In a surprising twist to end the week, global markets are in the green and US equity futures are near session highs despite two negative overnight developments: China denying it had agreed to cut the US trade deficit by $200BN, and the official formation of a populist, budget-busting Italian government. There were also some disappointing earnings overnight (Applied Materials, Deere, Nordstrom), which followed drops in marquee names Walmart and Cisco after their results failed to impress the market.
European stocks traded little changed after erasing initial declines as the euro tumbled amid uncertainties in Italy, sending Europe's Stoxx 600 Index heading for an 8th straight week of gains, even as Italian bond yields spiked to 2.22%, the highest in 10 months, with the BTP/Bund spread blowing out another 10bps, and Italy's default risk surging.
The biggest European underperformer this morning was Italy’s FTSE MIB (-1.1%). The Italian benchmark has fallen to a one-month low as details of the 5SM and League government contract emerged with measures such as a universal basic income, adjusting tax bands and limited deficit spending; both parties are yet to agree on a PM. Given the 'alliances' view on the banking sector, Italian banks sit at the foot of the index (Ubi Banca -4.5%, Banco BPM -4.9%, Bper Banca -4.3%, Intesa Sanpaolo -1.7%).
As a result of the latest Italian developments, Europe failed to follow Asian peers higher which however rose on news that China has offered a $200BN deficit-reduction deal, only for China to deny that was the case as the Asian session drew to a close. Australia's ASX 200 (-0.1%) initially opened higher but failed to hold on to gains amid weakness
in financials and mining-related sectors, while Nikkei 225 (+0.4%) was kept afloat by a weaker currency. Chinese markets were supported amid trade optimism in the wake of US-China trade talks with the Shanghai Comp. (+1.2%) and Hang Seng (+0.3%) closing in positive territory.
More importantly, however, the dollar reversed an early decline and Treasury yields edged lower after reaching the highest level since 2011. With nothing seemingly able to stop it, the Bloomberg Dollar Spot index heads for its longest streak of weekly gains since July 2015.
The latest bout of Dollar strength means another day of "sea of red" pain for Emerging Markets, which are now scrambling to hike rates to offset capital flight (see Brazil, Indonesia hikes in the past 48 hours) although it may be too little too late. No surprise: the Turkish lira weakened to a fresh record low as emerging market currencies headed for their biggest weekly slump since November 2016.
Dollar strength was not enough to pressure US Treasurys lower however, and the yield on 10-year U.S. Treasuries fell for the first time in more than a week, after rising overnight with the 30Y rising as high as 3.26%, above Bill Gross' threshold level, and the highest since Sept. 2014 while also a critical downward channel resistance level.
Gross: US 30yr Tsy now the focus as oil price keeps going up. 3.23% technical cap currently breached on an intraday basis.— Janus Henderson U.S. (@JHIAdvisorsUS) May 17, 2018
Today investors will be closely watching progress on the latest China-U.S. trade talks for signs of a breakthrough that could reignite the recent stock rally, even as they remain on edge over oil prices at a four-year high and a 10-year Treasury yield now firmly above 3%.
WTI and Brent are currently trading in positive territory approaching the week end, with Brent once again approaching the in-focus figure of USD 80BBL, currently trading +0.48% at USD 79.61/BBL. Traders awaiting further direction from Baker Hughes’ rig count later in the day. As the weeks’ close approaches, Gold is seeing some profit taking, with the yellow metal currently down 0.1%. Aluminium has also witnesses a slide as the metal fell for the third straight session on increasing inventories. Nickel is currently the outperformer in the metals scope, as it has risen to a near one month high of USD 14,830/tonne.
No major economic data is expected, while Campbell Soup and Deere are among companies reporting earnings.
