Global Stocks, US Futures Slide Spooked By G20 Protectionist Shift; Dollar Drops For 4th Day

Global markets start the week mixed with Asian stocks rising (Japan was closed for holiday), European stocks sliding, weighed down by declines in oil-and-gas shares and banks, and S&P500 futures also down. The dollar fell to a six-week low, falling four days in a row for the first time since early November as G20 leaders scrap a long-standing commitment to reject all forms of trade protectionism, suggesting the “weak Dollar” camp in Trump’s inner circle is winning.

Equities retreated in Europe, Australia and New Zealand, as did S&P 500 Index futures. Japan’s stock market was closed Monday for a holiday. Indexes rose in Hong Kong, Malaysia and Thailand. The Australian 10-year yield resumed a retreat after rising at the end of last week. The yen touched its strongest in three weeks, while the Korean won was the highest in five months. Oil fell for the ninth day in 11.

“European equity markets have started the week with a heavy risk-off sentiment after the G20 communiqué explicitly reflected U.S. intentions to establish trade protectionist measures,” Ipek Ozkardeskaya, senior market analyst at London Capital Group, told Reuters. “As the world’s number one economy is preparing to set significant barriers against the world, investors are increasingly worried,” she said.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose almost 0.4 percent to hit its highest level in more than two years on Monday. As a result, MSCI’s global benchmark equity index was little changed.
On Friday, Wall Street was flat to negative, dragged lower by bank shares that fell along with Treasury yields. Futures on the S&P 500 Index were down 0.1 percent. The underlying gauge rose 0.2 percent last week.  The Stoxx Europe 600 index fell 0.2 percent. The FTSE 100 and Dax index were also both down 0.2 percent. Australia’s S&P/ASX 200 Index and South Korea’s Kospi lost 0.4 percent. The Hang Seng Index advanced 0.8 percent, while the Shanghai Composite Index rose 0.4 percent. New Zealand’s S&P/NZX 50 Index slid 1.4 percent, the most since November, dragged lower by Fletcher Building Ltd., which identified more expected losses in its construction division.

For those readers who missed the weekend’s big news, the G20 omitted a pledge to resist all forms of protectionism in its communique from its meeting in Germany over the weekend. That shift followed hours of wrangling that kept officials in suspense on whether the G-20 would even mention trade, with occasional doubts that a communique might be produced at all.

Despite some modest weakness, global stocks are coming off their best week since January, even as the dollar has slumped 1.7% after the Federal Reserve raised interest rates on March 15 yet didn’t accelerate the timeline for future tightening. The dollar index of its value against a basket of six currencies fell to a six-week low of 100.02 on Monday.  It fell 0.2 percent against the yen before recovering to trade flat on the day at 112.70 yen JPY=D4, while the euro rose 0.3 percent to $1.0770 EUR=.  Citi became the latest major bank to abandon its headline forecast for a fall in the euro to below parity with the dollar, upping its prediction for the single currency over the next six to 12 months to $1.04 from $0.98 previously.

The dollar index of its value against a basket of six currencies fell to a six-week low of 100.02 on Monday. It fell 0.2 percent against the yen before recovering to trade flat on the day at 112.70 yen, while the euro rose 0.3 percent to $1.0770.

Volatility remains low across markets from equities to currencies and fixed-income as investors strive to assess how sustainable the nascent global economic recovery is.  As the chart below shows, following the recent volley of central bnk announcements, FX volatility has tumbled.

The greenback extended its recent decline, with the Bloomberg Dollar Spot Index touching its lowest level since November, pressured by investors who kept the latest bearish trend intact. A Japanese holiday and the previously noted Group-of-20 meeting that left most business unfinished suppressed flows in the major currencies; dropping a reference from the G-20 statement to resist trade protectionism weighed on the dollar, with macro and leveraged accounts adding to shorts positions, according to a London-based trader. Volumes were near the lowest they have been in March, a Europe-based trader noted. The Bloomberg dollar index, the BBDXY dropped, as much as 0.3% to 1223.95, lowest since Nov. 11, before paring decline; investors may look for guidance by speeches by Fed’s Dudley and Yellen expected later this week before meaningfully adjusting their current positioning.

