Stocks Jumps On Fresh China, Earnings Optimism As Volatility Disappears

Despite no reports of "China trade deal optimism" overnight, global markets are a sea of green this morning on optimism this time about China's economy itself, which is set to report its GDP tomorrow, coupled with renewed confidence that the equity rally will be supported by stronger than expected corporate earnings. The dollar edged up while Treasuries fluctuated around unchanged.

The MSCI world equity index, which tracks shares in 47 countries, edged up 0.1 percent in early European trade.  Europe's Stoxx 600 Index rose for a fifth day, now within inches of 8 month highs, driven higher by banks and retail shares. Germany’s DAX gained over half a percent, while Britain’s FTSE 100 also strengthened. The recent rally comes as a blanket of calm has descended across financial markets, with European stock volatility falling to its lowest since January 2018.

Across the Atlantic, S&P 500 futures pointed to a sharply higher open, one which puts the S&P's all time high within reach as better than expected earnings coming from both Bank of America and BlackRock. In Asia, shares in China and Hong Kong outperformed markets in Japan and South Korea. Emerging-market stocks climbed, though the currencies weakened. The yen inched higher.

While there was no immediate catalyst for the overnight optimism, Bloomberg notes that investors are spending the holiday-shortened week "assessing the chances that stocks will sustain their rally even as similar gains in investment-grade bonds have ebbed since late March. Optimism over earnings appears to be boosting bullish sentiment in equities, though volumes this week have been muted."

Natixis Cross Asset Strategist Florent Pochon echoes this take, saying that investors were mainly focused on U.S. earnings, especially after the first flurry of bank results made for mixed reading: “After the strong rally we have seen in equities, people are now waiting for the next catalyst,” Pochan said. “We do expect some more positive data from Europe which should give a bit of fresh air (to European assets)”

All eyes are now on a slew of Chinese data due on Wednesday, including industrial production and retail sales data but most important will be the latest quarterly GDP data which is expected to post another decline to 6.3% Y/Y. After a worrying start to the year, Chinese data have been more positive as authorities ramped up stimulus measures, soothing investor fears about a slowdown in the world’s second-biggest economy.

“The outlook for Asia critically hinges on the outlook of China’s growth and the ongoing U.S.-China trade talks,” wrote strategists at Bank of America Merrill Lynch. “On both fronts, policymakers and investors believe that the outcome of these two issues is turning more positive.”

Currency markets were generally quiet, although the Australian dollar took a dive lower after the Reserve Bank of Australia signaled in policy minutes that an interest rate cut would be appropriate should inflation stay low and unemployment trend higher. The Aussie shed 0.4 percent to $0.7140.

Elsewhere, an otherwise lackluster European trading session saw a brief flurry of activity as news that some ECB policy makers remained doubtful about the region’s growth prospects sent the euro lower, only to rebound after a separate report indicated ECB officials are reportedly lacking enthusiasm for sub-zero tiering, whilst there has been no talks to cut the deposit rate.

The dollar gained for a second day amid thin volumes ahead of U.S. industrial production data. The Aussie slid after RBA minutes showed policy makers discussed cutting rates, while the Canadian dollar slipped alongside oil prices as equities rose.

In commodities, after a rally to five-month highs this month, crude oil paused on the prospect of Russia and OPEC boosting production to fight for market share with the United States. U.S. West Texas Intermediate was flat at $63.46 per barrel after losing nearly 0.8 percent the previous day. Oil has been surging on tightening global supplies, as output has fallen in Iran and Venezuela amid signs the United States will toughen sanctions on those two OPEC producers, and on the threat that renewed fighting could stop production in Libya.

Industrial production is among scheduled economic releases. Companies reporting earnings include Johnson & Johnson, Bank of America, UnitedHealth and Netflix.

