Futures A Sea Of Green Amid Relentless Dollar Disintegration

It's deja vu all over again as the dollar resumed its decline against all major peers on Friday amid concerns over U.S. trade policy, after a brief rally that followed Trump’s comment on favoring a stronger dollar, setting the Bloomberg Dollar Spot Index heading for its seventh weekly loss. That would be the longest losing streak since 2010.

Meanwhile equity markets from Asia to Europe, and US futures, are a sea of green as the market meltup continues at an unprecedented pace.

Trump’s comments on Thursday that he wants to see a strong greenback barely lifted the currency, which has been dented this week by a rise in U.S. protectionism and Treasury Secretary Steven Mnuchin’s support for a weaker dollar.  Incidentally, with Mnuchin receiving rebuke from central bankers to the president himself overnight, he gave some additional clarification in Davos this morning:

  • MNUCHIN: DOLLAR'S SHORT-TERM DIRECTION 'NOT A CONCERN OF MINE ONE WAY OR THE OTHER'
  • DOLLAR COMMENTS WERE 'JUST A STATEMENT OF FACT' -TREASURY SECRETARY STEVEN MNUCHIN
  • DOLLAR COMMENTS NOT INTENDED TO VIOLATE G20 COMMITMENT: TREASURY SECRETARY MNUCHIN


So far the dollar response to any attempt to talk up the dollar has been brief and feeble at best.  "The next couple of weeks could be a watershed moment for world trade and protectionism –- with President Trump’s Davos and, more importantly, State of the Union speeches likely to set the tone for U.S. trade policy over the coming year," said Viraj Patel, currency strategist at ING Bank NV. "Were ‘America First’ policies to quickly lead to a ‘Sell America’ sentiment in global markets, then we could well see EUR/USD moving beyond 1.30 --and USD/JPY down at 100 -- by year-end," Patel wrote in a client note on Friday.

“The market focus before Mnuchin was on monetary policy, but now it’s shifted to the U.S.’s external policy, its trade stance,” said Naohiro Nomoto, manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. “The U.S. will likely target countries with strong trading relations with America, meaning that the dollar will be top-heavy against the euro and yen this year.”

Sue Trinh, Hong Kong-based head of Asia FX strategy with Royal Bank of Canada, wrote that President Trump’s comments that the dollar would continue to strengthen won’t probably change the emerging-market dynamic.  Regardless of whether the Trump administration wants a strong U.S. currency or not, this week’s plunge is breaching technical barriers that had stood as proverbial last lines of defense against a significant gap lower.

Elsewhere in macro, sterling was one of the main outperformers versus the dollar, trading at levels last seen on the day after the Brexit referendum in June 2016. Elsewhere, "The last time the euro was this overbought was March 2008,” says Roberto Cobo Garcia, head of G-10 currency strategy at BBVA. “There is not a fundamental justification for a 10-figure spike since mid-November."

With the dollar tumbling, its polar opposite, China's yuan, was set for its biggest weekly advance since Sept. 1. The onshore yuan gained 0.15% to 6.3219 per dollar, extending its advance for the week to 1.3% and set to climb for seventh week, longest such run since February 2017.

Meanwhile, equity markets were a sea of green, with european equities headed higher after a mostly bullish session in Asia. Europe's Stoxx 600 Index climbed, with personal and household-goods shares leading gains after LVMH quarterly sales beat estimates. Esewhere, aside from the luxury space, sector specific performance is relatively broad-based with other individual movers including Thales (+3%) following a positive broker upgrade at Exane and Givaudan (-2%) following disappointing earnings.

Earlier in Asia, Japanese stocks fell while those in South Korea and Hong Kong climbed. Chinese markets were higher in which the Hang Seng (+1.3%) advanced to fresh record levels amid strength in Tencent and China’s largest banks, while the Shanghai Comp. (+0.3%) was choppy after the PBoC refrained from open market operations which resulted to a net weekly drain of CNY 320bln. The Hang Seng Index surged 1.5% to a new record high of 33154, while the Hang Seng China Enterprises index surged 2.5%, led by Chinese banks and real estate developers. Mainland participants also digested Industrial Profits which grew a slower pace, but continued to show double-digit growth for December, while FY Industrial Profits grew at its fastest pace since 2011.

Naturally, U.S. equity futures inched higher, and were up over 10 points at 2851.50 at last check, which will force Goldman to promptly revise the bank's 2018 S&P price target which was hit in under 4 weeks.

Elsewhere, West Texas crude oil edged higher after surging to the highest level in more than three years Wednesday, and gold resumed an advance to trade near an 18-month high. Bitcoin dropped below $11,000.

