Futures Decline, Europe Slumps After German Industrial Orders Collapse

After a turbulent overnight session on Monday morning, this morning traders settle at their desks to find a relatively calmer environment, with US equity futures down 0.2% to 2,371.75, while European stocks fell for a third consecutive day, and Asian markets which closed mixed (China up, Nikkei down, MXAP up 0.2%). Basic metals continue to slide following another drop in copper as a result of the biggest inventory inflow to LME warehouses in 15 years, coupled with worries about China's telegraphed slowdown.Some have also pointed out that the market topped just in time for the SNAP IPO, which after crashing yesterday to below its IPO break price of $24, continued to sink in the pre-market this morning.

In addition to hopes about an imminent Fed rate hike shifting to concerns, as reported yesterday JPMorgan warned that hawkish Fed rhetoric has increased the likelihood for a short-term pullback after stocks hit the bank's year-end target of 2,400 the previous week. The dollar rose modestly as a surge in corporate bond issuance pushed up Treasury yields.

Markets appear to have topped off the relentless post-election surge, and are coming off recent peaks as investors start to contemplate what the upcoming March interest rate increase will mean for risk assets. They also have to contend with overnight headlines out of China where the "Two Sessions" are taking place, and where Premier Li Keqiang warned of larger challenges ahead during his work report to the annual National People’s Congress gathering in Beijing. In Europe, politics has become the main market driver as election campaigns in the Netherlands, France and Germany put the status quo under threat.

“The ‘pothole’ is a political one with far-right parties gaining ground in opinion polls ahead of both a Dutch and French ballots in spring,” Luca Paolini, chief strategist at Geneva-based Pictet, said in a research note. “We are scaling back exposure to European stocks, albeit retaining our overweight stance.”

Germany's largest lender continued to grab attention and European stocks fell for a third consecutive day on Tuesday, once again dragged down by financials as Deutsche Bank shares slid again on deepening concern about its health after its $8.5 billion cash call. Deutsche shares dropped as much as 3% to a fresh 2017 low. They have lost more than 10% in the last few days since the bank said it would tap investors for $8.5 billion.

Furthermore, a batch of weak corporate earnings reports and the biggest fall in German industrial orders since the depths of the global financial crisis also disappointed investors, setting the tone for a lackluster session in Europe.  German industrial orders slumped 7.4 percent in January, the biggest fall since January 2009 and nearly three times as steep as the 2.5 percent fall expected by economists.

"Weak German industrial orders suggests it's not a one-way ticket in Europe – there's been a lot of bullishness around European equities lately but maybe this is a sign it's not all positive. Deutsche Bank is not helping either," Neil Wilson, senior market analyst at ETX Capital, told Reuters.

Across the Atlantic, S&P500 futures pointed to a slightly lower open on Wall Street, further cooling off last week's record highs. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4%, and Japan's Nikkei closed down 0.2%.

In currencies, the dollar inched higher against a basket of trade-weighted peers. The dollar index rose 0.1 percent to 101.73 mirroring Monday's slender gain. The Bloomberg Dollar Spot Index added 0.2 percent, headed for its sixth advance in seven days. A rate hike from the Federal Reserve next week is virtually fully priced into financial markets, so the dollar and U.S. bond yields might be vulnerable to a correction lower. But investors saw enough room to push the greenback and yields higher on Tuesday, lifting the 10-year yield for the fifth day in a row back above 2.50 percent and the two-year yield up a basis point to 1.32 percent, on what traders attributed to interest rate locks following another massive corporate issuance session.

The Aussie Dollar has rallied after the RBA left rates on hold, as widely expected. The post meeting statement pointed to a firmly on hold RBA and few expect a change in the cash rate through 2017 or 2018. The pound was the biggest mover on major FX markets, falling nearly a third of one percent against the dollar to a seven-week low of $1.2202. Britain's House of Lords will on Tuesday try to force the government to give lawmakers a greater say over the terms of Britain's exit from the European Union and final approval of an eventual deal with the block.

Analysts at Morgan Stanley said on Tuesday they expect the pound to snap back as high as $1.45 by the end of next year. "Sterling looks increasingly cheap in a historical context and our FX strategists (have) recently turned more bullish on the currency, targeting $1.28 for year end and $1.45 by the end of 2018," they wrote in a note on Tuesday.