Bulletin Headline Summary from RanSquawk
- Five Star and League release government programme, with traders awaiting news on the name of the Italian premier; FTSE MIB underperforming
- US-China trade tensions hit a stumbling block as China deny USD 200bln trade surplus reduction; risk tone hitting European bourses
- Looking forward, highlight include, Canadian CPI, retail sales, Fed’s Mester, Kaplan and Brainard
- S&P 500 futures up 0.2% to 2,724.50
- MXAP up 0.1% to 174.34
- MXAPJ up 0.02% to 567.54
- Nikkei up 0.4% to 22,930.36
- Topix up 0.4% to 1,815.25
- Hang Seng Index up 0.3% to 31,047.91
- Shanghai Composite up 1.2% to 3,193.30
- Sensex down 0.7% to 34,913.00
- Australia S&P/ASX 200 down 0.1% to 6,087.36
- Kospi up 0.5% to 2,460.65
- STOXX Europe 600 down 0.3% to 394.53
- German 10Y yield fell 1.0 bps to 0.63%
- Euro up 0.1% to $1.1807
- Italian 10Y yield fell 0.2 bps to 1.856%
- Spanish 10Y yield rose 0.3 bps to 1.411%
- Brent futures up 0.5% to $79.73/bbl
- Gold spot down 0.2% to $1,288.82
- U.S. Dollar Index little changed at 93.47
Top Overnight News from Bloomberg
- Italy’s populist leaders sealed a coalition agreement that aims to ramp up spending on the poor and slash taxes in a direct challenge to the European Union establishment; however, plan drops request to cut QE bonds from debt ratio, doesn’t mention EU250b ECB write-off and drops reference to euro exit process
- Fed’s Mester: monetary policy should be on the table to defend financial stability if macroprudential tools fail to contain stability risks
- Lighthizer says Nafta countries are ’nowhere near close to a deal’
- China denied it has offered President Donald Trump a $200 billion reduction in its annual trade surplus. Trump seen following through on threat to impose China tariffs
- President Donald Trump rebutted his national security adviser, telling reporters that he didn’t consider the nuclear disarmament of Libya a model for negotiations with North Korea over its atomic weapons program
- President Donald Trump’s chief Nafta negotiator said the U.S., Canada and Mexico are "nowhere near close to a deal" to update the region’s 24-year-old free-trade pact as U.S. lawmakers warn that time is almost up to reach a agreement that can pass the current Congress.
- Oil headed for a third weekly gain as tensions in the Middle East intensified and the International Energy Agency said global stockpiles have shrunk
- EU Commission activates measures to try to block the effect of U.S. sanctions on European firms
- Japan April CPI y/y 0.6% vs 0.7% est; Core CPI 0.7% vs 0.8% est.
Asian stocks traded mostly positive but with gains contained as focus remained on US-China trade talks and the current geopolitical climate. Nonetheless, the region showed some improvement from the weakness on Wall St, after the Chinese trade delegation was said to offer a package to reduce the US trade deficit by USD 200bln annually. This was the same amount the US had demanded during the 1st round of trade talks earlier this month in Beijing, while President Trump also commented that it is important to keep trade cooperation between US and China, which is in contrast to an earlier pessimistic tone from Trump that he doubted trade talks would be successful. In addition, sentiment was further underpinned by China ending its anti-dumping investigation on US sorghum, while North Korea seemed to have reverted back from its recent change in temperament and is said to increase efforts to defuse military tensions. ASX 200 (-0.1%) initially opened higher but failed to hold on to gains amid weakness in financials and mining-related sectors, while Nikkei 225 (+0.4%) was kept afloat by a weaker currency. Chinese markets were supported amid trade optimism in the wake of US-China trade talks with Shanghai Comp. (+1.2%) and Hang Seng (+0.3%) closing in positive territory. Finally, 10yr JGBs were marginally softer amid similar price action in T-notes and as yields tracked continued gains in their counterparts stateside, which saw the US 10yr yield extend above 3.100% and the 30yr yield reach its highest since September 2014.
Top Asian News
- Kaisa Group Repurchases Partial Senior Notes Due 2022, 2024
- U.S. Hedge Fund Questions Korea’s Accounting Probe of Biologics
- China NDRC Talks to Cos. Over Violations in Overseas Borrowing
- Chinese Bank’s $150,000 Trump Dinner Invite Draws Complaint
European equities are trading mixed with (Eurostoxx 50 +0.1%) with underperformance in Italy’s FTSE MIB (-1.1%). The Italian benchmark has fallen to a one-month low as details of the 5SM and League government contract emerge with measures such as a universal basic income, adjusting tax bands and limited deficit spending; both parties are yet to agree on a PM. Given the 'alliances' view on the banking sector, Italian banks sit at the foot of the index (Ubi Banca -4.5%, Banco BPM -4.9%, Bper Banca -4.3%, Intesa Sanpaolo -1.7%). Moving on, telecoms lag following downgrades of Altice and Telecom Italia as well as a few ex-dividends weighing on the sector. Elsewhere, Swiss luxury goods maker Richemont (-5.2%) took a hit amid disappointing earnings, dragging Swatch (-1.2%) down in sympathy. Finally, FTSE 100 heavyweight AstraZeneca (-2.0%) shares fell ill after reporting a miss on revenue and EPS.