Currency markets will also be focused on a raft of speeches by Fed officials this week, including Chicago’s Charles Evans on Tuesday and Friday, Chair Janet Yellen on Thursday, Dallas’s Robert Kaplan and Minneapolis’s Neel Kashkari on Friday and New York’s William Dudley on Saturday.  “Sentiment towards the dollar has deteriorated significantly,” Societe Generale FX analysts said in a note to clients on Monday.

In rates, the 10-year U.S. Treasury yield has fallen around 10 basis points below 2.50 percent since the Fed raised rates last week for only the third time in over a decade. The gap between two- and 10-year yields has shrunk, meaning the yield curve has flattened. This suggests investors are skeptical growth and inflation will be strong enough to warrant a sustained cycle of rate hikes, and has subsequently weighed on the dollar.

In commodities, oil prices continued their downward trend as OPEC supplies remained steady despite touted cuts and rising U.S. drilling contributed to concerns about a supply glut.  U.S. crude dropped 1% to $48.29 a barrel.  Global benchmark Brent fell 0.7% to $51.40.  The weaker dollar boosted gold which rose 0.4 percent at $1,233 an ounce, after touching a two-week high earlier in the session.

Bulletin Headline summary from RanSquawk

  • European equities trade modestly lower so far, with Deutsche Bank weighing on the financial sector has they begin their capital raising
  • FX price action has been relatively muted amid light newsflow, while oil trades lower after lEA’s Birol highlighted an increase in US oil output
  • Highlights include, Chicago Fed National Activity Index, Bundesbank Report and comments from Fed’s Evans and BoE’s Haldane.

Market Snapshot

  • S&P 500 futures down 0.2% to 2,371.00
  • MXAP up 0.2% to 148.64
  • MXAPJ up 0.4% to 481.53
  • Nikkei down 0.4% to 19,521.59
  • Topix down 0.4% to 1,565.85
  • Hang Seng Index up 0.8% to 24,501.99
  • Shanghai Composite up 0.4% to 3,250.81
  • Sensex down 0.5% to 29,516.48
  • Australia S&P/ASX 200 down 0.4% to 5,778.91
  • Kospi down 0.4% to 2,157.01
  • STOXX Europe 600 down 0.1% to 377.86
  • German 10Y yield rose 0.5 bps to 0.44%
  • Euro up 0.3% to 1.0766 per US$
  • Brent Futures down 0.4% to $51.58/bbl
  • Italian 10Y yield fell 0.9 bps to 2.357%
  • Spanish 10Y yield rose 0.5 bps to 1.886%
  • Brent Futures down 0.4% to $51.58/bbl
  • Gold spot up 0.4% to $1,233.53
  • U.S. Dollar Index down 0.2% to 100.15

Top Overnight News via BBG

  • German Chancellor Angela Merkel and Japanese Prime Minister Shinzo Abe called for a concerted effort to defend free trade, expanding the list of economic powers joining together to counter the U.S. shift toward protectionism
  • Money managers cut bets on rising West Texas Intermediate crude by a record amount during the week ended March 14, while wagers on a further price drop doubled as oil remained below $50 a barrel
  • Deutsche Bank to Raise $8.6 Billion After Pricing Share Sale
  • Deutsche Bank Says Revenue to Stay ‘Broadly Flat’ This Year
  • Cerberus-Backed Albertsons Said to Consider Merger With Sprouts
  • Blackstone Venture Acquires $1.4 Billion of Hansteen Properties
  • Hansteen Rises to Highest in 10 Years on Blackstone Asset Sale
  • Alphapharm Begins Recall of Epipen Auto-Injector in Australia
  • Ford’s Lincoln to Offer Its First Hybrid Model in China
  • Arconic Reports Multi-Year Deal Supply With Toyota North America
  • FDA Investigating Rate of Cardiac Events With Abbott’s BVS
  • Cognizant Said to Likely Fire Over 6,000 Employees, ET Now Says

