The last day of an already tumultuous week is shaping up as a bloodbath for investors across the globe as the following market snapshot of global stocks and futures shows.
European equity markets and U.S. equity futures sold off sharply, however as Bloomberg notes, the traditional pre-NFP lack of market activity has so far mitigated large cross-asset reaction. S&P futures were down as much as 20 points and flirting with the 2,800 level.
Equities were tested by the surge in bond yields, with some fund managers saying anything between 2.7% and 3% on the 10Y TSY would signal a bond bear market. The level is seen by many stock-watchers as a potential trigger for a correction in equities.
To be sure, the correlation between higher yields and lower equities continued overnight in a particularly aggressive manner. The silver lining is that as the US 10y tests 2.80% and the US 30y at 3.04%, the USD at least appears to have found a bottom, for now. Overnight German Bund yields also reached a two-year high as core European bonds fell along with gilts.
As we pointed out last night, the risk off sentiment took shape in Asia, with Chinese stocks continuing their recent plunge...
... as core yields weighed on the EM FX space as a whole. "Markets are increasingly choppy and price action increasingly unpredictable" Citi's FX desk notes.
There was nothing obvious to trigger the move: some attributed the risk off mode to a report that 18 people were injured when a van intentionally hit pedestrians in central Shanghai, China. Additionally, WSJ reports, “Chinese stocks had their worst week since 2016, with fresh concerns about Beijing’s campaign to cut financial risk and predictions of a slowing economy...” The BoJ also knocked JPY back after it took action against the rising JGB 10y yield by announcing it would buy unlimited amounts of 10y JGBs at 11bps.
Meanwhile, Europe was a bloodbath largely due to to the previously discussed poor result from Deutsche Bank which sent the German lender's stock tumbling. The weakness quickly spread to German stocks with the DAX turning negative for 2018, giving up an advance that had reached 5%, as the DAX slides for a fifth straight day. This was the worst weekly drop for the DAX since November 2016, down 3.5%
The DAX weakness sent the broader Eurostoxx Index dropped for a 5th day, the longest losing streak since November, and sliding below its 200-DMA.
In FX, the USD/JPY rallied further toward 110 after BOJ acted to control the yield curve by placing a cap on yields as it offered to buy an unlimited amount in 10yr JGBs at a yield of 0.110%. The BoJ also announced to buy JPY 450bln in 5yr-10yr, more than the prior JPY 410bln operation.
The Bloomberg Dollar Spot Index snapped a three-day decline and headed for its biggest gain since November as stretched short positioning called for caution ahead of the U.S. payrolls report. The yen was set for its worst week in 3 1/2 months as the BOJ further damped speculation about normalizing its policy anytime soon. Monetary policy prospects weighed on Antipodean currencies as well, while the euro and the pound also came under pressure. European bonds and equities traded in the red. USD strength was particularly evident against EMFX, with USD/ZAR trading back above 12.00.
Elsewhere, core yields edge higher but without much momentum, while credit spreads widen, iTraxx Crossover through 200-DMA. As Bloomberg highlights, a hawkish Euribor put trade targeting ~80bps of ECB hikes by end-2019 caught attention; crude and metals weighed by USD move, another bitcoin selloff of more than 10%.
Looking at today's busy calendar, the highlight will obviously be the employment report. Average hourly earnings have taken over from the headline number as the key focus of the report at the moment. And while economists are strongly of the view that wages are going up this will not be seen in today's report, where monthly income growth is expected to tick down a tenth (+0.2% vs. +0.3%) but the year-over-year trend may round up a tenth to 2.6%. For the headline number consensus expects a gain in payrolls (+180k vs. +148k) which should keep the unemployment rate steady at 4.1%. So far this week the employment and wages data has generally been positive. The latest evidence was 4Q unit labour costs yesterday which were above market at 2% (vs. 0.9% expected).
Elsewhere, oil traded near its highest level since 2015 in New York as forecasters paint a rosier picture for supply and demand. WTI and Brent crude futures have modestly extended on the prior day’s gains, albeit off best levels with WTI back below USD 66/bbl and Brent retreating from USD 70/bbl with energy newsflow otherwise relatively light ahead of the Baker Hughes rig count and earnings from Exxon and Chevron (keep an eye out for CAPEX plans). In metals markets, Gold has traded relatively sideways ahead of NFP, whilst Chinese steel futures were seen higher overnight amid ongoing speculation over further extensions to domestic steel production curbs.
Finally, Bitcoin continues to slide after a miserable January, dropping below $8,000 in early trading.