Market Snapshot

  • S&P 500 futures up 0.3% to 2,918.25
  • STOXX Europe 600 up 0.3% to 389.38
  • MXAP up 0.3% to 163.45
  • MXAPJ up 0.4% to 544.55
  • Nikkei up 0.2% to 22,221.66
  • Topix down 0.09% to 1,626.46
  • Hang Seng Index up 1.1% to 30,129.87
  • Shanghai Composite up 2.4% to 3,253.60
  • Sensex up 1.1% to 39,326.02
  • Australia S&P/ASX 200 up 0.4% to 6,277.45
  • Kospi up 0.3% to 2,248.63
  • German 10Y yield rose 1.0 bps to 0.066%
  • Euro up 0.04% to $1.1309
  • Brent Futures down 0.5% to $70.83/bbl
  • Italian 10Y yield rose 3.6 bps to 2.207%
  • Spanish 10Y yield rose 1.3 bps to 1.097%
  • Brent Futures down 0.5% to $70.83/bbl
  • Gold spot down 0.3% to $1,284.72
  • U.S. Dollar Index down 0.03% to 96.91

Top Overnight News from Bloomberg

  • The U.K. labor market remained robust in the three months through February as employment jumped and wage growth far outpaced inflation. The number of people in work rose by 179,000 to a record high, keeping unemployment at 3.9%, the lowest rate since 1975, the Office for National Statistics said on Tuesday.
  • German ZEW Expectations for April, a gauge of investor confidence, beat estimates.
  • Congressional Democrats issued subpoenas to Deutsche Bank AG and other banks to obtain long- sought documents indicating whether foreign nations tried to influence U.S. politics, signaling an escalation of their probes into President Donald Trump’s finances and any dealings with Russians.
  • Currency-only hedge funds were once a hot corner of the investment world. From 2000 to 2008 the tally of currency funds tracked by the BarclayHedge Currency Traders Index almost tripled, to 145. Now they’re looking more like an endangered species, with just 49 in operation.
  • The People’s Bank of China shifted its tone on the economy, emphasizing that it will control excessive money supply amid signs of a recovery. It said it’ll keep good control of the money supply "floodgate" and not "flood" the economy with excessive liquidity, according to a statement released late Monday.
  • Banco Santander SA has reassured investors in the riskiest type of bank debt with its decision to call $1.5 billion of its perpetual contingent convertible notes. Spain’s biggest lender said it will buy back the popular type of debt, known simply as CoCos.

Asian equity markets were mostly higher after the region eventually shrugged off the lacklustre lead from the US where mixed earnings from the large banks dampened risk appetite. ASX 200 (+0.4%) and Nikkei 225 (+0.2%) were initially cautious although sentiment gradually improved with Australia supported amid dovish views on the RBA and with Rio Tinto shares unfazed by weaker production numbers, while the Japanese benchmark just about remained afloat as several telecom names outperformed following reports NTT DoCoMo is to reduce mobile phone rates by as much as 40%. Hang Seng (+1.0%) and Shanghai Comp. (+2.4%) opened lower amid the early cautious tone across the region and tentativeness ahead of key Chinese data including GDP, Industrial Production and Retail Sales which are all due out tomorrow, although Chinese markets steadily improved to outperform their peers in the aftermath of the PBoC’s first liquidity injection in almost a month. Finally, 10yr JGBs were flat amid the indecisiveness in the region and uneventful price action in T-notes, while mixed results at the 20yr auction also failed to spur demand.

Top Asian News

  • HNA Unit Defaults on Interest Payment, Faces Asset Seizures
  • Citi Hails ‘Bullish Turn’ in China and Says Chase Metals Now
  • China Traders Bet on Tight Liquidity as Interest-Rate Swaps Rise

