Stocks across the globe rose in a continuation of yesterday’s euphoric rally that sent the Dow Jones nearly 1000 points higher from its session lows, as the moderation of trade war rhetoric – despite the tit-for-tat tariff announcements by China and the US – lifted risk sentiment across the board. As a result, whereas yesterday’s market snapshot was a sea of red, this morning it’s green as far as the eye can see.
US TSY yields rose back over 2.80% (just shy of 2.82% as of this moment) as the dollar and commodities strengthened, while safe-haven assets including the yen and gold slipped.
In a dramatic, if low-volume, reversal, which according to many strategists was largely one widespread short squeeze, all major indices recovered from Wednesday’s initial sharp losses after US and China’s tit-for-tat tariff announcements, however fears later apparently were soothed as representatives from China and the U.S. left the door open for a negotiated solution to trade disputes. The improvement in sentiment was helped by comments from White House economic adviser Kudlow who stated that the US measures were a form of trade negotiations and that Trump’s tariffs on China are all proposals, while he added that backchannel talks with China were occurring. Furthermore, the White House noted there will be a couple of months before China tariffs are implemented with the review period ongoing, and some analysts also viewed the impact from proposed tariffs to be
manageable. It is still unclear how – or why – either Trump or Xi will show weakness and concede in the ongoing negotiations.
“I think that the substance of trade restrictions and their real impact will be far less than the headlines,” said Jeffery Becker, CEO of Jennison Associates who summarized the prevailing mood quite well. “U.S. and Chinese cross-border trade has grown significantly over the last decade and economic inter-dependence runs very deep, deeper than the actual trade numbers.”
At the same time, some argue that the global economy is currently running so well that it could even cope with the impact of the proposed tariffs, which cover a fraction of world trade. “We’ve had a few months now where markets have really been going sideways and progressively lower, but at the same time has data really rolled over? The answer is no,” Geoffrey Yu, head of the UK investment office at UBS Wealth Management, said. “The underlying economy is actually chugging along which will increase the scope for upside surprises on the corporate front, on the economic front and at some point markets will have to catch up to that.”
Meanwhile, Federal Reserve officials also chimed in and said it’s premature to fully assess the impact of the trade dispute, which is adding uncertainty to an otherwise bright economic outlook. A board member, Lael Brainard, said trade policy is “certainly something that I take into account, in thinking about risks.”
In any case, S&P futures also advanced after the S&P 500 Index on Wednesday erased a loss to close up 1.2% and were another 0.4% higher this morning, as the VIX slides back under 20.
Despite yesterday’s thundering reversal which from a loss of -2% ended up being a gain of over 1%, the biggest such intraday move since 2011, volatility is clearly back, and as the following Bloomberg chart shows, Wednesday was the 26th move of 1% or more this year, already triple the 2017 total.
One of the culprits of the recent tech wreck, Facebook, erased earlier losses in pre-market trading and was on pace to extend Wednesday’s gains as traders appeared unfazed by company disclosure that data on most of its 2 billion users could have been accessed improperly. According to Bloomberg, “investors are cautiously returning to technology shares after a selloff last month gave momentum to a global equity correction.”
Most of Asia’s major markets rose, even though China, Hong Kong and Taiwan were closed for holidays. Australia’s ASX 200 (+0.5%) and Nikkei 225 (+1.5%) were higher with strength in Australia’s largest weighted financials sector leading the local index, and the Japanese benchmark was among the outperformers as exporters cheered a weaker JPY. Elsewhere, KOSPI (+1.2%) also advanced and Straits Times Index (+2.0%) saw its largest intraday gain in over a year alongside the rising tide across stocks.
Having closed for the day before yesterday’s US short squeeze really kicked in, European stocks have advanced for the first time this week, following global peers higher, amid optimism that the U.S. and China will step back from a full-blown trade war, and boosted by a weaker euro propping up exporters. The Stoxx 600 climbs 1.6% with nearly 90% of its components in the green as mining, tech and autos lead gains.
Among regional benchmarks, Germany’s exporter-heavy DAX Index climbed the most aided by a slump in the Euro. Financials are higher as banks benefit from the US 10y yield rising back above 2.80%. In terms of stock specifics, Telecom Italia (+3.0%) is higher on sources reporting Italian state lender CDP is to purchase a 5% stake in the company. Sophos Group soars 18% after the company said it anticipates full-year reported billings growth toward the top end of the previously guided growth range. Lagging behind, Just Eat (-3.3%) is failing to deliver on the back of a downgrade by JP Morgan.
