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S&P Futures Suddenly Slide Amid Growing Trade War Fears

 

S&P Futures Suddenly Slide Amid Growing Trade War Fears

Courtesy of Zero Hedge

After earlier tracking the latest daily rally in global equities amid surging investor optimism, rising earnings and a spending bill to end the U.S. government shutdown which saw Asian stock hit new all time highs, US futures encountered an unexpected air pocket, with the E-mini sliding as much as 10 points from session highs.

There was no immediate catalyst for the move although the previously noted sharp  move lower in the USDJPY, which dropped below 110.40 after trading above 111 following Tuesday's BOJ announcement, may have been a factor behind the move.

Furthermore, as some trading desks point out, this latest risk off move is not unique to USDJPY, with US yields dipping lower, gold popping while S&P futs, which seemed to lead the move, slipped to $2831 at time of print.  

What caused risk sentiment to sour abruptly?

It is unclear, but two possible triggers have been discussed: first, Trump announced tariffs on imported solar panels and washing machines late Monday. While the sectors are not of huge economic significance, it has since sparked concerns that more protectionist moves could follow. Additionally, a tsunami alert has been issued for entire West Coast of US after a 7.9 magnitude earthquake was recorded in the Gulf of Alaska at 04:31 EST.

For those who missed it, the US imposed a 30% tariff on solar imports to the US and approved safeguard tariff action on imported washing machines. This resulted to various comments from other nations including China which said it was dissatisfied with the tariffs on US solar imports. Furthermore, Mexico said it regretted that it was not excluded from the measures, while South Korea stated it is seeking to reinstate tariffs on US products and have asked WTO to stop trade concessions

The news followed the reopening of the US government, when first the US Senate voted 81 vs. 18 to pass the stop gap spending bill to reopen government and fund it through to February 8th, followed by the House which also voted 266 vs. 150 for the 3-week stop gap measure which President Trump later signed to end the shutdown.

As Bloomberg notes, investors will be closely watching how markets respond to Trump’s import tariffs. Any positive impact from his signing of a temporary government spending bill that ended a three-day partial shutdown appears to have faded, perhaps because the deal simply delayed tough decisions for a few weeks

And while the aftershock from the quake will come and go, concerns about a growing trade war are only just beginning.

The shockwave from the steep drop in the ES and USDJPY has moved to Europe where the Stoxx 600 is up less than 0.1%, trimming earlier advance of as much as 0.4%, mirroring the US move: European banks erased earlier advance of as much as 0.4%, while miners are worst performers among European sectors following the overnight rout in iron ore. The Stoxx 600 basic-resource index slides 1.8%, most in 2 months and halting a 3-day winning streak, as copper, iron prices drop.

Earlier, the MSCI Emerging Markets Index advanced an eighth day, helped by stronger oil prices. West Texas crude futures climbed toward $64 a barrel, buoyed by forecasts for a record run of declines in U.S. crude stockpiles.

As reported earlier, the BoJ kept policy unchanged as expected in which QQE with YCC was maintained and NIRP held at -0.10%.  The decision on YCC was made by 8-1 vote with Kataoka the dissenter again and the central bank also extended the deadline for its loan program by 1yr. BoJ commented that inflation is likely to continue increasing to 2% target but  risks to prices tilted to the downside and that inflation expectations have been more or less unchanged, while the central bank affirmed all forecasts for Real GDP and Core CPI. BoJ Governor Kuroda says day-to-day JGB buying operations do not indicate future course of monetary policy and is closely watching FX markets.

As described earlier, the reaction to the BOJ statement sent the USDJPY on a tubulent stop hunt first lower, then higher, and finally lower again.

In macro and FX, the dollar found early strength from BOJ Governor Kuroda’s comments that policy makers aren’t at a stage to consider reducing monetary stimulus and reversed its Asia session drop. Even though the yen managed to eventually recover its losses, the greenback stayed generally stronger against G-10 in European session before fading to flat as U.S. govt. reopens and administration enacts selected import tariffs.

European euphoria continued, with the German ZEW Survey handily beating expectations while the current conditions index hit a record high as optimism prevails in Germany.

  • ZEW Economic Sentiment (Jan) 20.4 vs. Exp. 17.8 (Prev. 17.4)
  • ZEW Current Conditions (Jan) 95.2 vs. Exp. 89.8 (Prev. 89.3).

Commenting on the ZEW, CapEco notes that "January’s rise in ZEW investor sentiment confirms that investors are upbeat about Germany’s economic prospects despite the recent rise in the euro. The increase in the headline Economic Sentiment Indicator (ESI), from +17.4 to +20.4, more than reversed the previous month’s fall and was far stronger than the consensus expectation of a rise to +17.8. What’s more, the current conditions jumped to a record high of 95.2, leaving it far stronger than the previous record of 91.5. The historic relationship between the ZEW ESI and annual GDP growth is very loose, but for what it’s worth January’s rise leaves the ESI pointing to growth of around 2%."