- S&P 500 futures down 0.7% to 2,803.75
- STOXX Europe 600 down 0.8% to 390.55
- MSCI Asia Pacific down 0.7% to 183.03
- MSCI Asia Pacific ex Japan down 0.7% to 599.58
- Nikkei down 0.9% to 23,274.53
- Topix down 0.3% to 1,864.20
- Hang Seng Index down 0.1% to 32,601.78
- Shanghai Composite up 0.4% to 3,462.08
- Sensex down 2.3% to 35,099.20
- Australia S&P/ASX 200 up 0.5% to 6,121.39
- Kospi down 1.7% to 2,525.39
- German 10Y yield rose 2.0 bps to 0.741%
- Euro down 0.2% to $1.2484
- Italian 10Y yield fell 6.3 bps to 1.697%
- Spanish 10Y yield rose 1.4 bps to 1.423%
- Brent futures up 0.2% to $69.78/bbl
- Gold spot down 0.2% to $1,346.44
- U.S. Dollar Index up 0.2% to 88.87
Top Overnight News
- Chancellor Angela Merkel’s bloc and Germany’s Social Democrats secured an agreement on education even as “large” policy differences remain, a top party official said as parties near a self-imposed weekend deadline
- The U.K. must not enter into a new customs union with the European Union after it leaves the bloc, Trade Secretary Liam Fox said, setting a new red line for Theresa May’s negotiations with Brussels and her own party on Brexit
- Riksbank Deputy Governor Martin Floden says “there are risks to the rate path, inflation in particular is unusually uncertain," according to an interview with Market News International
- Japan’s government will likely present to Parliament its nominees of BOJ governor and deputy governors around mid- to late February at the earliest, Reuters reports, citing unidentified people familiar with the matter
- BofAML says “massive” equity inflows last week helped trigger a sell signal triggered Jan 30th via record equity inflows, bullish hedge fund risk appetite indicator and global equity index breadth measure
- U.K. Jan. Construction PMI 50.2 vs 52.2 est; housing activity lowest since Jul. 2016
- BOJ took action today after large increase in JGB yields: senior official
- Strong chance that BOJ’s Kuroda will be reappointed, according to people familiar, Reuters reports
- China to allow overseas investors to trade iron ore futures on Dalian exchange
Asia equity markets traded broadly lower with sentiment in the region dampened amid a lack of catalysts and following the indecisive lead from Wall St. where most major indices finished negative and the Nasdaq 100 underperformed. ASX 200 (+0.5%) and Nikkei 225 (-0.8%) were mixed with Australia kept afloat by financials and energy, while the Japanese benchmark was the laggard and saw nearly all the prior day’s gains wiped out. Elsewhere, Shanghai Comp. (-0.4%) and Hang Seng (-0.1%) were downbeat amid Shenzhen volatility, while continued inaction by the PBoC also resulted to a weekly net liquidity drain of CNY 760bln. Finally, 10yr JGBs reversed the initial spill-over selling from US, with support from a risk averse tone and after the BoJ Rinban announcement in which it increased purchases in the 5yr-10yr range. Furthermore, the BoJ also effectively placed a cap on yields as it offered to buy an unlimited amount in 10yr JGBs at a yield of 0.110%. BoJ announced to buy JPY 450bln in 5yr-10yr (Prev. JPY 410bln), JPY 190bln in 10yr-25yr and JPY 80bln in 25yr+ JGBs, while it also announced a special bond operation to buy an unlimited amount of 10yr JGBs at a yield of 0.110%. However, there were no takers for the fixed rate operation and the BoJ stated it took the steps after a surge in yields and that it is adhering to policy of keeping 10yr yield near 0%. PBoC skipped open market operations for a net weekly drain of JPY 760bln vs. Prev. JPY 320bln drain W/W.
Top Asia News
- Dollar Slide Spurs Yuan Forecast Revisions, Worry on Speed
- Foreign Funds Poured $13 Billion Into Chinese Shares in January
- Fosun’s $1.5 Billion Biotech Arm Is Said to Mull Hong Kong IPO
- HNA-Like Debt Pileups Raise Risk of Forced Asset Sales in China
- What’s on the Block in China’s Potential Sale of the Century?
- World’s Biggest Pension Fund Gains $55 Billion as Stocks Climb
- Mitsui & Co Surges to Highest Since 2008 on Share Buyback
European equities (Eurostoxx 50 -0.6%) are trading lower across the board following a downbeat session overnight in Asia-Pac and the US. Underperformance has been seen in the DAX (-1.1%) with the index dragged lower by Deutsche Bank (-6.1%) after reporting a larger than expected quarterly loss; Commerzbank (-1.5%) also seen lower but little contagion seen in the broader European banking sector. Elsewhere, energy names are the only sector trading higher in Europe alongside firmer energy prices, telecoms underperform with BT (-5.5%) at the bottom of the FSTE 100 following their latest earnings update.
Top European News
- Germany DAX Gives Up Year’s Gain in Worst Selloff Since 2016
- ECB Official Warns Markets Are Unprepared for Inflation Bogeyman
- Czechs Signal Pause in Rate Hikes and Bet on Currency Gains
- Wereldhave Slumps On 2018 Profit Guidance Miss, Dividend Cut
In FX, the DXY remains weak overall as its 2018 (and late 2017) bear trend continues, but the index is holding in above 88.500 and some key support levels ahead of the 88.000 level. In fact, the Dollar is firmer vs all G10 rivals as US Treasury yields continue their ascent and some benchmark maturities hit key or psychological levels (long bond over 3% for example). EUR/USD is pivoting around 1.2500, Cable still finding it tough on advances beyond 1.4200, USD/Cad sticky circa 1.2300 and similarly USD/CHF bouncing back towards 0.9300 after forays below. USD/JPY is still gradually firming within a wide 109.00-110.00 range, and sniffing out layered offers up to the top of that band, with a 50% Fib at 109.88 also providing some resistance. JPY undermined by more aggressive BoJ buying of JGBs overnight, NZD by weak building permits and the AUD extending recent losses/underperformance on disappointing data and rolled out RBA rate expectations. Ahead, NFP the main Friday focus.
In commodities, WTI and Brent crude futures have modestly extended on the prior day’s gains, albeit off best levels with WTI back below USD 66/bbl and Brent retreating from USD 70/bbl with energy newsflow otherwise relatively light ahead of the Baker Hughes rig count and earnings from Exxon and Chevron (keep an eye out for CAPEX plans). In metals markets, Gold has traded relatively sideways ahead of NFP, whilst Chinese steel futures were seen higher overnight amid ongoing speculation over further extensions to domestic steel production curbs.
US Event Calendar
- 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 148,000
- Unemployment Rate, est. 4.1%, prior 4.1%
- Average Hourly Earnings MoM, est. 0.2%, prior 0.3%; Average Hourly Earnings YoY, est. 2.6%, prior 2.5%
- 10am: U. of Mich. Sentiment, est. 95, prior 94.4; Current Conditions, prior 109.2; Expectations, prior 84.8
- 10am: Factory Orders, est. 1.5%, prior 1.3%; Factory Orders Ex Trans, prior 0.8%
- 10am: Durable Goods Orders, prior 2.9%; Durables Ex Transportation, prior 0.6%
- 10am: Cap Goods Orders Nondef Ex Air, prior -0.3%
DB's Jim Reid concludes the overnight wrap
Today’s highlight will obviously be the employment report. Average hourly earnings have taken over from the headline number as the key focus of the report at the moment. DB are strongly of the view that wages are going up but we are not convinced you’ll see that in this report. They expect the number to tick down a tenth (+0.2% vs. +0.3% - consensus 0.2%) but the year-over-year trend may round up a tenth to 2.6%. For the headline number they expect a healthy gain in payrolls (+210k vs. +148k – consensus 180k) which should keep the unemployment rate steady at 4.1%. So far this week the employment and wages data has generally been positive. The latest evidence was 4Q unit labour costs yesterday which were above market at 2% (vs. 0.9% expected).
The employment report comes at a time of a continued sell off in US treasuries. UST 10y yields jumped the most in 12 months, rising 8.5bp to 2.791% and making a fresh high since April 2014. The UST 30y also closed above 3% for the first time since May 17 (3.025%) while the 2s10s steepened 6.5bp back to the highest since mid-December. The weakness seemed to have several contributing factors, such as a perception of it being a hawkish FOMC statement the night before, more data that supports the view that inflation is firming (the highest ISM prices paid reading since May 2011), and the UCL data discussed above. Over in Europe, changes in core 10y bond yields were more modest, with Bunds and Gilts up c2bp and OATs up 0.8bp. Peripherals actually outperformed, with yields down 2-6bp, in part supported by successful debt auctions in Spain.
Staying with US equities, the S&P 500 initially traded higher yesterday post Facebook’s results (shares +3.3%) but pared back gains to be marginally lower (-0.06%) while other bourses were mixed (Dow +0.14%; Nasdaq -0.35%). European markets were broadly lower, with the Stoxx 600 (-0.50%), FTSE (-0.57%) and DAX (-1.41%) down to a c4 week low. The pull back in the DAX was broad based with all sectors in the red, particularly industrials, real estate and healthcare stocks. The VIX was little changed at 13.47 (-0.5%).
After the bell, Amazon’s share price jumped c6% after reporting the strongest holiday quarter sales growth in eight years, while Apple’s shares recovered to be up c3%, in part as the CFO guided to >10% growth in iphone sales for the current quarter and investors took note of Apple’s higher average selling price for iPhone (+14% on pcp) as a potential sign of solid demand for its iPhone X after earlier reports to the contrary. Elsewhere, Alphabet is down c2% after its 4Q results missed estimates.
