Asia, S&P Futures Rally, Europe Falters With US, China On Holiday

With the US on holiday for President’s Day and many Asia markets still closed for Lunar New Year holidays, it has been a quiet start to the week, even as last week's dollar turbulence has resumed, while S&P futures are doing their best to levitate without anyone manning the controls.

World stocks were set for a sixth session of gains on Monday, extending a recovery from a selloff sparked by fears of creeping inflation and higher borrowing costs.

The MSCI world index rose 0.1% in Monday trading. The index has recovered nearly half of its losses from late January to last week’s low, posting a gain of 4.3% last week. That was its best weekly performance since December 2011.

“Market confidence often attracts even more market confidence, and that is what we are seeing at the moment,” said CMC Markets' David Madden. “The cooling of the volatility index (VIX) has given some dealers the green light to buy back into the stock market, and while the fear factor keeps sliding, it is likely equity benchmarks will continue to push higher.”

Asian stocks rose for the 6th consecutive day, with Japan and South Korea sharaes advancing in holiday-thinned trade as the MSCI Asia Pacific index rose as much as 0.8% before trimming gains to 0.35%. Japan's Topix rose as much as 2% after Japan’s exports beat estimate.

European shares struggled to carry forward last week's momentum after rebounding from a selloff with their biggest weekly gain in 14 months. The Stoxx Europe 600 Index dipped -0.2% after erasing modest opening gains amid disappointing earnings reports, while a strong euro capped potential gains among European exporters.

In company specific news, Reckitt Benckiser fell -5% after posting its first-ever year of stagnant sales. Daimler sank -2% after US investigators said they are looking into whether the company used illegal software to cheat emissions tests on diesel vehicles in the US. Reports suggest the existence of documents indicating that one software function on Daimler diesel vehicles turned off the car's emissions control system after driving just 26 km. Swiss Re rose on news Softbank was seeking to join the company's board to influence how the reinsurer manages its $160BN in investments. Discussion is centred on a deal where Softbank would become an anchor shareholder in the company with a 20% to 30% stake while gaining multiple seats on the board. European steel companies including ArcelorMittal, Outokumpu and Tenaris climbed after Friday's U.S. commerce department revealed recommendations to impose tariffs or quotas on imports of aluminum and steel, and China said it reserves the right to retaliate.

The dollar swung around from losses to gains and back to losses; the yen retreat from a 15-month high even as data showed Japan’s exports and imports grew strongly in January from a year earlier in a sign the economy continues to expand. As a result, the USDJPY rebounded as intraday traders who sold earlier, bought back after the Nikkei 225 closed 2 percent higher, boosting risk sentiment. The Bloomberg Dollar Spot Index recouped early losses as the greenback’s gains vs yen helped offset its decline against the Aussie and kiwi which were buoyed by commodity prices.

The U.S. currency has been weighed down by a barrage of factors, including worries about widening U.S. trade and budget deficits and speculation Washington might pursue a weak dollar strategy. There is also talk that foreign central banks may be reallocating their reserves out of the dollar.

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Treasury futures were little changed while Australian sovereign bonds hold onto opening gains with 10-year yield four basis points lower. 10Y Treasuries yield closed at 2.87% on Friday, after rising to a four-year high of 2.944% last week. Treasuries are not trading Monday due to the holiday in the U.S.

Following today's holiday respite, the U.S. Treasury will open the borrowing floodgates, and it’ll be up to bond traders to signal how much that extra supply will cost American taxpayers. The Treasury will pack in auctions totaling $258 billion this week, including record-sized sales of three- and six-month bills. With little in the way of significant economic data on the schedule, the sales will provide the clearest gauge yet of how steeply borrowing costs may rise.

Greek government bond yields dipped after a ratings upgrade from Fitch that highlighted improving sentiment towards the indebted southern European state. That marked an outperformance of euro zone peers, with yields across the currency bloc creeping higher in the absence of any fresh drivers.

WTI crude climbs fourth day, topping $62.50; Brent crude rose 0.3 percent to $65.05 per barrel. Gold gained 0.1 percent to $1,348.05 an ounce. Bitcoin rose back over $11,000 on Monday morning, rebounding more than 50% from recent lows.

Today sees the vote for the next Vice-President of the ECB (effectively Draghi’s deputy) as the highlight. It’s a two horse race between Spain’s Luis de Guindos (Spanish finance minister) and Ireland’s Philip Lane (governor of the Irish Central Bank) with the FT reporting that sources suggest the Spaniard is favourite. There is some controversy about his candidacy as he’s not an economist and there are fears that a transitioning political figure will weaken the image of the bank’s independence.

