people with knowledge of the matter.
Asia equity markets carried over the momentum from the latest record day on Wall Street where the major indices printed fresh all-time highs as sentiment was underpinned by comments from US President Trump who will announce tax reforms in the upcoming 2-3 weeks. ASX 200 (+1.0%) was led by financial and energy names following similar outperformance in US, while Nikkei 225 (+2.6%) coat-tailed on the surge in USD/JPY which broke firmly above 113.00. Hang Seng (+0.6%) and Shanghai Comp (+0.4%). conformed to the widespread positive tone amid encouraging trade figures in which trade balance, exports and imports all beat estimates in both USD and CNY terms. 10yr JGBs saw spill-over selling from T-notes amid increases in global yields, although losses were stemmed after the BoJ raised the amount of JGB buying in the 10yr-25yr for today's Rinban operations.
Top Asian News
- China Exports Surge Ahead of Trade Friction Risk With Trump
- Trapped China Cash Breathes Life Into Hong Kong Yuan Banking
- Hong Kong’s Biggest Arbitrage Trade Gets a Boost From China
- Asian Stocks Climb to 18-Month High on Trump’s Tax Revamp Plan
- Hong Kong Existing Home Prices Rise to Near Record High
- Top Indian Bank’s Profit Jumps on Insurance Unit Stake Sale
The final European session of the week has seen EU bourses supported by the strong lead from their US and Asian counterparts. Oil prices are at intra-day highs in the wake of the !EA monthly report, whereby they raised their global oil demand, while highlight that OPEC compliance is up to 90% with OECD stockpiles falling the most in 3-yrs. Elsewhere, the material sector outperforms amid China's wider than expected trade surplus overnight, while firm earnings from ArcelorMittal has also supported the sector. Eurozone debt has been a touch softer across the board with bund prices flirting around 164.00 with the weakness led by the long of the curve, while the GE-FR 10yr spread back at 70bps having widened 3.2bps.
Top European News
- U.K. Industrial Output Posts Better Quarter Than First Estimated
- European Miners Surge After Earnings, Rebound in China Exports
- Brexit Gamble for Irish Funds Means Swapping U2 for Bankers
- Paschi’s Cash, Capital Crunch Adds Urgency to State Aid Plan
- UBS Counts on Russia Revival Even Without Trump-Putin Thaw
In currencies, the Bloomberg Dollar Spot Index rose less than 0.1 percent after Thursday’s 0.3 percent advance, and is poised to snap a six-week losing streak. The euro and British pound were both little changed. Citigroup Inc., the world’s largest foreign-exchange trading firm, sees the dollar rising this year even as the president talks the greenback down. Thin trading conditions still in evidence, with notable order levels intact as we head towards the weekend. In the lead USD pairings the recovery in the JPY spot rate has stalled ahead of initial resistance at 113.90-114.00, but the shallow pull-back suggests we are still well placed for an eventual test later in the session. Similarly in EUR/USD, pre 1.0616 bids continue to hold up a 'much-anticipated' downturn, but political risk seems to be tempered by German discord on how to accommodate the recent rise(s) in inflation. In the UK, strong manufacturing and industrial numbers beat expectations on all fronts, with the EU and non EU trade balances narrowing. GBP gains were muted however, though the data did manage to reverse some of the early morning weakness seen across the board. We continue to see sub 0.8500 demand holding up the EUR/GBP rate, while Cable through 1.2500 is finding it hard going, especially after coming against the strong resistance in the 1.2550-1.2600 zone.