In global macro, the dollar strengthened while safe-haven assets including the yen slipped. The USDJPY briefly rose above 107 while the USDTRY hit record highs due to concerns of further rate cuts and reports of Deputy PM resigning. BRL is likely to be in focus as Lula appeal is rejected, Brazil ETF rallies in Asian trading. Elsewhere, Australia’s dollar led declines against the greenback after the country’s money-market rate fell for the first time in almost two months.
In fixed income the core has been pressured by general positive tone as curves steepen; Spanish bonds underperform after a poor 30y auction with large tail; France unusually sells toward bottom end of indicative auction range which also weighs.
Ooil prices extended their post-DoE gains (May ’18 crude WTI futures hovering around USD 63.50/bbl) amid the easing of trade war fears. Gold has lost support from safe-haven flows with prices pulling back from one-week highs as the risk tone returns to the market. Copper traded sideways during Asia hours with its largest consumer China shut for the rest of the week due to holidays, while improved market sentiment lifted London copper, which has recouped the losses seen in the previous session. Elsewhere, Shanghai aluminium stocks tumbled for the first time in nine months. Copper futures well supported, spot gold grinds lower.
- S&P 500 futures up 0.4% to 2,656.25
- STOXX Europe 600 up 1.5% to 372.66
- MSCI Asia Pacific up 0.6% to 171.90
- MSCI Asia Pacific ex Japan up 0.6% to 560.40
- Nikkei up 1.5% to 21,645.42
- Topix up 1.1% to 1,724.61
- Hang Seng Index down 2.2% to 29,518.69
- Shanghai Composite down 0.2% to 3,131.11
- Sensex up 1.5% to 33,506.31
- Australia S&P/ASX 200 up 0.5% to 5,788.81
- Kospi up 1.2% to 2,437.52
- German 10Y yield rose 1.7 bps to 0.517%
- Euro down 0.1% to $1.2262
- Italian 10Y yield fell 5.2 bps to 1.488%
- Spanish 10Y yield rose 1.6 bps to 1.182%
- Brent futures unchanged at $68.02/bbl
- Gold spot down 0.5% to $1,326.35
- U.S. Dollar Index up 0.1% to 90.24
Top Overnight News
- The U.S. and China indicated they’re willing to negotiate on escalating frictions, helping to ease fears among investors that a tit-for-tat trade dispute could derail the strongest global expansion in years
- White House economic adviser Larry Kudlow stressed U.S. tariffs announced on Chinese goods are still only proposals that might never take effect as the Trump administration sought to tamp down fears of a trade war
- U.S. President Donald Trump said a trade war with China was “lost many years ago” by his predecessors, sounding a defiant tone amid tumult in financial markets a day after his administration slapped tariffs on 1,333 Chinese products
- Barclays Plc’s debt ratings were cut to one level above junk by Moody’s Investors Service, after the U.K. bank separated its investment banking activities from retail operations to comply with new rules
- The most accurate pound forecasters are keeping calm and see the currency climbing more than 8 percent this year
- The U.K. Financial Conduct Authority wants asset managers to disclose more information about how they measure their performance, ramping up pressure on active funds to justify their charges
- Brazil’s Supreme Court has rejected former President Luiz Inacio Lula da Silva’s plea to remain at liberty while appealing a 12-year prison sentence for corruption, paving the way for the imprisonment of the front-runner in October’s elections
- Yellen spoke at a private event 2 months after leaving the Fed; she said she considered inflation to be in check and unlikely to spike, so rates would stay relatively low, according to people familiar
- Nikkei: Kim Jong Un had shown intent to return to 6-party talks on denuclearization when he met with China’s President Xi according to people familiar
- Eurozone Mar. Services PMIs: Spain 56.2 vs 56.1 est; Italy 52.6 vs 53.9 est; France 56.9 vs 56.8 est; Germany 53.9 vs 54.2 est; Markit note salary pressures within Spanish, Italian and German reports
- U.K. Mar. Services PMI: 51.7 vs 54.0 est; bad weather in March a key factor holding back number