The minutes of the Fed’s last policy meeting, held amid the equities tumble on Jan. 30-31, are due on Wednesday. Besides the outlook on rates, markets will be keen to see what, if anything, the Fed makes of the gyrations in markets.

Top Overnight News

  • President Trump spent much of his weekend hammering the FBI, Democrats, Robert Mueller’s investigation and his own national security adviser over Russia’s efforts to sway the 2016 election. Excepted from the criticism -- Russia
  • Theresa May will temporarily set Brexit aside and try to repair her image with young voters with a speech on education, an issue where the opposition has the upper hand; As May retreats to the countryside with her Cabinet to thrash out differences on Brexit, it’s starting to become clearer what the prime minister wants the divorce to look like. Some in Brussels will call it cherry- picking, but May wants to stay very close to the EU in some areas, while breaking free in others
  • An historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs
  • Rick Gates said to plead guilty, may testify against Manafort: LA Times
  • Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017; Japan Jan trade balance -943.4 billion yen vs -1.0 trillion yen estimate
  • Latvian central bank Governor Rimsevics, a member of the ECB’s governing council, was detained by the anti-graft bureau in a flurry of actions by officials
  • Iraq’s political risk ranks among the highest in the world. A four-year war against the Islamic State left parts of entire cities in ruins. Corruption runs rampant. And its debt produces returns quadruple the average of peers
  • Fed’s Powell has appointed monetary policy specialists Jon Faust and Antulio Bomfim as senior advisers, according to people familiar; Faust advised advised Yellen and Bernanke, Bomfim is a long-term economist at the Fed’s monetary affairs division
  • Italy: Berlusconi (Forza Italia) and Salvini (Northern League) both failed to show up at an event in Rome Sunday at which they had been invited to sign a pledge to remain faithful to the center- right coalition
  • China says proposed U.S. tariffs groundless; reserves right to retaliate
  • Singapore to raise goods and services tax to 9% from 7% in 2021-2025
  • U.K. Feb Rightmove house prices 0.8% vs 0.7% prev, y/y 1.5% vs 1.1% prev

DB's Jim Reid concludes the overnight wrap

Don’t expect markets to require too much energy today as the US is off for President’s Day. Today does see the vote for the next Vice-President of the ECB (effectively Draghi’s deputy) as the highlight. It’s a two horse race between Spain’s Luis de Guindos (Spanish finance minister) and Ireland’s Philip Lane (governor of the Irish Central Bank) with the FT reporting that sources suggest the Spaniard is favourite. There is some controversy about his candidacy as he’s not an economist and there are fears that a transitioning political figure will weaken the image of the bank’s independence. So that’s the intrigue for today.

The rest of the week isn’t really that overloaded with data. Wednesday seems to be the big day with the flash February PMIs the focal point with manufacturing, services and composite readings due in Europe and the US. As a reminder, the January manufacturing reading for the Euro area came in at an impressive 59.6, albeit slightly down from the highs above 60 in December and November last year. The consensus is for another small pullback to 59.2 on Wednesday, while the composite is expected to edge down to a still solid 58.4 from 58.8. Outside of this Wednesday sees the monthly U.K. employment release with eyes on wages as the BoE gets closer to their next hike. FOMC minutes from the January meeting will be a focus later that day but it will be outdated news given it occurred before the higher AHE’s and CPI/PPI prints and before the market sell-off. The other highlight later in the week will be Friday's release from the Fed of the semi-annual monetary policy report to Congress, which lays the foundation for Fed Chair Powell's semiannual testimony on the 28th of February. For the rest of the week ahead see the end of today’s note for the full preview.

Back on Friday, the US Commerce department proposed that the US should impose tariffs or quotas on imports of steel and aluminium. One of the options was a 24% global tariff on steel imports and 7.7% duty on aluminium imports. The news contributed to a 4.51% rally in the steel sector within the S&P and a 2% rise in aluminium. Looking ahead, President Trump has until mid-April to decide on potential actions. In terms of other initial responses, China’s Ministry of Commerce has noted that it reserves the right to retaliate if the tariffs are imposed, while Germany’s acting economy minister Zypries said “we don’t share the assessment that steel imports from Europe…might threaten US national security”, “so there’s no basis for any unilateral US import restriction on steel”.