Today's expected data is wholesale inventories, annualized GDP and durable-goods orders. AbbVie, Colgate-Palmolive, Honeywell and NextEra Energy are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.3% to 2,851.50
  • Brent futures little changed at $70.43/bbl
  • Gold spot up 0.5% to $1,355.44
  • U.S. Dollar Index down 0.6% to 88.82
  • STOXX Europe 600 up 0.4% to 400.31
  • MSCI Asia Pacific up 0.04% to 186.68
  • MSCI Asia Pacific ex Japan up 0.5% to 612.18
  • Nikkei down 0.2% to 23,631.88
  • Topix down 0.3% to 1,879.39
  • Hang Seng Index up 1.5% to 33,154.12
  • Shanghai Composite up 0.3% to 3,558.13
  • Sensex down 0.3% to 36,050.44
  • Australia S&P/ASX 200 down 0.08% to 6,050.02
  • Kospi up 0.5% to 2,574.76
  • German 10Y yield fell 0.7 bps to 0.605%
  • Euro up 0.6% to $1.2465
  • Brent Futures up 0.1% to $70.51/bbl
  • Italian 10Y yield rose 5.4 bps to 1.695%
  • Spanish 10Y yield fell 1.4 bps to 1.396%


Top Overnight News

  • The U.S. Treasury secretary has traditionally been the chief spokesman on currency policy, though President Donald Trump’s White House has demonstrated in the past 48 hours that the practice of one message and one messenger may be a thing of the past.
  • President Donald Trump wanted to fire Special Counsel Robert Mueller in June, three people familiar with the matter said, raising concerns among his top aides and closest supporters that Trump would put himself in legal jeopardy.
  • Chancellor Angela Merkel said a new government for Germany is within reach as she began coalition talks with the Social Democrats and one of her allies set a two-week deadline
  • Countries should abide by the G-7 and G-20 agreements and shouldn’t target currency rates for the sake of international competitiveness, Japanese Finance Minister Taro Aso says on Friday
  • President Trump wanted to fire Special Counsel Robert Mueller in June, three people familiar with the matter said, raising concerns among his top aides and closest supporters that Trump would put himself in legal jeopardy
  • As the EU presents its plan for the U.K.’s Brexit transition, many governments are willing to push the expiration date beyond the December 2020 deadline they’ll set out as their official stance
  • President Donald Trump will support a path to citizenship for as many as 1.8 million undocumented immigrants brought into the U.S. as children, doubling the number of people covered by current protections from deportation, White House officials said Thursday.
  • Prime Minister Theresa May’s office slapped down Philip Hammond after the chancellor of the exchequer said he hoped the U.K. economy would move only “very modestly apart” from the European Union after leaving the bloc.
  • As the European Union presents its plan for the U.K.’s Brexit transition, many governments are willing to push the expiration date beyond the December 2020 deadline they’ll set out as their official stance.

Asian equities are broadly but modestly higher amid quiet conditions with both Australia and India shut today for national holidays. Nikkei 225 (-0.2%) was negative as the index gradually pared the initial support seen from a recovery in USD/JPY which reclaimed the 109.00 handle on Trump comments. Chinese markets were higher in which the Hang Seng (+1.3%) advanced to fresh record levels amid strength in Tencent and China’s largest banks, while the Shanghai Comp. (+0.3%) was choppy after the PBoC refrained from open market operations which resulted to a net weekly drain of CNY 320bln. Furthermore, participants also digested Industrial Profits which grew a slower pace, but continued to show double-digit growth for December, while FY Industrial Profits grew at its fastest pace since 2011. Finally, 10yr JGBs were slightly higher as prices retained marginal opening gains and with the BoJ also present in the market for JPY 820bln in JGBs under its Rinban operation. PBoC skipped open market operations for a net weekly drain of CNY 320bln vs. last week's CNY 590bln net injection.

Top Asian News

  • TPG Is Said to Back $1 Billion Tata Fiber Management Buyout Bid
  • Japanese Inflation Continues Rising But No Closer to Target
  • Thailand Central Bank Head Fires Warning at Baht Speculators
  • China Economy Starts 2018 on Solid Trajectory After Profits Dip
  • China Is Said to Consider Banking, Insurance Watchdog Merger


European equities trade higher across the board (Eurostoxx 50 +0.4%) with outperformance in the CAC (+0.8%) as LVMH tops the index (+4.7%) following their earnings, subsequently dragging the likes of Kering (+3%) and Christian Dior (+4.5%) higher in sympathy. Elsewhere, aside from the luxury space, sector specific performance is relatively broad-based with other individual movers including Thales (+3%) following a positive broker upgrade at Exane and Givaudan (-2%) following disappointing earnings.