Top European News
- PayPal to Buy IZettle for $2.2 Billion to Compete With Square
- Italy FTSE MIB Falls as 5 Star Leader Says Govt Contract Agreed
- Italy’s Di Maio Says Final Government Contract Agreed
- Italian Bonds Set for Worst Week Since 2015 on Political Concern
In FX, The DXY index is still largely trading sideways within recent ranges above 93.000 and underpinned by lofty US Treasury yields that are shielding the Greenback from trade-related bumps and bruises as talks between the US, China and other nations on tariffs continue. NZD: The outlier amidst very tight Usd/major moves, as the Kiwi revisits 0.6900 and recoups losses vs the Aud with the cross back down under 1.0900. JPY/CHF: Contrasting fortunes as the Jpy extends losses vs the Dollar to 111.00 in wake of more disappointing Japanese data (CPI softer than forecast following the surprise GDP contraction), and clears a key Fib resistance level (110.85) along the way. Stops reportedly at 111.20 unscathed so far. Conversely, the Franc has rebounded to trade through parity vs the Greenback, and is also testing bids below 1.1800 vs the Eur. EUR/GBP/CAD/AUD: All encircling round numbers vs the Usd and not showing much sign or inclination to break away, as Eur/Usd hugs 1.1800, Cable clings to 1.3500, Usd/Cad drifts back down to 1.2800 and Aud/Usd sits just above 0.7500. A large Eur/Usd option expiry at the strike (1.8 bn) could keep that pair tethered, but the Loonie could well see more volatile price action after displaying resilience in the face of no NAFTA deal (and reports suggesting no agreement in the offing) given looming Canadian CPI and retail sales data. On that note, the break-even via options indicates a circa +/- 75 pip reaction that could trigger 1.2700 expiries or a topside barrier.
In commodities, WTI and Brent are currently trading in positive territory approaching the week end, with Brent once again approaching the in-focus figure of USD 80BBL, currently trading +0.48% at USD 79.61/BBL. Traders awaiting further direction from Baker Hughes’ rig count later in the day. As the weeks’ close approaches, Gold is seeing some profit taking, with the yellow metal currently down 0.1%. Aluminium has also witnesses a slide as the metal fell for the third straight session on increasing inventories. Nickel is currently the outperformer in the metals scope, as it has risen to a near one month high of USD 14,830/tonne.
US Event Calendar
- 3am: Fed’s Mester Speaks at ECB on Macroprudential, Monetary Policy
- 9:15am: Fed’s Kaplan Speaks in Moderated Q&A
- 9:15am: Fed’s Brainard Speaks About Community Reinvestment Act
DB's Jim Reid concludes the overnight wrap
Happy Friday. The trick for all of us here in the UK this weekend is to stay out of the house as much as possible tomorrow and not get sucked into the coverage of the Royal Wedding here at Windsor. I got home last night to find my wife watching an hour long special on the event. I asked her why she was so fascinated by it. She replied that when she was young all her class dreamt of marrying a prince after Charles and Diana’s wedding. She reminded me that she failed in this dream as she’s married a banker and had to live vicariously through Meghan Markle. I think I’m annoyed by the wedding as I quite liked Suits (the big TV show Miss Markle was in) and the royal romance has kind of ruined part of it.
Anyway, back in the normal world yesterday was a case of another day, another survey that showed prices going through the roof in the US. Although this won’t be the main headline you’ve seen over the last 24 hours, I still think the fact that ‘prices received’ in the Philly Fed report were at their highest in 29 years merits close attention. This follows numerous equivalents across the different regional and national US surveys. The prices received number is less commodity influenced and should reflect more ‘core’ type inflationary pressures. The overall Philly Fed number was very strong even if there were concerns about falling capex spend within the report. See below for more on the data.