Elsewhere, in rates, TSYs rally and the curve flattened, with US 10Y yield back below 263bps level. Peripheral EGBs well supported, led by Spain despite expected large 10y syndication.

The combination of higher prices and the prospect of a more investor-friendly government is making Chile’s mining industry hopeful of a resumption in large projects after years of cost cutting. As a result iron ore futures sank by the most this year while copper declined 1%: it may have much more to drop.

Scheduled earnings include Johnson & Johnson, Procter & Gamble, Verizon and Texas Instruments. Economic data include Richmond Fed Manufacturing Survey for January.

Bulletin headline Summary from RanSquawk

  • US Senate passes stopgap spending bill to reopen the government.
  • Bank of Japan keeps monetary policy instruments, while tweaking language on inflation.
  • Looking ahead, highlights include API crude oil inventories.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,831.00
  • MSCI Asia Pacific up 1% to 185.73
  • MSCi Asia Pacific ex Japan up 0.9% to 605.96
  • Nikkei up 1.3% to 24,124.15
  • Topix up 1% to 1,911.07
  • Hang Seng Index up 1.7% to 32,930.70
  • Shanghai Composite up 1.3% to 3,546.51
  • Sensex up 0.9% to 36,109.21
  • Australia S&P/ASX 200 up 0.8% to 6,036.96
  • Kospi up 1.4% to 2,536.60
  • STOXX Europe 600 up 0.3% to 403.33
  • German 10Y yield fell 2.1 bps to 0.546%
  • Euro down 0.2% to $1.2238
  • Italian 10Y yield fell 4.0 bps to 1.655%
  • Spanish 10Y yield fell 5.0 bps to 1.343%
  • Brent Futures up 0.5% to $69.36/bbl
  • Gold spot up 0.3% to $1,336.93
  • U.S. Dollar Index up 0.1% to 90.51

Top Overnight news

  • Trump signs stopgap funding bill to end government shutdown
  • Global trade: U.S. imposes tariffs on imported solar panels and washing machines
  • BOJ: holds all policy as expected; tweaks language to say inflation expectations "have been more or less unchanged," after previously saying they were "weakening"
  • BOJ’s Kuroda: we are not at the point to consider a policy exit; no need to adjust rates because inflation expectations are higher; rinban size adjustments are for operational, not policy, reasons
  • German Jan. ZEW Expectations hits all time high: 20.4 vs 17.7 est; Current Situation 95.2 vs 89.6 est.
  • Earthquake: magnitude 8.0 quake in Gulf of Alaska; Tsunami warning issued for Alaska, a tsunami watch for the U.S. West Coast
  • Greek Prime Minister Tsipras will meet IMF’s Managing Director Lagarde and EU Commissioner Moscovici in Davos, a Greek govt official says
  • The Irish border issue may resurface sooner than U.K. Prime Minister May imagined. While the agreement was designed to prevent a breakdown in talks, serious questions still need to be resolved, according to people familiar with the EU side of the negotiations
  • Activist investor Bill Ackman is cutting 10 employees after assets overseen by his hedge fund firm shrank, according to a person with knowledge of the matter
  • Spain drew more than 45 billion euros ($55 billion) of investor interest for a new 10-year bond, reflecting growing confidence in the nation’s once-rattled economy and strong demand for euro sovereign debt


Asia equity markets took impetus from the record levels seen across all major indices on Wall Street and after the US Congress passed the spending bill to end the government shutdown. ASX 200 (+0.8%) and Nikkei 225 (+1.3%) were positive with Australia led higher by the energy sector as it tracked the outperformance of its counterpart stateside, while Nikkei 225 outperformed to reclaim the 24000 level. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp. (+0.5%) were positive with gambling names underpinned in Hong Kong as Wynn Macau shares surged following strong Q4 results from its parent. Conversely, LG Electronics felt the brunt of trade protectionism measures with losses of as much as 5% in early trade after the US imposed a 30% tariff on solar imports to the US and approved safeguard tariff action on imported washing machines. Finally, 10yr JGBs saw mild upside in the latter half of trade, as participants took comfort from an unsurprising BoJ which kept its bond buying intentions stable and eased
some tapering concerns.

BoJ kept policy unchanged as expected in which QQE with YCC was maintained and NIRP held at -0.10%.  The decision on YCC was made by 8-1 vote with Kataoka the dissenter again and the central bank also extended the deadline for its loan program by 1yr. BoJ commented that inflation is likely to continue increasing to 2% target but  risks to prices tilted to the downside and that inflation expectations have been more or less unchanged, while the central bank affirmed all forecasts for Real GDP and Core CPI. BoJ Governor Kuroda says day-to-day JGB buying operations do not indicate future course of monetary policy and is closely watching FX markets.

