Futures Rebound Sharply Despite Ongoing Trump Cabinet, Trade War Turmoil

After two consecutive days of failed S&P ignition attempts, in which US stocks opened sharply higher only to close near the lows, on Wednesday the algos will try for the third consecutive time to escape the recent late-day selloff funk. S&P futures are higher after declining on Tuesday following a fresh personnel shakeup in the Trump administration and renewed US trade war speculation with China dampened investor sentiment.

European stocks rose modestly led by mining shares even as Asian shares fell despite stronger than expected Chinese economic  data. 

Equity markets were attempting to recover after Tuesday’s hefty losses, encouraged by stronger than expected Chinese factory data, but struggled to overcome fears of a global trade war as well as the prospect of political uncertainty in the United States. “As long as the threat of protectionism and a trade war remains, markets will remain vigilant,” Rabobank analysts told clients according to Reuters.

The latest set of tariffs, reportedly targeting Chinese tech, electronics and telecoms, were revealed by sources hours after Trump abruptly fired Secretary of State Rex Tillerson. Tillerson’s exit follows that of economic advisor Gary Cohn, a strong free trade proponent. Since Trump took office in 2017 as many as 35 senior officials from his administration have walked out, including Tillerson, according to Citi.

The market probably correctly viewed this move as weakening internal White House opposition to some of Trump’s less market-friendly policies, in particular the President’s trade policy,” Daiwa strategist Mantas Vanagas said, quoted by Reuters.

The negative momentum faded somewhat in Europe, with a pan-European equity index up 0.24% after falling 1% on Tuesday. That left MSCI’s all-country equity index down 0.12% its second day in the red, although a rebound in the US will likely push it back in the green.

European stocks rose modestly after opening in the red after Tuesday’s plunge as traders assess the implications of a shakeup in the Trump administration amid corporate updates from companies including Inditex SA and Prudential Plc. The Stoxx Europe 600 Index rises 0.3%, with all major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds. Zara owner Inditex drops after reporting a slowdown in sales and its weakest profitability in a decade, while U.K. insurer Prudential rises after saying it divested 12 billion pounds ($16.7 billion) of annuities from its U.K. portfolio and plans to spin off its M&G Prudential unit. Miners were the best-performing industry group after Goldman Sachs analysts said the sector is enjoying robust global demand and after China reported strong economic data overnight.

There was no bounce earlier in Asia, where markets followed the negative US lead with the Nikkei (-0.9%), Kospi (-0.3%), Hang Seng (-0.5%) and Shanghai Comp (-0.6%) all down. The latest batch of mixed activity indicators were  released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. As shown in the chart below, Chinese macro data has been disappointing in recent months so the modest upside surprise in factory orders was a welcome change.

In global FX, the dollar pared an early decline as the euro felt some heat from another Draghi reference to the exchange rate, while the Yen rose following continued focus on the Moritomo scandal that has again rocked the Abe administration. A lackluster London session saw the pound shedding gains ahead of a May speech over the U.K.’s relationship with Russia. Bloomberg breaks down the latest overnight FX action:

  • The euro set a day low of $1.2364 in early London trading after ECB President Draghi said in a speech that adjustments to monetary policy will remain predictable as policy makers look for further evidence that inflation dynamics are moving in the right direction
  • He also said the central bank needs to monitor developments in the common currency closely as its appreciation since the beginning of the year cannot be explained solely by economic expansion
  • AUD/USD saw leveraged demand on stronger-than- expected gains in China’s factory output and investment growth
  • Kiwi shook off weaker-than-estimated 4Q current-account balance to climb on global fund demand to buy New Zealand’s bonds after Tuesday’s issuance

Treasuries and euro-area bonds were little changed.  German 10-year government bond yields approached one-month lows and currently stand 20 basis points below this year’s peak at 0.60 percent, following a soft 30Year debt auction.

Economic data include retail sales and PPI. Williams-Sonoma and Signet Jewelers are among companies due to release results

Market Snapshot

  • S&P 500 futures up 0.3% to 2,776.00
  • STOXX Europe 600 up 0.3% to 376.55
  • MXAP down 0.5% to 178.18
  • MXAPJ down 0.4% to 587.85
  • Nikkei down 0.9% to 21,777.29
  • Topix down 0.5% to 1,743.21
  • Hang Seng Index down 0.5% to 31,435.01
  • Shanghai Composite down 0.6% to 3,291.38
  • Sensex down 0.4% to 33,720.90
  • Australia S&P/ASX 200 down 0.7% to 5,935.31
  • Kospi down 0.3% to 2,486.08
  • German 10Y yield fell 1.0 bps to 0.609%
  • Euro down 0.2% to $1.2370
  • Brent Futures down 0.2% to $64.51/bbl
  • Italian 10Y yield fell 0.9 bps to 1.737%
  • Spanish 10Y yield rose 0.8 bps to 1.405%
  • Brent Futures down 0.2% to $64.51/bbl
  • Gold spot down 0.2% to $1,324.41
  • U.S. Dollar Index up 0.2% to 89.83