Staying in the US, the S&P initially traded c0.9% higher during the session but pared back gains to close +0.04% as news broke that Special Counsel Mueller had charged 13 Russians and three Russian entities with conspiring to interfere in the 2016 US election. That said, the S&P was still up 4.3% for the week while now ‘only’ 4.9% down from its all-time high in late January. The VIX rose marginally and for the first time in six days (+1.7% to 19.46). In Europe, the Stoxx 600 was up for the third day with all sectors in the green (+1.09%, +3.3% for the week), while the DAX (+0.86%) and FTSE (+0.83%) also advanced.

This morning in Asia, market are trading higher with the Nikkei (+1.80%), Kospi (+0.59%) and ASX 200 (+0.64%) all up while other key bourses are closed for the lunar New Year holidays. Datawise, Japan’s January trade deficit was smaller than expected (-943bn Yen vs. -1trn Yen expected) with exports growing above expectations (12.2% yoy vs. 9.4% expected) and outpacing import growth of 7.9% yoy.

Back to Friday, Nick Burns in our team published a Credit Bite called “The Resilience of Loans”: In the aftermath of the recent inflation induced spike in volatility he analysed the impact it has had on the relative performance of HY bonds and leveraged loans. One of the key relative value views in our 2018 outlook was that loans would fare better than bonds if we did indeed see an inflation/ rising yields led move higher in volatility that puts pressure on credit spreads. You can download the report here.

Staying with our team, Michal Jezek published a one-pager called “IG Bond Strategy Charts & Comment:Outflows Hit Credit Funds” which provides charts and short commentary on the latest IG bond fund flows and puts them in the broader context of flows in other asset classes. You can download the report here.

Now briefly recapping other markets performance from Friday. Government bonds firmed for the first time in three days, with core bond yields down 4-7bp (UST 10y -3.4bp; Bunds -5.7bp; Gilts -6.4bp) while peripherals yields also fell 4-8bp. Turning to currencies, the US dollar index strengthened for the first time in five days (+0.57%), while the Euro and Sterling fell 0.80% and 0.52% respectively. In commodities, WTI oil was up 0.55% to $61.68/bbl. Elsewhere, precious metals weakened c1% (Gold -0.50%; Silver -1.33%) and other LME base metals broadly advanced, in particular aluminium (Zinc +0.14%; Copper +0.71%; Aluminium +1.99%).

Now onto Brexit, the EU negotiator and former Belgium PM Guy Verhofstadt noted a Brexit trade deal with the EU is unlikely to be fully finalised before March 2019. Instead, he said “…what is possible…will be the withdrawal agreement. (Then) inside that withdrawal agreement (is) also an agreement on the transition”,  which describes what the future relationship will be. This “annex” will then allow both sides to clarify the trade deal details over the two year transition period. Elsewhere, he did not think a bespoke agreement was possible, noting “….there can be not a type of saying….that we like, this is not interesting for us…”

Over in Germany, the new SPD leader Ms Nahles noted “I’m convinced we will get a majority” approvals from 464,000  SPD members to form a coalition government with Ms Merkel’s bloc, although conceded that we “…don’t have a plan B”.

Before we take a look at this week’s calendar, we wrap up with other data releases from Friday. In the US, the February Uni. of Michigan consumer sentiment index was above market and the second highest since 2004 (99.9 vs. 95 .5 expected). In the details, inflation expectations were unchanged mom, with the 1 and 5 year-ahead expectation at 2.7% and 2.5% respectively. The January  housing starts (1,326k vs. 1,234k) and building permits (1,396k vs. 1,300k) were also both above market, with the latter up 7.4% yoy and at a fresh cycle high. Elsewhere, the January import index (1% mom vs. 0.6%) and export index (0.8% mom vs. 0.3%) were both above expectations. Factoring in the above, the Atlanta Fed now estimate 1Q GDP growth of 3.2% saar, while the NY Fed expect 3.1% saar. In the UK, January core (ex-auto) retail sales was below market at 0.1% mom (vs. 0.6% expected) and 1.5% yoy (vs 2.4% expected).

With US markets shut for Presidents' Day, expect it to be a pretty quiet start to the week with mainly second tier data releases due including February house price data in the UK and the Euro area current account reading for December. Away from that, Euro area finance ministers are expected to vote for the next ECB vice-president position, as well as debate Greece's bailout.