After yesterday's violent gap up in stocks across the globe in response to the "expected" outcome from the French election, today the risk on sentiment has continued if to a lesser extent, with stocks in Europe, Asia all rising while S&P futures point to a higher open. Yen, gold decline, while the euro traded as high as 1.09 this morning before fading some gains; oil is up modestly.
While today's surge may have been more muted, world stocks hit a new record high on Tuesday, with investors still cheering Macron's victory in the first round of the French presidential election, supported by speculation about U.S. tax reform and the overnight report that Trump has conceded on the border wall, eliminating a government shutdown as a potential risk. As shown below, the MSCI All World Index has jumped to a new all time high, boosted by strong Asian markets.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6%, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains. Japan's Nikkei rose more than 1 percent to a three-week high aided by a weaker yen. South Korea's also advanced 0.7 percent to its highest level since April 2015. China equities climbed from a three-month low on speculation that a selloff over concerns of a regulatory crackdown were overdone. Australia and New Zealand were closed for Anzac Day.
European stocks hovered near a 20-month high, with the Dax flirting with all time highs. The Stoxx Europe 600 index edged 0.2% higher after jumpin 2.1% on Monday to the highest since August 2015, with property and technology shares helping to underpin a global rally. French shares pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012. Futures on the S&P 500 added 0.1 percent. The index climbed 1.1% Monday to within 1% of its all-time closing high.
These gains helped push MSCI's world stocks index to a fresh all-time high after chalking up its biggest rise since shortly after Britain's vote last June to leave the European Union.
So with attention to France fading, if only until the runoff round in the election, "attention will fast move over to Washington with the outline of the Trump tax plan likely tomorrow, the need to avoid the shutdown on Friday and the end of the first 100 days of Trump on Saturday" with the White House determined that higher growth can offset tax cuts, DB's Jim Reid wrote in his overnight note.
Commerzbank currency strategist Thu Lan Nguyen in Frankfurt, however, said that "(the second round) is going to be a non-event for the market. Markets have pretty much priced out the risk of a Le Pen victory, and rightly so, because the first round of the elections has shown that the polls in France were correct...and this increases the confidence in the polls for the second round...It's highly likely that (Macron) is going to win."
With one of the year's major risks to markets seen less acute, markets were also looking ahead to other factors, including U.S. President Donald Trump's promise to announce on Wednesday "a big tax reform and tax reduction". The Wall Street Journal reported Trump wanted to cut the corporate tax rate to 15 percent. The White House budget director told Fox News on Monday Trump's announcement would focus on principles, ideas and rates. "I'm becoming little concerned over the President’s big announcements, especially since we haven’t seen any major legislative achievement so far and he will be marking his 100th day in the White House this Saturday," said FXTM chief market strategist Hussein Sayed in a note.
Elsewhere, the ECB said in a quarterly survey of lenders that while banks would tighten access to credit for companies in the second quarter, lending volumes were still expected to rise.
The euro added to Monday's gains against the dollar, rising 0.2 percent to $1.0884, albeit off Monday's high of $1.0940. The yen, however, pulled back 0.6% to 110.39 per dollar. Sterling rose 0.1 percent to $1.2806. The Canadian dollar 0.5 percent to C$1.3561 per U.S. dollar after the United States announced new duties averaging 20 percent on Canadian softwood lumber imports.
French and German 10-year government bond yields rose and the spread between them hit its tightest since November at around 41 basis points. The two-year spread was its narrowest since late January. The yield on French 10-year notes rose two basis points to 0.85 percent, after tumbling 11 basis points in the previous session. German benchmark yields added four basis points to 0.37 percent. U.S. bonds headed for a fifth day of declines, with yields on 10-year Treasuries climbing three basis points to 2.31 percent.
Gold fell 0.4 percent to just under $1,270 an ounce. Copper reversed falls in Asia and headed higher, last trading 0.7 percent higher at $5,695 a tonne. Oil prices steadied after six straight days of losses. Brent crude, the international benchmark LCOc1, was just 4 cents down on the day at $51.59 a barrel.
Economic data include new home sales, April consumer confidence. Scheduled earnings include AT&T, Coca-Cola, McDonald’s. Alphabet Inc., Microsoft Corp., Amazon.com Inc., Twitter Inc., Intel Corp., Credit Suisse Group AG, Barclays Plc, Bayer AG, Daimler AG and Total SA are among major companies releasing results this week. The Bank of Japan is widely expected to keep the settings on its monetary easing program unchanged at the end of a two-day policy meeting on Thursday. Though inflation remains well below the central bank’s 2 percent target, it’s ticking up. The European Central Bank sets monetary policy later that same day. With officials indicating little chance of a policy change, the focus will be on any signals from President Mario Draghi that the ECB is starting to discuss an exit from its extraordinary stimulus.
