Europe And S&P Futures Higher, Dollar Drops As OPEC Talks Oil Up

European stocks rose amid earnings beats, offsetting weakness in the energy sector and easing investor concerns ahead of the weekend’s French election. Asian shares and U.S. futures also rise. The dollar weakens against the euro and most crosses, while crude oil rebounds following renewed OPEC chatter of a production cut, this time with Saudi Arabia seemingly onboard.

World stocks eked out small gains on Thursday, with the MSCI’s world stock index up 0.13 percent, as investors resisted risky bets ahead of the first round of the French presidential election over the weekend. Oil prices, which fell sharply on Wednesday on supply news, regained some losses after Saudi Arabia’s energy minister said that OPEC is likely to reach an agreement to extend the group’s production cuts into the second half of 2017. Overall, markets have stuck to familiar trading ranges buffeted by concern over political risks and continued tensions over North Korea.

What happened overnight? Here is a 30 second summary from JPM:

Stocks were mixed in Asia while equities in Europe have a bid and US futures are bouncing too. On the macro front, nothing major occurred (although there are a few interesting headlines, esp. the ones concerning easier China capital controls). The main focus was on earnings w/a slew of reports out of both the US and Europe (on balance earnings over the last 12-18 hours were positive although no single report is altering the broader market narrative). There were a bunch of articles talking about the potential for a US gov’t shutdown (which still seems unlikely). Finally, Saudi Arabia sounds confident in extending the OPEC deal although maybe by less than 6 months.

Looking at markets, the Stoxx Europe 600 Index fluctuated before advancing 0.1%, helped by a rally in food producers after Unilever NV and Nestle SA results beat estimates. It has been a pretty busy morning of Eurozone earnings w/a bunch of large reports (ABB, Man Group, Nestle, Pernod Ricard, Publicis, Rio Tinto, Schneider Electric, Unilever, and more). Pretty much all the large caps are rallying in Europe after reporting. Man Group, Schneider Electric, and Publicis are some of the top stocks in the SXXP following their earnings. Sawai Pharmaceutical said on Thursday it would buy U.S. generic drug maker Upsher-Smith Laboratories for $1.05B (per Reuters). VIRT has reached a deal to buy KCG and an announcement is likely Thurs; VIRT will pay $20/shr. (per Bloomberg and CNBC).

In Asian trading, Japanese stocks failed to hold on to slim gains and closed flat on the day. S&P 500 futures rose 0.3% after the cash market slid 0.2% on Wednesday.

Quoted by Reuters, Fan Cheuk Wan, head of investment strategy and advisory, Asia, at HSBC Private Banking said that “given the binary risk of the French presidential elections and geopolitical concerns over North Korea, investors are staying on the sidelines.”

Investors are facing a stern test of nerves on Sunday where polling ahead of the first round of the French elections suggests that any two candidates can make it into the second round.

Millions of French voters remain undecided, making this the least predictable vote in France in decades, and raising fears of a potential surprise result that could spread turmoil in markets. As Reuters notes, however, France’s borrowing costs nudged down on Thursday before a bond auction that is likely to be watched more closely than usual. There was some optimism for a market-friendly “status quo” outcome when a Harris Interactive-France Televisions poll show Macron’s lead rising by 1 point to 25% over Le Pen at 22%, which in turn sent the EUR to session highs.

However, a subsequent poll from OpinionWay showed that Macron’s lead remained unchanged at 23%, just 1 point above Le Pen at 22% and Fillon and Melenchon both within poll error distance.

Additionally, ongoing tensions around North Korea and Syria ratchet up market risks. U.S. President Donald Trump’s travails trying to implement his fiscal agenda are also clouding the growth picture, while the Federal Reserve’s plan for monetary tightening looks increasingly unsure. “This political uncertainty’s not going away for a while,”  said Ben Kumar, a London-based investment manager at Seven Investment Management.“Markets are trying to get their heads around whether that will actually affect company earnings. For the first part of this year the message was no, it doesn’t matter, earnings upgrades came through in Europe and the U.S.”

Indeed, a run of disappointing U.S. economic data and questions about whether the Trump administration can push through tax cuts have dented some of the enthusiasm for risky assets in recent weeks. A sharp dip to three-week lows in oil prices overnight was the latest sign of an unwind in the global reflation trade. Crude oil clawed back some of the loss but concerns about a supply glut capped the rebound.

