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Emerging Markets On Edge As Dollar Surge Resumes; Oil Hits 3 Year High

Courtesy of ZeroHedge. View original post here.

Global stocks and US equity futures are in the green, despite the dollar rebounding to session highs overnight, putting already nervous emerging markets on edge, while oil rising to a 3 year high above $70 is set to pressure corporate margins even more.

In the otherwise quiet overnight session which saw yet another disappointing European datapoint as German industrial orders dropped -0.9% from 0.3%, and below the expected 0.5%, all eyes remained on the dollar which once again defied bears, and reversed an early drop rising sharply to session highs following the Tokyo fix, even though volumes remained low with London closed for a U.K. bank holiday.

This follows what Bloomberg notes was the best week for the dollar since Trump took office.

Of course, the reason why every dollar move is being scrutinized is because as we noted last week, some of the key emerging markets have been getting crushed as a result of dollar strength, with EM assets – especially bonds – tumbling last week, with markets in Turkey and Argentina especially volatile. So far today, developing-nation stocks rebounded modestly even as currencies were slightly weaker. Overnight it was Indonesia's turn to join the fallout, as the Rupiah tumbled after Indonesia’s economy expanded slower than expected last quarter, a setback for the government after eight interest rate cuts in the past two years. Meanwhile, in the country many say is ground zero for the next EM crisis, both Turkey’s lira and its equities retreated.

Another day, another EM FX bloodbath:

Elsewhere, in developed markets, the euro reversed gains from the Asian session as a pickup in dollar demand following the Tokyo fix and the abovementioned miss in German factory orders kept the euro under pressure. Australia’s dollar fell on speculation foreign funds were selling after asset managers placed the most short positions on the currency since 2015 amid waning bets the central bank will raise interest rates this year. USD/JPY halted three days of declines and rebounded from a loss to rise as much as 0.2% to 109.33; According to Bloomberg, Japanese banks had sold dollar-yen over benchmark fixing for corporate clients and Japan-domiciled funds as they returned from two-day public holiday, according to a trader. Going back to Europe, the Franc led losses in G-10 after Swiss inflation missed estimates and printed lower on a month-on-month basis.

Back to stocks, where the quiet session saw Europe's Stoxx Europe 600 Index extend Friday’s gains as most regional indices advanced. Trading volumes were lighter than usual thanks to a holiday in the U.K. Focus today has been more on stock specific stories. SMI heavyweight Nestle (+0.6%) has formed a partnership with Starbucks of which Nestle will pay USD 7.15bln in closing consideration. German insurer Allianz (+0.1%) sold an 8.4% shareholding in Banco BPI (+21.2%) to Caixabank (+0.1%). Elsewhere, Air France (-13.4%) shares fell following the CEO offering his resignation after a pay deal rejection. Furthermore, a French finance minister expressed his concerns regarding the company’s survival.

In Asia, shares climbed in Australia and jumped in Shanghai. The ASX 200 (+0.4%) was lifted by commodity names following recent upside in the complex and with big 4 bank Westpac underpinned after reporting a 6% increase in H1 cash earnings, while Nikkei 225 (-0.1%) underperformed on return from last week’s holiday closures amid a firmer JPY. The Shanghai Comp. (+1.2%) and Hang Seng (+0.5%) shrugged off PBoC liquidity inaction to trade in the green and although a lack of progress was made during the US delegation visit, the consensus to keep on talking provided hope that an escalation to a full-blown trade war will likely be avoided.

Core euro-area bonds edged higher, while US Treasurys were generally unchanged due to the UK holiday. The 10Y TSY yield rose by less than one basis point to 2.95%. 10yr JGBs were quiet and failed to benefit from a subdued tone in Japan, as well as the BoJ Rinban announcement for JPY 840bln of JGBs across the curve with the amounts left unchanged. BoJ meeting minutes for March 8th-9th meeting stated that the BoJ should maintain easy policy as inflation target still a distance.

In the commodity sector, oil breached a key resistance level, rising above $70 for the first time since November 2014, and continued its climb amid reports that Saudi Arabia is looking to push prices up to at least USD 80/bbl (contrary to Iran who see USD 60-65/bbl as 'suitable').

Furthermore, geopolitical tensions remain a key focus for markets ahead of the Trump's judgement on the Iranian nuclear deal on My 12th with non-conciliatory comments from the Iranian foreign minister and president stating that Tehran's reaction if the US leave the nuclear deal will not be pleasant, and they will pay a heavy price.

Movements in Gold were largely being dictated by increases in the USD, with the yellow metal currently down USD 2.00. Copper is seeing strength as a result of Chinese outperformance.