Top European News

  • SES, Eutelsat Extend Slide After Satellite Woes, Rating Cut
  • ECB Says Forecasters Lift Inflation Outlook for 2018 and 2019
  • U.K. Economy Caps Challenging Year With Surprise Growth Pickup
  • Magnit Plunges as Earnings, Sales Disappoint Investors Again
  • Czechs Vote for President as Ties With EU, Russia in Focus
  • ‘God Is Dead’ and Other Takeaways at Credit Suisse Banker Trial


In FX markets, there was more fast and furious action as US President Trump countered ‘weak Dollar good for trade’ claims made by Treasury Secretary Mnuchin with a desire to see a strong USD and prediction that it will get stronger and stronger. His rallying call sparked a sharp short squeeze across the board, but the Greenback is already under pressure again, albeit off worst levels vs its peers. Indeed, all G10 rivals have regained the upper hand and the DXY is back below the 89.000 handle, with key Index support levels still close enough to warrant attention (88.423 and 88.282). The AUD is outperforming just below 0.8100, while Sterling the CHF, NZD and EUR are not far behind around 1.4230, 0.9350, 0.7370 and 1.2460 respectively. USD/CAD is pivoting 1.2300 again amidst dovish sounding BoC Poloz’ rhetoric and some less bullish (for the Loonie) NAFTA noises ahead of Canadian CPI data. USD/JPY has retreated to sub-109.00 levels from around 109.75 on the Trump bounce, with solid support/bids remaining at 108.50, but options eyeing further downside by end Q1 (via 105.00 expiries in March). In short, the US President’s intervention appears to have stemmed the tide of broad Greenback selling that was veering towards an avalanche in Davos, but the  overall bear trend remains intact. Finally, GBP/USD edged closer to 1.4300 after UK GDP exceeded expectations (Q/Q 0.5% vs. Exp. 0.4%, Y/Y 1.5% vs. Exp. 1.4%).

In commodities, WTI and Brent crude futures have traded relatively sideways during European trade as energy newsflow remains light and prices pare some of yesterday’s USD-inspired losses; next up for energy traders is the Baker Hughes rig count. In metals markets, gold is also off worst levels and has retraced nearly half of yesterday’s move post-Trump, elsewhere, copper has seen relatively rangebound trade with markets likely to be swayed by fluctuations in the USD.

Looking at the day ahead, this morning in Europe we’ve got January confidence indicators due in France along with December M3 money supply data for the Euro area. Also due in the UK will be a first look at Q4 GDP for the UK with the consensus expecting a +0.4% qoq and +1.4% yoy print. This afternoon in the US the main highlight will be the aforementioned first estimate of Q4 GDP. We’ll also get the Q4 Core PCE print (+1.9% qoq consensus), December advance goods trade balance, December wholesale inventories and preliminary durable and capital goods orders for December. For what it’s worth, the consensus is for +0.8% mom headline durable goods orders and +0.6% core capex orders. Expect Davos developments to be the other big focus for markets today including President Trump’s speech. BoE and BoJ Governors Carney and Kuroda are also scheduled to speak along with the IMF’s Lagarde at 2pm GMT and the ECB’s Coeure at 10am GMT. Over at the Fed, Bullard is due to speak in Oslo at 1pm GMT

US Event Calendar

  • 8:30am: Advance Goods Trade Balance, est. $68.9b deficit, prior $69.7b deficit, revised $70.0b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.39%, prior 0.8%; Retail Inventories MoM, prior 0.1%, revised 0.1%
  • 8:30am: GDP Annualized QoQ, est. 3.0%, prior 3.2%; Personal Consumption, est. 3.7%, prior 2.2%
  • 8:30am: Durable Goods Orders, est. 0.8%, prior 1.3%; Durables Ex Transportation, est. 0.6%, prior -0.1%
  • 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.55%, prior -0.2%; Cap Goods Ship Nondef Ex Air, est. 0.4%, prior -0.1%

DB's Jim Reid Concludes the overnight wrap

It may have made an assist but it’s not often that an ECB meeting gets overshadowed by a diplomatic - and somewhat confusing - war of words over currencies. Indeed, there will be plenty of people who will have to double-take their screens this morning after FX markets spun on their heels last night. Before you do though a quick 121- word summary goes as follows. Yesterday morning in Davos US Treasury Secretary Steven Mnuchin reinforced his weaker dollar rhetoric. ECB President Mario Draghi then fired an unsubtle warning shot back to Mnuchin at the ECB  press conference. The EUR/USD peaked at an intraday high of just over 1% at this stage. Then, after Europe went home, a Bloomberg story hit the screens suggesting that some ECB Governing Council members were said to favour waiting until June to start tweaking forward guidance. A matter of minutes later, President Trump then announced his presence in Davos by saying that he wants to see a strong USD and that comments from Mnuchin were taken out of context. Six hours after starting the rally and EUR/USD was back to flat.