Top Overnight News

  • ECB’s Praet says the central bank’s forward guidance on the path of policy rates will have to be further specified and calibrated as appropriate for inflation to remain on the sustained adjustment path toward levels below, but close to, 2% over the medium term
  • The special election in southwestern Pennsylvania remained too close to call with all precincts reporting results. House seat in Pennsylvania may be a bellwether for the fall elections that will decide control of Congress
  • Theresa May will meet with her national security and intelligence chiefs Wednesday to assess whether Russia has given a credible answer to her charge that it was behind the poisoning of Sergei and Yulia Skripal in Salisbury. She will then update Parliament on her response.
  • China’s factory output and investment growth unexpectedly accelerated in the first two months of the year amid robust global demand
  • U.S. Trade Representative Robert Lighthizer presented President Donald Trump with package of tariffs targeting equivalent of $30b a year in Chinese imports, but Trump urged him to aim for higher number, Politico reports, citing three unidentified people familiar with discussions
  • Japanese Prime Minister Shinzo Abe and his finance minister denied ordering officials to tamper with documents at the center of a scandal rocking his administration.
  • German Chancellor Angela Merkel was formally elected to a fourth term in a parliamentary vote, extending her 12 years in office at the helm of Europe’s biggest economy
  • Germany may be ready to sacrifice Jens Weidmann in the contest of becoming the next head of the ECB in a trade for more influence on French President Emmanuel Macron’s push to create closer ties among euro countries

European equities are trading in the green this morning, subsequently pairing the initial losses that stemmed from Asian and US bourses, which saw risk-sentiment soured by reports of Secretary of State Tillerson being fired and increased caution over trade wars. All major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds.

Top European News

  • Germany Ready to Sacrifice Weidmann as a Pawn in EU Chess Match
  • Draghi Says Policy Adjustments to Proceed at Measured Pace
  • Corin’s Billionaire Owners Said to Mull Sale of Orthopedic Firm
  • Volvo Venture Seeks Top Self-Driving Role Angling for More Deals
  • May Plots to Punish Russia as Crisis Over Poisoned Spy Deepens

In Asia, equity markets were negative across the board as the region tracked the losses on Wall St, where sentiment was dampened after another high-profile departure from the administration in which President Trump fired Secretary of State Rex Tillerson, while trade war concerns were also stoked by reports the US is looking to impose tariffs on Chinese goods. ASX 200 (-0.7%) and Nikkei 225 (-0.9%) were negative with financials pressured amid the ongoing royal commission hearings in which NAB employees were said to knowingly approved fake loans to reach targets, while Nikkei 225 was pressured by a firmer JPY and with some analysts also noting ‘Abexit’ worries in the wake of the land-sale/cronyism scandal. Shanghai Comp. (-0.4%) and Hang Seng (-1.4%) conformed to the weakness with tech and telecom names weighed as the US seeks to impose tariffs of USD 60bln on Chinese goods, which would target tech and telecom products as a punishment for intellectual property infringement. Although, losses in the mainland were somewhat stemmed by mixed data including higher than expected Industrial Production and Fixed Asset Investments. Finally, 10yr JGBs were flat despite the weakness in stocks, with an uneventful BoJ minutes release and unchanged BoJ Rinban operation amount for 1yr-10yr maturities also ensured quiet price action. BoJ Minutes from the January 22nd-23rd meeting stated it is appropriate to pursue powerful easing and that price momentum to reach target is maintained.

Top Asian News

  • China’s Factory Output, Investment Rise on Robust Global Demand
  • China Imposes Record $870 Million Fine for Stock Manipulation
  • Noble Group Seeks to Sweeten Disputed Debt Deal After Backlash
  • Toyota Offers Bigger Raises as Japan Pushes for Inflation
  • Not Even Trump Can Slow Vietnam’s Economy, Official Says