“Rising U.S. oil inventory data is now starting to impact the market’s aggressive long position in crude,” said analysts at Morgan Stanley in a note to clients.

Following the abovementioned Saudi comments on a potential deal extension, Brent crude futures were up 0.5% to $53.22 a barrel after sliding more than 3 percent in the previous session. U.S. West Texas Intermediate crude futures CLc1 were up 0.4%.

In currency markets, the euro rose 0.4 percent to a three-week high of $1.0748 against the dollar. The greenback was 0.2 percent weaker against a basket of major currencies

The greenback slipped against most peers. Commenting on the dollar slide, SocGen’s Kit Juckes writes that “the Fed’s biggest challenge may be that inflation expectations are still falling, steadily de-coupling from its 2% target. It’s hard to see how the Fed can remain hawkish against a backdrop of falling inflation expectations and hard, in the process, to see the dollar getting more than a nominal bounce until there are clearer signs of economic robustness.”

USD/JPY has been faithfully following real yields, and does look increasingly like a buy closer to 105. AUD/JPY may come back into its own at around the same time. We just can’t see the justification for US real yields to fall all that much further, and stability around here may be all that is needed to get USD/JPY trending back up within the current trading range.


The bigger dollar story remains against the euro. French election polls continue to show the top four candidates’ poll rankings bunching around 19-23%, which will keep markets nervous, though the only major risk to the market is that Le Pen and Mélenchon make the second round together – something that is getting slightly less likely as M. Mélenchon’s poll ranking fails to break above 20%.

It is a quiet day in the US where economic data include initial jobless claims. Philip Morris, Verizon are among companies scheduled to publish results. On the DC docket, U.S. Vice President Mike Pence continues his Asia-Pacific trip with a stop in Jakarta.

Bulletin Headline summary from RanSquawk

  • Indecisive trade across the main European indices this morning with the downside in the energy sector counterbalanced by the gains in consumer staples
  • Modest moves across the currency spectrum in G10 this morning, with modest gains for the EUR, GBP and AUD against the USD as yields remain suppressed
  • Looking ahead, highlights include US weekly jobs, Philly Fed, Fed’s Powell, Rosengren and BoE’s Carney

Global Market Wrap

  • US futures are up 6-7 points
  • Asia: Japan Nikkei -0.01%, Japan TOPIX +0.09%, China +0.04%, Hong Kong +0.97%, KOSPI +0.50%, Taiwan -0.08%, Australia +0.30%
  • Stoxx 600, +0.11%. EuroStoxx 50 +0.73%, FTSE -0.05%, DAX +0.27%, CAC +1.10%, Italy +0.31%, Spain +0.84%
  • USD (DXY) down 0.27%, EUR up 0.48%, GBP up 0.38%, JPY down 0.17%, CNY Onshore up 0.07%, CNH Offshore up 0.06%, AUD up 0.27%
  • VIX down 4.22% to 14.3
  • Gold down 0.10% to $1,278.95
  • Silver up 0.04% to $18.17
  • Copper up 0.63% to $256.50
  • WTI Crude up 0.69% to $50.79
  • Brent Crude up 0.74% to $53.32
  • Natural Gas up 0.31% to $3.20
  • Corn up 0.48% to $3.70/bu
  • Wheat up 0.23% to $4.36/bu
  • Treasuries 2yr yields are up ~0.4bps at 1.181%, 10yr yields are up ~1.1bps at 2.225% and 30yr yields are up ~0.6bps at 2.879%
  • Japan 10yr yields 0.003%, up ~0.8bps on the day
  • France 10yr yields 0.966%, up ~2.3bps on the day
  • Italy 10yr yields 2.288%, up ~3.1bps on the day
  • Spain 10yr yields 1.687%, up ~3.8bps on the day
  • Germany 10yr yields 0.234%, up ~3.4bps on the day

Top Overnight News from Bloomberg

  • Fischer Says Foreign Economies Better Able to Handle Fed Hikes
  • Sky Expands Partnership With HBO to Counter Netflix on Drama
  • Nestle, Unilever Price Increases Stoke Food Industry Optimism
  • Saudi Arabia Says Some Oil Producers Reach Deal to Extend Cuts
  • Russia Says Extension of OPEC Oil Deal Still Under Discussion
  • General Motors Ceases Venezuela Operations After Assets Seized
  • Amazon Confirms Australia Opening, Seeks Marketplace Merchants
  • Enbridge Announces 27% Apportionment on Line 4/67 in May
  • Encana Sees Montney Asset Producing 70k Barrels a Day by 2019
  • American Air to Combine Flight Attendant Operations in Oct. 2018
  • AbbVie Veliparib Phase 3 Studies Didn’t Meet Primary Endpoints
  • Deere Mentioned Cautiously by Grant’s Interest Rate Observer
  • Microsoft in Talks to Buy Cloudyn for $50m-$70m: Calcalist
  • Buffett May Have Voted Shares to Back Wells Fargo Board: Reuters
  • Apple to Start Trial Assembly of iPhones Starting Next Month: ET
  • Virtu Financial to Buy KCG Holdings for $20/Share Cash: CNBC

Asia equity markets traded mostly higher after shrugging off the weak lead from Wall Street, where weakness in the energy complex weighed on sentiment. ASX 200 (+0.2%) traded in the green as strength in financials upstaged losses in commodity related sectors, while Nikkei 225 (flat) was initally led higher by Toshiba after interest surrounding its chip business gave shares a 4% boost, with strong Japanese trade data also underpinning exporter sentiment, before losing steam heading into the close. In China, Shanghai Comp. (-0.1%) and Hang Seng (+0.9%) initially conformed to the improved tone amid reports of tax cuts and after the PBoC upped its liquidity injections, although the mainland bourse later failed to sustain the momentum. Finally, 10yr JGBs traded lower amid the increased risk appetite in the region, although prices were supported off the lows following a firm 20yr JGB auction in which the b/c rose to its highest since 2014. PBoC injected CNY 70bIn in 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 10bIn in 28-day reverse repos.

Top Asian News

  • Hon Hai Eyes Amazon, Dell Roles in Toshiba Chip Bid: Mainichi
  • Abu Dhabi’s Taqa Seeking to Sell Some Overseas Energy Assets
  • China’s New Market Anomaly: Stocks Refuse to Drop More Than 1%
  • The Indian Bank Bonds Everyone Wants. If Someone Would Sell
  • Sun Hung Kai & Co. Said to Revisit Finance Unit IPO in Hong Kong
  • Rainforest Wood Breaches Tokyo Green Olympic Vow, Activists Say
  • Sawai to Buy U.S. Generic Drug Business for $1 Billion
  • Macquarie Buys U.K. Green Investment Bank for $3 Billion

European bourses have seen modest upside this morning indices this morning with the downside in the energy sector counterbalanced by the gains in consumer staples. More focus has been on the latest slew of financial results as European earning season cranks up a notch, with the likes of Unilever and Nestle higher this morning after they announced better than expected figures. WTI and Brent crude futures have clawed back some of yesterday’s sharp losses, this comes amid talk from the Saudi Energy Minister Al-Falih who stated that a preliminary agreement (but still not including all producers) has been reached, although did highlight that an extension may not necessarily be another 6-months but instead an additional 3-months. Softness in EGBs had been partially attributed to the spate of supply this morning with Spain and France coming to market, all of which was relatively well digested by the market despite some concerns over French paper ahead of this weekend’s election. Elsewhere, German paper has been showing somewhat of a bear steepening bias with a narrowing in the FR/GE 10yr spread to 65.9bps as markets begin to position ahead of the aforementioned event.

Top European News

  • ECB Officials Inch Toward the Day They Discuss Stimulus Exit
  • ABB Sees Signs of Markets Stabilizing as Smaller Orders Advance
  • Pandora Rebounds as Transparency Issues Addressed, Guidance Kept
  • BioMerieux Shares Surge on First-Quarter Sales Increase of 16%
  • Schneider Quarterly Sales Rise Amid Push for Solar Business
  • Croat Opposition to Seek FinMin Maric’s Ouster on Agrokor: Grbin
  • Euro Option Traders Focus More on First Round France Vote Risks

In currencies, the Bloomberg Dollar Spot Index fell 0.2 percent after rising 0.5 percent Wednesday. The pound jumped 0.5 percent to $1.2835 and the euro climbed 0.5 percent to $1.0766. The yen advanced 0.2 percent to 109.02 per dollar, following a 0.4 percent decline on Wednesday. Modest moves across the currency spectrum in G10 this morning, with modest gains for the EUR, GBP and AUD against the USD as yields remain suppressed. One would expect a little more pressure on the EUR spot rate given the election risk over the weekend, with the French polls — which garner little confidence in light of the past year — still showing a very tight race. EUR/USD now pushing for new highs towards 1.0800, but we expect sellers to gain the upper hand as we get close to the figure. Cable looks to be following to a modest degree, but is hampered by tentative gains seen in EUR/GBP. The cross rate found support after the stab through 0.8333 earlier in the week — this a level we always have to watch out for (inverse rate 1.2000), as it generates a large amount of hedging activity from UK corporates. The fundamental backdrop will dictate at some stage, but amid the air of Brexit uncertainty, we have to assume this as a key support level in the interim.

