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US Futures Rebound After Trump’s SOTU Speech; Dollar Slide Resumes Ahead Of Fed

Courtesy of ZeroHedge. View original post here.

S&P futures rebounded 0.3% from the worst two-day selloff since Sept. 2016, and European and Asian stocks rose modestly from early weakness after Trump's SOTU address did not deliver any major surprises, while traders were cautious ahead of the Fed’s last rate decision under Janet Yellen’s leadership expected to lean on the hawkish side.

On Tuesday, U.S. stocks tumbled amid concerns about a recent sharp rally in bond yields. Health-care shares slumped after Amazon.com, Berkshire Hathaway and JPMorgan agreed to collaborate on ways to offer health-care services to their employees; drugmakers will be in the spotlight again as Trump says prescription drug prices will come down "substantially."

Despite the recent drop, it’s been a stellar month for stock markets, with major gains across most major gauges that were followed this week by the MSCI All-Country World Index’s biggest two-day slide since September 2016. Investors will now focus on Wednesday’s Federal Reserve rate decision, the ongoing earnings season and more big economic data points to see if the uptrend can resume.

On Tuesday night, Donald Trump sought to connect his presidency to the nation’s prosperity in his first State of the Union address, arguing the U.S. has arrived at a “new American moment” of wealth and opportunity. Trump vowed the “era of economic surrender is over,” but stopped short of naming the targets of his efforts to narrow the U.S.’s ballooning trade deficit, which prevented a major market reaction.

Trump also stated the US is finally seeing rising wages and that unemployment claims have hit a 45-year low. Trump also called on Congress to produce a bill that generates at least USD 1.5tln for new infrastructure investment and said that they will work to fix bad trade deals.

Overnight, the Dollar weakened again as Trump’s State of the Union speech offers few new details, while EMs rose as Trump failed to emphasize tariffs and trade.

“There was a moment where the dollar was bought on Trump’s infrastructure remarks, but that’s because the topic was in focus and markets reacted to that,” said Koichi Takamatsu, head of G-10 currency trading for Japan at Nomura Securities Co. in Tokyo. “On the other hand, after concerns about protectionism receded at Davos, Trump made clear his stance on ‘America First.’ Overall, the reaction to his speech was limited.”

The yen weakened as the BOJ unexpectedly boosted 3-to-5 year bond purchases in today's open market operation and Kuroda affirmed stimulus policy, before erasing declines. Aussie grinds lower after inflation data misses, while the Aussie curve bull steepened as 3-year yield drops as much as seven basis points to 2.14% following a benign Australian inflation report. The British pound erased a gain as Prime Minister Theresa May headed to China to talk trade.

U.S. Treasuries were marginally firmer with 10-year yield just above 2.70%, despite Trump unveiling his plan for a $1.5 trillion debt-busting infrastructure plan.

European stocks erased gains of as much as 0.3%, with health-care shares (-0.5%) contributing the most to declines higher, after a two-day selloff as traders assess earnings and eye Federal Reserve Chair Janet Yellen’s final meeting on interest rates before her term ends. The Stoxx Europe 600 Index was flat heading for its best January in three years. Media shares lead gains, while Ericsson drags the tech sector lower after posting sales that missed analysts’ estimates. Capita is the biggest single-stock drag on the index after suspending its dividend and saying it plans to raise more equity, sending the stock for a record slump.

Asian stocks were mostly higher after Trump refrained from any comments that would have unnerved markets. As such, Australia's ASX 200 (+0.2%) pared early losses and finished positive, although the commodity-related sectors continued their underperformance, while Nikkei 225 (-0.4%) swung between gains and losses with Japanese stock news dominated by earnings. Japan’s Topix index (-1.2%) slid to its lowest this year.

The region also mulled mixed Chinese Official PMI data in which Non-Manufacturing PMI topped estimates but Manufacturing PMI disappointed, which in turn disappointed local markets. The Shanghai Composite fell for a 3rd straight day, down 0.2% to 3480, while the Chinext index, tracking mid and small caps plunged near 2.7%, its biggest drop since January 15, and is now down 1% for year after rising as much as 3.7%. Big-cap blue chips outperformed with the SSE50 index tracking the 50 biggest stocks on Shanghai Stock Exchange climbed over 1.2%. The Koran Kospi index was boosted by Samsung's stock split announcement, while the won strengthens in line with other Asian currencies. PBOC skips liquidity injections for fifth day; CSI 300 index 0.7% higher.