Top Asian News

  • Tencent to Back Carrefour China, Challenging Alibaba in Retail
  • World’s Most Overbought Stocks Have Gone 18 Days Without Falling
  • Jakarta Offices Evacuated as 6.1 Magnitude Quake Jolts City
  • India Builder Orbit Aims to End Talks with Bank, Buyers by March
  • Country Garden Cancels 1.8B Yuan Bond Sale on Market Fluctuation


European equity markets rallied in early trade after US Senators agreed a deal to end the government shutdown on Monday. The DAX opened at a new record high with all major European bourses higher. easyJet led the FTSE 100 higher after a strong trading update while Sky shares rose despite the UK regulator saying that the deal with Fox is not in the public interests. However, the CMA proposed remedies to address the concerns and Sky have said it will review its position.

Top European News

  • IG Group Jumps; Cryptocurrency ‘A Significant Growth Driver’
  • Allianz Goes Against the Grain to Buy U.K. Government Bonds


In FX, there was only modest support for the Dollar in wake of the White House funding extension, as Senate approval was only achieved on the proviso that immigration issues will be sorted out by February 8th when the stop-gap bill expires. USD/JPY rebounded above 111.00 with the aid of dovish BoJ policy guidance and tones from the post-meeting press conference, as Governor Kuroda pledged to maintain QQE and YCC until the 2% inflation target is met (forecast by FY 2019/20). However, the headline pair has reversed course with ample supply/offers noted above the figure and currently mid-range ahead of 110.50 support. AUD the worst G10 performer and helping the DXY hold around 90.500 as AUD/USD recoils from 0.8000+ levels towards 0.7950 amidst weaker copper, iron ore and consumer sentiment.  Cross flow also undermining the AUD as it slides below 1.0900 vs the NZD and the Kiwi maintains 0.7300+ status  against the Greenback. Other major USD rivals all softer, with Cable back in the mid-1.3950 area after a spike to 1.4000 (new post-Brexit vote high amidst reports that a Norway style transition deal has been agreed in principle) – little response to much better than forecast UK public finance data. EUR/USD at the lower end of a 1.2225-75 range, eyeing ZEW next, but really the ECB on Thursday, USD/CHF still firmly above 0.9600 and USD/CAD nudging towards 1.2500 within a 1.2400-1.2600 broad recent range as NAFTA talks resume.

In commodities, WTI and Brent crude futures both traded higher as markets continue to digest the recent information regarding upbeat growth and demand outlook vs. fears of an increase in US shale output as prices remain elevated. Barclays have raised their forecasts for Brent after the strong start to the year but still maintain a bearish view in the quarters ahead. Gold and silver were mostly flat while copper declined around 1% as iron ore fell on the Dalian exchange.

Looking at the day ahead, world leaders are due to gather for the annual Davos World Economic Forum. Also worth noting is the scheduled sixth round of NAFTA talks in Montreal. Data highlights in Europe on Tuesday include UK public sector net borrowing data for December and CBI selling prices data for January, the German ZEW survey for January and Euro area consumer confidence reading for January. In the US, the January Richmond Fed manufacturing activity index print is due. The Fed’s Evans is due to make introductory remarks at a conference in the evening. Johnson & Johnson, Procter & Gamble and Verizon are due to report earnings.

US Event Calendar

  • 10am: Richmond Fed Manufact. Index, est. 18.5, prior 20
  • 10am: Senate Holds Confirmation Hearing for Fed Nominee Goodfriend
  • 6:30pm: Fed’s Evans Makes Introductory Remarks


DB's Jim Reid concludes the overnight wrap

Front row seats have been reserved for the BoJ this morning. As was broadly expected, there was no change in policy rates and asset purchases targets. The BOJ noted inflation expectations have been more or less unchanged, which compares to its previous view that inflation expectations were weakening. They’ve also narrowed the range for expected inflation from 1.1-1.6% to 1.3-1.6% for this year. While this may sound a little hawkish, median inflation forecasts were unchanged at 1.4% for 2018. Governor Kuroda will speak at 3:30pm loca time (6:30 am UK time), so we’ll learn more around any fine tuning of the view just before this note hits your inbox. The YEN is up 0.2% as we type.

Elsewhere in Asia, markets are trading c1% higher. The Nikkei (+1.28%), Kospi (+1.14%), Hang Seng (+1.06%) and China’s CSI 300 (+0.54%) are all up as we type. After the US bell, Netflix’s shares were up c8% after signing up c2m more subscribers than market expectations in 4Q.

