Tuesday February 7: Five things the markets are talking about
Capital markets remain on tenterhooks as a rising tide of economic and political concerns add to investors’ anxiety over expectations.
One day its risk-on, and the next its risk-off. Overnight, it seems that investors are willing, for the time being, to step back after acquiring haven assets in yesterday’s session, but, for how long?
Currently, the overall market theme of a Trump-fueled equity rally continues to be challenged as dealers and investors assess how the new President’s team will balance protectionist trade rhetoric with promised tax cuts and spending increases.
While in parallel, the market is assigning a greater risk premium to European countries (Netherlands, France) where the rise of populism is gaining traction ahead of national elections.
Note: Widening Eurozone peripheral spreads will continue to have a negative effect on market risk appetite
Also helping the dollar's cause is China’s foreign exchange reserves falling again last month. It fell below +$3T for the first time in six years.
1. Global equities a mixed bag
In Japan, stocks dropped to a new two-week low in thin trade overnight, hit by weakness in global indices and a stronger yen.
The Nikkei dropped -0.4%, while the broader Topix dropped -0.3% on thin volumes.
Note: Japanese investors remain particularly cautious ahead of Friday’s meeting between PM Abe and U.S. President Trump (Feb. 10 and 11), with trade and currencies likely to be on the agenda.
In Hong Kong, stocks were little changed, with buying interest from the mainland countered by weakness in global markets. The benchmark Hang Seng index dropped -0.1%.
In China, stocks pulled back on fresh signs the government was moving to deflate potential credit bubbles in the broader economy. The CSI300 index fell -0.2%, while the Shanghai Composite Index dipped -0.1%.
In Europe, indices are trading mixed across the board. The Eurostoxx is being weighed lower by financials, while the FTSE 100 is outperforming with commodity and mining stocks trading higher in the index.
U.S equities are set to open in the black (+0.2%).
Indices: Stoxx50 +0.1% at 3,243, FTSE +0.6% at 7,213, DAX +0.4% at 11,555, CAC-40 +0.1% at 4,783, IBEX-35 -0.2% at 9,338, FTSE MIB -0.2% at 18,654, SMI +0.7% at 8,388, S&P 500 Futures +0.2%
2. Oil prices steady, gold trades atop of its three-month highs
Crude oil prices are somewhat steady ahead of the U.S open as lower production by OPEC and other exporters is balancing growing evidence of a revival in U.S. shale production.
Brent crude futures are trading at +$55.72 per barrel, unchanged from the close. On Monday, the Brent futures contract closed down -$1.09 a barrel. U.S light crude (WTI) is also unchanged at +$53.01 after closing down -82c yesterday.
Note: Despite OPEC cutting production, investors can expect higher stock levels, rising rig counts and growing U.S. production to cap intraday gains.
Gold prices continue to hover near its three-month high on investors political concerns. Spot gold is down -0.04% at +$1,231.60 a troy ounce, after closing at the highest price since early November yesterday.
The precious metal has gained nearly +5% over the last month, and nearly +7% since the year began.
3. U.S rate curve steepens, Bund yields fall
Prices of U.S treasuries and German bunds continue to rally, as euro political uncertainty convinces investors to seek assets considered safer when trying to protect capital.
On the flip side, investors continue to sell bonds in France, Italy, Spain and Greece, sending the yield on the 10-year French bond to the highest since September 2015.
Note: The 10-year France/Bund spread has widened to the highest level in nearly five years.
In the U.S, the Treasury curve is following last week’s trend and continues to steepen – the 10’s/30-year spread has reached +64.5 bps; the U.S long bond backed up +6.5 bps over the 10-year note as investors see a slower path of rate hikes by the Fed. Yields on U.S 10’s are at +2.41% after the biggest drop in more than two weeks Monday.
4. Dollar finds support across the board
Europe’s single unit trades atop of its 12-day low outright, falling -0.7% overnight to €1.0657, while the pound follows suit, dropping -0.9% to a two-week low of £1.2347.
Weighing on the EUR are concerns about the outcome of European elections (Netherlands and France) this year.
In France, the presidential ambitions of right-wing candidate Fillon took a blow from a scandal related to employing family members as parliamentary aides. This is giving further support to the anti-euro, National Front candidate Marine Le Pen.
There are a plethora of reasons to be wary of the EUR. First, there are the ‘dovish’ comments from the ECB’s Draghi yesterday. Second, there are concerns about the possible far-right success in the Dutch elections. Third, there is the outlook for Italian banks and Greece’s public finances.
The ‘big’ dollar is +0.5% higher against the yen at ¥112.32.
5. RBA on hold with an upbeat view of inflation, German production falls
Overnight, the Reserve Bank of Australia (RBA) left rates unchanged (+1.5%), but was more hawkish on inflation, forecasting headline CPI to pick up this year above their +2% threshold. In his communiqué, Governor Lowe also added more positive tones on the economy, stating that consumption and non-mining investment are expected to pick up this year (A$0.7620).
Data this morning from Germany showed that industrial production’s fell -3% in December. On a seasonally adjusted basis, it was the biggest such drop in 8-years. The decline was led by a -3.4% fall in manufacturing output.
However, Germany’s economics ministry says solid order books and positive business sentiment still point to a pickup in industrial activity near-term.
Note: Manufacturing orders, released yesterday, revealed a +5.2% monthly growth in December.