Of note: China's onshore yuan climbed for its best month in at least a decade as the greenback drubbing continued. The Onshore yuan jumped 0.62% to 6.2855 per dollar in Shanghai; CNY has gained 3.5% so far in January, biggest monthly advance in CFETS data going back to April 2007 according to Bloomberg. Overnight, the PBOC weakened daily reference rate by 0.04% to 6.3339, matching average estimate in a Bloomberg survey of 25 traders and analysts; the predictions ranged from 6.3250 to 6.3414

Elsewhere, UK PM May said that there was a long-term job to do in Brexit and that she will publish Brexit impact studies during February speech in Munich. Furthermore, PM May said the UK is seeking a free trade deal with China and wants more access in the interim before trade deal.  EU officials are to reject the City of London's intention to strike a post-Brexit free trade deal for financial services, according to financial executives.

In commodities, oil retreated and industrial metals reversed losses. A measure of China’s manufacturing sector came in below expectations, while the services gauge topped estimates. WTI and Brent crude futures trade lower in the wake of last night’s larger than expected build in headline API crude oil inventories with energy newsflow otherwise relatively light ahead of today’s official EIA release. WTI crude slides below $64. In metals markets, gold prices are seen higher amid a lacklustre greenback while copper was marginally supported overnight by the improvement in risk tone. Finally, Chinese steel futures were seen lower overnight as adverse weather conditions capped demand in China. Dalian iron falls two percent.

Expected data include MBA mortgage applications. Anthem, AT&T, Boeing, Facebook, Lilly and Microsoft are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

  • European equities trade broadly higher albeit modestly so, as earnings dictate the state of play for Europe.
  • The DXY remains vulnerable under the 89.000 handle as January draws to a close and month end portfolio hedging indices continue to flag sell signals
  • Looking ahead, highlights include US ADP, Quarterly Refunding Announcement and FOMC rate decision.

Market Snapshot

  • S&P 500 futures up 0.3% to 2,833.00
  • STOXX Europe 600 up 0.2% to 396.98
  • MSCI Asia Pacific down 0.2% to 184.23
  • MSCI Asia Pacific ex Japan up 0.4% to 607.33
  • Nikkei down 0.8% to 23,098.29
  • Topix down 1.2% to 1,836.71
  • Hang Seng Index up 0.9% to 32,887.27
  • Shanghai Composite down 0.2% to 3,480.83
  • Sensex down 0.1% to 35,993.63
  • Australia S&P/ASX 200 up 0.3% to 6,037.68
  • Kospi down 0.05% to 2,566.46
  • German 10Y yield fell 1.3 bps to 0.67%
  • Euro up 0.3% to $1.2444
  • Italian 10Y yield rose 0.2 bps to 1.76%
  • Spanish 10Y yield rose 1.3 bps to 1.422%
  • Brent futures down 0.6% to $68.60/bbl
  • Gold spot up 0.3% to $1,343.12
  • U.S. Dollar Index down 0.2% to 88.95

Top Overnight News

  • Donald Trump sought to connect his presidency to the nation’s prosperity in his first State of the Union address, arguing the U.S. has arrived at a “new American moment” of wealth and opportunity. Trump vowed the “era of economic surrender is over,” but stopped short of naming the targets of his efforts to narrow the U.S.’s ballooning trade deficit
  • U.K. Prime Minister May landed in China with a message to rebels back home who want to oust her: she won’t quit. May said she would raise the sensitive topics of China’s human rights record and Hong Kong democracy
  • Bank of Japan offered to buy more bonds at a regular operation for the first time since July, helping to bring down yields and weaken the yen as Governor Kuroda reaffirmed a commitment to his ultra-loose monetary policy
  • Mark Carney said he can fully focus on tackling inflation as the drag from Brexit on investment and the economy starts to recede
  • U.K. banks will have limited access to the European Union’s single market after Brexit if the government refuses to weaken its red lines, the European Commission told diplomats, according to two people familiar with private discussions in Brussels
  • The BOJ isn’t at the point where it can change interest rates soon, says Bank of Japan Deputy Governor Kikuo Iwata, in his final press conference before leaving the board
  • German jobless rate dropped to a record low of 5.4 percent in January, extending its decline as companies stepped up hiring to meet buoyant demand
  • Siemens Reports Strengthening Orders Amid Global Economic Upturn
  • H&M’s Biggest Profit Drop in Six Years Puts CEO Under Pressure
  • Volvo Sees Rising Global Truck Demand Straining Supply Chain