This morning in Asia, markets are broadly lower. The Nikkei (-0.85%), Kospi (-1.62%) and China’s CSI300 (-0.20%) are all down while the Hang Seng is up modestly (+0.13%) as we type. Elsewhere, the BOJ has announced its first unlimited fixed rate bond purchase operation since July, while also offering to buy more (40bn Yen; $365m) 5-10 year bonds at its regular operation this morning.
The yield on 10y JGBs fell from yesterday’s 9.4bp to c8bp this morning. Now turning to the ECB, Bloomberg has reported a group of unnamed ECB members had urged Mr Draghi in last week’s ECB meeting to be more specific than its current expectation that it will keep rates on hold “well past” the end of QE, but Draghi resisted a change on the wording. Elsewhere the ECB’s Praet seemed a tad dovish. On inflation, he noted “…we’re still some distance away from meeting the council’s criteria for a sustained adjustment in the path of inflation” and that “monetary policy will evolve in a data dependent and time consistent manner”.
Over in Germany, Ms Merkel noted that based on mid-term growth estimates, she expects the new government will “have additional scope” to spend beyond the EUR46bn agreed to in the exploratory talks with the SPD. The additional funds could be spent on digital transformation, development and foreign policy objectives. Elsewhere, when asked if the self-imposed Sunday deadline for coalition talks would hold, the SPD premier of the state of Mecklenburg said “we need to take the time that we need so that we can do good things for the people”.
Turning to currencies performance from yesterday, the US dollar index fell for the third consecutive day (-0.52%), while the Euro and Sterling jumped 0.77% and 0.51% respectively, with the Euro now at 1.251 – a fresh high since December 2014. In commodities, WTI oil edged up 0.4%. Precious metals were mixed but little changed (Gold +0.27%; Silver -0.62%) while other base metals advanced (Copper flat; Aluminium +0.14%; Zinc +0.71%).
Away from the markets, the ECB’s Nowotny has added to the debate on bitcoins, he noted “for a long time, I had the view that investment in Bitcoin should be a private matter, but I got the feeling that a legal provision is needed” and that “I like what the Chinese PBOC governor has said – bitcoins…are a matter for the police”. As a reminder, bitcoin fell c9% yesterday and is c54% down from its December highs. Elsewhere, he also noted “in my view, we should end the bond buying program” and that “this will also then lead to an increase in long term interest rates”.
Over in the UK, the BOE has begun simulating stresses in “stretched” bond markets to assess potential financial stability risks, in part as companies issued more bonds for funding than they did before the GFC. A key focus will be on liquidity mismatch in times of stressed markets. Across the pond, 38 US banks will have to report back to the Fed by 5 April in their annual stress test. Some of the downside assumptions include a jump in unemployment rate to 10%. Staying in the UK, the FT has reported that Brexit advisers to PM May are in “live” discussions on whether Britain can achieve a customs union deal covering trade in goods with the EU post a two year transition period.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January ISM manufacturing index was above market at 59.1 (vs. 58.6) and the ISM prices paid rose to the highest since May 2011 (72.7 vs. 68.8 expected), which likely adds to the argument of higher inflation going forward. The 4Q nonfarm productivity fell for the first time in seven quarters (-0.1% vs. 0.7% expected) while unit labour costs was above market at 2% (vs. 0.9%). The December construction spending was up 0.7% mom (vs. 0.4%). Elsewhere, the final reading of the January manufacturing PMI was confirmed at 55.5. Finally, the weekly initial jobless claims was below expectations (230k vs. 235k) while continuing claims was above (1,953k vs. 1,929k). Factoring in the above, the Atlanta Fed now estimate 1Q GDP growth to be a whopping 5.4% (vs. 4.2% previous).
In Europe, the final readings for January manufacturing PMIs were broadly unchanged with the Euro area confirmed at 59.6 – 1pt below last month’s 20 year high, while Germany’s PMI was revised 0.1 lower to 61.1 and France 0.3 higher to 58.4. Elsewhere, the flash PMI for Italy was above market at 59 (vs. 57.4) but the UK PMI fell to the lowest since June 2017 at 55.3 (vs. 56.5), although still above its long run average of 51.7. Finally, the UK’s January Nationwide House price index was above expectations at 3.2% yoy (vs. 2.5%).
Looking at the day ahead, as discussed at the top it’s another payrolls Friday in the US and as usual keep an eye on other components of the January report including average hourly earnings and the unemployment rate. Also due in the US will be December factory orders, the final January University of Michigan consumer sentiment report and final December durable and capital goods orders.