Global Market Snapshot
- S&P 500 futures up 0.1% to 2,372.75
- STOXX Europe 600 up 0.1% to 386.57
- MXAP up 0.8% to 148.90
- MXAPJ up 0.9% to 485.69
- Nikkei up 1.1% to 19,079.33
- Topix up 1.1% to 1,519.21
- Hang Seng Index up 1.3% to 24,455.94
- Shanghai Composite up 0.2% to 3,134.57
- Sensex up 0.8% to 29,898.45
- Australia S&P/ASX 200 up 0.3% to 5,871.78
- Kospi up 1.1% to 2,196.85
- German 10Y yield rose 2.5 bps to 0.354%
- Euro up 0.2% to 1.0888 per US$
- Brent Futures up 0.1% to $51.67/bbl
- Italian 10Y yield fell 8.0 bps to 1.888%
- Spanish 10Y yield rose 4.4 bps to 1.649%
- Brent Futures up 0.1% to $51.67/bbl
- Gold spot down 0.5% to $1,270.54
- U.S. Dollar Index down 0.1% to 99.00
Top Overnight News from Bloomberg
- President Donald Trump’s plan to slash the corporate tax rate to 15 percent is setting up a showdown with House Speaker Paul Ryan, who has called for a tax plan to pay for itself
- French billionaire Bernard Arnault moved to consolidate control over Christian Dior for about 12.1 billion euros ($13.2 billion), folding the fashion house’s operations into the LVMH luxury empire in one of his biggest transactions
- Rising defaults in China are unearthing hidden debt at companies across the country
- Warburg Pincus, the private equity firm where former Treasury Secretary Tim Geithner is president, is targeting $1.6 billion for its first fund dedicated to financial services
- Credit Suisse Group, two years into a belt-tightening turnaround plan, splurged a bit last month in Texas
- Trump Slaps Duty on Canada Lumber, Intensifying Trade Fight
- Trump Signals Shift on Wall Funding to Avert Government Shutdown
- U.S., North Korea Flex Military Muscles as Tensions Simmer
- Netflix in China Licensing Deal With IQiyi, Variety Reports
- Berkshire Hathaway Buys 3.88m Liberty Siriusxm Series C Shares
- Diebold Nixdorf to Support TD’s 5,000 ATMs in North America
Asian equity markets maintained the positive momentum from the strong Monday close where the French election relief rally spilled over and tax cut hopes also buoyed sentiment. Nikkei 225 (+1%) was underpinned as USD/JPY reclaimed the 110.00 handle, while the KOSPI (+1%) also shrugged off geopolitical concerns amid no further signs of provocation from North Korea which conducted a firing drill to commemorate its 85th military anniversary. Elsewhere, Shanghai Comp. (+0.2%) and Hang Seng (+1.2%) were higher following an increased liquidity injection by the PBoC, although mainland bourses were somewhat restrained on trade concerns and the ASX 200 was shut for ANZAC day. Finally, 10yr JGBs continued to reclaim the losses seen from the French election with prices back above the 151.00 level, while today's enhanced liquidity auction for 10yr, 20yr and 30yr maturities also drew greater interest. PBoC injected CNY 40bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos.
Top Asian News
- China Markets Reel as Banks Unwind $1.7 Trillion in Shadow Funds
- India’s Central Bank Chief Says Cash Ban’s Effects ‘Transitory’
- Iron Ore Seen Slumping for Years After Hitting February Peak
- Japan Post Books $3.6 Billion Charge on Toll Holdings Writedown
- IRB InvIT Plans to Raise up to 50.4b Rupees Through IPO
European bourses have seen a tamer session with local markets trading in mixed fashion, CAC 40 slightly trims post-election gains, falling a meagre 0.1%, similarly with the DAX which hovers around record highs. In terms of equity specific newsflow, LVMH outperforms after reports that they are to simply the Christian Dior which would subsequently boost their earnings, while Peugeot shares slip this morning on news that French prosecutors are to conduct a formal investigation over diesel emissions. Across credit markets, OATs are marginally extending on their outperformance, with the 10yr tightening against German benchmark to around 41bps. The German curve has shifted to a bear steepening bias with the 30yr +0.25bps.
Top European News
- LVMH to Buy Christian Dior Couture; Arnault Christian Dior Bid
- Arnault to Buy Rest of Dior for $13 Billion, Bolstering LVMH
- U.K. Faces $2 Billion EU Demand on Customs Failures, Times Says
- U.K. Meets Borrowing Forecasts But Consumer Slowdown Hits VAT
- Rocket Internet Narrows Losses, Boosts Sales at Key Startups
- Oil Steadies After Six-Day Slide as U.S. Stockpiles Seen Falling
- German-Only Power Futures Start Trading Ahead of Market Split
- Dutch Minister Kamp Continues to Support Independent Akzo: BNR
- Brexit Districts in Tory Sights as May Seeks Bigger Majority
- Volvo AB Shares Hit 10-Year High on Construction-Equipment Sales
In currencies, the euro rose 0.2 percent to $1.0892, retreating from near the highest level in five months. The yen fell 0.6 percent to 110.47 per dollar. The currency dropped 0.6 percent in the previous session. The Bloomberg Dollar Spot Index was little changed, after slipping 0.5 percent Monday. It has been another trading session where London liquidity calms things down to (less than) a cantor. We continue the CAD under pressure in the wake of the US trade case against Canada, where they propose a tariff on lumber tax to the tune of 20% - worth USD 1.0bIn on current imports stateside. However, the first line of USD/CAD resistance looks to have held, but we will have to contend with North American trade ahead, so we factor in the broader resistance area from 1.3600 up to 1.3675. 1.3850 is the next lever to watch if we manage to work through here. Tariffs on dairy produce have also been threatened given Canadian reclassification on ultra-refined milk from the US, and this has had a clear impact on the NZD, which has slipped below .7000 against the USD, and through 1.0800 vs the AUD. In the meantime, the near-term calm in risk sentiment has allowed USD/JPY bulls some modest upside through the lower 110.00's, but we start coming up against some tech resistance through 110.50, with the slow grind higher stalling in the last hour or so accordingly.
In commodities, gold lost 0.5 percent to $1,270.46 after slipping 0.6 percent on Monday. Oil advanced 0.3 percent to $49.40, rebounding from six straight days of losses before U.S. government data that’s forecast to show crude stockpiles fell for a third week. Copper prices have seen some upside pressure as reports of the Chilean earthquake hit the wires. This is in tandem with the end of the strikes in the Cerro Verde mine in Peru. Market is now looking to test USD2.60 again, with the current risk on mood also supportive for base metals in general. Iron ore struggling though, as Chinese stockpiles weigh. Little risk related relief for Oil however, as US production tempers the impact of the current production cut agreement, the extension of which is still seen in the balance, but recent OPEC rhetoric remains hopeful. Below USD50.00, we see plenty of support ahead of USD45.00, the bottom end of the broader range in WTI. Precious metals still fading slightly, as Gold now floundering ahead of USD1270.00. Silver looks to have established near term footing, but risk/USD sentiment flighty at present to maintain a modicum of support.
US Event Calendar
- 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.0%
- S&P CoreLogic CS 20-City MoM SA, est. 0.73%, prior 0.86%
- S&P CoreLogic CS 20-City YoY NSA, est. 5.77%, prior 5.73%
- S&P CoreLogic CS 20-City NSA Index, prior 192.8
- S&P CoreLogic CS US HPI YoY NSA, prior 5.87%
- S&P CoreLogic CS US HPI NSA Index, prior 185.5
- 10am: New Home Sales, est. 583,500, prior 592,000; New Home Sales MoM, est. -1.44%, prior 6.1%
- Conf. Board Consumer Confidence, est. 122.5, prior 125.6
- Conf. Board Present Situation, prior 143.1
- Conf. Board Expectations, prior 113.8
- 10am: Richmond Fed Manufact. Index, est. 16, prior 22
Looking at the day ahead today, we got April confidence indicators out of France this morning (manufacturing confidence: 108 actual, 104 expected; 105 previous). Shortly after that we got the ECB’s bank lending survey numbers, which saw slightly tighter standards for business loans in Q2. In the US we will get housing market data in the form of the S&P/Case-Shiller house price index and FHFA house price index (+0.4% mom expected) for February. Thereafter we will see confidence indicators for the month ahead in the form of the conference board consumer confidence number (122.5 expected; 125.6 previous) and the Richmond Fed manufacturing survey (16 expected; 22 previous), both of which are expected to drop given growing policy uncertainty in the US.