Clearly it’s the Trump reaction to Mnuchin’s earlier comments which has left plenty – including us – confused but before we dig into that it’s worth firstly recapping how that FX volatility reverberated around markets. First and foremost, the EUR/USD closed last night at $1.240 and -0.06% on the day. However, the intraday high-to-low range of 1.40% was the second biggest since October last year. This morning the EUR/USD is hovering around $1.242.  Meanwhile, after being down as much as -0.86% the USD index rallied back to +0.21% and in the process snapped a three-day losing run (although it’s back in the red this morning). In fact, amazingly, after being down versus all other  G10 currencies when Europe went home, only the CHF, NOK and SEK strengthened versus the USD yesterday. It won’t come as a great surprise to hear then that FX vol (based on the CVIX) is now the highest since early October.

Anyway, those FX moves really dictated the price action elsewhere in markets too. After trading a smidgen higher leading into Draghi’s press conference, the majority of European bourses ended in the red including the Stoxx 600 (-0.56%), DAX (-0.87%) and CAC (-0.25%) with the EUR/USD just off the highs. The DAX actually suffered its worst two-day drop (-1.93%) since August last year. Across the pond the S&P 500 and Dow ended +0.06% and +0.54% respectively. They also pared bigger gains as the USD rallied back. Meanwhile in bond markets, yields continued to edge north in Europe. In fact, by the closing bell 10y Bunds ended at the highest since December 2015 (+2.3bps to 0.607%). The periphery sold off a little more with yields in Spain and Portugal +5.4bps and +5.5bps higher respectively. Treasuries felt the full force of the day’s headlines however and in the end 10y Treasuries closed -3.0bps lower at 2.618% with an intraday range of over 6bps.

Given that it’s fairly rare to see such high-profile comments about the USD it’s not a huge surprise to see markets react as they have however the apparent contradiction of comments between Mnuchin and Trump make this a real head scratcher. Early yesterday Mnuchin said that a “lower USD is beneficial for the US trade balance” while also reinforcing some of his other rhetoric from the day prior. The President then said last night in an interview with CNBC in Davos that “the USD is going to get stronger and stronger and ultimately I want to see a strong USD”. He also suggested that comments made by Mnuchin were “taken out of context”. Bisecting those comments and wading into the war of words was ECB President Draghi. At the ECB press conference yesterday Draghi said that “the exchange rate has moved in part because of endogenous reasons, namely the improvement in the economy, in part due to exogenous reasons that have to do with communication. But not by the ECB, but by someone else”. He added that “this someone else’s communication doesn’t comply with the agreed terms of references”.

Trying to make sense of the Mnuchin-Trump confusion, DB’s FX Strategist Alan Ruskin believes that what you have here is two officials who like a weak(er) USD in the short-term that will help the US trade accounts and support  growth, albeit to the point where strong growth will eventually support a strong USD longer-term. In Alan’s view this is a way of saying that in the short-term a weak USD is good for US trade, and in the long-term a strong USD is good because it is indicative of strong growth a healthy economy. Alan highlights that this is clearly a very confusing message to convey and it’s unlikely to either be reported or understood correctly, which doesn’t really help the message.

In any case, he may have done so already, but the last 48 hours or so sets us up quite nicely for President Trump’s turn to take the spotlight at Davos this afternoon. With markets already on edge expect trading floors to be glued to the TV. The President is due to speak at 1pm local time in Davos (2pm GMT). Also on the agenda today is some first tier data with a first look at Q4 GDP for the US. Our US economists expect a +3.3% qoq annualized print which  compares to the market consensus of +3.0% and the previous reading of +3.2%. One thing worth noting is that a reading close to our economists’ estimate would mean that it would be the third consecutive quarter of 3%-plus-inflation-adjusted output growth and the economy will have ended the year having expanded +2.7% (Q4/
Q4). That would be the best performance since 2014.

Finally, back to the ECB. While there were no real surprises at yesterday’s meeting it felt to us like it was the hawks who probably came away feeling slightly better about life. With the forward guidance can kicked down the road for another meeting it was instead that lack of any pushback on recent EUR appreciation by Draghi which was the biggest talking point. DB’s Mark Wall thought the press conference was a bit more balanced and highlighted that the strongest message was that the sequencing on exit and the insistence that the policy rate will remain unchanged ‘well past’ the end of net asset purchases are not just carved in stone but are triple underlined in stone. He notes that there will be changes to QE forward guidance in the coming months. The end of net asset purchases by yearend feels inevitable – the Council debate is about when to act, not when it should – and the ECB apparently wants to ensure that financial conditions decouple from the QE exit process by insisting that policy rates are not up for debate at all. It is worth adding that market pricing for a first rate hike is now mid-2019 which is when our European economists also expect the first hike. On that it’s worth noting that Draghi was asked at the end of his press conference about Weidmann’s recent comment that a rate hike in mid-2019 was consistent with data and Draghi confirmed that this timing was broadly appropriate given what is known today.

A quick refresh of our screens this morning now shows that equity markets are generally trading firmer in Asia with the exception of Japan. The Shanghai Comp (+0.28%), Hang Seng (+1.20%) and Kospi (+0.27%) are all up while H-shares have rallied another +1.96% following the first drop of the year on Thursday. The Nikkei is -0.09% with the Yen a bit more volatile after Japan’s December CPI figures missed at the headline (+1.0% yoy vs. +1.1% expected) and core-core (+0.3% yoy vs. +0.4% expected) lines.

Moving on. It feels like it’s almost been slightly forgotten about but Special Counsel Robert Mueller’s probe is picking up pace according to a Bloomberg story which did the rounds yesterday, with the obstruction part of the probesupposedly nearing its conclusion. It suggested that Mueller has interviewed a number of people close to Trump in recent weeks including James Comey, Jeff Sessions and the Director of National Intelligence Dan Coats and NSA  Director Michael Rogers, in addition to CIA Director Mike Pompeo. It’s expected that Mueller will schedule an interview with Trump in the next couple weeks which Trump responded to in front of reporters by suggesting that” we do it under oath”.

It’s worth highlighting that other parts of the investigation are however expected to last a while longer, including the investigation into Russia potentially interfering in the 2016 presidential election. This morning the NY Times is running a story suggesting that Trump ordered the firing of Mueller last June, but backed down after Mueller threatened to resign.

In other news, in Davos yesterday we also heard from UK Chancellor Philip Hammond. With Brexit unsurprisingly top of the agenda, Hammond said that “we should be confident of reaching something much more ambitious than any free trade agreement that has ever been achieved”. He also added that “an off the shelf deal, whether like Canada or Norway, is not the right option”. Also in Davos, Italy Finance Minister Pier Carlo Padoan expressed concern about potential US protectionism while the IMF’s Lagarde urged that trade rules have to be fair and clear.

Jumping to the micro now where US earnings season continues to tick along with over 20% of the S&P 500 now having reported. Yesterday we saw Caterpillar report, for who’s earnings are always worth keeping an eye on as a bit of a barometer for global growth. The numbers appeared upbeat with Caterpillar reporting that sales of retail machines in Q4 rose by the most since 2011 after they had been negative in percentage terms for every month in the two years through 2016, while overall earnings and sales figures came in ahead of analyst expectations. Guidance was also revised up for 2018 with growth gathering pace in Latin America and Europe.

Before we look at today’s calendar, for completeness yesterday’s macro data in the US didn’t really move the dial. Initial claims jumped 17k to 233k last week while December new home sales slumped a bit more than expected (-9.3% mom vs. -7.9% expected). The conference board’s leading index for December on the other hand rose a bit more than expected (+0.6% mom vs. +0.5% expected). In Europe the only data of significance came from Germany where the January IFO business climate reading for January was reported as jumping 0.4pts to 117.6 (vs. 117.0 expected), matching the record high made back in November. Current conditions jumped over 2pts to 127.7 although the expectations gauge did slide by 1pt to 108.4

Looking at the day ahead, this morning in Europe we’ve got January confidence indicators due in France along with December M3 money supply data for the Euro area. Also due in the UK will be a first look at Q4 GDP for the UK with the consensus expecting a +0.4% qoq and +1.4% yoy print. This afternoon in the US the main highlight will be the aforementioned first estimate of Q4 GDP. We’ll also get the Q4 Core PCE print (+1.9% qoq consensus), December advance goods trade balance, December wholesale inventories and preliminary durable and capital goods orders for December. For what it’s worth, the consensus is for +0.8% mom headline durable goods orders and +0.6% core capex orders. Expect Davos developments to be the other big focus for markets today including President Trump’s speech. BoE and BoJ Governors Carney and Kuroda are also scheduled to speak along with the IMF’s Lagarde at 2pm GMT and the ECB’s Coeure at 10am GMT. Over at the Fed, Bullard is due to speak in Oslo at 1pm GMT