The euro was steady at $1.0575 and the dollar was flat against the yen at 113.90 yen. In commodities, U.S. oil CLc1 rose 0.3 percent to $53.55 a barrel, following Monday's 0.2 percent drop, and Brent crude also rose 0.3 percent to $56.17 LCOc1.

Market Snapshot

  • S&P 500 futures down 0.2% to 2,371.75
  • STOXX Europe 600 down 0.03% to 373.16
  • German 10Y yield fell 2.2 bps to 0.32%
  • Euro down 0.06% to 1.0576 per US$
  • Brent Futures up 0.3% to $56.16/bbl
  • Italian 10Y yield rose 6.5 bps to 2.165%
  • Spanish 10Y yield fell 2.6 bps to 1.702%
  • MXAP up 0.2% to 144.63
  • MXAPJ up 0.5% to 465.42
  • Nikkei down 0.2% to 19,344.15
  • Topix up 0.01% to 1,555.04
  • Hang Seng Index up 0.4% to 23,681.07
  • Shanghai Composite up 0.3% to 3,242.41
  • Sensex down 0.2% to 28,997.87
  • Australia S&P/ASX 200 up 0.3% to 5,761.39
  • Kospi up 0.6% to 2,094.05
  • Brent Futures up 0.3% to $56.16/bbl
  • Gold spot down 0.09% to $1,224.14
  • U.S. Dollar Index up 0.09% to 101.73

Top Overnight News

  • Hellman & Friedman, GIC Buy Allfunds Bank for $1.9 Billion
  • CSX Names Harrison CEO, Warns He’ll Exit Unless Paid $84 Million
  • Fitbit Chief Business Officer to Leave, Samir Kapoor Promoted
  • Copper’s Biggest Storage Rush in 15 Years Jeopardizes Rally
  • Ford Not Planning Job Cuts as it Pares Europe Costs After Brexit
  • Republicans Unveil Health Care Bill to Bridge Gaps in Party
  • WhatsApp Joins Arsenal of Online Luxury Amid Race for Customers
  • German Factory Orders Slump Most Since 2009 on Investment
  • Turkey Imposes Anti-Dumping Levy on Kraftliner Paper From U.S.
  • Dakota Access Pipeline Could See Oil by Week of March 13

Asian equity markets largely shrugged off the broad negative lead from Wall Stret to trade mixed as cautiousness remained ahead of the looming risk events. ASX 200 (+0.3%) recovered from early losses amid strength in healthcare and utilities, although upside was capped as participants awaited the RBA which kept rates unchanged and maintained a neutral tone, while Nikkei 225 (-0.2%) languished after USD/JPY failed to gain a footing above 114.00. Shanghai Comp. (+0.3%) was choppy as mainland sentiment was dampened following another weak PBoC liquidity injection and reports China is looking to slow borrowing using short term money markets, while the Hang Seng (+0.3%) was resilient after several encouraging operating updates. Finally, 10yr JGBs saw mild gains amid a lack of risk appetite in Japan, although upside has been limited following a mixed 30yr JGB auction in which accepted prices were higher and demand fell from prior.

Top Asian News

  • China to Avoid Coal Mining Limits If Prices Remain ‘Reasonable’
  • Japanese Double Bearish Yen Bets as Wall Street Cuts and Runs
  • PAG to Replace Yingde Chairman, CEO If Takeover Is Completed
  • Duterte Backs Environment Chief as Congress Weighs Endorsement
  • Lupin CFO Says $1 Billion M&A War Chest Could Be Just The Start
  • Traders Shun Hedges Before India Vote on Confidence in Modi Win

In European bourses, materials stocks are among the best performers amid a relatively flat session . Midcaps grabbed the attention given the number of earnings in an otherwise quiet session for large caps, with UK listed Intertek are at the top of the FTSE100 leader board after the company's revenue and dividends both rose. Elsewhere, Paddy Power underperform after an uninspiring earnings update and this comes despite increased revenue past the GBP 1.5bIn mark during a "transformational" year. In Fixed Income markets, the German 2/10Y spread is nearly back to 119bps again after German factory orders fell short of expectation and many analysts are paying credence to the PSPP which has lifted the Shatz after strong buying yesterday.