In the latest Brexit news, PM Theresa May is prepared for a backlash from Brexiteers after pushing ahead with her hybrid customs plan according to the FT. Greg Clark, the Business Secretary, claimed that 3,500 jobs at Toyota could be at risk if the Prime Minister bowed to pressure from other members of her Cabinet and dropped the plans. Separately, Britain faces restrictions on post-Brexit trade and draconian measures to enforce free-market policies because the European Union fears a future Jeremy Corbyn government, according to EU officials, the Times reported.

Over in Italy, party leaders are meeting today for a potentially final round of negotiations aimed at forming a  government. League's Salvini and Forza Italia's Berlusconi are reportedly divided over the 5 star government offer. Italy’s 5 Star leader Di Maio says the party is not willing to vote for any technocratic government; adding that an early vote is the only alternative if a government cannot be formed.

Looking ahead, economic highlights include consumer credit while there is a full docket of Fed speakers including  Bostic, Barkin, Harker, Kaplan and ECB’s Praet

* * *

Bulletin Headline Summary from RanSquawk

  • WTI continues its climb above the USD 70.00/bbl mark, surpassing 4-year highs
  • Equity markets mixed as Nestle announce marketing partnership with Starbucks
  • Looking ahead, highlights include Fed’s Bostic, Barkin, Harker, Kaplan and ECB’s Praet

Market Snapshot

  • S&P 500 futures up 0.2% to 2,669.25
  • STOXX Europe 600 up 0.2% to 387.61
  • MXAP up 0.09% to 172.61
  • MXAPJ up 0.2% to 561.22
  • Nikkei down 0.03% to 22,467.16
  • Topix up 0.09% to 1,773.18
  • Hang Seng Index up 0.2% to 29,994.26
  • Shanghai Composite up 1.5% to 3,136.65
  • Sensex up 0.6% to 35,136.80
  • Australia S&P/ASX 200 up 0.4% to 6,084.47
  • Kospi down 1% to 2,461.38
  • German 10Y yield fell 1.3 bps to 0.531%
  • Euro down 0.2% to $1.1931
  • Brent Futures up 0.8% to $75.49/bbl
  • Italian 10Y yield rose 5.6 bps to 1.542%
  • Spanish 10Y yield fell 1.9 bps to 1.28%
  • Brent Futures up 0.8% to $75.49/bbl
  • Gold spot down 0.1% to $1,312.71
  • U.S. Dollar Index up 0.2% to 92.76

Top Overnight News from Bloomberg

  • Oil in New York rose above $70 a barrel for the first time since November 2014 as traders braced for a re-imposition of U.S. sanctions on Middle East crude producer Iran
  • Iran, faced with a possible restoration of U.S. sanctions, came out against higher oil prices, signaling a split with fellow OPEC member Saudi Arabia, which is showing a willingness to keep tightening crude markets
  • Indonesia’s economy expanded at a slower pace last quarter than economists had forecast, a setback for the government after eight interest rate cuts in the past two years.
  • Conservative tensions over Brexit erupted again on Sunday as a senior U.K. minister fueled speculation that PM Theresa May may be planning to revive a customs plan rejected by euroskeptic members last week
  • North Korea said U.S. sanctions aren’t the reason behind its willingness to remove nuclear weapons from peninsula, accusing its adversary of trying to ramp up tensions ahead of a summit between leaders of the countries
  • Some of the Bank of Japan nine board members said it’s important to communicate thoroughly that it’s still a long way from achieving the inflation target and the bank hasn’t reached the phase to consider exit, according to the record of the March 8-9 policy meeting
  • The European Union is mulling the option of tolerating quotas on metal imports to the U.S. in an effort to avert a trans-Atlantic trade war should President Donald Trump impose restrictions on steel and aluminum shipments, according to EU officials.
  • German factory orders unexpectedly dropped in March and February was revised lower, confirming a weak start to the year in Europe’s largest economy and raising concern over the strength of the euro-area growth.
  • All the countries in the euro area are set to meet the currency bloc’s annual deficit target of less than 3 percent of GDP this year — a feat that has never been achieved since the start of Economic and Monetary Union in 1999. Eight members of the currency bloc are even projected to show budget surpluses for 2018, EU Economic Affairs Commissioner Pierre Moscovici said.
  • This year’s selloff in Asian dollar bonds has made their valuations more attractive but they are not yet cheap enough for investors to consider buying the dip, according to Goldman Sachs Group Inc.