In Asian markets, stocks traded mixed amid a lack of key drivers and with Japanese trade closed for the Spring Equinox public holiday, while ASX 200 (-0.5%) was led lower by telecoms and profit-taking in gold related stocks. China was positive with Hang Seng (+0.7%) the outperformer after a firm liquidity injection of CNY 100bIn by the PBoC and as participants digested earnings releases, while Shanghai Comp. (+0.4%) lagged after Chinese property prices continued to surge with Bejing prices up over 20% Y/Y, which could essentially attract funds away from stocks. Elsewhere, US equity futures were pressured and broke below Friday’s lows, while Nikkei 225 remained shut due to the public holiday. Chinese Property Prices (Feb) Y/Y 11.8% (Prey. 12.2%). PBoC injected CNY 60bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 20bIn in 28-day reverse repos.

Top Asian News

  • Risk Appetite Goes Missing as Asia Starts the Week: Markets Wrap
  • Yellen’s Shadow Looms Large Over China Central Bank Policy
  • Selling Dollars Is Becoming The New Trump Trade: Markets Live
  • Meitu Erases 28% Surge as Shares Seen Volatile Before Earnings
  • China Said to Temporarily Suspend Beef Imports From Brazil
  • Hong Kong Stocks Extend Weekly Rally as Shenhua Jumps on Payout
  • Credit Suisse Co-Head of Asia Cash Equities Lee Said to Leave
  • Malaysia Should Improve ‘Fragmented’ Military, Honeywell Says
  • Morgan Stanley Said to Lose Second Senior M&A Banker in Asia

European bourses have kicked off the week in tentative fashion with the calendar looking somewhat light. EU bourses are trading with minor losses amid slight weakness in the financial sector with Deutsche Bank commencing their EUR 8bIn capital raising plan, while UBS are set to go on trial in their tax case in France. Elsewhere, Vodafone initially saw telecoms as the only sector in the green after agreeing to merge their Indian unit with Idea Cellular, however with Co. shares paring the initial upside amid suggestions that the merger may struggle to pass through regulatory requirements. Price action in fixed income markets has been somewhat contained with Bunds only modestly lower, with slight underperformance observed in the belly of the curve. Ahead of the French TV debate in the presidential race, OATs had been underperforming for much of the morning with the German/French spread widening the most in 2 weeks.

Top European News

  • Deutsche Bank Says DoJ Closed Criminal Inquiry in FX Matter
  • Merkel, Abe Call for EU-Japan Deal to Stem Trade Barriers
  • Visco Says ECB Could Shorten Break Between QE Exit And Rate Hike
  • Atos Denies Worldline Preparing Ingenico Bid, Reuters Says
  • Hugo Boss Drops After Report Frere’s GBL Isn’t Shareholder
  • Ingenico Rises After La Lettre Report Worldline Preparing Bid
  • Troim’s Borr Buys Transocean’s Jack-Up Fleet for $1.35 Billion
  • Paris Climate Accord Could Make the World $19 Trillion Richer
  • Vodafone, Idea Agree on Merger to Create India Mobile Leader

