While the general risk-on sentiment across global markets persisted for a third day amid sliding volatility, the rally appears to have lost some steam with Dow futures lagging after last night's disappointing IBM revenues, which in turn may have capped the S&P ramp that started on Monday.
Earlier, the pound slumped and the euro briefly dropped on disappointing inflation data, as both UK and Eurozone CPI prints missed. European stocks then turned negative driven by steep declines in the auto sector, led by tiremakers after a bellwether issuing a profit warning. The catalyst was Continental which cut its forecast for FY adjusted Ebit margin to >10% from the previous view of ~10.5%, citing negative currency impact and inventory revaluation, mainly in the tire business, sending its shares sliding 4.3%, and dragging the rest of the sector with it: Michelin down -3.2%; Pirelli -1.9%, Schaeffler -1.4%; Michelin. The broader European auto index was down 1%, the worst market sector in Europe this morning.
"The profit warning is a huge disappointment as management had previously signaled a significant reduction in raw material headwinds for the Rubber group, which fanned expectations of an improvement in profitability,” said Commerzbank in a note.
As a result, the Stoxx Europe 600 Index dropped 0.1% to session low around 6am ET, erasing earlier gains with 15 of 19 industry groups declining, however despite some weakness in the DAX, most global stock markets remained in the green.
Earlier in Asia, Japanese shares outperformed amid gains across the region, boosted by a drop in the yen as President Donald Trump met Japanese Prime Minister Shinzo Abe. China’s 10-year bond yield tumbled after the People’s Bank of China cut the reserve-requirement ratio for banks, part of its efforts to boost market liquidity amid concerns of trade war and to support credit amid a crackdown on shadow lending.
As Bloomberg notes, the yield on 10-year sovereign debt plunged 16bps, the most since December 2016, to 3.50%; the cost on five-year sovereign notes slumps 21bps, extending its 12-day drop to 51bps, to 3.17%; the yield on one-year debt declines 16bps to 3.02%. Yield on China Development Bank bonds due in a decade tumbles 20bps to 4.44%, the lowest level since October. The one-year interest rate swaps declines 11bps to 3.19%, the lowest since Jan. 2017
Chinese lenders advanced, but automakers fell after the government moved to allow foreign players to take full ownership of their local ventures.
Automobile sector plunges -2.1% to 25-month low amid China is opening up the car industry? pic.twitter.com/zNvAKUoH9X— Simon Ting (@simonting) April 18, 2018
Meanwhile as the EUR and GMP slumped, the Bloomberg Dollar Spot Index rose for a second day on easing geopolitical tension and as softer price pressures in Europe hurt the pound and euro. Reports that CIA Director Mike Pompeo held a secret meeting with North Korea’s leader boosted optimism about the prospect of a peace deal for the peninsula, while investors see a low chance of a negative surprise on planned trade talks on Wednesday between U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe. The pound led losses in G-10 land, as U.K. data missed estimates a second day, triggering stops and stop entries by leveraged accounts, on concerns the BOE's resolve to hike may have been dented. The euro followed suit as euro-area inflation rose less than initially estimated last month.
Meanwhile, with a blockbuster earnings season clearly priced in - as not even Goldman could close green after reporting spectacular earnings - traders are searing for the next big thing to push stocks higher. Luckily, there’s once again no shortage of catalysts for investors across the globe, from corporate fundamentals and geopolitics to simmering trade tensions and growth concerns. For now the bulls appear to have the upper hand, especially after the U.S. says it’s already started direct talks with North Korea. Separately, Russian leader Vladimir Putin was said to be seeking to dial down tensions with America.
Elsewhere, as we warned overnight, nickel surged to the highest in more than three years on the London Metal Exchange on worries that the metal used in stainless steel could be caught in the crossfire of any further U.S. sanctions against Russia.
Oil prices continued rising, with WTI at USD 67.10 and Brent at USD 72.08. This comes following the weekly API inventory report which despite showing a slightly narrower than expected draw in headline crude stockpiles, was accompanied by draws across all product components of the release. The rise in oil prices is further compounded by the continued narrative of middle-eastern tensions with the latest source reports suggesting that weapons inspections have been delayed in Douma, Syria amid gunfire on the site. In the metals scope, prices for aluminium surged as Rio Tinto said it could not fulfil supply contracts due to US sanctions on Rusal, adding to the squeeze seen in the aluminium sector. Further, the US Commerce Department launched a probe on imports of some types of steel wheels from China, while it was also said to have made a preliminary finding that aluminium sheet imports from China benefit from unfair subsidies. Gold has remained flat for the day.