In commodities, oil added 1 percent to $53.53 a barrel Friday after it climbed 1.3 percent the previous session. Gold fell 0.3 percent to $1,224.41 an ounce, after dropping 1.1 percent on Thursday. The metal, which is considered a haven asset, was at a three-month high earlier in the week. Iron ore futures jumped 3.8 percent in a fourth consecutive day of gains exceeding 1 percent. The !EA report dominated the headlines this morning, with 2017 Oil demand growth forecast to rise by 100k bpd. Production also fell by 1k in Jan to raise OPEC output (cut) compliance to 90% - 82% previously. This naturally saw WTI and Brent both rallying, but recent ranges look 'safe', with WTI through USD53.00 but still holding comfortably off the USD55.00 upper band. Notable losses in Gold after the moderate USD recovery and fresh record highs on Wall Street. Gains in the week stopped well short of key resistance at USD1250.00, moving down from USD1243 to USD1222.5 today. Strong gains in base metals on strong Chinese demand reported through Jan — Copper is back to USD2.70, but Zinc and Lead the out-performers — both gaining 2.5% on the day. !EA Monthly Report says they have raised their 2017 global oil demand growth forecast by 100,000bpd to 1.4mln bpd and estimate that OPEC are working with a 90% level of compliance to their output cut deal. OECD stock piles decline by 800,000bpd during Q4; most in three years.
Looking at today’s calendar, in the US the only data of note is the import price index reading for January, the flash University of Michigan consumer sentiment reading for this month, and then the January monthly budget statement later this evening. The only central bank speak comes from the ECB’s Mersch this morning, although Fed Vice-Chair Fischer will speak over the weekend. The other event to keep an eye on is the aforementioned meeting between President Trump and Japan PM Abe. Finally on the earnings front there are just 4 S&P 500 companies due to report.
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US Event Calendar
- 8:30am: Import Price Index MoM, est. 0.3%, prior 0.4%; ex Petroleum MoM, prior -0.2%; YoY, est. 3.4%, prior 1.8%
- 10am: U. of Mich. Sentiment, est. 98, prior 98.5
- 10am: U. of Mich. Current Conditions, prior 111.3; Expectations, prior 90.3; 1 Yr Inflation, prior 2.6%; 5-10 Yr Inflation, prior 2.6%
- 2pm: Monthly Budget Statement, est. $45.0b, prior $27.5b deficit
DB's Jim Reid concludes the overnight wrap
Metaphorically President Trump yesterday got his driver out and launched it high into the financial market fairway as he let the world know that there would be a "phenomenal" tax plan in the next two or three weeks in a meeting with US airline executives. During a press briefing later on in the day with White House Press Secretary Sean Spicer the question was asked whether or not this comment was corporate focused to which Spicer said it will be a “comprehensive” package and one “that will address both the business side of the tax ledger as well as the individual rates”. Trump also confirmed that he is working on seeking to roll back “burdensome regulations” and change the country’s “obsolete” infrastructure system.
With that in mind, today could be another day dominated by Trump headlines with the President due to meet with Japan PM Abe today in Washington. Ironically, they are also booked in for a round of golf tomorrow. While the scorecard may be of interest to some, markets will be more focused on the specifics that actually come out of the meeting. It should take on even more significance in light of Trump removing the US from the TPP, his comments about Japan being a currency manipulator and also accusations of Japan conducting unfair business practices. The suggestion is that today’s meeting will be about more than just two-way trade and should have a focus on a full range of economic ties with Abe supposedly planning to discuss creating jobs and also building infrastructure in the US. It’s worth also highlighting that overnight the Federal Appeals Court ruled against Trump’s executive order on the travel ban. Trump has since tweeted saying “see you in court” in reference to pursuing the appeal in the Supreme Court. So look out for any reaction to that today too.
Markets are certainly going into the end of the week in a better mood. The S&P 500 (+0.58%) and Dow (+0.59%) both hit fresh record highs last night with financials leading the charge on those Trump comments, as well as airlines. Interestingly Bloomberg ran a story overnight saying that DB's Binky Chanda is now the most bullish US equity strategist of all the analysts they poll. Binky's year end target is a lofty 2600 for the S&P500.
The Stoxx 600 (+0.78%) had also earlier rallied along with some of the peripheral bourses in Europe while this morning in Asia we’ve seen markets continue the positive momentum with bourses in Japan rallying hard (Nikkei +2.30%, Topix +2.04%), helped by a -1.50% decline for the Yen over the last two days. The Hang Seng (+0.58%), Shanghai Comp (+0.35%) and ASX (+0.83%) are also up in the early going.
Meanwhile credit also had a strong session yesterday with CDX IG and iTraxx Main indices ending 2.2bps tighter and 1.5bps tighter respectively. Indices in Asia and Australia are also a couple of basis points tighter this morning. In FX the Greenback firmed with the Dollar index closing +0.37%. That bounce means that the index has now closed higher for 7 consecutive sessions. At the other end of the risk spectrum we saw a decent reversal for Treasuries with 10y yields more or less completely undoing Wednesday’s rally after rising 5.9bps and back to 2.396%. Outside of Mr Trump, comments from the Fed’s Evans may have played a part after he said three rate hikes this year was not “unreasonable” although he did also say that he wasn’t sure what the right answer is on the balance sheet debate. The Fed’s Bullard did downplay the prospect of a March hike although that’s not surprising in the context of his call for just one rate hike over the next two years.
Meanwhile in Europe, bond markets were a bit more mixed yesterday. Bunds followed the moves in Treasuries with 10y yields up 1.6bps to 0.308% however there was a reasonable bounce for France (-1.9bps), Italy (-7.4bps), Spain (-7.4bps) and Portugal (-6.4bps). The exception to the moves in the periphery though came in Greece and most notably at the short end of the curve where 2y yields broke north of 10% yesterday, before settling to close at 9.816% but still up 64bps on the day. Yields are now up nearly 160bps this week alone as the continued deadlock around Greece’s debt talks continue to spook the market. It’s the standoff between the IMF and EU that is really the focus at the moment. Yesterday the IMF dug their heels in once again with spokesman Gerry Rice saying that the Fund stand by their analysis and reiterated their view that Greece should target a primary surplus target of 1.5% accompanied by significant debt relief. That contrasts to what the EU has been pushing for in no debt relief but more austerity and a primary surplus target of 3.5%. Interestingly a Bloomberg article broke last night suggesting that Greece’s creditors were readying a proposal, possibly as soon as today, on a framework of measures required to complete the bailout review. This apparently includes fiscal measures equal to about 2% of Greek GDP. So keep an eye on that this morning.
Coming back to the Asia session this morning where the latest trade data out of China was also released. In yuan terms, the trade surplus was reported as increasing more than expected in January (to 354bn yuan from 275bn; 307bn expected) thanks to a +15.9% yoy surge in exports (vs. +5.2% expected). That compares to a +0.6% yoy reading for exports in December. Imports also grew +25.2% yoy, jumping from +10.8% the month prior. In USD terms exports also surged 7.9% yoy (vs. +3.2% expected) from -6.2%.
Before we look at the day ahead, yesterday was another day of largely second tier data releases. In the US there was no change to the final wholesale inventories print of +1.0% mom in December, while initial jobless claims were reported as falling 12k last week to 234k, which in turn lowered the four-week average to just 244k. Prior to this in Germany the December trade surplus was reported as a narrower than expected €18.7bn (vs. €20.5bn expected), largely reflecting a -3.3% mom decline in exports. Imports were reported as being flat during the month.
Looking at today’s calendar, this morning in Europe we’ve got December industrial production reports due out of France, Italy and the UK, along with the latest trade balance reading in the latter. Over in the US this afternoon the only data of note is the import price index reading for January, the flash University of Michigan consumer sentiment reading for this month, and then the January monthly budget statement later this evening. The only central bank speak comes from the ECB’s Mersch this morning, although Fed Vice-Chair Fischer will speak over the weekend. The other event to keep an eye on is the aforementioned meeting between President Trump and Japan PM Abe. Finally on the earnings front there are just 4 S&P 500 companies due to report.