  • RAI Way Said to Consider Takeover of Berlusconi’s EI Towers
  • U.K. House Price Growth Adds Weight to Predictions of a Slowdown
  • Deutsche Bank Bets on Ex-Goldman Partner in Strategy Revamp
  • EDF Begins $4.2 Billion Share Sale to Bolster Balance Sheet
  • Million Migrants Fleeing Putin Score a Jackpot for Poland
  • Norway Regional Survey Outlook Jumps to Highest in 4 Years
  • Niel’s Iliad Boosts Profit After Luring Users With Discounts

In currencies, despite the range bound USD, there has been some movement in major pairs to keep traders busy ahead of the US payrolls on Friday, as well as (what could be) a lively ECB meeting on Thursday, Both USD/JPY and EUR/USD are still trading inside relatively tight ranges, but with UST yields firm, the former is retesting 114.00 again. For EUR/USD, there is little to get excited about until we retest 1.0500 lower down. German factory orders fell 7.4% compared to a more modest forecast of -2.5%, and this may have assisted the move back towards 1.0550. The Bloomberg Dollar Spot Index added 0.2 percent, headed for its sixth advance in seven days. The euro weakened 0.4 percent to $1.0585, the worst performer among major. The yen was at 113.895 per dollar. Some support is coming through EUR/GBP buying as we continue to probe into offers ahead of 0.8700. Pressure on GBP has been exacerbated by yet another potential hurdle for PM May's proposed Brexit timetable, as the House of Lords are set to seek a more meaningful vote on the terms of exit. This delay would have been GBP supportive a few months ago, but with the government seemingly undermined, the uncertainty factor has pushed the cross rate higher and Cable below 1.2200 accordingly. 1.2150 the next level of support to note here.

In commodities the big story at present is the recent highs seen in base metals, where the growing stockpiles in China have been garnering greater attention. Copper prices have continued their move below USD2.70 to trade below USD2.65 today, with losses in Zinc and Nickel also impacted given supply issues in all cases (strikes/mine closures). Precious metals are also lower today as they follow in tight correlation to Treasuries. The USD has been a little more reluctant to follow, but enough to pull Gold back towards USD1220 again while Silver is still pressuring the recent lows around USD17.70.  Gold futures slumped 0.1 percent to settle at $1,225.50 an ounce in New York for a fifth day of losses. That’s the longest slump since November. Oil prices still in a range, with compliance and production/inventory levels ahead feeding near term support, but CERA week could prompt some volatility: speakers include Barkindo, Novak and Al-Falih. West Texas Intermediate crude slipped 0.2 percent to settle at $53.20 a barrel. Clashes between armed factions in Libya curbed crude output, while U.S. drilling increased.

Looking at the day ahead, we will get the January trade balance and then the January consumer credit reading in the evening. Away from the data, German Finance Minister Schaeuble is scheduled to speak this morning, while in the UK we are also expecting the House of Lords to complete its scrutiny of the Brexit bill.

* * *

US Event Calendar

  • 8:30am: Trade Balance, est. $48.5b deficit, prior $44.3b deficit
  • 3pm: Consumer Credit, est. $17.3b, prior $14.2b

DB's Jim Reid concludes the overnight wrap

In terms of markets, yesterday felt like a day you rolled the dice and landed on someone's property and had to pay a small unwelcome amount of rent after a good run of accumulating cash in the bank. Equities closed on the soft side led by Europe with financials and commodity names in particular having a rough start to the week. Coming off the back of a +1.41% gain last week which was the strongest week this year, the Stoxx 600 closed -0.52% and European banks finished -1.23%. Markets in the US were back peddling from the start although the S&P 500 (-0.33%) did manage to pare back heavier losses into the close. The Dow (-0.24%) did likewise but still closed back below the 21,000 level for the first time since passing it last week. There were similar losses across credit markets with CDX IG about 0.8bps wider and the iTraxx Main 1.5bps wider. Sub-financials in Europe did however outperform on a relative basis, with the iTraxx Sub-Fins index finishing just 0.5bps wider (compared to +1.5bps for iTraxx  Senior-Fins). It was a similar outperformance story in the cash credit market with EUR Fin Subs actually 1bp tighter (using Markit indices), compared to EUR Fin Sen which was just 0.5bps tighter.