A mixed tone was gradually seen in Asia, as equity markets somewhat recovered from the initial spill-over selling from Wall St. where the S&P 500 posted its worst 2-day performance since May last year. The overnight rebound in sentiment was alongside President Trump’s first State of the Union Address, which Trump was viewed to have delivered a composed and conventional speech, while he also refrained from any comments that would have unnerved markets. As such, ASX 200 (+0.2%) pared early losses and finished positive, although the commodity-related sectors continued their underperformance, while Nikkei 225 (-0.4%) swung between gains and losses with Japanese stock news dominated by earnings. Furthermore, the region also mulled over mixed Chinese Official PMI data in which Non-Manufacturing PMI topped estimates but Manufacturing PMI disappointed, which in turn clouded over the Shanghai Comp. (-0.6%) and Hang Seng (+0.1%), despite a brief turnaround which momentarily saw most stocks lifted with the tide. Finally, 10yr JGBs are higher, with prices supported from today’s Rinban operation in which the BoJ were in the market for JPY 850bln of JGBs across the curve and upped its purchases of 3yr-5yr maturities.

  • Chinese Manufacturing PMI (Jan) 51.3 vs. Exp. 51.6 (Prev. 51.6).
  • Non-Manufacturing PMI (Jan) 55.3 vs. Exp. 54.9 (Prev. 55.0)

BoJ Summary of Opinions from January meeting said must continue with powerful easing policy as inflation remains weak. There summary noted the opinion that BoJ must look at effects and costs of BoJ's ETF and risky asset purchases given stock prices and corporate profits improving sharply, while there also may be a chance for the BoJ to consider adjusting level of yield targets if economy and prices continue improving. BoJ says it plans to keep the current pace of bond purchases in Feb for all maturities.

Top Asian News

  • BOJ Lifts Bond Purchases as Kuroda Affirms Loose Policy Path
  • Dealmakers Jump Ship as China Tycoon’s $5 Billion M&A Push Ends
  • Japan Factory Output Surges in December on Strong Exports
  • Sumitomo Mitsui Profit Rises on Fee Income, Share Sale Gains
  • Vakrangee Tumbles by 20% Limit Amid Stock-Price Rigging Report

European equities trade broadly higher (Eurostoxx 50 +0.2%) albeit modestly so, as earnings dictate the state of play for Europe. In terms of sector specifics, utility names have seen some support with SSE (+1.6%) sitting near the top of the FTSE after lifting their guidance, while IT names are seen softer with Ericsson (-8%) lower following earnings and Infineon (-0.7%) at the bottom of the DAX after cutting guidance alongside earnings. Elsewhere, stock specifics have been dominated by earnings with reports from the likes of Electrolux (+6.3%), Volvo (+3.4%), H&M (-4.8%), Lonza (-3.6%), Julius Baer (-3.2%) and focus once again on Capita (-35%) with shares slammed following their latest profit warning.

Top European News

  • Italy’s Jobless Rate Falls Before Election to Lowest Since 2012
  • German Workers Begin Day-Long Strikes as Wage Talks Hit Snag
  • EU Softens Push to Keep Clients From Exiting Failing Banks
  • European Union’s Biggest Rate Hawks Are Poised to Hike Again
  • European Pharma Stocks Drop After Trump Comments, Lonza Results
  • VW, Continental Best Placed in Break-Up Scenarios, BofAML Says

In FX, the DXY remains vulnerable under the 89.000 handle as January draws to a close and month end portfolio hedging indices continue to flag sell signals, and strong for several USD/G10 pairs. The Dollar did derive some support from a buoyant from US President Trump’s buoyant SOTU address and clarification by Treasury Secretary Mnuchin that a strong Greenback is in the country’s best interest (long term at least). However, EUR/USD looks solid above 1.2400 and around the 1.2433 level (200 MMA), with decent option expiries between 1.2400-40 (1.5 bn) and 1.2450-55 (1.7 bn) perhaps adding to the aforementioned rebalancing bid tone. Cable briefly reclaimed 1.4200+ status before easing back again amid EUR/GBP month-end demand and news that EU officials are to reject the City of London's intention to strike a post-Brexit free trade deal for financial services. USD/JPY is back below 109.00, but still within a broad 108.50-109.50 range.

In commodities, WTI and Brent crude futures trade lower in the wake of last night’s larger than expected build in headline API crude oil inventories with energy newsflow otherwise relatively light ahead of today’s official EIA release. In metals markets, gold prices are seen higher amid a lacklustre greenback while copper was marginally supported overnight by the improvement in risk tone. Finally, Chinese steel futures were seen lower overnight as adverse weather conditions capped demand in China.

US Event Calendar

  • 7am: U.S. MBA Mortgage Applications, Jan. 26, no est., prior 4.5%
  • 8:15am: U.S. ADP Employment Change, Jan., est. 185k, prior 250k
  • 8:30am: U.S. Employment Cost Index, 4Q, est. 0.6%, prior 0.7%
  • 8:30am: U.S. Treasury’s Quarterly Refunding
  • 9:45am: U.S. Chicago Purchasing Manager, Jan., est. 64, prior 67.6, revised prior 67.8
  • 10am: U.S. Pending Home Sales MoM, Dec., est. 0.5%, prior 0.2%; NSA YoY, Dec., est. 1.7%, prior 0.6%
  • 10:30am: DOE U.S. Crude Oil Inventories, Jan. 26, est. 900k, prior -1.07m
  • 2pm: FOMC Rate Decision (Upper Bound), est. 1.5%, prior 1.5%

Looking at the day ahead, the Fed monetary policy meeting outcome will be the highlight today. Flash January CPI reports for the Euro area will be closely watched, as will the January ADP employment print change for the US. The latter will also release the Q4 employment cost index, January Chicago PMI and December pending home sales. Microsoft, Facebook, eBay, AT&T, Boeing and Paypal highlight a busy day for high profile earnings releases. The ECB’s Coeure will also speak.

DB's Jim Reid Concludes the overnight wrap

If you’re reading this in the Western Hemisphere, stand by today for an event we haven’t seen since 1866. No, not equity markets going down two days in a row but instead a “Super Blue Blood Moon”. To break this down, a blue moon is where there are two new moons in a month. A supermoon is where our satellite’s perigee (its closest approach in its orbit and appearing c.14% larger and is c.30% brighter) coincides with a full moon. A blood moon is a lunar eclipse when the moon passes into the earth’s shadow. The reddish tint that this will bring as the sun’s light is cut off and it’s visible through the filter of our atmosphere provides the blood reference.

As discussed above this astrological event coincides with a bad month end for markets with confidence suddenly sucked into a black hole. Indeed the last couple of days are perhaps a taster of what might actually happen when yields properly normalise rather than simply selling off a bit. However unless something extraordinary happens today, January will still go down as an exceptional month for risk although bond returns will see a lot of negatives in front of the numbers. We’ll do the full review of the month tomorrow.

One of the most impressive parts of the equity sell-off yesterday was that there wasn’t really a flight to quality into bonds. 10yr USTs rose a further 2.6bps and 10yr Bunds only fell 1.1bps even with a weaker than expected German inflation print.

Now reviewing the equity moves. The S&P 500 (-1.09%) saw its worse day since mid-August and worst 2-day fall (-1.76%) since May, while the Dow (-1.37%) and Nasdaq (-0.86%) also retreated. The mini-selloff in the S&P seemed to have a few contributing factors, including ongoing concerns over valuation, rising yields, a lower oil price and weakness in health care stocks (-2.13%). The latter partly reflects potentially higher competitive tensions in view of Amazon, JP Morgan and Berkshire’s plans to launch a new joint company to provide their US staff with tech solutions for simplified healthcare at lower costs. The risk off tone was also evident in Europe with key bourses down 0.9%-1.1% and the Stoxx 600 down the most for c2.5 months (-0.92%). The VIX jumped to an intra-day high of 15.42, before closing 6.9% higher to 14.79 – the highest since mid-August.

Focusing on Apple, Bloomberg reported that according to unnamed sources, the US DOJ and SEC are investigating whether Apple violated securities laws regarding its disclosures about a software update that slowed older iPhones. Notably, the inquiry is in early stages and Apple’s share price fell c1.5% intraday and closed -0.59% lower.

Staying with US equities, since tax reform was signed, banks have written off billions of dollars of deferred tax assets. Yet the effects extend far beyond finance firms. In fact, one in ten companies in the S&P 500 has net deferred tax assets. 

Also in the US, President Trump’s first State of the Union address touched on many issues but was short on details on his policy proposals. He highlighted his administration’s progress to building a “safe, strong and proud America” and noted that “c3m workers have gotten tax cuts…this in fact is our new American moment…there has never been a better time to start living the American dream”. Then he spoke of unity in politics, such as “extending an open hand to work with members of both parties” and “…call upon all of us to set aside our differences… to deliver for the people we were elected to serve”. On trade, he touched on “America has finally turned the page on…unfair trade deals…” Then on the big infrastructure plans, he proposed to allocate $200bn federal funds over the next 10 years on roads and transit projects. Then the expectation is the investments would encourage further spending from the state, local governments and private sector – as least $1.5trn.