In FX, USD weakness amidst ongoing global trade war and White House personnel concerns remains the principle theme, as the DXY continues to reject advances towards the 90.000 level and beyond, which in turn is shifting the technical outlook more bearish. However, EURUSD and single currency crosses have been knocked back to an extent by comments from ECB President Draghi and Chief Economist Praet, reiterating that inflation is still below target and therefore policy needs to stay ‘patient, persistent and prudent’. Key downside risks were highlighted – FX and the aforementioned potentially adverse trade developments due to US President Trump’s import tariff proposals. Eur/Usd is back below 1.2400, but holding above the 30 DMA at 1.2345, and also eyeing decent expiry interest from 1.2390-1.2405 (around 1 bn). Conversely, Aud/Usd is testing resistance either side of the 0.7900 handle again and recent peaks just below the big figure, aided by some Chinese data beats overnight and more balanced rather than dovish/cautious RBA rhetoric via Assistant Governor Kent. Chart-wise, yesterday’s 0.7898 high forms the first/nearest bullish target and offers are touted around 0.7925, if 0.7900 is breached. Cable looks capped by the 1.4000 level, and Usd/Cad by 1.3000, while Usd/Jpy is back in the 106.50 area after a further retreat from 107.00+ peaks late last week and earlier this week with the 10 DMA at 106.31 holding in for now. Elsewhere, Eur/Sek just a fraction softer after broadly as forecast Swedish CPI data that will underscore growing calls for the Riksbank to refrain from tightening for longer.   

In commodities, oil prices are trading slightly higher with prices finding some slight reprieve from yesterday’s smaller than expected build in the latest API report, alongside the improvement in risk sentiment, which has seen WTI retest USD 61/bbl

Looking at the day ahead, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 0.3%
  • 8:30am: Retail Sales Advance MoM, est. 0.3%, prior -0.3%
    • Retail Sales Ex Auto MoM, est. 0.4%, prior 0.0%
    • Retail Sales Ex Auto and Gas, est. 0.32%, prior -0.2%
    • Retail Sales Control Group, est. 0.4%, prior 0.0%
  • 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.4%
  • PPI Ex Food and Energy MoM, est. 0.2%, prior 0.4%
  • PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4%
    • 8:30am: PPI Final Demand YoY, est. 2.8%, prior 2.7%
    • 8:30am: PPI Ex Food and Energy YoY, est. 2.6%, prior 2.2%
    • 8:30am: PPI Ex Food, Energy, Trade YoY, prior 2.5%
  • 10am: Business Inventories, est. 0.6%, prior 0.4%

DB's Craig Nicol concludes the overnight wrap

Picking the right moment to run out and grab lunch is something of a fine art working in markets. Indeed, anyone who was out for the 12 minutes between 12.30pm GMT and 12.42pm GMT yesterday probably felt like they’d been gone a lot longer when they returned to their screens. It takes something fairly significant to overshadow US inflation data at the moment however the shock news that President Trump had ousted now former US Secretary of State Rex Tillerson was certainly enough to do just that.

The announcement came via a tweet from the President and it also included confirmation that CIA Director Mike Pompeo would take over the role. Trump confirmed with reporters that Tillerson “had a different mindset” relative to the President with the Iran nuclear deal named as an example. It was no secret that Tillerson’s tenure had been somewhat rocky however it’s fair to say that markets were still caught off guard, despite his clock probably ticking. Indeed Politico also reported that Tillerson had no plans to leave and was also unsure why he had been let go. There were suggestions that Tillerson’s vocal statements on Monday about condemning the Russian government about its alleged role in the Russian spy incident in the UK could have played a part however that remains to be seen. Various news outlets also confirmed that Trump wanted a new team in place ahead of talks with North Korea and also ongoing trade talks.

It’s not the first time that Trump has moved quickly in his administration without warning, with Reince Priebus and James Comey two other such examples. In fact, the NY Times also reported that Trump’s personal assistant, John McEntee, was let go on Monday and escorted from the White House, while another headline from the Times suggested that there would be more staff shifts this week. The bottom line for us is that all these moves show that the President is certainly moving a lot closer to his anti-globalist policy agenda. On that point, the view on Pompeo is that he and Trump are a lot closer aligned and that Pompeo is more likely to have the President’s ear. On a related note, it also appears that Larry Kudlow is now the favourite to replace Gary Cohn based on comments from the President yesterday. That’s perhaps more interesting given that Kudlow and Trump have clashed in the past over tax reform and also the recent tariff announcements.

Aside from the 12 minutes of a slightly more positive risk environment following the US CPI report (more on that below), the Tillerson news certainly more than played its part in equity markets dropping from early highs. The S&P 500 finished -0.64% last night after being up as much as +0.67% at one stage. A Reuters story suggesting that Trump was seeking for tariffs of up to $60bn a year on China imports seemed to just extend selling pressure into the evening. Meanwhile the previously untouchable Nasdaq (-1.02%) snapped its 7-day winning run while in Europe the big mover was the export-heavy DAX which tumbled to a -1.59% loss. Moves for bonds were actually a bit more contained. The high-to-low range on 10y Treasuries was 6bps and the yield did fall to the lowest in over a week (2.828%) at one point, however by the end of play they were just 2.6bps lower at 2.843%. The 30y auction was also relatively solid  with the highest award to direct bidders since October 2015. In Europe bond markets were broadly 1-2bps lower while the Greenback was well offered with the Dollar index falling -0.26%. Gold (+0.26%) also seemed to benefit from a flight to quality bid.