In overnight central bank speakers, Fed's Evans (Non-Voter, Dove) said rates can be raised gradually without risk of a surge in inflation. Elsewhere, the Fed's Bostic (Voter, Dove) said goal for policy should be to get to a more neutral stance, while he added the US economy is in a good place and that he expects to see a build to inflation.
In geopolitical news, the Russian Embassy in the US notified that no sanctions are coming. US President Trump said US has had discussions with North Korea at high levels, while there were separate reports that Secretary of State nominee Pompeo met with North Korean Leader Kim Jong-Un over the Easter weekend.
What to watch
- BOC rate decision; Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins are scheduled to hold a news conference
- Another round of Fed speakers, New York Fed President William Dudley and Fed Governor Randal Quarles to speak; Fed releases Beige Book
- Brexit negotiations in Brussels; Ireland’s border, the future relationship between the U.K and the EU in focus
- President Trump and Japan PM Abe will hold 2pm working lunch before joint press conference at 5:30pm Wednesday, White House says in guidance
- Abbott, Morgan Stanley, U.S. Bancorp, Alcoa, American Express, and Canadian Pacific are among companies reporting earnings. Expected data include MBA mortgage applications.
Bulletin Headline Summary from RanSquawk
- European equities mostly higher, taking the lead from Asian and Wall St. with all major bourses in the green (Eurostoxx 50 +0.1%) as earnings come into focus.
- FTSE 100 outperforms as cable has now lost another big figure level (1.4200) in wake of considerably weaker than forecast CPI data
- Looking ahead, highlights include NZ inflation, BoC rate decision, DoEs and a slew of central bank speakers
- S&P 500 futures up 0.2% to 2,712.50
- STOXX Europe 600 up 0.2% to 381.48
- MSCI Asia Pacific up 0.7% to 174.37
- MSCI Asia Pacific ex Japan up 0.6% to 568.76
- Nikkei up 1.4% to 22,158.20
- Topix up 1.1% to 1,749.67
- Hang Seng Index up 0.7% to 30,284.25
- Shanghai Composite up 0.8% to 3,091.40
- Sensex up 0.2% to 34,446.75
- Australia S&P/ASX 200 up 0.3% to 5,861.42
- Kospi up 1.1% to 2,479.98
- German 10Y yield fell 0.5 bps to 0.502%
- Euro down 0.05% to $1.2364
- Italian 10Y yield fell 4.2 bps to 1.505%
- Spanish 10Y yield fell 1.2 bps to 1.209%
- Brent futures up 0.7% to $72.09/bbl
- Gold spot down 0.2% to $1,345.21
- U.S. Dollar Index up 0.2% to 89.70
Top Overnight News:
- High-level U.S. officials have spoken directly with North Korean leader Kim Jong Un in preparation for a meeting between President Donald Trump and Kim, said a person familiar with matter. Washington Post reports that CIA Director Mike Pompeo made a top-secret visit to North Korea over Easter weekend.
- President Donald Trump again soured on the 11-nation Trans- Pacific Partnership ahead of planned trade talks on Wednesday with Japanese Prime Minister Shinzo Abe. Trump and Abe will hold 2pm working lunch before joint press conference at 5:30pm Wednesday, White House says in guidance.
- President Donald Trump’s accusations that China and Russia are gaming their currencies were a “warning shot” about the consequences about devaluation, rather than part of a wish to achieve a weaker dollar, U.S. Treasury Secretary Steven Mnuchin said.
- Fed’s John Williams played down risks the yield curve would become inverted as the U.S. central bank gradually raises interest rates.
- Putin wants to give President Trump another chance to make good on pledges to improve ties and avoid escalation, according to four people familiar with the matter
- The PBOC lowered the reserve-requirement ratios for some banks by 1 percentage point, spurring the biggest drop in the 10-year government bond yield since December 2016
- U.K. Prime Minister Theresa May’s Brexit strategy faces a renewed threat on Wednesday when her flagship bill returns to Parliament’s upper chamber, where Lords of all political stripes are seeking to amend it
- The European Commission has drafted 30-40 proposals to amend laws and give special powers to regulators for EU to deal with a no-deal scenario, either on Brexit day in March 2019 or after a transition period, FT reports
- EU President Donald Tusk stepped up the pressure on the U.K. to come up with a solution to prevent a hard border on the island of Ireland after Brexit by warning that all deals, including the transition period agreement, would otherwise be canceled.
