Bonds Bounce After China Denies "Fake News" Report; Oil Tags $64

U.S. equity futures are back in the green, while Asian and European stocks are mixed after worries about a U.S.-led trade war put world stocks at risk of their first two day loss of the year on Thursday, while bond markets bounced as China poured cold water  on reports that it might stop buying U.S. debt.

As discussed last night, the current market challenge is to assess whether the slew of reports we’re getting are ‘fake news’ - Bloomberg's report on Wednesday about China Treasury holdings triggered a fixed income sell off. However, China’s FX authority SAFE overnight condemned those reports as ‘false news’, which nonetheless may have been a simple "trial balloon" to gauge the market's reaction to when the real announcement comes. Amid the confusion, Treasuries have unwound much of yesterday's move.

What’s clear, as some trading desks note, is that whether it’s fake news or not, the market mindset right now is ‘react first, check later’. This has resulted in choppy markets and a welcome pick up in volatility – although the subsequent backtracking is less welcome, these market dynamics may become a frequent feature of 2018.

Then, another Reuters report late Wednesday said Canada was "increasingly convinced" Trump will announce the US is pulling out of Nafta. Following the news there was a report that Mexico will leave NAFTA negotiation if President Trump triggers 6-month process to withdraw from the deal. Both the CAD and MXN immediately sold off and remain on edge, awaiting official confirmation.

“The denial of the China story puts the dollar back where it was though the yen is still strong, so to me that is the interesting move and whether that is going to stick,” said Saxo Bank’s head of FX strategy John Hardy. “The 2.5 percent level on the Treasury is a line in the sand so U.S. CPI (inflation) data tomorrow is going to be absolutely critical,” he added, talking about the view that higher inflation will encourage more U.S. interest rate hikes.

U.S. 10Y TSY yields  pulled back to 2.544 percent from Wednesday’s ten-month high of 2.597 percent. Euro zone bond yields eased 1-3 basis points (bps) too, with Germany’s 10-year Bund yield 3 bps off a two-month high at 0.46 percent. China's denial also helped the dollar to its fourth gain in the last five days against a basket of top world currencies, having suffered one of its worst years on record in 2017. Against the yen, it added 0.3 percent to 111.63, after hitting a six-week low of 111.27 yen in the previous session when it skidded 1.1 percent, its largest decline in almost eight months.

There was also some relief from Japan, another source of pain for bond markets this week. The Bank of Japan maintained the amount of its bond purchases on Thursday. A cut in its buying of longer-dated debt earlier this week had fanned worries the BOJ may be moving to turn off its stimulus. Specifically, as RanSquawk explains, "10yr JGBs found some reprieve from this week’s selling on mild short-covering and after the BoJ’s Rinban announcement in which purchases in 1yr-10yr maturities were maintained at a respectable amount of nearly JPY 1tln."

Still, as Bloomberg - which started this whole mess notes - while traders have shaken off some of the concerns that led to Wednesday’s declines, they’re still struggling to find fresh reasons to extend a rally that took global stocks to or near record highs earlier this week. A string of earnings releases starting with JPMorgan Chase & Co. and Wells Fargo & Co. on Friday might offer them more direction.


Looking at world equity markets, Europe’s main bourses are modestly in and out of the red and MSCI’s world index was down 0.2% after Asian and emerging market indexes had been pulled lower by the abovementioned warnings from Canada and Mexico that NAFTA’s days could be numbered. Asian equities were mixed – rallying in China while the Nikkei was down.

European stocks are little changed amid a slew of corporate results as investors continue to assess the new year’s equity rally. The Stoxx Europe 600 Index rises less than 0.1% following Wednesday’s 0.4% drop, which snapped a five-day winning streak. Miners are the best performers among industry groups, advancing for a sixth straight session, while retail shares drop with Tesco Plc after its Christmas sales missed estimates. Hexagon AB is the best performer among technology shares after its Chief Executive Officer Ola Rollen was acquitted by a Norwegian court of insider-trading charges.

The euro traded at $1.1945, nearly flat on the day, and holding above Tuesday’s low of $1.1916. There was more upbeat data for the shared currency though. German economy grew at the strongest rate in six years last year a preliminary estimate from the country’s statistics office showed, although it was slightly under some peoples’ forecasts.

Bitcoin also took a major beating, falling as much as 11% as South Korea - one of the crytocurrency’s biggest markets - said it was drawing up laws to ban trading in it.

European stocks edged lower, extending Wednesday’s retreat as retailers declined, while bonds gained as investors sought to put the turbulence of midweek behind them.

After Treasuries slid on Wednesday, with the 10Y yield rising as high as 2.59%, the Treasury complex found support on the back of a statement by China's State Administration of Foreign Exchange in response to media reports that it may reduce or halt its purchases of US Treasuries. The statement stipulated that the report may have cited wrong sources or may be fake news (using translation from Bloomberg). The USD found support versus the JPY, although the move corrected less than half of yesterday’s USDJPY selloff. Equities were mixed – rallying in China while the Nikkei was down.

Commodity markets meanwhile were taking something of a breather after a flying start to the year.

Both Brent and West Texas Intermediate oil price futures were hovering just off three-year highs at just under $70 and $64 a barrel, with WTI briefly rising above $64 overnight, triggering stops, while industrial metals dipped and gold ticked to $1,317.76 after spiking to nearly four-month highs in the previous session.

“In Q1, the balance of risk to Brent lies to the downside, with prices overheating, record net-length built into the futures market and fundamentals set to weaken seasonally,” BMI Research said in a note.

Expected data include PPIs and jobless claims. Delta Air Lines and Shaw Communications are among companies reporting earnings. The ECB’s account of the December meeting due Thursday may shed light on the use of forward guidance. The U.S Treasury will auction $12 billion of 30-year bonds on Thursday.

Bulletin Headline Summary from RanSquawk

  • European equities trade relatively directionless with UK retail names underperforming following week trading updates
  • The Dollar Index is back within striking distance of the 92.500 level and firmer vs all G10 rivals bar its antipodean
  • counterparts

Market Snapshot

  • S&P 500 futures little changed at 2,751.30
  • STOXX Europe 600 down 0.09% to 398.25
  • MSCI Asia Pacific down 0.3% to 180.28
  • MSCI Asia Pacific ex Japan down 0.2% to 585.71
  • Nikkei down 0.3% to 23,710.43
  • Topix down 0.2% to 1,888.09
  • Hang Seng Index up 0.2% to 31,120.39
  • Shanghai Composite up 0.1% to 3,425.35
  • Sensex up 0.2% to 34,497.16
  • Australia S&P/ASX 200 down 0.5% to 6,067.62
  • Kospi down 0.5% to 2,487.91
  • German 10Y yield fell 2.4 bps to 0.519%
  • Euro down 0.07% to $1.1940
  • Italian 10Y yield rose 0.3 bps to 1.769%
  • Spanish 10Y yield fell 4.9 bps to 1.502%
  • Brent futures up 0.2% to $69.36/bbl
  • Gold spot up 0.1% to $1,318.22
  • U.S. Dollar Index up 0.2% to 92.47

Top Overnight News

  • China’s State Administration of Foreign Exchange said in a statement Thursday that a report on Wednesday which said China may slow or halt purchases of U.S. Treasuries “might have cited wrong sources or may be fake news.” It said investments in Treasuries are decided by market conditions
  • Premier Li Keqiang said China’s economy expanded by about 6.9 percent in 2017, according to a report by the official Xinhua News Agency; Li said the economy performed better than expected and the urban surveyed unemployment rate was the lowest in many years
  • Dollar rises against most Group-of-10 peers; EUR/USD little changed, sliding from a day high in Asia following the statement from China’s State Administration of Foreign Exchange on report about China’s purchases of U.S. Treasuries

