Stocks Stumble As 10Y Hits 2.996%; Dollar Squeeze Accelerates

Global stocks stumbled on Monday ahead of an avalanche of earnings in this season's busiest reporting week but the big story overnight was the spike in 10Y Yield which climbed as high as 2.9957%, the highest level since January 2014, and nearing the psychological 3% level which has triggered market spasms and more than one tantrum in the past. The move was catalyzed by Treasury Secretary Steven Mnuchin saying over the weekend that he is planning a trip to China, an indication the US is considering a truce in its trade war with China.

Citi's technical team repeats the key highlights, pointing out that we're 1bp away from the psychological 3% level in the Treasury 10y yield. "The benchmark is trading at levels not seen since 2014, and we are continuing to make fresh YTD highs. The 10s now trade at 2.99% while the 2s10s trades on the 51 mark."

If we break 3%, major levels come in here that extend up to 3.05%: this is the level where we have the 2014 high which is also the long term double bottom neckline and the long term channel top:

Not everyone is convinced that the 10Y will soar once it blows through 3% (especially not in a world which both the IMF and IIF said has record debt): "Ultimately it’s hard to see a move sustained above 3 percent on the U.S. 10-year,” Mitul Kotecha, a strategist at TD Securities, told Bloomberg TV from Singapore. “Some of the dialing down in tensions, in risk aversion, may be having some impact there as well as expectations of continued strong growth in the U.S.”

Meanwhile, rising yields are capping other risk assets and the recent sell off in Treasuries is being closely eyed by  other markets, and supporting a pretty aggressive USD bid and VIX is rallying.

Mostly as a result of rising yields and a stronger dollar, S&P 500 Index futures turned lower, tracking moves in the Stoxx Europe 600 Index which failed to capitalize on an unexpected beat in the April PMI prints, while earlier the MSCI Asia Pacific Index also started off the week in the red.

In global stocks, MSCI’s world index fell 0.25% after Asia shed 0.5% overnight and Europe then slipped 0.2% as results from Switzerland’s biggest bank, UBS, disappointed. S&P futures also pointed to a modestly lower open.

Meanwhile, traders are on edge because in addition to earnings - more than 180 companies in the S&P 500 are due to report results this week, including Amazon, Alphabet, Facebook, Microsoft, Boeing and Chevron - traders also received the latest round of advance economic surveys that should show in the coming days if economic softness in the first quarter was just a passing phase linked to wintery weather and the Lunar New Year holidays in Asia. Readings from Japan, France and Germany were all relatively reassuring. Japan’s PMI data firmed as output and domestic demand picked up, France got help from its services sector, while Germany came in above forecast despite weaker new orders numbers.

  • EU Markit Manufacturing Flash PMI (Apr) 56.0 vs. Exp. 56.6 (Prev. 56.6)
  • EU Markit Services Flash PMI (Apr) 55.0 vs. Exp. 54.8 (Prev. 54.9)
  • EU Markit Comp Flash PMI (Apr) 55.2 vs. Exp. 54.9 (Prev. 55.2)

“It’s a good reading, it’s still encouraging,” said Chris Williamson, chief business economist at IHS Markit, of the combined euro zone numbers, which he said pointed to quarterly GDP growth of 0.6 percent.

Helping the spike in yields is the recent sharp reversal/short squeeze in the dollar as the dollar; the BBDXY index gained a fifth day, rising 0.5% on Monday to the highest level since March 1, and is now up by 1.4% since Wednesday’s close, the most on a three-day basis since December 2016. In addition to the squeeze of near record dollar shorts, a "Europe-based trader" quoted by Bloomberg says dollar bids represent both unwinding of medium-term trailing stops and fresh positions, while another trader said that interbank names are seen selling the euro and the yen.

Elsewhere in FX, the EUR/USD slipped for a third day, down to a two-week low of 1.2226 while GBP/USD reversed an earlier gain to drop below 1.4000 handle as chances that the BOE may not move in May, together with renewed concerns over the Brexit front, weighed on pound sentiment. USD/JPY rose to trade above 108.00 for the first time since mid-February: option-related offers below that level capped for a while, before stops above the figure were filled. As Citi notes, some big levels have been broken in FX today:

  • EURUSD is through Friday’s low at 1.2256 and is less than 30 pips away from the 100d MA at 1.2206.
  • USDJPY has broken the 108 handle and now through 108.13. The reverse head and shoulders target of 109.36 looks feasible according to CitiFX Technicals.
  • AUDUSD trendline comes in here at 0.7634 as we find fresh YTD lows.
  • NZDUSD testing the 200d MA at 0.7185. From here, there are a few levels to eye with 0.71500 and 0.7111.
  • USDCAD levels in 1.2720-80 including the 55d MA at 1.2767 seem to have been broken. Through 1.2800, there are plenty of levels from the March rally.
  • USDNOK MTD highs are at 7.8990, and the 100d MA at 7.9284. EURNOK looks more mixed, with the 100d MA not until 9.6721.
  • GBPUSD: The pair has broken through the 1.40 handle and looks like we could test the 100d MA at 1.3850. However GBP may stabilize against EUR here, with all the notable MA levels converging ahead.

It was a busy weekend in geopolitical news, with North Korea surprising the world on Saturday stating that it would immediately suspend nuclear and missile tests, scrap its nuclear test site and instead pursue peace and economic growth, a development which Trump quickly latched on to as evidence of yet another mission (nearly) accomplished. Additionally, talk of a trip by the U.S. Treasury Secretary to China also fueled hopes that the recent trade tensions between the world’s two biggest economies may be thawing.

In overnight central banks news, the Nikkei reported that the Bank of Japan has shown signs it is tapering its ETF purchases in order to trim what it sees as an outsize profile in the equity market. Meanwhile, BoJ Governor Kuroda said the Bank of Japan must continue very strong accommodative monetary policy for some time in order to
reach 2% inflation. However, he may not have the choice, as dark clouds continue to gather over the head of this boss and over the weekend, the approval of Japanese Prime Minister Shinzo Abe’s cabinet dropped in polls conducted by the Yomiuri and Mainichi newspapers to the lowest level since 2012.

Oil prices edged down in the cross-currents but were not far from their highest since late 2014. The market had wobbled on Friday when Trump tweeted criticism of OPEC’s role in pushing up global prices, but quickly steadied. Oil prices dipped in Monday trade with WTI down 0.6% at USD 68/bbl. In addition to echoes from Trump's anti-OPEC tweet, the modest weakness followed Baker Hughes reporting an increased rig count on Friday, which is now at its highest level since March 2015. The strengthening dollar is also weighing on gold with the yellow metal down 0.5% on the day. Some OPEC specific news coming from the Azerbaijani energy minister who says the country joining OPEC is not on the agenda.

It's a busy week (full preview to follow), with some of the key events as follows:

  • French President Emmanuel Macron begins a three-day visit to the U.S. Monday
  • U.S. manufacturing and services sector PMIs. Later this week: GDP and jobless claims.
  • Earnings season continues. Among those reporting: Alphabet/Google, Amazon.com, Samsung and Credit Suisse.
  • The European Central Bank has a rate decision on Thursday. Investors will watch for any sign that officials are preparing a shift in stimulus plans for their June meeting.
  • Bank of Japan announces its latest policy decision Friday and releases a quarterly outlook report.

Bulletin Headline Summary from RanSquawk

  • US 10 year treasury ticking towards 3.00% yield
  • Upward pressure on the USD pushing down commodities
  • Looking ahead, highlights include US existing homes sales, ECB’s Coeure and BoC’s Poloz

Market Snapshot

  • S&P 500 futures down 0.2% to 2,667.25
  • STOXX Europe 600 down 0.2% to 380.98
  • MSCI Asia Pacific down 0.4% to 173.19
  • MSCI Asia Pacific ex Japan down 0.5% to 564.10
  • Nikkei down 0.3% to 22,088.04
  • Topix down 0.02% to 1,750.79
  • Hang Seng Index down 0.5% to 30,254.40
  • Shanghai Composite down 0.1% to 3,068.01
  • Sensex up 0.5% to 34,579.62
  • Australia S&P/ASX 200 up 0.3% to 5,886.01
  • Kospi down 0.09% to 2,474.11
  • German 10Y yield rose 4.1 bps to 0.631%
  • Euro down 0.3% to $1.2254
  • Italian 10Y yield fell 0.3 bps to 1.524%
  • Spanish 10Y yield rose 1.9 bps to 1.301%
  • Brent futures down 0.5% to $73.66/bbl
  • Gold spot down 0.7% to $1,327.23
  • U.S. Dollar Index up 0.4% to 90.66

Top Overnight News from Bloomberg

  • U.S. Treasury Secretary Steven Mnuchin said he’s considering a trip to China amid a trade dispute with Beijing that finance chiefs warn could derail the global economic upswing. Mnuchin said he’s “cautiously optimistic” of reaching an agreement with China
  • President Trump tempered his optimism on North Korea on Sunday, saying that “only time will tell” how things turn out. U.S. lawmakers sounded skeptical about promises made by Pyongyang ahead of possible historic talks between the countries leaders
  • North Korea will freeze nuclear and intercontinental ballistic missile launch tests from April 21, state-run media Korean Central News Agency said Saturday; The leaders of the two Koreas are set to hold their first summit since 2007 on Friday
  • Approval of Japanese Prime Minister Shinzo Abe’s cabinet dropped in polls conducted by the Yomiuri and Mainichi newspapers over the weekend.
  • French President Emmanuel Macron’s arrival in the U.S. kicks off a crucial week for European leaders in an uphill battle to convince Donald Trump to stay in the Iran nuclear deal
  • “If conflict increases, there will be less growth, more inflation,” says Federal Reserve Bank of San Francisco President John Williams in an interview with El Pais published in Spanish
  • Has an invisible hand stepped in to support the Indian sovereign bond market? Traders are abuzz with speculation over the identity of the buyer or buyers behind the $862 million of purchases Friday
  • U.K. PM Theresa May’s inner circle thinks she could be forced to accept staying in the EU’s customs union because Parliament will reject her plan to withdraw from it when the issue comes to a vote in the House of Commons, according to one official. Such a move could trigger a challenge to May’s leadership from Brexit campaigners in the Conservative Party
  • U.K. Chancellor of the Exchequer Philip Hammond has indicated a willingness to look abroad when he begins his search for a successor to Bank of England Governor Mark Carney
  • Eurozone April Flash composite PMI 55.2 versus estimate 54.8

Asia equity markets began the week lacklustre after last Friday’s losses on Wall St where all majors declined on continued tech weakness and losses in Apple amid concerns regarding iPhone demand. However, overnight pressure was contained in the AsiaPac region amid a further improvement of the geopolitical climate in the Korean peninsula after North Korea announced it will stop nuclear and ICBM testing, as well as begin dismantling a nuclear test site in the north of the country. ASX 200 (+0.3%) and Nikkei 225 (-0.3%) were mixed with weakness in Japan the result of last week’s flows into JPY. Elsewhere, Shanghai Comp. (-0.1%) and Hang Seng (-0.5%) were choppy amid a lack of drivers and a neutral position by the PBoC which injected CNY 80bln via reverse repos to match maturing operations, although underperformance was observed in Hong Kong names. Finally, 10yr JGBs were lower amid spill over selling from USTs and as yields tracked the upside in their US counterparts, in which the US 10yr yield printed its highest since January 2014. PBoC injected CNY 80bln via 7-day reverse repos for a daily net neutral position.

Top Asian News

  • Sudden Modi-Xi Meet Signals Diplomatic Thaw Between Neighbors
  • Bond Traders in India Hope Mystery Buyer Is the Central Bank
  • Ping An Good Doctor Aims to Raise as Much as HK$8.8b in IPO
  • Noble Group Board Becomes Battleground as Goldilocks Fights
  • New Hong Kong Tech Darling Hawks IPO With Rare Valuation Metric

European equities opened on the back foot this morning (Eurostoxx 50 -0.2%) following the dampened tone from Asia. Switzerland’s SMI is underperforming as index heavyweight UBS (-3.1%) lags following earnings. Sector wise, consumer staples underperform while Reckitt Benckiser (-2.2%) are at the bottom of the FTSE 100 following a downgrade at Raymond James and a target price cut at JP Morgan. In terms of stocks specifics, Fresenius (+0.6%) shares are higher following the terminations of the Akorn merger amid data breaches. Fresenius Medical (-3.6%) is at the foot of the DAX 30 following a revenue target cut for this year. Capita (+10.1%) is the best performing in the Stoxx 600 following earnings and reports the company is to raise GBP 701mln in a 3 for 2 rights issue entirely underwritten by Citigroup and Goldman Sachs.

Top European News

  • May Is Said to Face Cabinet Pressure Over Brexit Customs Union
  • Poland Shatters Fragile Peace With Its Jews After Holocaust Law
  • Euro-Area Economy Stays in Lower Gear as Order Growth Weakens; German Growth Momentum Rebounds After First-Quarter Slowdown
  • How China Bought Up A Swath of Europe When Nobody Was Looking

In FX, firmer US rates are certainly fuelling the latest Dollar revival and the Greenback’s broad gains, but latest conciliatory noises from NK on the nuclear front are also undermining the traditional safe-haven currencies. The index is now comfortably above 90.500 and 90.600 resistance, looking at 90.750 next. JPY/EUR: Both on the brink of breaking out of recent ranges, with Usd/Jpy up through 108.00 offers, a big barrier and resistance extending to 108.20, but capped just ahead of stops reportedly lying between 108.25-30, while Eur/Usd has breached last  Friday’s 1.2250 low having failed to reach 1.2300 in wake of better than forecast Eurozone flash PMIs, and is now also below the next downside technical support level at 1.2235, eyeing 1.2200. CAD: Usd/Cad looks is revisiting 1.2800+ on the aforementioned supportive Greenback narrative and contrasting Loonie weights in the form of last Friday’s CPI data and a still cautious BoC, although latest NAFTA reports indicate a deal could be reached in early May. The range has been 1.2750-1.2805, and the recent peak is circa 1.2820 (February 9). GBP: Losing traction around the 1.4000 level after last week’s heavy losses on a mixture of UK data misses and dovish or less hawkish BoE policy guidance from Governor Carney. Looking to test chart support around 1.3960 while Eur/Gbp is nudging up towards the high of a 0.8745-75 range.

In commodities, oil prices dipping in Monday trade with WTI down 0.6% at USD 68/bbl. This follows Baker Hughes reporting an increased rig count on Friday, which is now at its highest level since March 2015, suggesting increased US production putting downward pressure on the fossil fuel, as well as tweets from the US President suggesting oil is “artificially high” due to OPEC. The strengthening dollar is also weighing on gold with the yellow metal down 0.5% on the day. Some OPEC specific news coming from the Azerbaijani energy minister who says the country joining OPEC is not on the agenda.

Kicking off the week today will be the flash April PMIs due to be released in Europe and the US. Other data worth flagging is US existing home sales data for March. Away from that French President Macron is due to begin a three-day visit to the US, while the ECB's Coeure is scheduled to speak in the afternoon. UBS and Google are the earnings release highlights.

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. 0.3, prior 0.9
  • 9:45am: Markit US Manufacturing PMI, est. 55.2, prior 55.6
    • Markit US Services PMI, est. 54.1, prior 54
    • Markit US Composite PMI, prior 54.2
  • 10am: Existing Home Sales, est. 5.55m, prior 5.54m; MoM, est. 0.18%, prior 3.0%

We wonder whether this week will finally host the 10 year Treasuries at 3% party? The sell off continued on Friday with yields closing at the highs for the session at 2.96% (+5bps) - the highest since January 2014. This was in spite of a Trump tweet bomb where he accused OPEC of artificially driving up prices. This morning in Asia, yields have crept up another c1.5bp and edging us closer to this landmark. Elsewhere equities are trading mixed with the ASX200 up 0.42% while the Nikkei (-0.30%), Kospi (-0.19%) and Hang Seng (-0.36%) are down as we type. Datawise, Japan’s April Nikkei manufacturing PMI firmed 0.2pts mom to 53.3.

Back to yields, in terms of what might attract us or repel us to the 3% mark we have a busy week with the ECB and BoJ holding policy meetings and the latest flash PMIs out around the globe today as well as a first look at Q1 GDP in the US. European PMIs in particular will be closely watched given the recent sharp deceleration.

With regards to the two big central bank meetings this week the ECB (Thursday) is the more interesting. While no change in policy is expected all eyes will be any hints or signs that officials are preparing the ground for an announcement in June that stimulus is to come to an end by the end of the year. Weaker data of late and some slightly dovish ECB commentary perhaps means that risks are tilted to the downside so the market will likely be on the watch in Draghi's press conference. Ahead of this today sees the flash PMIs. In Europe the consensus is for a continued moderation with the manufacturing print expected to nudge down another 0.5pts to 56.1 (which would be the lowest since February 2017) and the services a more modest 0.3pt decline to 54.6. European data surprises have been hovering at multi-year lows of late so Europe could do with some stabilisation soon to avoid stoking fears of a sharper downturn. It’s possible that the easing trade war tensions and healthier sentiment in the last week or so won’t yet be in these numbers though.

In terms of earnings this week, 181 S&P 500 companies are scheduled to report including some of the big tech heavy hitters like Google (today), Facebook / eBay / Twitter (Wednesday), Microsoft / Amazon / Intel (Thursday). Also worth highlighting are earnings reports from Verizon, Caterpillar and Coca-Cola on Tuesday, AT&T and Boeing on Wednesday and Exxon Mobil and Chevron on Friday. Earnings season also picks up in Europe with 121 Stoxx 600 companies reporting including the likes of UBS today, Credit Suisse on Wednesday and Volkswagen, Total and Royal Dutch Shell on Thursday.

Last but by no means least, the big political event this week is likely to be the summit held between South Korea President Moon Jae-in and North Korea Leader Kim Jong Un in the demilitarized zone between the two countries on  Friday. Over the weekend, President Trump seemed to have softened his expectations as he tweeted “we’re a long way from conclusion on North Korea….only time will tell”. Away from that, French President Macron is due to travel to the US on Monday for three days and is scheduled to meet US President Trump on Tuesday. German Chancellor Merkel is also due to meet Trump on Friday.

Turning to trade, tensions appeared to have eased further over the weekend as the US Treasury Secretary Mnuchin said he’s “cautiously optimistic” on reaching a trade agreement with China and that “a trip (to China) is under consideration”, but declined to comment on potential timing. On the other side, China’s Ministry of Commerce said it would welcome such a visit. Elsewhere, the PBOC’s Governor Yi reiterated that the recently announced measures to open up China’s financial sector will be “implemented either in the next few months or by the end of this year”. Finally, the Russian Finance Minister Siluanov has met with Secretary Mnuchin and sought “clarifications” on the US sanctions, without elaborating more.

Now recapping other markets performance from Friday. US bourses weakened further, weighted down by tech and consumer staples stocks (S&P -0.85%; Dow -0.82%; Nasdaq -1.27%). The VIX rose for the third straight day to 16.88 (+5.8%) while the Stoxx 600 was marginally lower. In FX, the USD index gained for the fourth consecutive day (+0.42%) while the Euro and Sterling fell -0.46% and -0.62% respectively. WTI oil edged up 0.10% to $68.40/bbl on Friday.

Elsewhere, European government bonds firmed and partly reversed Thursday’s losses with yields on 10y Bunds and OATs both down c1bp while Gilts outperformed (-4.1bp), partly due to BOE Governor Carney’s dovish talk on a potential rate hike in May. Notably, the Bloomberg implied odds of a May rate hike in the UK fell 31ppt to 46% on Friday.

Moving onto central bankers speak. The Fed’s Williams reiterated that it makes sense to keep raising rates through next year given an improving economy and noted that if growth slows, the USD could get “dramatically stronger”. In Europe, the ECB’s Villeroy said the greatest medium term risk is “incontestably protectionism”. He added that if tariffs increased by 10% and became the norm, then “global GDP could decrease by at least 2%”. Elsewhere, Bloomberg cited unnamed sources which noted the ECB see scope to wait until their July meeting to announce their plans on ending QE, in part to allow more time to judge the impacts of the recent economic slowdown.

In the world of DB Research, our US economists find that if the Fed continues to raise rates according to their forecast and the term premium does not recover, the yield curve would invert by the end of 2019, potentially as early as June of next year. However, several factors, including higher inflation and the unwind of central bank balance sheets, should help lift the term premium and delay an inversion. Overall, they argue that because a low term premium has contributed to the flat yield curve, the negative signal from the yield curve should be discounted some. However they acknowledge that the growth negative signal from the yield curve could build by the time we get to 2020.

Before we take a look at today’s and this week’s full calendar, we wrap up with other data releases from Friday. The Euro area’s April consumer confidence was above market and rose 0.3pts mom to 0.4 (vs. -0.1 expected) – the highest since January which was the two decade high. Elsewhere, Germany March PPI was slightly below expectations at 0.1% mom (vs. 0.2% expected), leading to an annual growth of 1.9% yoy.

A look at the day ahead: kicking off the week today will be the flash April PMIs due to be released in Europe and the US. Other data worth flagging is US existing home sales data for March. Away from that French President Macron is due to begin a three-day visit to the US, while the ECB's Coeure is scheduled to speak in the afternoon. UBS and Google are the earnings release highlights.