European equities crept higher during early trade (Eurostoxx 50 +0.4%) following an upbeat tail-end to Asia-Pac session wherein the Shanghai Comp advanced in excess of 2% ahead of tomorrow’s China GDP release. Germany’s DAX (+0.7%) marginally outperforms its peers whilst broad-based gains are seen across other major bourses. Sectors are relatively mixed with outperformance seen in financials whilst energy names lag amid the price action in the complex. Notable movers include Lufthansa (-0.9%), after recouping from a 5.5% drop at the open amid a downgraded in EBIT guidance. Meanwhile Hays (-3.2%) shares tumbled to the foot of the Stoxx 600 amid disappointing earnings. Finally, UniCredit (+2.7%) shares felt some reprieve after the bank agreeing to pay USD 1.3bln to resolve investigations by US authorities regarding allegations that the bank violated multiple US sanction programmes. Looking ahead, markets will be looking out for earnings from UnitedHealth (at 10:55BST), Johnson & Johnson (11:45BST) and IBM (after-market), three DJIA components with the former accounting for 5.9% of the bellwether index. On a broader note, Morgan Stanley strategists believe that US stocks “sell off more than the rest of the world during a broad market sell-off”. This was measured by the S&P 500’s downside beta to the MSCI AC World Index (which the bank highlights is a measure of the US index’s performance when global shares decline), which is at a pre-financial crisis highs.

Top European News

  • Nexi Declines in Milan After Europe’s Biggest IPO This Year
  • U.K. Labor Market Remains Robust as Employment Surges
  • Everyone ‘Exhausted’ by Brexit as Talks Drag On, EU’s Tusk Says
  • Takeover Target G4S Moves Ahead With Breakup as Sales Rise
  • Zalando Gains on German Online Retailer’s Unexpected Profit

In currencies, once again it seems that the official RBA policy statement failed to reveal all, as alongside the neutral stance and guidance maintaining no need to change rates in the near term there was a relatively detailed discussion about easing, to the extent that criteria was laid out. Hence, Aud/Usd has retreated to retest sub-0.7150 levels and the Aud/Nzd cross is back under 1.0600 even though the Kiwi also took heed of RBNZ Governor Orr reaffirming an easy bias overnight, with Nzd/Usd pivoting 0.6750 and now looking to the latest GDT auction and NZ CPI for more direction.

  • CAD/EUR/CHF - All weaker vs the Greenback as well, with the Loonie still suffering in wake of Monday’s somewhat cautious if not downbeat BoC business survey and extending losses to circa 1.3400 at one stage, while the single currency has lost grip of the 1.1300 handle after topping out around a Fib at 1.1316 yet again. The latest German/EZ ZEW survey was mixed, and the accompanying comments not exactly confident about economic developments, but the final straw for Eur/Usd came via sourced ECB comments suggesting that several members are concerned about forecasts for a growth rebound in H2 and the accuracy of the models used to formulate estimates. The headline pair is now just above another Fib (1.1284), while the Franc has also lost more ground vs the Buck towards 1.0060, but is pivoting 1.1350 vs the Euro.
  • GBP/JPY - Cable largely shrugged off broadly in line UK jobs and earnings data, but the Pound has drifted away from hefty option expiries at 1.3100 (1.6 bn) amidst a broader Dollar upturn as the DXY reclaims the 97.000 handle, albeit just and to the detriment of the aforementioned weakness elsewhere. Indeed, Usd/Jpy has slipped through 112.00 following another fade ahead of the 2019 peak and amidst export offers layered above the big figure.
  • EM - Only minor respite for the Lira via better than expected Turkish IP data as Usd/Try remains around 5.8000 and still eyeing recent highs on a mixture of negative domestic factors - political, fiscal and fundamental.
  • RBA Minutes from April 2nd meeting stated the board saw no strong case for near term move in rates but added that a rate cut would be appropriate if inflation stayed low and unemployment trended up, while the likelihood of a near-term rate hike was low given subdued inflation. The board also agreed inflation likely to stay muted for some time and expects further gradual progress on unemployment and inflation. (Newswires)