Elsewhere the Treasury Secretary Mnuchin sought to clarify his comments last week on the USD. He noted his comments were “not anything new” and “it was no way intended to talk down the dollar whatsoever”. Further he reiterated that “I absolutely support a strong dollar as being in the long term best interest of the country and….we have a free currency market that we don’t intervene in…”. As a reminder, today’s FOMC meeting will serve in part as a farewell to Chair Yellen, but is unlikely to result in any significant new signals for the market. Our US economists expect that the FOMC will want to see some more data and go through another round of forecasts before signalling a more aggressive tightening stance of four hikes this year (DB’s forecast).

This morning in Asia, markets are mixed but UST 10y yields is down c1.5bp. The Nikkei is down 0.47% while the Hang Seng (+0.06%), China’s CSI 300 (+0.14%) and Kospi (+0.44%) are all up, with the latter supported by Samsung, which is up c5% post its 4Q results and announcing a 50 to 1 stock split. Datawise, China’s January manufacturing PMI was a tad softer at 51.3 (vs. 51.6 expected) although the services number was a bit higher. Japan’s December IP was above market at 4.2% yoy (vs. 3.3%). Elsewhere, outgoing deputy BOJ governor Iwata warned against an early turn towards fiscal austerity, in part as “…achievement of the price stability target of 2% will become difficult” Now recapping other markets performance from yesterday. The US dollar index was marginally lower (-0.14%), while the Euro and Sterling gained 0.15% and 0.52%, respectively. Core 10y bond yields traded within a c3bp range intraday and closed little changed (Bunds -1.1bp; OATs -0.7bp; Gilts +0.7bp). In commodities, WTI oil fell 1.62% ahead of the API data, which later showed that US crude inventories rose for the first time since November. Elsewhere, precious metals softened c0.1% (Gold -0.13%; Silver -0.15%) and other base metals also weakened (Copper -0.34%; Zinc -1.06%; Aluminium -0.58%).

Away from markets, the BOE Governor Carney spoke on a range of topics in front of the House of Lords. On inflation, he noted the pass through from Sterling into inflation still has a way to go, but he is happy with the BOE’s inflation target. On Brexit, he denies that the BOE has a bias against it and that a “disorderly Brexit” is not a likely scenario. Elsewhere, he noted business investments is likely 4ppt lower than it would have been if the UK voted to stay in the EU bloc but also noted that investments could also pick up next year when uncertainty from Brexit reduces. On rates, he noted “as slack in the economy has been taken out…. (the focus for monetary policy) is increasingly on returning inflation sustainably to target over an appropriate horizon”. The implied Bloomberg odds of a rate hike in June was little changed, up 2ppt to 49%.

Returning to the UK, BuzzFeed has leaked the UK government’s forecasts of the potential economic impacts from Brexit. The worse scenario suggests the UK economy will be 8% smaller than otherwise in 15 years time and the  softest scenario would slow economic growth by 2%. Brexit minister Baker noted the documents “require significant further work” and “its’ not yet anywhere near being approved by the ministers”. DB’s Oliver Harvey has published an update on the state of play with Brexit. He argues that the newsflow in recent days suggests rising risks of a political crisis before agreement can be reached on transitional arrangements in March. Refer to his note for more details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January CB consumer confidence index was above market at 125.4 (vs. 123) and slightly lower than November’s 17 year high, with the mom increase mainly driven by a rebound in the expectations index. The November S&P corelogic house price index also beat at 6.41% yoy (vs. 6.3% expected).

The Euro area’s 4Q GDP was in line at 0.6% qoq and 2.7% yoy, while France’s 4Q GDP was also in line at 0.6% qoq. The Euro area’s January economic confidence (114.7 vs. 116.2) and business climate index (1.54 vs. 1.68 expected) were both softer than expected, but the final reading of consumer confidence was confirmed at 1.3 – a 17 year high. In Germany, the January CPI was lower than expected at -1% mom (vs. -0.7%) and 1.4% yoy (vs. 1.6%) – the lowest annual print since May. Elsewhere, Italy’s January consumer confidence was also slightly softer at 115.5 (vs. 116.7 expected). In the UK, the December mortgage approvals fell to the lowest level since January 2015 (61k vs. 63.5k expected) while net consumer credit was a tad higher at £1.5bn (vs. £1.4bn expected).

Looking at the day ahead, the Fed monetary policy meeting outcome will be the highlight today. Flash January CPI reports for the Euro area will be closely watched, as will the January ADP employment print change for the US. The latter will also release the Q4 employment cost index, January Chicago PMI and December pending home sales. Microsoft, Facebook, eBay, AT&T, Boeing and Paypal highlight a busy day for high profile earnings releases. The ECB’s Coeure will also speak.


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