In currencies, the yen was little changed at 112.74 per dollar as of 8:26 a.m. in London after reaching its strongest since Feb. 28. The euro climbed 0.3 percent to $1.0769, while the Australian and New Zealand dollars rose 0.3 percent and 0.4 percent, respectively. The British pound gained 0.2 percent. The South Korean won jumped 1 percent to its highest since Oct. 20, leading gains in emerging Asian markets. The baht also reached its strongest level since October. The USD-index continues to weakn post the G20 meeting as finance leaders caved into pressure from the US and scrapped a commitment to reject all forms of trade protectionism. As such, the pullback in the greenback has supported its major counterparts, with GBP making a break above 1.2400. Additionally, from a UK stand point reports report have been circulating that PM May’s closest have been calling for a potential snap election on May 4th in order to take seats from the SNP and reduce the likelihood of a second Scottish referendum. Another thing to keep an eye out for will be the French Election TV debate scheduled at 1900GMT, consequently, price action in EUR could be somewhat tame throughout the day, as has been the case so far, with the notable data of the morning coming I the form of Eurozone labour cost index, which was in line with Exp. ECB’s Visco (Dove) said that deflation risk seems to have passed and that the ECB could shorten the time gap between exit from QE and first rate hike.

In commodities, another rise in oil rigs continues to put the pressure on crude prices as WTI looks to test USD 48 to the downside, while lEA’s Birol added to these concerns having noted that he expects a major boom in US oil output and shale gas volumes. Elsewhere, copper will be in focus after labour unions at Chile’s Escondida mine slams new offer from management.  West Texas Intermediate crude slid 0.7 percent to $48.42 a barrel. It has dropped 10 percent this month, heading for the steepest one-month slide since July. Gold rose 0.3 percent to $1,232.97 an ounce, climbing for a fourth day. Base metals fell on the London Metal Exchange, with copper forwards down 0.2 percent and tin retreating 0.3 percent.

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. 0.03, prior -0.05

* * *

DB’s Jim Reid concludes the overnight wrap

Markets look set to be a little less interesting than my bedroom arrangements this week with perhaps the highlights being lots of Fed speakers, the first televised French Presidential debate tonight and the flash global PMIs on Friday. The Fed speakers will likely reinforce the message from the FOMC but watch for signs of increased confidence in their outlook. The French debates might start to lead to some bigger moves in the polls which have been relatively steady of late. As for the PMIs, volatility has been very subdued in the face of high political uncertainty due to continued strong data, especially survey data so the flash PMIs are often the best real time update of the global economic pulse.

Over the weekend the G-20 meeting ended with the “resist all forms of protectionism” line dropped from the previous communiqué. The US were the stumbling block but it’s still early days in the new Trump administration so for now it seems that markets will wait and see before becoming too scared by the implications. Indeed the more significant meeting may be the G-20 meeting in Hamburg in July by which time some of that uncertainty around the new US administration may have started to clear up. Aside from that the rest of the weekend news has been fairly light. The general view of the meeting between President Trump and Chancellor Merkel was that it was inconclusive with the President also tweeting after that “Germany owes vast sums of money to NATO and the United States must be paid for the powerful, and very expensive, defence it provides to Germany”.

Over in markets there hasn’t been too much a reaction to the weekend headlines with bourses generally mixed in Asia, albeit with fairly modest moves. Indices in China are little changed while the Kospi (-0.52%) and ASX (-0.47%) are down. The Hang Seng (+0.53%) is up however and in doing so has passed the 24,000 level for the first time since 2015. Elsewhere, US equity index futures are down about -0.20% while in FX the USD is a smidgen weaker.

Staying in Asia, there was also some data released in China over with the weekend with the release of the February house prices data. For new homes excluding subsidized housing, prices were reported as rising in 56 out of the 70 major cities which compares to 45 cities in January. It’s worth noting that Beijing’s municipal government on Friday increased the down payment requirement on second homes by 10% in an attempt to cool prices. The maximum length of a mortgage was also cut to 25 years from 30 years.

The relatively quiet start this morning follows Friday’s session in which markets appeared to run out of steam following a packed week. That was certainly the case for equity markets where the S&P 500 closed with a modest -0.13% loss and so capping the weekly return at +0.24%. In Europe the Stoxx 600 did however end +0.16% despite Banks underperforming and so making the weekly return a solid +1.36%. Last week’s winner was EM however with the MSCI EM index rising every day last week, including a +0.25% gain on Friday, to finish +4.26% for the week and the strongest week since July last year.