Over in the US, the three day partial government shutdown is over for now which helped sentiment towards the end of the US session and in Asia. The Senate (81-18) and then the House have voted (266-150) to extend government funding until 8th February. No formal agreement has been reached on DACA, with Democrats accepting Senator McConnell’s assurance that it is his “intention” to allow a Senate vote on the immigration measure afterwards if a compromise cannot be reached by early February. Elsewhere, House Speaker Paul Ryan has promised House Republicans that they will not be bound by any arrangement reached in the Senate on immigration to reopen the government.

The agreement helped US bourses climb to fresh highs, and was also supported by announced M&As in the healthcare space. The S&P (+0.81%), Dow (+0.55%) and Nasdaq (+0.98%) were all higher. Within the S&P, all sectors excluding materials and industrials were up, with gains led by the telco, energy and consumer discretionary sectors. European markets were broadly higher with the Stoxx 600 up 0.31% to the highest since August 2015. Across the region, the DAX and CAC were both up c0.2%, but the FTSE fell 0.20%. Spain’s IBEX led the gains, closing 1.00% higher.

Over in government bonds, core bond yields were little changed, with UST 10y down 0.9bp, Bunds broadly flat and Gilts up 2.1bp. Peripherals outperformed with yields down 4-5bp, in part as Fitch upgraded Spain’s sovereign rating one notch higher to A-/Stable. This compares to S&P’s current rating of BBB+ but with a positive outlook. The spread between Spain’s 10y bond and Bunds has narrowed to 82bp, the lowest since April 2010.

Turning to currencies, the US dollar index dipped 0.22% while the Euro gained 0.33% and Sterling jumped 0.93% to another fresh post Brexit vote high. In commodities, WTI oil was 1.0% higher, partly supported by OPEC and Russia’s reaffirmation that they will continue with OPEC production cuts until at least the end of the year. Elsewhere, precious metals were broadly flat (Gold +0.16%; Silver -0.02%) and other base metals were little changed (Copper -0.04%; Zinc -0.10%; Aluminium +0.48%).

Also helping sentiment yesterday was news that the IMF has upgraded its forecasts for world economic growth by 0.2ppt to 3.9% for this year and next – the fastest pace in seven years. In the details, about half of the upgrades were due to the US tax cuts, with US GDP growth lifted 0.4ppt higher to 2.7% this year, while the Eurozone is projected to grow 2.2% (+0.3ppt), China to 6.6% (+0.1ppt) and the UK unchanged at 1.5%. Elsewhere, the IMF cautioned that loose financial conditions, rich asset valuations and low bond yields raise the possibility of a market correction and that “a possible trigger is faster than expected increase in advanced economy’s core inflation and interest rates as demand accelerates”. Hence, policy makers should take steps to raise potential growth and increase   resilience to shocks, such as reforms to lift productivity and proactive financial regulations.

Yesterday we also saw the latest CSPP numbers. The net CSPP purchases were €1.34bn last week with net PSPP purchases €3.85bn. The CSPP/PSPP ratio was a whopping 34.9% (19.4% last week, 11.5% before QE was trimmed in April 2017 and 12.7% between April and December after first taper). The highest weekly ratio before this week was 20% last May. So this was an abnormally high week for corporate buying even with the usual volatility in numbers. Our view remains the same – that CSPP won’t be tapered much (if at all) and that the ratio will settle at around 20% in H1.

Elsewhere, President Trump has acted on the recommendations by US trade representatives and has imposed a 30% tariff on imported solar panels for the first year before steadily declining to 15% by the fourth year. Notably, imported residential washing machines will be hit with a 20% tariff on the first 1.2m machines and then up to 50% >1.2m units.

Turning to Brexit, the latest draft EU directives obtained by Bloomberg seems to be broadly similar to an earlier version sighted by the FT. The draft noted “preserving the integrity of the single market excludes participation based on a sector by sector approach…..there can be no cherry picking”. It also reaffirmed that the UK should continue to comply with the Union trade policy during transition and that British ministers will not be able to enter into agreements with non-EU countries to replace the benefits of those lost trade deals unless authorised to do so by the EU. Elsewhere, a poll commissioned by the UK in a changing landscape showed 56% of UK lawmakers believe it was possible to consider that Britain had “really left the EU” even if the country stayed in the single market, although the result was down from 66% a year earlier.

Looking at the day ahead, world leaders are due to gather for the annual Davos World Economic Forum. Also worth noting is the scheduled sixth round of NAFTA talks in Montreal. Data highlights in Europe on Tuesday include UK public sector net borrowing data for December and CBI selling prices data for January, the German ZEW survey for January and Euro area consumer confidence reading for January. In the US, the January Richmond Fed manufacturing activity  index print is due. The Fed’s Evans is due to make introductory remarks at a conference in the evening. Johnson & Johnson, Procter & Gamble and Verizon are due to report earnings.


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