In commodities, WTI and Brent are choppy amid a lack of catalysts ahead of tonight’s API inventory release. Markets expect US crude stocks to build by around 2mln barrels whilst gasoline and distillates are forecast to draw by 2.55mln and 1mln barrels respectively. Elsewhere, metals are mostly lower as the dollar recoups some recent losses. In terms of precious metals, gold losses more ground below the 1300/oz level ahead of support at 1281/oz. Meanwhile, base metals trade marginally in the red ahead of tomorrow’s China GDP release. On that note, Rio Tinto stated that Q1 Pilbara iron ore shipments were at 69.1mln tons (Prev. 80.3mln tons Y/Y), whilst iron ore production 76.0mln tons (Prev. 83.1mln tons Y/Y), and copper output 143.9k tons (Prev. 139.3k tons Y/Y).

Looking at the day ahead, we’ve got March industrial production and the April NAHB housing market index print. Away from that we’re due to hear from the ECB’s Nowotny this afternoon at an event in New York, before the Fed’s Kaplan speaks this evening at a community forum event in New Mexico. Meanwhile the earnings highlights include Bank of America, Johnson & Johnson, UnitedHealth, Netflix and IBM.

US Event Calendar

  • 9:15am: Industrial Production MoM, est. 0.2%, prior 0.1%
  • 9:15am: Manufacturing (SIC) Production, est. 0.1%, prior -0.4%; Capacity Utilization, est. 79.15%, prior 78.2%
  • 10am: NAHB Housing Market Index, est. 63, prior 62

DB's Jim Reid concludes the overnight wrap

Easter week has started relatively quietly but as a reminder by the time the EMR lands through your virtual letter box tomorrow we’ll have a slew of important China data to digest. Will it confirm our suspicions from Q1 that China has created a new mini growth cycle? We’ll have a better idea this time tomorrow. This morning sees the German ZEW survey which is always closely followed, especially with the Germany economy at its current inflection point. So all that to look forward to as well as Thursday’s flash PMIs before you can unravel and devour those Easter Eggs. As for yesterday, after a bright start in Asia and Europe, equity markets dipped as US equity markets opened before a late run nearly got US markets back to flat. Nevertheless after a very good recent run some softness crept in as markets digested the latest US bank earnings and trade news. The end result was the S&P 500 closing -0.06% (-0.38% at the lows) and weaker for only the second time in the last 13 sessions. The last time we had such a run was October 2017. The NASDAQ (-0.10%) and DOW (-0.10%) also dipped while in Europe the STOXX 600 (+0.15%) ended with a small gain but slightly off the session’s high of +0.27%.

Just on those earnings reports, while the GS and Citi results beat at a headline level for earnings, revenues did disappoint slightly. So JPM’s bumper results on Friday might be a bit more company specific than sector wide. It’s also worth noting that earnings expectations have been heavily slashed in recent months which is certainly helping the optics. For GS for example, EPS of $5.71 was a long way ahead of the $4.97 consensus however that is down from $5.50 at the end of March and closer to $6.00 at the start of the year. The talk was also that equity trading revenues disappointed at GS along with the outlook for the investment banking business. Their shares fell -3.84%. Citi shares pared losses to end the session close to flat. It’s worth noting that BofA results are out later today.

As for other markets yesterday, 10y Treasuries pulled back to 2.551% which was -1.4bps lower, while bunds closed flat at 0.056%. They did hit a vertigo inducing 0.079% at lunchtime though. Greek 10-year yields extended their recent rally, trading -0.9bps lower to 3.274%, within 7bps of the lowest yields based on bbg data going back to 1997. Later I’m going to dig through the archives to see if I have any longer history for Greek government bonds. WTI oil prices slid -0.59%, though there were limited catalysts yesterday. Investors were possibly reacting to Friday’s data showing a second weekly increase in the US rig count, as well as data showing that speculative long positioning in the commodity has risen to its highest level since last October. Credit markets were quiet with HY spreads -1bps and -4bps in the US and Europe respectively. Staying with credit it is worth highlighting that Michal Jezek from my team published a new report last week entitled “Value of high-grade corporate bonds in Japanified Europe” (click here ). The note examines the European IG market in light of recent developments on the data and policy fronts, and identifies the most attractive opportunities. It also assesses how much a restarting of CSPP is priced in.