Meanwhile US 10yr Treasury yields continued to edge higher (+1.5bps) to 3.112% - to fresh 7 years highs and the 30yr up around 3bps to 3.247% - highest since September 2014. Yields are up another basis point or so in the overnight session too. US equities held in ok (S&P 500 -0.09%) especially after an earlier dip with Mr Trump not sounding optimistic on China trade talks although overnight developments appear more positive (see below). Europe saw a stronger day with most European bourses up 0.7% to 1.0% with the exception of Italy (‘only’ +0.29%). Core European bonds were 2-3bps higher with peripherals outperforming (Italy & Spanish yields flat) which was impressive given the Italian newsflow. Gilts soared 6bps as lots of stories circulated as to whether Mrs May is preparing a more prolonged stay within the custom union perhaps until an alternative can be worked out.
Overnight, price action has been generally muted in Asia for the most part with little reaction to the headlines which broke last night suggesting that China was to offer the US a $200bn reduction in its annual trade surplus with the country. As a reminder the $200bn number was demanded by Trump’s administration earlier this month following a visit to Beijing. A Bloomberg story noted that China would increase imports of US goods following talks between the two nations in Washington this week and on a similar note China has also said that it will end its anti-dumping and anti-subsidy investigations into US imports of sorghum. The Hang Seng (+0.12%), Shanghai Comp (+0.28%) and Nikkei (+0.40%) are all up modestly on the news, as are US equity futures (+0.22%) however all eyes will likely be on Trump’s twitter account at the US open to see his response. In other news, Japan has reported slightly softer than expected inflation data overnight (core +0.7% yoy vs. +0.8% expected) which is weighing on the Yen (+0.20%). So with yields generally on a rising trend again its worth keeping an eye on Oil.
Yesterday’s focus was on Brent which rose to around $80.50 intra-day and with an 8-handle for the first time since December 2014, on the back of a decline in US crude oil inventories and continued geo-political tensions. We closed back down at $79.30 but overnight have added about 20c to that.
Meanwhile, in Italy the wait for the coalition agreement as well as who will be PM continues for now but the 5SM and League parties have stated that they have virtually completed a draft government program with more confirmation that they have dropped the request for €250bn write-off of the Italian debt held by the ECB. However, a 5SM official said that the draft agreement contains a proposal that the Italian bonds bought by the ECB under PSPP should not be counted towards country’s gross debt to GDP ratio (Eurostat said this was not possible). There’s been a lot of talk and opinion pieces about the €250bn write off draft request over the last 36+ hours and a common worry would be that creates a wedge between the new coalition and the core of Europe even though the request has seemingly been removed. It will be interesting to see whether this impacts the ECB’s decision of QE. It complicates things on both sides. Carry on for longer and you may be seen as enabling populist policies but stop at this point and you may be creating more Italian instability. The can of worms has been opened.
Further, the draft program still carries the pledge of tax cuts, pension reforms (likely EU unfriendly) and the reviewing of EU treaties even as the reference to the € has been dropped. The document also calls for a review of European “bail-in” rules for the banking industry while adding that small shareholders should also be entitled to partial reimbursements in the event of a lender becoming insolvent. So lots to look forward to when we see the actual final agreement.
Fully reviewing yesterday’s data now. The US was a little mixed in nature, with initial jobless claims increasing to 222k as against consensus of 215k while the Philly Fed surprised significantly on the upside by reaching 34.4 (highest since June 2017), as against Bloomberg consensus of 21 and the previous read of 23.2. The rise in the Philadelphia Fed Business Outlook index was on the back of a robust rise in new orders (surging 22.2pts to a huge 40.6) and employment components of the index. We’ve already remarked on the 29-yearhigh ‘prices received’ index but what was a little worrying was the decline in the component for six-month outlook for the capex to 21.6 from 29.8 last month. The April Leading Index rose in line with expectations at +0.4% mom. In the Euro area, construction output declined to -0.3% mom in March while the previous months figure got revised lower to -0.7% mom from -0.5% mom.
In terms of the day ahead then, it’s another fairly quiet morning for data in Europe with the April PPI print in Germany and the March trade balance reading for the Eurozone the only data of significance. It’s similarly quiet in the US with no releases to highlight however we are due to hear from the Fed’s Mester at 8am BST this morning when she speaks on monetary policy at an ECB conference in Frankfurt, followed by Kaplan and Brainard at separate events at 2.15pm BST this afternoon. The latter is speaking on modernization of the Community Reinvestment Act at a housing conference so it’s unlikely to be market sensitive.