On those moves for commodities, while Oil ended up little changed both precious and base metals struggled throughout the day. Gold (-0.77%), Silver (-1.07%), Iron Ore (-1.74%), Copper (-1.00%) and Aluminium (-0.82%) in particular all finished lower. A few potential reasons were discussed but it appears that a combination of the China NPC headlines from the weekend, rising Copper inventories and a stronger US Dollar in the face of geopolitical related headlines all contributed to some degree. The latter concerned the reports of North Korea firing missiles into the Sea of Japan – although in fairness there didn’t appear to be a huge reaction in EM FX or equity markets – while later on in the day we got confirmation that President Trump has signed a new travel order banning the entry of citizens from 6 countries (1 less than the initial January order) into the US for the next 90 days from March 16th. The new order will also see the US Refugee Admissions Program suspended for 120 days.

Elsewhere, all things considered Treasuries had a relatively calm day compared to the Fed-driven excitement of last week. 10y Treasury yields finished +2.2bps higher at 2.500% with the slight weakness reflecting a busy day for corporate issuance with over $22bn of IG sales coming, while short end yields ended little changed. A Fed rate hike next week also consolidated around 96% according to Bloomberg’s calculator. Meanwhile bond markets in Europe were busy digesting the latest French presidential election update. Indeed as hinted by the L’Obs press report over the weekend Juppe left the French elections for a second time as he ruled out a comeback in spite of the fragile nature of Fillon's campaign. His speech didn't endorse Fillon's campaign and the Republicans have to choose soon whether to stick with a candidate who is losing support due to the recent allegations or to consider alternatives who weren't part of the original run-off or who were earlier beaten. Bloomberg reports they have 10 days to file paperwork if they want to replace Fillon. French 10y yields climbed +2.3bps yesterday versus a -1.5bps fall in the German equivalent. The spread tightened 15.6bps last week and this gave up around a quarter of these gains.

Refreshing our screens this morning now. It's been a fairly mixed but quiet start in Asia. While the Nikkei (-0.20%) and Shanghai Comp (-0.07%) are posting modest losses, the Hang Seng (+0.42%), Kospi (+0.64%) and ASX (+0.27%) are all firmer. In FX the Aussie Dollar has rallied +0.64% after the RBA left rates on hold, as widely expected. Our economists in Australia believe that the post meeting statement point to a firmly on hold RBA and expect no change in the cash rate through 2017 or 2018.

Moving on. The latest ECB CSPP data came out yesterday. The average daily run rate in the week to March 3rd was €339mn, a bit below the average of €365mn since the scheme started. In February 8.8% was bought in the primary market, lower than the 13.5% ratio since the scheme commenced and the lowest ratio since the summer. It's too early to say whether the ECB are starting to prepare for taper but there seems to have been a reduction recently from peak purchases. We can't extrapolate too much as there are many who think they'll initially taper more on the government side rather than the corporate side. Anyway one to keep an eye on over the weeks ahead.

With regards to the rest of the data yesterday, in the US factory orders in January printed at +1.2% mom which was marginally ahead of consensus expectations for a +1.0% rise in orders. The final revisions to January durable and capital goods orders were also released. Headline durable goods orders were confirmed at +2.0% mom which was up two-tenths from the initial estimate while core capex orders were revised up three-tenths to -0.1% mom. Interestingly the two most followed GDP trackers have diverged significantly for Q1 GDP estimates.

The Atlanta Fed is now at 1.8% while the NY Fed is at 3.1%. It’s worth noting that over the past 4 quarters the NY Fed has tended to be the more accurate of the two although both have shown a tendency to have large errors during various quarters. Elsewhere and wrapping up, yesterday in Europe the most notable release was the Sentix investor sentiment reading for the Euro area which showed the index as rising 3.3pts in February to 20.7 and in the process reaching a new post financial crisis high. So a sign perhaps that improving data is overshadowing any potential political concerns for now.

Looking at the day ahead, this morning in Europe the early data comes from Germany where the January factory orders data is due. Shortly after that we’ll get the February Halifax house prices data in the UK before we then get the final Q4 GDP print for the Euro area. No change from the initial +0.4% qoq estimate is expected. This afternoon in the US we will get the January trade balance and then the January consumer credit reading in the evening. Away from the data, German Finance Minister Schaeuble is scheduled to speak this morning, while in the UK we are also expecting the House of Lords to complete its scrutiny of the Brexit bill.