Asian stocks traded mostly higher as the region sustained the momentum from Wall St where all major indices recovered from the initial losses seen after US and China’s tit-for-tat tariff announcements, with fears later soothed as the US hinted at a willingness for negotiations. The improvement in sentiment was helped by comments from White House economic adviser Kudlow who stated that the US measures were a form of trade negotiations and that Trump’s tariffs on China are all proposals, while he added that back-channel talks with China were occurring. Furthermore, the White House noted there will be a couple of months before China tariffs are implemented with the review period ongoing, and some analysts also viewed the impact from proposed tariffs to be manageable. As such, ASX 200 (+0.5%) and Nikkei 225 (+1.5%) were higher with strength in Australia’s largest weighted financials sector leading the local index, and the Japanese benchmark was among the outperformers as exporters cheered a weaker JPY. Elsewhere, KOSPI (+1.2%) also advanced and Straits Times Index (+2.0%) saw its largest intraday gain in over a year alongside the rising tide across stocks, while mainland China, Hong Kong and Taiwan remained shut for holidays. Finally, 10yr JGBs were subdued following losses in T-notes and with safe-havens shunned amid the heightened risk appetite, while an enhanced-liquidity auction in the super-long end also kept participants side-lined during early trade and after results showed weaker demand
Top Asian News
- Second-Biggest Pakistan Bank Targets ‘Enormous’ Youth Market
- Japan Seeks Jump in Green Bond Issuance With State Backing
- Singer Stake Looms Over Hyundai’s Plan for Smooth Succession
- Japan’s Foreign Stock Investors Come Back After 11-Week Hiatus
European bourses opened higher with 88% of the Stoxx 600 in the green as it sustained the momentum and risk appetite from Wall St. and Asia. The improvement in sentiment was aided by comments from White House economic adviser Kudlow stating that the US measures were a form of trade negotiations and that Trump’s tariffs on China are all proposals, while he added that backchannel talks with China were occurring. All sectors sit firmly in the green with material and technology names top-performers. Financials are also higher as banks benefit from the US 10y yield rising back above 2.80%. In terms of stock specifics, Telecom Italia (+3.0%) is higher on sources reporting Italian state lender CDP is to purchase a 5% stake in the company. Lagging behind, Just Eat (-3.3%) is failing to deliver on the back of a downgrade by JP Morgan.
Top European News
- Steinhoff Bows to Pressure Over Bonus Payments After Outrage
- Danske Executive Behind Baltic Unit Quits Amid Laundering Probe
- Cassa Depositi May Buy Up to 5% of Telecom Italia: Il Sole
- U.K. Economy Battered by the ‘Beast From the East’ Snowstorm
- DXY: The Index looks a bit more comfortable back above the psychological 90.000 level and with the Greenback firmer vs all G10 peers, bar the Loonie that continues to glean encouragement from broadly constructive NAFTA developments (negotiations said to be progressing well, albeit with some major issues yet to be resolved, and on track for an agreement in principle by mid-April). A truce or rather a time out for talks between the US and China on proposed import tariffs has calmed trade war fears, underpinning the Dollar and risk sentiment in general to the detriment of traditional safe-havens. However, the DXY really needs to reclaim 90.500 and above to maintain momentum vs highs around 90.335 thus far.
- CAD: Bucking the broader trend due to the aforementioned positive NAFTA impulses and back near recent peaks vs the Usd within 1.2780-45 parameters ahead of Canadian (and US) trade data.
- CHF: Also a bit of an outlier among majors with firmer than forecast Swiss CPI data supporting the Franc between 0.9600-30 and 1.1790-1.1805 vs the Usd and Eur respectively, but the Chf still not really trading like a safe-haven amidst market talk of SNB intervention.
- GBP: Another mover on independent factors, or to be precise in the run up to a much weaker than expected UK services PMI, with Cable drifting back from yet another test of 1.4100 resistance/multiple tops to around 1.4035 and Eur/Gbp nudging towards 0.8740.
- EUR: Losing more ground from recent 1.2300+ peaks vs the Usd and seriously probing stops around 1.2250 ahead of more layered bids in the 1.2240-20 area and decent tech support at the upper end of that range.
- JPY: Also extending losses vs the Usd and the headline pair probing a bit higher above 107.00, but not quite challenging offers said to be sitting at 107.20 and 107.30, which could expose stops above the 107.33 level (55 DMA).