With regards to the CPI data, that in-line +0.2% mom core print meant that the annual rate also held at +1.8% yoy for the third consecutive month. The unrounded reading was +0.182%, so the overall feeling was that it largely mirrored the marginally softer earnings number on Friday. However, momentum is still favouring the hawks with the three-month annualized rate now up to +3.1% and the highest since 2007. The six-month annualized rate is also at a
robust +2.5%. That should be comforting to a Fed which is targeting the gradual approach for now though. As a reminder that is the last CPI report that the Fed will see prior to the FOMC meeting next week however they will benefit from the release of the February PPI data today. Expectations for that is also for a +0.2% mom core reading while the headline is expected to show a +0.1% mom rise in producer prices.

Here in the UK there were no huge surprises to come from Chancellor Hammond’s Spring Statement. As widely expected the borrowing numbers for the current fiscal year and also the next were revised down. This year was  revised down from £50bn to £45bn while next year was revised down from £40bn to £37bn. Headroom relative to the 2% cyclically adjusted borrowing to GDP target by 2020-21 is more or less unchanged versus the November estimate at around £15bn, so not a huge amount more fiscal room. Finally GDP forecasts remain fairly lacklustre and included a cut to the 2021-22 forecast. The 2018 forecast was however revised up one-tenth to 1.5%. Sterling closed up  +0.40% last night versus the USD but that appeared to be more USD weakness related to the Tillerson news than anything else. Indeed versus the Euro, Sterling was closer to unchanged. Gilt yields also finished more or less unchanged by the end of play.

This morning in Asia, markets have largely followed the negative US lead with the Nikkei (-0.83%), Kospi (-0.51%), Hang Seng (-1.30%) and Shanghai Comp (-0.60%) all down as we type. The latest batch of activity indicators were  released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. The combined Jan and Feb data is meant to smooth out the effects of the Lunar New Year. Meanwhile, the Pennsylvania Congressional District special election in the US is appearing to head for a neck and neck finish.

Bloomberg is reporting that Democrat Conor Lamb holds a tiny lead of 579 votes over Republican Rich Sacconne, out of about 227,000 votes cast. Finally in Japan, the BOJ minutes showed most board members believe the bank must “persistently” pursue powerful easing. Notably, during Q&A BOJ Governor Kuroda noted “by combining various tools, it’s possible to shrink the BOJ’s balance sheet at an appropriate pace while keeping markets stable”.

Turning back to Europe, another Politico article yesterday suggested that the Bundesbank’s Weidmann is the favourite  to replace Mario Draghi as ECB President from October 2019. However the story also suggested that his support was receiving pushback, in part given Weidmann’s vocal opposition to Draghi’s QE policy and his strict enforcement of the EU’s fiscal policies. Other potential German candidates touted include Klaus Regling (current head of the ESM) and Marcel Fratscher (Head of the research institute DIW Berlin). Notably, the swing factor for the candidacy likely depends on the relative support of French President Macron, who has been relatively quiet on this topic.

In other news, the OECD has upgraded its forecasts on global economic growth by 0.2-0.3ppt to 3.9% for both 2018 and 2019, with “private investment and trade picking up on the back of strong business and household confidence”. Across countries, growth in the US has been lifted to 2.9% for 2018 (+0.4ppt) and 2.8% for 2019 (+0.7ppt) in part  due to the tax cuts and new fiscal spending increases, while the UK’s growth was revised slightly higher to 1.3% in 2018 and 1.1% in 2019. Notably, the agency also warned on protectionism and noted that “an escalation of trade tensions would be damaging for growth and jobs” and that countries should “avoid escalation and rely on global solutions to solve steel excess capacity”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February NFIB small business optimism index was above market at 107.6 (vs. 107.1 expected) and marked a fresh high since 1983. The survey also showed that c.1/3 of owners reported raising compensation to retain or attract workers in the month, the largest share in 17 years. In Europe, Italy’s Q4 unemployment rate was in line at 11% and the final reading of Spain’s February CPI was confirmed at 1.2% yoy. Elsewhere, France’s Q4 total payrolls was up +0.3% qoq (vs. +0.2% expected).

Looking at the day ahead, we'll get final revisions to February CPI in Germany along with January industrial production and Q4 employment data for the Euro area. ECB President Draghi is scheduled to speak in the morning (8am London  time), as well as the ECB’s Coeure, Praet Constancio and then Bank of France’s Governor Villeroy. In the US, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament.