Global Stocks, Dollar Slide As Nervous Traders Eye US-China Trade Talks

It has been a confusing 24 hours, with US futures slumping after yesterday's unexpectedly hawkish-yet-dovish FOMC, which first slammed the dollar, then sent the USD surging, and sparking an equity selloff even as rates remained relatively unchanged. Today's this confusion spilled over into international markets, with both Asian and European shares retreating, as traders are on edge ahead of the US-China trade talks taking place today and tomorrow.

The weakness continued this morning, when another disappointing euro-zone core CPI number (1.1%, Exp. 1.2%, last 1.3%) led to sharp rally across EGBs, dragging Treasurys higher in response, and bull-flattening the curve as 10Y yields slumped.

And while U.S. equity futures are slowly trying to grind higher from overnight lows, the response among US equities to what has so far been an impressive earnings season has left most of the bulls very disappointed, and judging by recent analyst commentary, 2018 is clearly not going according to plan (to echo what Citi said last month): 

"A slightly disappointing growth reaction thus far to the late 2017 tax cuts, no sign of a meaningful pick-up in inflation pressures and uncertainty generated by the potential for a trade war were always likely to commit the Fed to a steady as she goes message,” said Lee Ferridge of State Street Global Markets. "There might also be a little concern over recent market moves, with stocks flat so far in 2018 while US Treasury yields have moved meaningfully higher, doing some of the Fed’s tightening work for it."

European equities opened on the backfoot (Eurostoxx 50 -0.2%), perhaps anxious as US-China trade talks start in Beijing. Major bourses are lower on the day whilst Switzerland’s SMI 20 outperforms its peers. Most sectors are in the red with the exception of energy and IT. Logitech (+7.0%) shares soared following earnings, buoying the IT sector along with it. Financials underperform after euro-zone inflation data.

Asian equity markets traded mostly negative following the late US slump on Wednesday, with the Fed seen to remain firmly on track for a June hike. Nonetheless, ASX 200 (+0.9%) was the regional outperformer and gained across all sectors with miners underpinned amid upside in metals, while NAB was among the laggards after a decline in H1 cash profit. Elsewhere, Shanghai Comp. (-0.2%) and Hang Seng (-1.7%) declined after a daily net liquidity drain by the PBoC and amid trade concerns ahead of talks between US and China, with tech and telecoms related stocks pressured after reports the US is considering equipment sales restrictions on Chinese telecom firms over national security concerns. As a reminder, Japan is shut for the remainder of the week.

Of note, the Hang Seng China gauge dropped as much as 2.2% ahead of trade talks between U.S. and China which begin later on Thursday, and dragged the MSCI Asia Pacific lower by 0.2%.

"When you think about the things that have been weighing on the market -- the potential for trade war with China, Nafta breaking up, rising rates and of course the potential rolling over in growth -- I think the one that is really weighing the most heavily is trade and that’s why the market tends to swing the most violently on every new piece of news,” RiverFront Investment Group Chairman Michael Jones told Bloomberg TV.

Meanwhile, as TSY yields slumped overnight, the USD predictably weakened across the board, undoing some of yesterday's post-FOMC spike: the Bloomberg dollar index fell for first time in four sessions.

Elsewhere, in FX, the pound erased an earlier advance after U.K. services data undershot forecasts, before fading the move to claw back a 0.2% gain; while the euro pared gains after the euro-area CPI estimate for April came in below the median forecast, it was still higher for the first time in four days; The TRY spiked to a new record low against the USD after both core and headline CPI surprised to the upside with the backdrop of Erdogan's increasing pressure against higher rates. NOK stronger as Norges Bank does not hint at any dovish changes to rate path. The AUD was the best performing G-10 currency after a larger-than-expected trade surplus.

Notably, the onshore yuan extended its biggest decline in two months as the abovementioned trade talks between China and U.S. begin. Consensus expectations are low for any breakthrough, however, with China unlikely to make more concessions.

Treasuries edged higher while emerging-market currencies rebounded from a four-month low; European government bonds all rose following poor Eurozone inflation data, while Australia's 10-year yield steady at 2.80%.

In commodities, oil prices recovered from yesterday's post-DoE sell off with prices continuing to factor in the risks surrounding Iranian-US relations with the latest source reports suggesting that US President Trump is reportedly all but decided to end the nuclear agreement with Iran. In other energy newsflow, China's Sinopec is planning to cut Saudi crude oil loadings by 40% in June for a 2nd month on high prices; according to a UNIPEC official. In the metals scope, spot gold is sitting in modest positive territory following yesterday's FOMC release and a slightly softer USD. Elsewhere, aluminium prices have risen for the second consecutive session, as attention turns to developments on  US-China trade talks being conducted today. Copper was flat overnight with trade contained amid opposing forces of rising metal prices in China during early trade and a broad risk averse tone.

In geopolitical news, Reuters reported that Trump has all but decided to end nuclear agreement with Iran, according to sources which added it is unclear how he will withdraw from the agreement. Meanwhile, the WSJ added that the US is said to be considering equipment sales restrictions on Chinese telecom firms over national security concerns. In related news, a Chinese trade official commented that China will not accept pre-conditions in trade discussions and that China is more prepared than the US to cope with a trade war.

In central bank news, Norges Bank Interest Rate Decision 0.50% vs. Exp. 0.50% (Prev. 0.50%). Comments stated that outlook and balance of risks have not changed substantially, inflation is below target, as such policy rate will be raised after summer 2018. Krone is weaker than expected as measured by the import weighted exchange rate. There was little new information about growth in the Norwegian economy. Riksbank's Jansson said that there is a limit for how expansionary policy can be, but haven't reached there yet, hopes next step will be tightening of policy; Riksbank's Skingsley not at the point where rate hikes can begin; Riksbank Governor Ingves says the rate path is a forecast, not a promise.

Today's busy calendar includes data on jobless claims, trade balance and factory orders. DowDuPont, Bombardier, Cigna and Ferrari are among companies reporting earnings

Bulletin Headline Summary from RanSquawk:

  • Norges Bank maintains post-summer hike guidance, Riksbank sticks to end of year
  • UK Services PMI and Eurozone CPI miss expectations
  • Looking ahead, highlights include US trade, weekly jobs, ISM non-mfg, factory orders, a slew of speakers and earnings

Market Wrap

  • S&P 500 futures up 0.2% to 2,633.50
  • STOXX Europe 600 down 0.2% to 386.55
  • MSCI Asia Pacific down 0.2% to 172.83
  • MSCI Asia Pacific ex Japan down 0.5% to 563.89
  • Nikkei down 0.2% to 22,472.78
  • Topix down 0.2% to 1,771.52
  • Hang Seng Index down 1.3% to 30,313.37
  • Shanghai Composite up 0.6% to 3,100.86
  • Sensex down 0.05% to 35,159.39
  • Australia S&P/ASX 200 up 0.8% to 6,098.28
  • Kospi down 0.7% to 2,487.25
  • German 10Y yield rose 0.2 bps to 0.583%
  • Euro up 0.4% to $1.2002
  • Italian 10Y yield rose 0.5 bps to 1.535%
  • Spanish 10Y yield fell 0.9 bps to 1.302%
  • Brent futures up 0.2% to $73.52/bbl
  • Gold spot up 0.6% to $1,313.06
  • U.S. Dollar Index down 0.1% to 92.40

Top Overnight News from Bloomberg

  • The dollar fell after the Federal Reserve seemed less hawkish than some had positioned for; the Bloomberg Dollar Spot Index slipped for the first time in four days; 10-year Treasuries rose for the first time in three days
  • The greenback weakened against all its G-10 peers; Norway’s krone saw the biggest advance Thursday after the Norges Bank reiterated that it could lift interest rates after the summer
  • The pound erased an earlier advance after U.K. services data undershot forecasts, before fading the move to claw back a 0.2% gain; while the euro pared gains after the euro-area CPI estimate for April came in below the median forecast, it was still higher for the first time in four days
  • Stocks in Europe followed Asian peers lower as investors began to switch their attention away from the Fed and back to earnings and the outlook for global trade ahead of talks between Chinese and U.S. officials
  • China won’t succumb to “threats” from the U.S., a senior government official said, hours before talks are to begin Thursday with a delegation of the Trump administration’s top trade policy officials
  • Federal Reserve officials made doubly sure to convey a relaxed attitude toward inflation rising above 2%, mentioning the “symmetric” nature of their target twice in a statement Wednesday that signaled no intention to accelerate a gradual tightening of monetary policy
  • The U.S. Treasury announced it will lift long-term debt sales by $73b this quarter
  • If billionaire bond investor Bill Gross is right, most of this year’s excitement in the Treasury market is done and yields won’t see a substantial move from here
  • Theresa May is facing a crisis after pro-Brexit ministers paired up with Conservative hardliners to demand a clean break from the European Union’s customs system
  • Eurozone Apr. CPI Estimate y/y: 1.2% vs 1.3% est; Core CPI 0.7% vs 0.9% est; Services CPI 1.0% vs 1.5% prev.
  • U.K. Apr. Services PMI: 52.8 vs 53.5 est; Markit note the underlying performance of the economy has continued to deteriorate
  • Norges Bank holds rates at 0.50% as expected; says upturn in the economy appears to be continuing broadly in line with the March policy report
  • Turkey Apr. CPI y/y: 10.9% vs 10.5% est; Core CPI 12.2% vs11.5% est

European equities opened on the backfoot (Eurostoxx 50 -0.2%) as US-Sino trade talks start in Beijing. Major  bourses are lower on the day whilst Switzerland’s SMI 20 outperforms its peers. Most sectors are in the red with the exception of energy and IT. Logitech (+7.0%) shares soared following earnings, buoying the IT sector along with it. Glencore (+1.1%) is at the top of the FTSE following pleasing production numbers. Other individual movers post-earnings include: Veolia (+2.5%), Gerberit (+3.1%), Infineon (+0.9%), Vonovia (-1.4%) and Smith & Nephew (-6.0%).

Top European News

  • U.K. Services Disappoint as Economy Stays Stuck in Slow Lane
  • Norway Sticks to Tightening Plan as Rate Held at Record Low
  • Danske Bank Is Slammed by Regulator in Money Laundering Probe
  • Starwood Capital Sells $1.1 Billion Portfolio of U.K. Hotels

Asian equity markets traded mostly negative following the weakness on Wall St post-FOMC, with the Fed seen to remain firmly on track for a June hike. Nonetheless, ASX 200 (+0.9%) was the regional outperformer and gained  across all sectors with miners underpinned amid upside in metals, while NAB was among the laggards after a decline in H1 cash profit. Elsewhere, Shanghai Comp. (-0.2%) and Hang Seng (-1.7%) declined after a daily net liquidity drain by the PBoC and amid trade concerns ahead of talks between US and China, with tech and telecoms related stocks pressured after reports the US is considering equipment sales restrictions on Chinese telecom firms over national security concerns. As a reminder, Japan is shut for the remainder of the week. US is said to be considering equipment sales restrictions on Chinese telecom firms over national security concerns. In related news, a Chinese trade official commented that China will not accept pre-conditions in trade discussions and that China is more
prepared than the US to cope with a trade war.

Top Asian News

  • Mahathir Probed Under Malaysia Fake News Law for Sabotage Claim
  • Fed Adds to List of Reasons Why Asia Stock Investors Are Jittery
  • Little Known China Biotech Firm Lures Top Global Stock Fund
  • Turkish Investors Get Reality Check After Inflation Accelerates

In FX, it has been very choppy trade for the DXY in the FOMC aftermath, but ultimately the index has pulled back from fresh 2018 highs around 92.830 made in the run-up to circa 92.500. To recap, the Fed’s latest assessment acknowledged inflation rising to within a whisker of its target rate, but was less upbeat on the pace of economic activity and unexpectedly added a degree of flexibility around the 2% price mandate, which has been perceived dovishly.  CAD: Another beneficiary of the broad Greenback downturn amidst rebounding oil prices and looking ahead to Canadian trade data that is expected to reveal a narrower deficit. Usd/Cad is back down in the low 1.2800 area and eyeing residual bids from 1.2820-00 that were not quite filled recently. EUR/GBP: Both movers on independent factors, as Eur/Usd revisited sub-1.1950 lows on the back of weaker than consensus Eurozone CPI and Cable retreated from 1.3600+ again in wake of the UK services PMI miss that has dragged BoE hike expectations for next week down to single digits from almost odd-on this time last month. Tech supports eyed in Eur/Usd still the major 1.1936 Fib and for Cable 1.3550. NOK/SEK: Contrasting fortunes for the 2 Scandi Crowns as the Nok is underpinned by the Norges Bank reaffirming intentions to hike ‘after Summer’ this year, but the Riksbank reiterates no tightening until the end of 2018. However, Eur/Nok and Eur/Sek are both softer on a weaker single currency

In commodities, oil prices have recovered from yesterday's post-DoE sell off with prices continuing to factor in the risks surrounding Iranian-US relations with the latest source reports suggesting that US President Trump is reportedly all but decided to end the nuclear agreement with Iran. In other energy newsflow, China's Sinopec is planning to cut Saudi crude oil loadings by 40% in June for a 2nd month on high prices; according to a UNIPEC official. In the metals scope, spot gold is sitting in modest positive territory following yesterday's FOMC release and a slightly softer USD. Elsewhere, aluminium prices have risen for the second consecutive session, as attention turns to developments on  US-China trade talks being conducted today. Copper was flat overnight with trade contained amid opposing forces of rising metal prices in China during early trade and a broad risk averse tone.

Looking at the day ahead, the April CPI report and March PPI for the Euro area will be out while the latest European Commission forecast updates will be released. For core CPI, consensus expects a +0.9% yoy print after holding at +1.0% yoy for the last 3 months (headline CPI 1.3% yoy expected). The final April services and composite PMIs in the UK will also be out in the morning. In the US preliminary Q1 nonfarm productivity and unit labour costs data are due, along with the March trade balance print, April ISM non-manufacturing, weekly initial jobless claims, March factory orders and the final March durable and capital goods orders data. Away from the data, the ECB's Villeroy, Praet, Constancio and Coeure are due to speak.

US Event Calendar

  • 7:30am: Challenger Job Cuts YoY, prior 39.4%
  • 8:30am: Nonfarm Productivity, est. 0.9%, prior 0.0%; Unit Labor Costs, est. 3.0%, prior 2.5%
  • 8:30am: Initial Jobless Claims, est. 225,000, prior 209,000; Continuing Claims, est. 1.84m, prior 1.84m
  • 8:30am: Trade Balance, est. $50.0b deficit, prior $57.6b deficit
  • 9:45am: Bloomberg Consumer Comfort, prior 57.5
  • 9:45am: Markit US Services PMI, est. 54.5, prior 54.4; Markit US Composite PMI, prior 54.8
  • 10am: ISM Non-Manf. Composite, est. 58, prior 58.8
  • 10am: Durable Goods Orders, prior 2.6%; Durables Ex Transportation, prior 0.0%
  • 10am: Cap Goods Orders Nondef Ex Air, prior -0.1%; Cap Goods Ship Nondef Ex Air, prior -0.7%
  • 10am: Factory Orders, est. 1.4%, prior 1.2%; Factory Orders Ex Trans, prior 0.1%

DB's Jim Reid concludes the overnight wrap

After the football last night Jim is too emotionally drained to contribute today as Liverpool did their best to avoid making the final of the Champions League. However they just about got there and I think he’ll be busy dusting off his rolodex for clients in Kiev later today.

Unlike the football, it wasn’t quite so easy to get excited about last night’s Fed meeting but there were still one or two interesting statement changes to highlight. Our US economists believe that the statement moved incrementally in a more hawkish direction and also towards brevity. In their view, it recognized that inflation has moved close to and is expected to continue to run near the Committee’s 2% objective. As expected, it also emphasized that the 2% objective is a “symmetric” one, allowing for some overshoot as well as undershoot of inflation – a modestly dovish modification in their view. They also note that having just about reached the inflation objective, they dropped the need to continue monitoring inflation developments closely – a hawkish innovation.

Meanwhile, with inflation about on target and with risks to the Fed’s labour market objective running to the upside with the unemployment rate seen as low and the labour market expected to “remain strong”, one interesting point that our economists made in their note (link) yesterday was that they believe a change in the balance of risks language is coming, possibly as soon as June when the Chair will have an opportunity to explain things. In a nutshell our colleagues expect to learn from the minutes to this meeting, as well as upcoming Fedspeak, that should point to a more hawkish stance of policy at the June meeting, absent any unexpected events before then.

For markets, while moves were fairly modest, they did seem to interpret the statement as overall leaning very slightly more dovish. Perhaps that reflected the removal of the sentence “the economic outlook has strengthened in recent months” however we tend to agree with our economists in that this line was just removed simply as an acknowledgment of soft Q1 growth, which was widely anticipated. In any case, Treasury yields closed off their intraday highs with 2y yields finishing at 2.489% after trading as high as 2.517% while 10y yields ended broadly unchanged at 2.967% after being at 2.994%. The 2s10s curve finished at 48bps and nearly 2bps steeper on the day. It’s worth noting that June is 97% priced in for a hike now – which is little changed compared to the day prior.

The big mover in markets yesterday was the Greenback however. The Dollar index was initially strong leading into the Fed, however proceeded to fall -0.47% after the statement was released, but then rallied +0.66% off the lows into the close. EM currencies appeared to be on the receiving end of that with the Colombian Peso, Brazilian Real, Russian Ruble, Turkish Lira and Argentine Peso down between 1% and 3%. Some headlines about the US potentially increasing sanctions on Russia didn’t seem to help the Ruble weakness in particular. In any case the rally for the US Dollar did appear to weight on US equity markets with the S&P 500 and Dow both closing -0.72% despite Apple doing its best to lead markets higher post results.

This morning in Asia, market are broadly lower with the Hang Seng in particular down -1.66%, weighted down by tech and financials stocks, while the Nikkei (-0.16%), Kospi (-0.38%) and Shanghai Comp (-0.16%) have also trended lower. Ahead of today’s China/US trade talks today, Bloomberg cited unnamed Chinese government officials indicating that Beijing will not agree to preconditions that include abandoning its advanced manufacturing program and cut the trade gap by a fixed amount.

Moving on. While monetary policy came under review, there was also some focus on the fiscal side of things yesterday too with the US Treasury quarterly refunding announcement, however there were no great surprises with a $1bn increase to all maturities which was roughly in line with expectations, representing an additional $27bn of new issuance for the upcoming quarter.

Away from the Fed, earlier in the day the focus was on some of the data in Europe. Particularly in the spotlight was a first look at the Q1 GDP print for the Euro area however there were no real surprises with the +0.4% qoq/+2.5% yoy print coming in bang in line with expectations. The Q4 2017 reading was also revised up a tenth to +0.7% qoq. While Q1 was the slowest QoQ rate of growth in the Euro area since Q3 2016, it’s interesting to note that this is the first time ever that Europe has outpaced the UK for 5 consecutive quarters. Keep in mind that the UK outpaced Europe, with the exception of one flat quarter, for 15 quarters in a row between Q2 2011 and Q4 2014.

Meanwhile, just before that we had the final April manufacturing PMIs in Europe. The final Euro area reading was revised up 0.2pts from the flash estimate to 56.2. While that represents the fourth consecutive monthly decline, the rate of decline in April at just 0.4pts is a lot more moderate than the 1-2pt declines in the first 3 months of this year. The upward revision for April appeared to be due to a combination of a slightly stronger picture in France (+0.4pts to 53.8) and the noncore countries performing marginally better than implied. One exception was Italy which fell 1.6pts and more than expected to 53.5 (vs. 54.5 expected), marking a 15-month low. We should note that the new orders series for the Euro area fell 1pt albeit to a still solid 54.5 – but the lowest since November 2016. Italy’s new order series fell a more significant 3.2pts to 52.2 and is now down 9.1pts from the January high. So the fragility still appears to lie with Italy. European equity markets returned from Monday’s holiday in a positive mood with the Stoxx  600 finishing +0.63% and DAX closing at a fresh three-month high (+1.51%), albeit helped by a weaker Euro.

In other news, as far as the daily Brexit update is concerned, much of the focus was on the headlines from the night prior concerning the ‘rebellion’ being staged by Brexiteers in the cabinet over the customs union. Some reports suggested that Davis and Fox were willing to resign over May’s option preference for the union. Staying with the UK, it’s worth noting that there was rare good news to come from the construction PMI data which rose 5.5pts to 52.5 in April, with a big rise in housing activity the main driver. Sterling pared early gains by the close (-0.28%) as a result of broad Dollar strength however 10y Gilt yields were 5.2bps higher at 1.455%.

In terms of the remaining data, ahead of payrolls on Friday in the US the ADP moderated mom, but was above expectations at 204k (vs. 198k expected) and so remains solid at a three-month annualised rate of 224k. The  Eurozone’s March unemployment rate was steady and in-line at 8.5% while Italy was slightly higher than expected at 11.0% (vs. 10.9% expected).

Looking at the day ahead, the April CPI report and March PPI for the Euro area will be out while the latest European Commission forecast updates will be released. For core CPI, consensus expects a +0.9% yoy print after holding at +1.0% yoy for the last 3 months (headline CPI 1.3% yoy expected). The final April services and composite PMIs in the UK will also be out in the morning. In the US preliminary Q1 nonfarm productivity and unit labour costs data are due, along with the March trade balance print, April ISM non-manufacturing, weekly initial jobless claims, March factory orders and the final March durable and capital goods orders data. Away from the data, the ECB's Villeroy, Praet, Constancio and Coeure are due to speak.