DB's Jim Reid concludes the overnight wrap
The only tears shed yesterday in markets were ones of pure joy as risk-on dominated following the first round of the French elections. Over in Europe the STOXX 600 (+2.1%) hit its highest levels since mid Aug 2015, while the CAC rallied by +4.1%. Every single sector within the STOXX index was safely in positive territory, with European banks leading the way with outsized gains of 4.8% on the day (Eurozone banks in particular were up by 7.4%). French banks were some of the best performers on the day with Credit Agricole (+10.9%), Societe Generale (+9.9%), Natixis (+9.0%) and BNP Paribas (+7.52%) all within the top ten gainers in Europe. Italian banks also benefited from the broader risk on sentiment as Unicredit (+13.2%) and UBI (+10.4%) both posted double digit returns. Other regional equity indices also reflected the broader relief rally as the FTSE, DAX, and FTSE MIB all gained by +2.1%, +3.4% and 4.8% on the day. Markets over in the US also benefited from the risk on sentiment as the S&P500 (+1.1%) and Dow (+1.05%) both posted gains, as financials were the top performer within the S&P with gains of 2.2% on the day. Market volatility measures also dipped aggressively yesterday with the VIX (-3.7pts; -26%) and VSTOXX (-8.9pts; -35%) giving up recent increases to drop to three week lows.
Credit markets also saw broad risk on moves. Main and Crossover tightened by -6bps and -16bps on the day, while Senior and Sub Financials tightened by -10bps and -20bps. French Bank Senior CDS also rallied as Societe Generale (-21bps), BNP (-18bps), and Credit Agricole (-16bps) all saw significant spread tightening. Over in the US CDX IG and HY also tightened by -3bps and -12bps.
Over in government bond markets German bunds (2Y: +10bps; 10Y: +8 bps) and US treasuries (2Y: +5bps; 10Y: +2.5bps) sell off across all maturities. On the other hand French OAT yields dropped across the curve (2Y: -14bps; 10Y: -11bp) as the OAT-Bund 10Y spread tightened by -19bps. Italian BTPs also saw yields drop across the term structure (2Y: -5bps; 10Y: -8bps) amid the rally. Over in currency markets the Euro ticked by +1.05% on the day after giving up larger gains at the open and then hardly moving all day. Commodity markets however remained largely unaffected by the risk on rally: WTI was down marginally at -0.7% while Gold remained fairly flat after falling slightly in the Asian session the night before.
Attention will fast move over to Washington with the outline of the Trump tax plan likely tomorrow, the need to avoid the shutdown on Friday and the end of the first 100 days of Trump on Saturday. The WSJ reported last night that Mr Trump has ordered aides to prioritise cutting taxes ahead of budget neutrality and in particular target a 15% corporate tax rate. Treasury Secretary Mnuchin was bullish by telling reporters at the White House that the tax plan will "pay for itself with economic growth" and that Mr Trump is determined to get sustained growth of 3% or higher. So all eyes on the US for the next few days.
Asian markets are generally in decent shape overnight with the Nikkei +0.8% higher, the Hang Seng +0.95% and the Shanghai Comp +0.45% as we go to print. Global bond yields are pretty flat as is the Euro against the Dollar.
Returning back to yesterday, the latest ECB CSPP numbers were released. They remain inconclusive as to whether the ECB have decided against tapering corporate purchases. The Easter period has created too many distortions to give a clear answer. If you assume the €1.482bn of buying is spread over 4 business days this averages €371mn per day very close to the daily average of €368mn since the program started. However if you feel the ECB would want to try to offset the loss of a day with more buying then the numbers are optically weaker. We should have a clearer view next Tuesday (after bank hols) as to where we stand as they'll publish the full monthly numbers then for both CSPP and PSPP.
Away from the French elections there was little in way of data to drive markets yesterday. In Europe we got the April IFO survey in Germany which was mostly positive: the business climate indicator (112.9 vs. 112.4 expected) and the current assessment indicator (121.1 vs. 119.2 expected) both clocked in above expectations. However IFO expectations marginally disappointed by dropping to 105.2 (vs. 105.9 expected; 105.7 previous). Over In the US we got the April Dallas Fed manufacturing activity survey which ticked down marginally to 16.8 against expectations of a slight increase to 17.0 (16.9 previous).
Looking at the day ahead today, we will get the April confidence indicators out of France this morning (manufacturing confidence: 105 expected; 104 previous). Shortly after that we will get the ECB’s bank lending survey numbers. Over in the UK we will get public sector net borrowing data for March which is expected to rise to 1.5bn (1.1bn previous). Heading over to the US we will get housing market data in the form of the S&P/Case-Shiller house price index and FHFA house price index (+0.4% mom expected) for February. Thereafter we will see confidence indicators for the month ahead in the form of the conference board consumer confidence number (122.5 expected; 125.6 previous) and the Richmond Fed manufacturing survey (16 expected; 22 previous), both of which are expected to drop given growing policy uncertainty in the US.
Earnings will continue to be a big focus today, as we see AT&T and Caterpillar report today amongst others.