This morning in Asia markets are largely moving higher with the Shanghai Comp (+1.11%), Hang Seng (+0.63%), Nikkei (+0.18%) and Kospi (+0.06%) all up. Elsewhere, futures on the S&P 500 are also up +0.11%. In other news, South Korea’s Yonhap News reported that Russia is preparing for North Korean leader Kim Jong Un’s first summit with President Vladimir Putin. Separately the South Korea’s Maeil Business Newspaper reported yesterday that Putin and Kim’s summit will likely take place on April 24 in Vladivostok. However Russian government spokesman Dmitry Peskov said that plans were being made for a summit but offered no details on a time or place.

Moving on. In terms of the latest trade news, US Treasury Secretary Mnuchin said yesterday that US-China trade negotiations were “making a lot progress” but also that there “is more work to do…including enforcement”. That appeared to mirror a lot of what he had said over the weekend. Meanwhile, a separate Bloomberg story also suggested that China was considering a request from the US to shift certain tariffs on agricultural goods to other products “so the Trump administration can sell any eventual trade deals as a win for farmers ahead of the 2020 election”. Unconfirmed reports also circulated that President Trump may meet President Xi at the June 28-29 G20 summit, which could be an opportunity to finalize a trade agreement, though of course things can change over the next few weeks and months.

It wasn’t just US-China trade headlines yesterday though with Reuters also quoting the EU’s Malmstrom as saying that the EU is “ready to start trade talks” and that it is in the “US’ hands to see when talks start”. EU ministers yesterday gave the go ahead for formal talks to start and it’s worth noting that it’s just over a month until the S232 deadline for making a decision on auto tariffs, so we’re approaching a potentially important spell for trade talks.

In other news, it was a very quiet day for data yesterday with only the April empire manufacturing print in the US out. The headline reading was solid enough at 10.1, beating expectations for 8.0 and up from 3.7 in March however there was a big drop in the six-month outlook reading to 12.4 from 29.6 last month. That was in fact the lowest outlook reading since January 2016 so a fairly unusual dichotomy between the current conditions and the forward-looking readings.

Elsewhere Chicago Fed President Evans made some interesting public remarks. He is a voting member of the FOMC this year and has been near the centre of the committee on policy. He noted that economic data is “quite good” and that he expects to keep rates “flat and unchanged into the fall of 2020.” However, his more newsworthy remarks were in reference to the Fed’s policy review, as Evans said that “the Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time.” That would presumably suggest a preference for more dovish policy and higher inflation rates moving forward. Elsewhere, Boston Fed President Rosengren (voter) said in published remarks of a speech overnight that the US economy is doing quite well but inflation is “slightly below” the Fed’s 2% target and this is one of the reasons for the Fed to be patient. On policy review, he said that “My own preference is for the Federal Reserve to adopt an inflation range that explicitly recognizes the challenge of the effective lower bound,” while adding, “We might be forced to accept below-2% inflation during recessions, but we would commit to achieving above-2% inflation in good times, so as to provide more policy space to counteract the next recession.” Separately, the Bank of France Governor Villeroy said that economic growth is developing more weakly than he expected so far this year, though he expects a rebound later this year. He also said that the effects of negative rates are overall positive, but he did reiterate that he would be open to mitigating measures if necessary.

Finally to the day ahead which starts this morning in the UK with the February and March employment stats. Not long after that we get the April ZEW survey in Germany while this afternoon in the US we’ve got March industrial production and the April NAHB housing market index print. Away from that we’re due to hear from the ECB’s Nowotny this afternoon at an event in New York, before the Fed’s Kaplan speaks this evening at a community forum event in New Mexico. Meanwhile the earnings highlights include Bank of America, Johnson & Johnson, UnitedHealth, Netflix and IBM.