  • Sterling trimmed losses in early London hours after earlier touching a two-week low versus the greenback; recruitment firm Morgan McKinley said an annual 37% decline in job openings in December underscored the looming “Brexodus” from the City

  • The yen fell against the dollar for the first time in three days as a flow of short- dollar unwind saw turnover pick up on China statement, only to cap at macro and small exporter selling; BOJ maintained debt- purchases plan at operation, after cutting buying of super-long debt on Tuesday

  • London Finance Jobs Post ‘Seismic’ Drop in Sign of Brexit Impact
  • Morgan Stanley Counters Bill Gross Over Bond Bear Market Call
  • Apple Seen Getting Possible $4 Billion Boost From Tax-Law Quirk; 
  • Quant Copycats Tested as Yield Rise Imperils Hottest Trade
  • Rio Is Said to Drop Chase for $5 Billion Lithium Miner Stake
  • Cryptocurrencies Retreat Amid South Korea Clampdown Concerns

Asian equity markets were mostly lower amid a dampened global risk tone, which was triggered by China concerns after officials were said to see US Treasuries as less attractive and recommended either cutting back or halting purchases altogether. This was viewed by some as an implicit threat by the world’s largest foreign holder of USTs against trade measures by the US, although China’s SAFE later suggested that the report may have cited a wrong source or could be fake news. Nonetheless, ASX 200 (-0.5%) and Nikkei 225 (-0.3%) were both subdued with broad-based weakness across nearly all sectors in Australia, while Japanese stocks remained at the whim of the recent JPY strength. Chinese markets also conformed to the sombre picture with both Shanghai Comp. (+0.1%) and Hang Seng (+0.1%) initially cautious as the PBoC’s liquidity efforts continued to be on the light-side. Finally, 10yr JGBs found some reprieve from this week’s selling on mild short-covering and after the BoJ’s Rinban announcement in which purchases in 1yr-10yr maturities were maintained at a respectable amount of nearly JPY 1tln. China SAFE said that report on China mulling reduction in US Treasury purchases may cite a wrong source or be fake news.

Top Asian News

  • PBOC Adds Funds First Time in 3 Weeks After Money Rates Jump
  • Saudi Bourse ‘Taking All Measures’ for Successful Aramco IPO
  • One Thing Missing From Copper Boom Is Buyers of Actual Metal
  • Japan Bond Risk Hits 10-Month Low as Tension Over N. Korea Eases

European stock markets trade relatively directionless (Eurostoxx 50 -0.2%) once again as European-specific newsflow remains on the light side. In terms of sector specifics, telecom and consumer discretionary names underperform, whislt stock specific movers include Tesco (-4.4%) and Marks & Spencers (-5%) who are at the foot of the FSTE 100 following disappointing trading updates. Elsewhere, Fiat Chrysler shares are underperforming in the FTSE MIB on NAFTA concerns. Meanwhile in fixed income, the turnaround from bear market territory to debt friendly if not bullish sentiment appears to have been confirmed by decent investor demand for sovereign issuance, and of course China’s apparent rejection of anti-US Treasury holdings headlines yesterday. Considerable concessions in advance of the auctions must be taken into consideration, but Italian BTPs have nudged new intraday peaks in wake of the results, not to mention the scramble for Wednesday’s 20 year syndication. Bunds, Gilts and USTs all holding the bulk of their recovery gains, but the last leg of this week’s US refunding still to come and the long bond perhaps not as attractive below 2.90% as it was when heading towards 2.95%. On the data front, US weekly jobless claims and PPI also on the agenda, as crude prices continue to rally and keep bond vigilantes on their toes.

Top European News

  • No Deal Brexit Could Cost 482,000 Jobs as City Recruitment Slows
  • German Economic Growth Accelerates Less Than Forecast in 2017
  • Chemicals Slump as BofAML Downgrades BASF, Clariant, Evonik
  • Hungary Calls April Election as Orban Seeks to Extend His Rule

In FX, the Dollar Index is back within striking distance of the 92.500 level and firmer vs all G10 rivals bar its antipodean counterparts, as Chinese reports about curtailing US debt purchases are dismissed as false by SAFE and the Foreign Ministry. However, fresh NAFTA jitters are also underpinning the Greenback to the detriment of the Cad and Mxn. Usd/Cad has bounced further from last Friday’s divergent US/Canadian jobs data lows (1.2355) towards the 1.2593 100 DMA and offers around the 1.2600 level. BoC rate hike odds have lengthened dramatically in response to concerns that the trade talks could break down, while Usd/Mxn has spiked to 19.3000+ for the same reasons. Usd/Chf is back up near 0.9800 vs yesterday’s lows below 0.9750, and Usd/Jpy over 111.50 and through the 200 DMA at 111.72 and 111.85 supply to a high just shy of 111.90 at one stage, eyeing 112.00 offers/psychological resistance, before a 112.08 Fib and the 112.26 100 DMA. 111.40-35 provides support on the downside. Cable has retreated below 1.3500 and through 1.3480 stops (just), but could be drawn towards a 600+ mn option expiry at the figure, with bids seen at 1.3425. Eur/Usd has reversed towards recent low 1.1900 area lows vs Wednesday’s 1.2000+ high and may also be influenced by expiry interest given a big (2 bn) 1.1950 strike that runs off tomorrow. On that note, a Eur/Sek 9.8000 option in the same size could entice given that the strike is close to the current 9.7800 spot price. As noted, the Aud and Nzd are bucking the weaker vs Greenback trend, with Aud/Usd through 0.7860-65 stops and 0.7870 macro offers on the way to a 0.7885 overnight high in wake of much stronger than expected Aussie retail sales data. 0.7900+ stops lie ahead, as the Aud/Nzd cross reclaims 1.0900 and the Kiwi stalls just above 0.7200 vs the Usd.

In commodities, price action in WTI and Brent crude had been somewhat uneventful overnight, however prices broke above yesterday’s highs during European trade amid no fresh fundamental catalysts before extending gains after WTI tripped stops above USD 64.00bbl. In metals markets, precious metals have seen very little in the way of price action. Elsewhere, nickel hit a 2-month high in Chinese trade following tight stocks whilst copper saw mild gains as prices tested USD 2.50/lb to the upside. UAE Energy Minister says there is a commitment to continue OPEC deal for a full year and that oil market is still rebalancing, expects to achieve full balanced oil market this year

Looking at the day ahead, the December PPI (core 0.2% mom and 2.5% yoy expected) as well as the weekly initial jobless and continuing claims are also due. Onto other events, the minutes for the ECB December meeting will be out and the Fed’s Dudley will speak on US economic outlook. Elsewhere, the BOE will publish its 4Q credit conditions survey and China begins a three-day annual meeting to set the agenda for its anti-corruption work in 2018.

US Event Calendar

  • 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.4%; PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
  • PPI Final Demand YoY, est. 3.0%, prior 3.1%; Ex Food and Energy YoY, est. 2.5%, prior 2.4%
  • 8:30am: Initial Jobless Claims, est. 245,000, prior 250,000; Continuing Claims, est. 1.92m, prior 1.91m
  • 9:45am: Bloomberg Consumer Comfort, prior 51.8
  • 2pm: Monthly Budget Statement, est. $26.0b deficit, prior $138.5b deficit

DB's Jim Reid concludes the overnight wrap

We’re only just through the seventh working day of 2018 but this year already feels like it’s going to be more interesting than 2017! Feel free to define “interesting” yourselves but it would be remarkable to us if higher inflation, less QE support and higher yields didn’t periodically give us more bouts of volatility and increased activity like that seen over the last 48 hours.

Treasuries were again in the crossfire yesterday with what I’m calling the Twitter vs Bloomberg phoney war. Twitter because Mr Trump loves to cite US equity performance via that medium and also use it to hit out against things like China’s trade policy. It may be overthinking to suggest the following but yesterday’s sell-off originated from an uncited Bloomberg story that could have been China’s way of warning Mr Trump that being too aggressive on trade might have consequences for his country’s bond market (China being the largest holder - see below) and with it equity markets.

The Bloomberg report in question suggested that senior government officials in China were in the process of reviewing China’s FX holdings and had supposedly recommended either slowing the pace of Treasuries purchases or halting them altogether. This led to 10yr US yields touching 2.5954% intra-day (up 5.3bps from day’s lows) and taking it to within 3bps of the calendar year high made back on March 13th last year. 10 year yields have already seen a 19bp range in the 7 days of the year so far and to put that in perspective, we’ve already seen about 30% of the high-to-low range of 2017. Later in the US session, a strong 10yr auction (highest bid to cover since June 2016) led to a strong rally back, with the close at 2.558%, some 3.7bps off the highs for the session and only 0.4bps higher on the day.

To add further intrigue to the story, this morning China’s State Administration of Foreign Exchange suggested that the story may have quoted a “wrong source” or be “fake news”. The release on their website went onto say that  China has always invested and managed its reserves in a diversified manner, to ensure the safety and value of its foreign exchange assets. Investment in U.S. Treasuries are decided by market conditions. Treasuries have rallied around 2.5bps on the report and are trading around 2.531% as we type.

As a bit of general context, China currently holds about $1.2tn of US Treasuries (as of the latest data to the end of October 2017), although that’s up from just over $1.0tn at the start of last year. Japan is in second place with $1.1tn and Ireland third but with a relatively much smaller $312bn of holdings. There was plenty of scepticism about the validity of the story at the time yesterday but even with this morning’s response from China the market will still debate as to whether there’s actually no smoke without fire.

The possible political angle shouldn’t be underestimated and the timing is apt given that the Politico article from last week suggesting that President Trump was preparing to unveil an “aggressive” trade crackdown over the coming   week including tariffs “aimed at countering China’s and other economic competitors’ alleged unfair trade practices”.

DB’s FX strategist Alan Ruskin wrote an interesting note yesterday in response to the story. In his view given possible US protectionist measures, it makes sense for China to pre-emptively flag that it holds some important cards, which  could then restrain the US's actions. It depends on how disruptive Trump’s measures are on trade, as to how much incentive there will be for China to show it can also hurt the US. What is pretty clear is that in hurting each other, China and the US will hurt themselves. That is the glue that supports the status quo, with China the global manufacturer in chief, and the US a recipient of China capital to cheaply finance the trade deficit. There are limits to how much either the US or China will be willing to disrupt this synergistic relationship and thus Alan thinks China’s bark is bigger than its bite. You’ll find the link to Alan’s report here.

Elsewhere on a day of unnamed officials being quoted, over in Canada, another unnamed government official told Bloomberg there is increasing likelihood that the US could withdrawal from the NAFTA (North American Free Trade Agreement) and a withdrawal notice could come at any time. Conversely, another unnamed White House official said there has been no change in President’s Trump’s position on NAFTA. Nonetheless, the Bloomberg implied odds of a Canadian rate hike for this month has dropped 14ppt to c73% and the CADUSD weakened 0.67%.

This morning in Asia equities are modestly lower. The Nikkei (-0.44%), Kospi (-0.26%), China’s CSI 300 (-0.30%) and Hang Seng (-0.20%) are down as we type. In China, Premier Li said the country’s economy expanded by about 6.9% in 2017 (vs. 6.8% for 4Q expected). If confirmed later on 18 January, this would mark the first full year acceleration since 2010. Back in the US, during a Q&A sessions with reporters, President Trump noted the US has “some problems” with North Korea, but he does not expect a war and “hopefully, a lot of good things are going to work out” from the recent talks.

Now recapping other markets performance from yesterday. US equities softened even as the S&P pared back losses and closed marginally lower for the first time in seven days (-0.11%). Within the S&P, only the financials and industrials sectors were in the green while utilities and real estate stocks led the losses. European markets were mixed, with the Stoxx 600 (-0.38%) and DAX (-0.78%) modestly lower while the FTSE rose 0.23%, led by the financials.

Turning to currencies, the US dollar index initially fell c0.6% on the aforementioned China story but subsequent weakness in the Canadian dollar helped the Greenback to partly recover into the close (-0.18%). The Euro gained 0.09% and Sterling fell 0.24%. In commodities, WTI oil rose 0.97% after EIA data confirmed US crude stockpiles fell for the eighth consecutive week.

Elsewhere, precious metals strengthened slightly (Gold +0.31%; Silver +0.02%) while other base metals were mixed but little changed (Zinc -0.21%; Copper +0.11%; Aluminium +0.43%).

Away from markets and onto central bankers’ speak. The Fed’s Bullard said the Fed should consider targeting inflation above 2% for a period to make up for past misses on the low side. Elsewhere, he is a little bit sympathetic to the idea of price level targeting. The Fed’s Evans reiterated his dovish view, noting that “I don’t see any evidence of inflation moving up really fast or even moving up enough” and that “it would be good to sort of put off the (rate) increases until the middle of this year” to ensure the inflation concerns resolve themselves.

Conversely, the Fed’s Kaplan supports three rate hikes in 2018, in part as “… we want to avoid a situation where we have such an (economic) overheating that we’re playing catch-up”. Notably, none of the three Fed speakers are FOMC policy voters this year.

In Sweden, Riksbank governor Ingves said the central bank is “a little closer” in terms of changing its policy decision, but “is not there yet”. He also noted that it is possible that the bank could raise rates before the ECB does. The Swedish 10y yields rose 5.3bp back to November highs. Elsewhere, the leader of Japan’s opposition Democratic party Mr Ohtsuka noted that existing BOJ governor Kuroda should stay on for a second term. A potential reappointment is in line with our Japanese team’s expectation.

Back onto Brexit, unnamed (again!!!) Germany officials noted to Bloomberg that the UK may have to contribute more to the EU budget in return for a bespoke trade deal, particularly in regards to allowing UK based financial companies the ability to operate freely across the EU post Brexit,

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the final reading of the November wholesale inventories was slightly above market at 0.8% mom (vs. 0.7%), while wholesale trade sales also beat at 1.5% mom (vs. 0.6% expected). The ratio of wholesale inventory to sales fell to a three-year low. Following the above, the latest Atlanta Fed’s GDPNow estimate of 4Q GDP growth has nudged up to 2.8% saar.

In France, the November IP was in line at -0.5% mom, but prior revisions meant the annual growth was slightly below market at 2.5% yoy (vs 2.6% expected), while manufacturing production was higher than expected at 3% yoy (vs 2.9%). In the UK, November IP was also in line at 0.4% mom but annual growth was higher at 2.5% yoy (vs 1.8% expected). Elsewhere, manufacturing production expanded for the seventh consecutive month, with annual growth above expectations at 3.5% yoy (vs 2.8%). Finally, its November trade deficit widened to -£2.8bln (vs. -£1.5bln), mainly driven by a jump in the deficit on goods to £12.2bn. In real terms, imports of goods rose 0.7% mom and exports fell 0.1% mom.

Looking at the day ahead, the Eurozone’s November IP and Italy’s retail sales are due, along with the December reading for the Bank of France industrial sentiment index. Over in the US, the December PPI (core 0.2% mom and 2.5% yoy expected) as well as the weekly initial jobless and continuing claims are also due. Onto other events, the minutes for the ECB December meeting will be out and the Fed’s Dudley will speak on US economic outlook. Elsewhere, the BOE will publish its 4Q credit conditions survey and China begins a three-day annual meeting to set the agenda for its anti-corruption work in 2018.