In commodities, oil prices extended their post-DoE gains (May ’18 crude WTI futures hovering around USD 63.50/bbl) amid the easing of trade war fears after US officials said they are open to negotiations with China over tariffs. Gold has lost support from safe-haven flows with prices pulling back from one-week highs as the risk tone returns to the market. Copper traded sideways during Asia hours with its largest consumer China shut for the rest of the week due to holidays, while improved market sentiment lifted London copper, which has recouped the losses seen in the previous session. Elsewhere, Shanghai aluminium stocks tumbled for the first time in nine months. Qatar oil energy minister says OPEC and non-OPEC should continue cooperation over oil market.
Looking at the day ahead, in the US, data due include weekly initial jobless claims and the February trade balance reading.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior -4.3%
- 8:30am: Initial Jobless Claims, est. 225,000, prior 215,000; Continuing Claims, est. 1.84m, prior 1.87m
- 8:30am: Trade Balance, est. $56.8b deficit, prior $56.6b deficit
- 9:45am: Bloomberg Consumer Comfort, prior 56.8
DB’s Jim Reid concludes the overnight wrap
I’m glad this is not a podcast this morning as I was shouting and screaming so much at the football last night that I think I’ve lost my voice. For those with no interest in football Liverpool beat Man City 3-0 in the Champions League QF 1st leg. Bulldozed them in the first half, hung on for dear life in the second. Man City are 18 points clear in the Premier League so a great win but only half way in the tie.
Staying in Europe as someone that once lost his dog for two hours at a motorway petrol station in France I had some sympathy yesterday for the well-publicised German who left his two daughters behind at a petrol station en route to the Alps. For those who didn’t see the story he travelled around 100 miles before police (who phoned 48 times) could get hold of him to tell him of his mistake. Apparently they went to the bathroom while he was getting petrol and he hadn’t realised they were gone when he jumped back in. To make matters worse the girls didn’t have their father’s number and when they tried their home their mother was still asleep and not picking up. So worst Dad of the year might not be coming my way after all.
We’re at an important point in the phoney trade war that’s currently playing out between the US and China. As the European session opened China retaliated to the prior day US move by proposing 25% tariffs on around $50bn of US imports (therefore an equal reaction in $ terms). The levies are reciprocal but won’t come in immediately, but only after the US tariffs officially come into force and depends on the outcome of bilateral negotiations, so still time for things to de-escalate but it was a rapid response.
As our Chinese economist Zhiwei Zhang put it yesterday “The US announcement of tariff against China is well expected, but the Chinese reaction is stronger and faster than we expected. The macro impact on China’s growth is negligible at this stage, but another step further by either side would likely trigger retaliation with visible macro impact”.
Zhiwei thinks there is room for the two sides to negotiate though. His baseline is for the lists on both sides to be shortened. The tension will likely continue with tough talk from both sides, but he does not see further escalation beyond the lists announced yesterday. Zhiwei believes China is still willing to make compromise and open the service sector in exchange for a resolution of the trade tension. It remains in the best interest for both sides to eventually negotiate, though timing wise it may go beyond 2018. See his note here for more details about his views and what China have announced. Elsewhere, our US economists have also outlined the key products as proposed by the USTR and time line for negotiations in their note yesterday.
For us, the dilemma for markets is that equities are now ‘cheap’ relative to current economic activity (see yesterday’s equities vs PMI analysis) and therefore if you think the trade war fears are overblown and the economy stabilises then this is a good short term buying opportunity. However if the war escalates then sentiment will undoubtedly worsen further. Indeed it feels that equities are unlikely to settle at these levels. They’re more likely to rebound sharply with easing tensions or slump more with any further escalations. The status quo and low vol is the least likely outcome.
Markets did a full turnaround yesterday as the early slump (S&P 500 opened -1.56%) after China’s swift retaliation was reversed with the S&P 500 closing +1.16%. The Dow saw a 786 point intra-day range and the VIX traded as high as 24.51 before finishing -4.9% lower at 20.06. The recovery seemed to be due to a belief that negotiation could still be the end game. Indeed US Commerce Secretary Wilbur Ross appeared on CNBC earlier in the session and said the US isn’t entering “World War III” and left the door open for a negotiated solution by suggesting that “even shooting wars end with negotiations”. Further, Trump’s top economic advisor Larry Kudlow added “…there’s already back channel talks going on…this is a negotiation, using all the tools”. President Trump also played down the prospect of trade war and tweeted “we are not in a trade war with China…” On the other side, China’s ambassador to the US Cui Tiankai noted “negotiations would still be our preference…but if others does things in the wrong direction, we’ll have to respond”.