- Brussels seeks emergency powers to prepare for hard Brexit, FT reports.
Asian equity markets were mostly higher as the region got a tailwind from Wall St where sentiment was lifted by encouraging earnings; gains were led by the Nasdaq after Netflix shares surged on strong subscriber numbers. ASX 200 (+0.3%) was positive but with upside capped by weakness in the largest weighted financials sector amid an ongoing Banking Royal Commission grilling and after CYBG flagged a GBP 202mln pre-tax charge, while Nikkei 225 (+1.4%) outperformance was fuelled by a weaker JPY. Hang Seng (+0.7%) and Shanghai Comp. (+0.8%) were underpinned at the open in reaction to the PBoC’s surprise 100bps RRR cut for most banks and a CNY 150bln Reverse Repo operation. Finally, 10yr JGBs were flat as safe-haven outflows from the increased risk appetite in Japan was counterbalanced by the BoJ presence in the market for over JPY 1tln in 1-10yr JGBs, while USTs were lower overnight with yields in the short-end higher in which 2yr yields rose to 2.400% for the first time since 2008. US Commerce Department launched probe on imports of some types of steel wheels from China, while it was also said to have made a preliminary finding that aluminium sheet imports from China benefit from unfair subsidies.
Top Asian News
- Japan Bank Falls Most Since 1975 Over Faked Documents Report
- Down $1 Trillion, World’s Worst Stocks Near Make-or-Break Level
- ‘Risky’ Cash Crunch Pushes India to Defend Its Scam-Hit Banks
The European equities have taken the lead from Asian and Wall St. with all major bourses in the green (Eurostoxx 50 +0.1%) as earnings come into focus. The FTSE 100 is outperforming, fuelled by the weaker sterling as the UK inflation rate drops to the lowest in a year. Almost all sectors are resting in the green, with materials outperforming on the firmer base metal prices while consumer discretionary lagging behind. In terms of stock specifics, Hammerson (+2.4%) shares are higher following a withdrawal from the proposed acquisition of Intu Properties (-3.5%). Danone (+2.3%) is dominating the CAC 40 following strong earnings and maintaining 2018 guidance. Further for the CAC, Total (+0.8%) are also a top performer in French index amid reports the company is in talks to purchase Direct Energie (+30.5%), which in turn is soaring. Elsewhere, Germany’s Continental (-4.3%) shares dropped following a negative change in their 2018 outlook. Michelin (-3.5%) and Pirelli (-1.9%) fell in sympathy
Top European News
- Equity Strategists Lower Projections for Euro-Area Stock Rally
- U.K. Inflation Drops More Than Expected to Slowest in a Year
- Brexit Transition Is No Go Without Irish Border Answer, EU Says
- Spain Is Booming and Now Voters Turn Against the Prime Minister
In FX, the DXY was underpinned around 89.500 after Tuesday’s broadly better than expected US data and some hawkish-leaning Fed commentary, while US-China/Russia tensions remain relatively contained after latest reports that the White House is not in the process of imposing more sanctions against Moscow, although it is purportedly looking at additional Chinese imports from an unfair competitive angle. However, the index is still looking rangy between 89.700-400 and 90.000-89.000 outside of that. GBP Cable had already retraced further from fresh post-Brexit vote peaks (circa 1.4375) in the run up to UK inflation data, but has now lost another big figure level (1.4200) in wake of considerably weaker than forecast CPI data that could prevent the BoE from hiking rates in May. Eur/Gbp has rebounded sharply as a consequence, through 0.8650 and just over 0.8700. CAD: Only a couple of outlying hawkish calls for the upcoming BoC policy meeting vs the large consensus expecting no change, as the Loonie unwinds some of its recent gains vs the Usd and perhaps is drawn to big option expiries from 1.2585-1.2600 in some 3 bn. Currently near the bottom end of the band vs a circa 1.2525 low yesterday with the level break via options suggesting a 90 pip move on the BoC and MPR. EUR: Eur/Usd just holding above key chart support around 1.2330 having retreated from 1.2400+ on Tuesday following an unexpected downgrade to final Eurozone CPI.
In commodities, Oil prices continue their rise, with WTI at USD 67.10 and Brent at USD 72.08. This comes following the weekly API inventory report which despite showing a slightly narrower than expected draw in headline crude stockpiles, was accompanied by draws across all product components of the release. The rise in oil prices is further compounded by the continued narrative of middle-eastern tensions with the latest source reports suggesting that weapons inspections have been delayed in Douma, Syria amid gunfire on the site. In the metals scope, prices for aluminium surged as Rio Tinto said it could not fulfil supply contracts due to US sanctions on Rusal, adding to the squeeze seen in the aluminium sector. Further, the US Commerce Department launched a probe on imports of some types of steel wheels from China, while it was also said to have made a preliminary finding that aluminium sheet imports from China benefit from unfair subsidies. Gold has remained flat for the day.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -1.9%
- 2pm: U.S. Federal Reserve Releases Beige Book
- 8:30am: Fed’s Dudley Has Opening Remarks at Community Bank Conference
- 3:15pm: Fed’s Dudley Speaks on Economic Outlook
- 4:15pm: Fed’s Quarles Speaks in Washington
DB's Jim Reid concludes the overnight wrap
The strong results of Netflix the said company on Monday night seemed to help extend the rally yesterday as healthy corporate earnings are overpowering the various geopolitical and trade headlines. The tech sector jumped with the Nasdaq rallying +1.74% (Netflix closed up +9.19%) and the NYSE FANG Index rose +3.74%. Broader markets also saw solid gains with the likes of the S&P 500 (+1.07%), Dow (+0.87%), DAX (+1.57%) and Stoxx 600 (+0.80%) all up, while the VIX (-1.3pts to 15.25) is back to testing the March lows after Goldman Sachs, Johnson & Johnson and UnitedHealth also added to a solid day for earnings. GS did actually fade early gains (+1.69% to -1.65% at the close) following the results briefing call (on cost question marks), however it’s hard to look past the fact that it’s been a decent Q1 for US bank results so far.
Not all earnings have been positive. After the bell in the US, IBM’s share price was down c6% after reporting narrower 1Q profit margins and flat revenue growth (FX adjusted). To partly illustrate how times have changed, yesterday IBM’s market cap was only $2.4bln larger than Netflix at $148.2bln and will be smaller today if it opens inline with post close trading. This compares to it being $98bln larger one year ago and a whopping $224.2bln larger five years ago.
Back to the overall positive tone in markets, there is definitely a feeling over the last few days that the trade war tensions are easing with a renegotiated NAFTA looking more likely, Mr Trump opening back the door to TPP and China showing some increased flexibility (more evidence below) in trade/IP policy and showing a willingness to negotiate even while retaliating. There’s little doubt that Mr Trump could make the headlines with some negative comments on trade over the weeks ahead as it continues to be a useful negotiation strategy but the market appears to be increasingly feeling that rhetoric may not fully translate into actions.
The rally in equities though hasn’t yet encouraged a bond sell-off. Yesterday government bond yields ended the day either flat or slightly lower (US Treasuries +0.1bp; Bunds -1.8bp). While some of the softer data may have played a part, it does feel likes rates markets are reluctant to break out of what have been fairly tight ranges for a while – particularly for Treasuries – as we noted over the last couple of days.
This morning in Asia it’s largely been a similar story with equities up (Nikkei +1.40%, Kospi +1.05%; Hang Seng +0.25%) and yields on UST 10y little changed (+0.5bp). Elsewhere, the Washington Post reported US Secretary of State nominee Pompeo has met with North Korean leader Kim Jong Un over the Easter weekend, in part to prepare for a summit with President Trump. So another area of tension potentially in the process of being eased.
Bourses in China are modestly down (Shanghai Comp. -0.56%) while 10y yields on Chinese bonds are down c15bp after yesterday’s 1% RRR cut by the PBOC. Just on that, according to the PBOC the cut – which takes effect from April 25th - will be for certain banks however the excluded banks appeared to be rural or commercial banks in rural areas. The statement also suggested that about 900bn Yuan/$143bn of medium-term lending facility loans would be repaid on the same day that the RRR cut is applied. Our China economist Zhiwei Zhang believe the RRR cut should not be seen as a change of monetary policy stance, rather the main purpose is to avoid an over-tightening on small banks and small businesses as well as to provide more stable liquidity for the banking system. Overall, they maintain their macro and policy outlook for 2018 and expect GDP growth to slow only marginally in the next few quarters (Q2-Q4 forecasts: 6.6% to 6.5%) while annual growth forecasts remain 6.6% and 6.3% for 2018 and 2019.
Staying with a busy China, yesterday Beijing removed the 50% ownership cap for foreign carmakers on local China car producers. According to the FT the plan is to remove it over the course of 5 years. This of course follows threats by President Trump to invoke tariffs on imports from China worth as much as $150bn a year. So further signs maybe of a de-escalation in the ongoing trade war. Something else that caught our eye yesterday was a Reuters article suggesting that China’s international trade rep had held meetings with European ambassadors last week asking them to unite with China against US protectionism.
Over in the US, White House Economic Advisor Larry Kudlow was reported as saying on Fox News yesterday that “we don’t want any currency wars” and that Trump was “just concerned – more about China” following his tweet on Monday calling Russia and China currency manipulators. That was in contrast to Treasury Secretary Steven Mnuchin’s comments who called Trump’s comments a “warning shot”.
Now turning to the five Fed speakers overnight. The Fed’s Bostic who is a FOMC voter this year said “our goal is to get a more neutral stance” on rates. He added that “we’ve embarked on a slow gradual move to neutral” and he is not anticipating a change to this path, but “to the extent things happen, we will respond”. Mr Evans also reiterated the gradual path towards a more neutral rates setting and then subject to the incoming data “we see how far we have to go beyond that”. On inflation, he noted that “to the extent that inflation continues to move towards 2%, above 2%, 2.25%, (it is) completely consistent with symmetry for our price objective”. Elsewhere, Mr Williams said “I don’t see the signs of an inverted yield curve” and that “the flattening of the curve that we’ve seen is so far a normal part of the process, as the Fed is raising interest rates…”. On rates, his “own forecast would be that interest rates are going up gradually, smoothly”. Then on trade, he said “what worries me in this trade discussion is that uncertainty, even without action, can have a detrimental effect”. Elsewhere, Mr Harker noted the current unemployment rate of 4.1% is “at or below the natural rate in his view” and that the independence of the Fed is “crucial” to the US economy. Finally, Mr Quarles told the House Financial Services Committee that regulators can’t repeal the Volcker rules but “there’s a lot we can do to increase the certainty of application and reduce the burden of application”.
Moving onto the latest GDP forecasts by the IMF, where its’ forecast for global growth remains unchanged at 3.9% for this year and next but “growth is projected to soften beyond the next couple of years, partly held by back by ageing populations and lacklustre productivity”. Notably, forecasts for the US economy was revised up 0.2ppt in both years, to 2.9% for this year and 2.7% next year.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the March IP was above market at 0.5% mom (vs. 0.3% expected) while capacity utilisation also beat at 78% (vs. 77.9% expected). Most of the growth in March was from a 3.0% mom rebound in utility output. Elsewhere, the March housing starts grew 1.9% mom to 1,319k (vs. 1,267k expected) while building permits were also above expectations at 1,354k (vs. 1,321k). Factoring in the above,the Atlanta Fed's estimate of 1Q GDP growth edged up 0.1ppt to 2.0% saar.
Germany’s April ZEW survey on current conditions was broadly in line (87.9 vs. 88 expected), but the expectations index fell for the first time since July 2016 (-8.2 vs. -1.0 expected) while the Euro area’s expectations reading was also lower (1.9 vs. 13.4 previous). Elsewhere, the final reading of Italy’s March CPI was revised down 0.2ppt to 0.9% yoy. In the UK, the February unemployment rate edged down 0.1ppt mom to 4.2% (vs. 4.3% expected), marking a fresh low since 1975.The average weekly earnings growth (ex-bonus) was in line and grew at the fastest pace since August 2015, but the headline growth was modestly below market at 2.8% yoy (vs. 3.0% expected). Overall, the implied Bloomberg odds of a May rate hike in the UK fell c5ppt to 80% yesterday.
Looking at the day ahead, the main highlights are the March CPI reports for the UK and Euro area. In the US there is no data due out however we will get the Fed's Beige Book, while the Fed's Dudley and Quarles are scheduled to speak The BoE's Brazier is also due to speak to lawmakers in London. Morgan Stanley will report earnings.