In commodities, West Texas Intermediate oil increased 0.9 percent to $50.87 a barrel, after tumbling 3.8 percent Wednesday when a report showed U.S. gasoline supplies increased for the first time since February, while crude output keeps rising. Gold fell 0.1 percent to $1,278.79 an ounce.  Focus in the commodity markets back on Oil price once again as leading OPEC members crank up the rhetoric on looking to extend the output cuts into H2. Saudi Arabia and Kuwait have both commented positively on the intent continue production cuts for another 6 months, and this has given WTI a modest boost, having reclaimed USD51.00 but somewhat cautiously as yet. Yesterday’s heavy downturn stopped short of the USD50.00 mark, but there is still very little on the horizon to suggest a test of USD55.00 higher up. Precious metals look to be taking their feed off risk rather than Treasuries at moment, with Gold stabilising around USD1280 as Silver has edged back towards USD18.10-15. Base metals continue to meander inside familiar ranges, and taking the lead off Copper which is pushing further up away from the earlier base ahead of USD2.50. Zinc is the outperformer on the day.

Looking at the day ahead, data due out includes initial jobless claims, Philly Fed business outlook and conference board’s leading index. Away from the data, the Fed’s Powell is due to speak this afternoon at 8am BST while the BoE’s Carney speaks at two separate events in the early evening. US Treasury Secretary Steven Mnuchin is also due to speak. In terms of earnings, 21 S&P 500 companies are pencilled in to report including Verizon (prior to the open) and Visa (after the close).

US Event Calendar

  • 8:00am: Fed’s Powell Speaks on Economic Growth And Capital Markets
  • 8:30am: Initial Jobless Claims, est. 240,000, prior 234,000; Continuing Claims, est. 2.02m, prior 2.03m
  • 8:30am: Philadelphia Fed Business Outlook, est. 25.5, prior 32.8
  • 9:45am: Bloomberg Consumer Comfort, prior 51; Bloomberg Economic Expectations, prior 54
  • 10am: Leading Index, est. 0.2%, prior 0.6%

DB’s Jim Reid concludes the overnight wrap

A couple of weeks ago we published a note illustrating that 2017 has been the least volatile year on record for credit which has been a surprise to us. Since this point volatility outside of credit has picked up notably, especially in VSTOXX. This morning we’ve published a short Credit Bites entitled “Credit now expensive vs. Volatility” where we look at the close historical relationship between credit spreads and vol and how credit looks a little more expensive now given the recent moves. Obviously the vol could be short lived and credit illiquid enough that trading in and out might not be worth the costs. However the move does have an impact on valuation which is worth highlighting and overall the results in the note are consistent with our general views that IG should outperform HY on a relative basis from here.

Over in markets it had looked like we’d be in for a relatively calm session yesterday after European equities inched higher (Stoxx 600 +0.24%) and the surge in the VSTOXX abated with the index edging just off its highs to close below 25 again. However things rolled over after Europe went home. The S&P 500 initially rose +0.44% helped by some better than expected earnings from Morgan Stanley which sent shares up 2%. However a sharp leg lower for Oil prices saw the energy sector tumble which in turn sent the S&P 500 to a -0.17% loss by the end of play while the VIX edged back up over 3% to 14.93. The energy sector was down -1.43% alone with WTI plunging -3.76% to $50.44/bbl for its biggest one-day loss since March 8th. The move came after the latest EIA data revealed an unexpected increase in US gasoline stockpiles last week and in fact the first climb in two months.

Unsurprisingly oil and commodity sensitive currencies felt the brunt of that selloff with the likes of the Norwegian Krone (-0.80%), Canadian Dollar (-0.78%), Mexican Peso (-1.28%) and Brazilian Real (-1.36%) amongst the biggest underperformers. Sterling (-0.50%) also gave back some of Tuesday’s big rally but is still up some +1.70% or so since the snap election announcement. It’s worth noting that yesterday, as expected, the UK Parliament passed the necessary approval to hold the June 8th election. Meanwhile, despite the slide for oil yesterday bond yields across most core markets actually ticked higher. 10y Treasury yields finished back above 2.200% again (at 2.215%) after climbing 4.6bps while similar maturity Bund yields finished an equal amount higher at 0.199%. A heavy day for corporate issuance with $10bn of bank IG issuance yesterday was cited as a factor while comments from various ECB speakers were also reasonably upbeat. ECB Governing Council member Hansson said that growth rates in Europe are “probably higher than potential” and that the “output gap is closing”. Peter Praet said after this that he doesn’t “personally see risks to the downside anymore”.

Meanwhile over at the Fed there was some focus on comments from Rosengren (non-voter) and Fischer. The former told his audience that the Fed’s balance sheet reduction could begin “relatively soon” and that the “tightening of short term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet”. His compatriot at the Fed, Vice-Chair Fischer, said “I expect that the Fed’s removal of accommodation will be driven by a continued expansion of the US economy” while also adding that “foreign output expansions appear more entrenched and downside risks to those economies appear noticeably smaller than in recent years”.

Staying with the Fed, it’s worth highlighting our economists’ latest global economics perspectives piece published yesterday titled “global inflation risks rising”. They note that the market has marked down inflation expectations noticeably over the years to come with gridlock in Washington and some very recent declines in inflation. They believe that this revision is misguided. In their view inflation risks in the US have shifted significantly to the upside, and the move from deflation risk to rising inflation elsewhere around the globe has been impressive.

This morning in Asia, despite the energy sector also coming under pressure most major bourses are actually posting modest gains this morning. The Nikkei (+0.31%), Hang Seng (+0.38%), Shanghai Comp (+0.18%), Kospi (+0.35%) and ASX (+0.22%) are amongst those currently up, while US equity index futures are also showing small gains overnight. The overnight data has been supportive. In Japan exports were reported as rising +12.0% yoy in March (vs. +6.2% expected) and up from +11.3% in February. A big jump in imports did however see the trade surplus shrink slightly. Meanwhile in NZ headline CPI came in at a higher than expected +1.0% qoq (vs. +0.8% expected) in Q1. Our economists also noted that the core measure was robust.

Moving on. There wasn’t much to report at all on the data front yesterday. In Europe we got confirmation of the final March CPI prints with headline growth confirmed at +0.8% mom and +1.5% yoy and the core confirmed at +0.7% – the latter resulting in a two-tenths of a percent decline from the February reading. There wasn’t any data in the US although we did get the Fed’s Beige Book. It reported that economic activity increased in each of the twelve Fed reserve districts between mid-February and the end of March, with the pace of expansion said to be equally split between “modest and moderate”. Interestingly the labour market was described as remaining “tight, and employers in most districts had more difficulty filling low-skilled positions”.

Before we look at today’s calendar, a quick mention that this morning our European equity strategy team have published a note on European vs. US equities. They note that with US equities trading at  historically elevated valuation levels, investors have turned increasingly positive on the outlook for European versus US equities. However, our European equity strategist Sebastian Raedler argues that the three conditions that are typically required for European equities to outperform are not in place. First, Europe tends to outperform only when Euro area GDP growth is above that in the US, but neither our  economists nor consensus expects this to happen either this year or next. Secondly, the relative performance of Europe versus the US tracks the trajectory of relative EPS growth – and projections by our strategy teams in Europe and the US suggest the US will continue to benefit from premium EPS growth this year (13% versus 9%). Lastly, Europe has typically outperformed when the global composite PMI was above 55 (i.e. global GDP growth was strong, at around 4%), while our global economists’ growth projections suggest that it will ease back to around 53, from the current 53.6 (implying around 5% underperformance by Europe versus the US). Contact for the full report.

Looking at the day ahead, this morning in Europe the only data due out is the Germany PPI reading for March. This afternoon we will also get the flash April consumer confidence reading for the Euro area while in the US the data due out includes initial jobless claims, Philly Fed business outlook and conference board’s leading index. Away from the data, the Fed’s Powell is due to speak this afternoon at 1pm BST while the BoE’s Carney speaks at two separate events in the early evening (the first at 4.30pm BST). US Treasury Secretary Steven Mnuchin is also due to speak. In terms of earnings, 21 S&P 500 companies are pencilled in to report including Verizon (prior to the open) and Visa (after the close).

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