This morning in Asia, markets have followed US markets higher with the Nikkei (+1.88%), Kospi (+1.55%) and ASX 200 (+0.69%) all up while the Hang Seng and Chinese bourses are closed today for holidays. Elsewhere, Reuters reported that the US could announce sanctions on Russian business elites this week under a law targeting Moscow for interfering in the 2016 US election.
Now recapping other markets performance from yesterday. Within the S&P, only the energy sector was down (-0.14%) while gains were led by the consumer, health care and tech sectors. Boeing pared back losses of -5.73% to close -1.02% as the Chinese tariffs on aircrafts seemed to target a generation of 737 jets that are nearing the end of their production run. In Europe, the Stoxx 600 (-0.47%) and DAX (-0.37%) fell modestly while the FTSE edged up 0.05%.
Government bonds were relatively unaffected with yields on 10y Bunds (-0.1bp) and OATs (-0.8bp) down slightly after the softer than expected Euro area CPI print. Elsewhere, yields on UST 10y and Gilts rose 2.8bp and 0.8bp respectively while Italian BTPs outperformed (-5.2bp) as negotiations get underway to form a new government. In FX, key currencies were little changed with the US dollar index down -0.06% while the Euro and Sterling gained 0.07% and 0.16% respectively. In commodities, WTI oil fell -0.22% while Gold was marginally higher (+0.03%). Other base metals also weakened (Copper -0.06%; Zinc -0.74%; Aluminium -0.32%) while soybeans fell 2.19% post the proposed tariffs from China.
Now turning to the latest Fed speak. The Fed’s Bullard reiterated his dovish views and noted “current monetary policy settings are close to neutral….it’s not necessary…to raise the policy rates further” On trade, he noted the US/China trade frictions “….increases the uncertainty around the (economic) forecasts” and that “more uncertainty is likely keeping longer rates lower. I could see that feeding back and keeping short rate lower than they would otherwise be”. Elsewhere, the Fed’s Brainard noted trade policy is “a material uncertainty” to the outlook and “…it’s certainly something that I take into account, in thinking about risks”.
Following on, the Dallas Fed researchers published a note yesterday indicating the impact from metal tariffs could reduce US GDP by 0.25ppt over the long run, but the “consequences accompanying retaliation and a potential trade war could prove far more potent” with their scenario analysis suggesting US GDP could be -3.5ppt lower if the EU / China and US imposed prohibitively high tariffs on each other across every industry. Elsewhere on NAFTA talks, unnamed sources told Bloomberg that the Trump administration may softened its demand for higher North American content in cars produced by introducing a tiered system on parts, although Canada’s ambassador to the US noted “there’s still lots of issues…we’re going to work hard to try and narrow down the gaps and get to…an agreement”.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the March ADP employment change was above expectations at 241k (vs. 210k) and broadly similar to readings over the past three months. The March ISM non-manufacturing index was marginally below (58.8 vs. 59 expected) while the February factory orders was also weaker than expected at 1.2% mom (vs. 1.7%). Elsewhere, the final reading of the February core capital goods orders was unrevised at 1.4% mom while core durable goods orders was revised -0.2ppt to 1% mom. Also the final reading for the March services PMI was 54 (vs. 54.2 expected) while the composite PMI was revised down by -0.1 to 54.2.
The Euro area’s March core CPI was below market at 1% yoy (vs. 1.1% expected) and steady for the third consecutive month. Elsewhere, the Euro area’s February unemployment rate was in line at 8.5% and marked a fresh 10 year low, while Italy was 10.9% (vs. 11% expected). In the UK, the BRC shop price index fell 1.0% yoy in March, which was the weakest result in 13-months.
Looking at the day ahead, non-manufacturing PMIs should again dominate the morning session with final March revisions due for the core and non-core countries. Also due are February factory orders data in Germany, and February PPI for the Euro area. In the US, data due include weekly initial jobless claims and the February trade balance reading. Off to find some Lozenges.
THE SOURCE: ZeroHedge.com