Meanwhile, over in bond markets and following those Nowotny comments late on Thursday suggesting that the ECB could raise the deposit rate before the main refinancing rate and also prior to QE ending, the front end of the Bund curve saw yields tick higher, with 2y yields up 1.8bps to -0.792% and to the highest since February 6th. 10y and 30y Bund yields on the other hand finished 1.4bps and 3.1bps lower. Our European fixed income strategy team highlighted in their weekly on Friday that the market is now pricing a significant probability of a oneoff hike in the deposit facility rate. They note that a 10bp hike is priced by Jan-18, a 15bp hike by May-18 and a 20bp hike by Aug-18. Indeed they believe that the sequencing of the ECB’s easing decisions since the start of QE suggests that a one-off hike in the deposit rate is likely, however at the same time could present some communication challenges highlighted by the steepening of the money market curve in the recent repricing of the timing of the first 10-20bp move in Eonia rates.

Elsewhere 10y Treasury yields retraced much of the previous day’s move by falling 4bps to 2.501%. The Fed’s Kashkari spoke – who as a reminder was the lone dissenter at the FOMC vote last week – and said that relatively little change in recent data and his belief that the job market slack remains tilted his vote towards favouring not raising rates.

While there wasn’t much particularly going on in markets, Friday was however another busy session for data releases in the US. The most anticipated was the February industrial production report which came in a  little disappointing with production flat during the month versus expectations for a +0.2% mom rise, while capacity utilization also ticked down one-tenth to 75.4%. Manufacturing production did however rise +0.5% mom during the month and matching consensus. Away from that the first look at the March University of Michigan consumer sentiment reading revealed a 1.3pt rise in the headline sentiment reading to 97.6 (vs. 97.0 expected). Most notable in the details was the 3pt rise in the current conditions index to a new high of 114.5. The expectations component on the other hand rose a much more modest 0.2pts to 86.7 while both 1y and 5-10y inflation expectations fell three-tenths each to 2.4% and 2.2% respectively. The other data out on Friday was the conference board’s leading index which rose +0.6% mom in February and the labour market conditions index which strengthened by 1.3 index points in February. All told the Atlanta Fed’s Q1 GDP tracker remains unchanged at 0.9%. That continues to fly in the face of the NY Fed model which, while revised down 0.4% last week, still sits at 2.8%.

Over to this week’s calendar now where, after all the excitement last week, it looks set to be a fair bit quieter this week. The lone data in Europe this morning is PPI in Germany while in the US the only data due is the Chicago Fed national activity index. On Tuesday the early focus is on the UK with both the February CPI/ PPI/RPI prints and also the CBI trends orders data and public sector net borrowing data for last month. In the US we’ll get the current account balance reading. Kicking off Wednesday is Japan where the latest trade data is due. There is nothing of note in Europe on Wednesday while in the US we’ll get the FHFA house price index and February existing home sales. The diary is a bit busier on Thursday with various confidence readings due in France and Germany in the morning along with UK retail sales data for February. Over in the US we will then get new home sales, initial jobless claims and the Kansas City Fed’s manufacturing index. We end the week with what looks set to be the busiest day on Friday. In the morning we will get the flash March manufacturing PMI in Japan before we then get the flash manufacturing, services and composite PMI’s in Europe. France GDP will also be released. In the US we then end with preliminary February durable and capital goods orders and also the flash manufacturing PMI.

Away from the data this week’s Fedspeak consists of Evans this evening, Dudley, George and Mester on Tuesday, Fed Chair Yellen on Thursday along with Kashkari and Kaplan, and then Evans on Friday along with  Bullard. Bundesbank President Weidmann is also due to speak today and the ECB’S Lautenschlaeger on Thursday. The BoJ minutes from the January meeting are due out on Tuesday. Other events worth watching is the live televised debate between the French presidential candidates tonight and also the Euro area finance ministers meeting today, including a discussion on Greece.

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