Asian stocks began the week mostly positive as the region took its first opportunity to digest Friday’s US stock market surge despite the miss on NFP data, as well as the US delegate visit to China last week which ended with minimal progress although both sides agreed to keep talking. ASX 200 (+0.4%) was lifted by commodity names following recent upside in the complex and with big 4 bank Westpac underpinned after reporting a 6% increase in H1 cash earnings, while Nikkei 225 (-0.1%) underperformed on return from last week’s holiday closures amid a firmer JPY. Elsewhere, Shanghai Comp. (+1.2%) and Hang Seng (+0.5%) shrugged off PBoC liquidity inaction to trade in the green and although a lack of progress was made during the US delegation visit, the consensus to keep on talking provided hope that an escalation to a full-blown trade war will likely be avoided. Finally, 10yr JGBs were quiet and failed to benefit from a subdued tone in Japan, as well as the BoJ Rinban announcement for JPY 840bln of JGBs across the curve with the amounts left unchanged. BoJ meeting minutes for March 8th-9th meeting stated that the BoJ should maintain easy policy as inflation target still a distance. Furthermore, most members agreed that momentum towards hitting price goal is being maintained and most members also viewed that exports have been on an increasing trend due to firm growth overseas.

Top Asian News

  • China Steps Up Crackdown, Imposes More Fines on Financial Firms
  • China Hasn’t Intervened in FX for Nearly a Year, Yi Tells Caixin
  • Vinhomes Is Said Poised to Price $1.35 Billion Share Sale at Top

European equities opened mixed although they have since risen to session highs (Stoxx 600 +0.18%) this morning whilst the UK away on bank holiday. Looking at the sectors, IT names are leading with sector-wide gains of almost a percent. Focus today has been more on stock specific stories. SMI heavyweight Nestle (+0.6%) has formed a partnership with Starbucks of which Nestle will pay USD 7.15bln in closing consideration. German insurer Allianz (+0.1%) sold an 8.4% shareholding in Banco BPI (+21.2%) to Caixabank (+0.1%). Elsewhere, Air France (-13.4%) shares fell following the CEO offering his resignation after a pay deal rejection. Furthermore, a French finance minister expressed his concerns regarding the company’s survival.

Top European News

  • Berlusconi Clashes With League Over Five Star’s Offer of Pact
  • German Factory Orders Slump to Cap Feeble Economic First Quarter
  • Turkish Central Bank Moves to Provide Dollar Liquidity to Banks
  • ECB Says Protectionism Would Hurt Economy With U.S. Hit Severely
  • Iran Opposes Higher Oil Prices, Signaling Divide With Saudis

In FX, the DXY index has drifted back from fresh 2018 highs made in the aftermath of last Friday’s US jobs data, once the dust settled and markets got over the initial double disappointment of sub-consensus headline payrolls and average earnings. The bottom line is that the latest report is highly unlikely to prevent the Fed from hiking rates a 2nd time this year in June, and the Greenback is holding gains vs all G10 counterparts bar the Pound as a result. DXY currently just above 92.800 vs 92.900 at best ahead of the weekend. GBP: As noted, Sterling is showing a degree of resilience in UK holiday-thinned trade, with Cable bouncing firmly above the 1.3500 level and Eur/Gbp testing bids around 0.8000 amidst what appears to be a mixture of short-covering and perhaps some bargain hunting ahead of BoE super Thursday. Rate expectations have turned full circle to around 90% for unchanged from tightening only a few weeks ago, but the vote split may still reveal some hike advocates and the minutes could highlight a close call. EUR/CHF/AUD:  The biggest losers vs the Dollar, as Eur/Usd only just retains 1.1900+ status, Usd/Chf extends gains beyond parity in wake of softer than expected Swiss CPI data and Aud/Usd is struggling to stay above 0.7500 amidst bearish cross-winds – note, a major bank has instigated a short Aud/Jpy position around 82.24 and is targeting 80.50.

In commodities, oil continues its climb as WTI maintains its move above USD 70.00/bbl amid reports that Saudi Arabia is looking to push prices up to at least USD 80/bbl (contrary to Iran who see USD 60-65/bbl as 'suitable'). Furthermore, geopolitical tensions remain a key focus for markets ahead of the Trump's judgement on the Iranian nuclear deal on My 12th with non-conciliatory comments from the Iranian foreign minister and president stating that Tehran's reaction if the US leave the nuclear deal will not be pleasant, and they will pay a heavy price. Movements in Gold are largely being dictated by increases in the USD, with the yellow metal currently down USD 2.00. Copper is seeing strength as a result of Chinese outperformance.

US Event Calendar

  • 8:25am: Fed’s Bostic Makes Welcome at Financial Markets Conference
  • 2pm: Fed’s Barkin Speaks in Moderated Q&A at GMU
  • 3pm: Consumer Credit, est. $16.0b, prior $10.6b
  • 3:30pm: Fed’s Kaplan Speaks on Panel at Financial Conference
  • 3:30pm: Fed’s Evans Speaks At Atlanta Fed Financial Markets Conference

There is no commentary from Jim Reid this morning due to the UK bank holiday.


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