Global shares were mixed, equity futures, the dollar and crude rose as investors focused their attention on today’s inauguration of Donald Trump as U.S. president. While the early tone is well bid, some traders anticipate a volatile session, with speculation that a bout of “sell the inauguration” could cap the aging Trump rally, which started with his inauguration.
Despite last night’s Yellen speech which was more dovish than her remarks just 24 hours earlier, and which suggested that the US economy is “not overheating”, the dollar managed to rebound from overnight losses and was trading 0.2% higher this morning. The early gains came after China reported its first economic expansion in 2 years (conveniently with president Xi in Davos) with GDP rising to 6.8% after quarters of decline.
However for the year, China’s GDP growth declined to the slowest pace in 26 years, despite a record debt load and record weak Yuan.
But it will be all about Trump today: tens of thousands of law enforcement officers and miles of barriers were in place in Washington D.C., as officials braced for hundreds of thousands of people planning to celebrate or protest the inauguration of Trump. The inauguration is “definitely a big moment for the markets,” said Neil Mellor, a London-based currency strategist at Bank of New York Mellon Corp. “We could get more clues about what Trump is planning today. If he ramps up the rhetoric the market will be concerned about building long dollar positions.”
“All eyes will be on the content and style of Trump’s inauguration speech,” Morgan Stanley’s Hans Redeker wrote in a note. “The more ‘Presidential’ this speech comes across, the better the outcome for markets.”
“[Trump is] likely to talk about job creation and unifying the U.S. and we may have to wait a bit longer for details on economic measures,” said Natixis fixed income strategist Cyril Regnat.
“It’s clear that investors have reached a level where they are prepared to wait and see what the Trump administration has to offer,” said Ric Spooner, chief market analyst at CMC Markets Asia Pacific Ltd. in Sydney.
Trump’s inauguration ceremony “will be followed by a speech that will be carefully decoded by those looking for signs of things to come in the new U.S. administration, an exercise that amounts to political astrology in an era characterized by a shakeup of the old rules of the game,” Citigroup’s chief global political analyst Tina Fordham wrote in note.
As Bloomberg notes, rallies in the dollar and equities are easing this week before Trump is sworn in as the 45th American president, with investors growing anxious for indications the administration will follow through on pro-growth campaign promises. Billionaire investor George Soros said the euphoria among stock investors since Trump’s victory will end as uncertainty takes over. The Dow Jones Industrial Average has churned in its tightest range ever over the past month.
European stocks opened weaker before recouping some losses to trade flat. Trading was choppy with mining shares, the biggest beneficiaries of the reflation rally spurred by Trump’s election win, the biggest drag on the indexes. The Stoxx Europe 600 Index was poised for its worst week since early December while the pound slid after a report showed U.K. retail sales fell at the fastest pace in almost five years last month. Gold headed for a fourth weekly advance.
Fund flows in the run-up to Friday’s inauguration indicate investors moving into less risky assets and locking in some profits in banking stocks and high-yield debt. Precious metals funds saw their first inflows in 10 weeks, according to data from fund tracker EPFR and Bank of America-Merrill Lynch while money was pulled from funds focused on financials stocks and high-yield bonds.
The Stoxx Europe 600 Index little changed as declines in miners offset gains in energy shares. Futures on the S&P 500 Index rose 0.2%. The S&P500 is heading for its biggest weekly drop of 2017. Contracts on the Dow Jones Industrial Average were little changed on Friday, and may be pressued by the disappointing earnings from both American Express and IBM.
10Y yields were flat at 2.5%, erasing previous declines. Government bonds retreated across the European Union.
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Bulletin summary from RanSquawk
- Somewhat of a quiet affair this morning with European bourses failing to find any firm direction
- USD saw softness during Asian hours amid dovish interpretations of Yellen’s latest comments as well as ahead of Trump’s inauguration
- As well as Presidential Elect Trump’s Inauguration, today also see Canadian CPI and comments form Fed’s Harker and Williams
Market Snapshot
- S&P 500 futures up 0.2% to 2267
- Stoxx 600 down 0.1% to 362
- FTSE 100 down less than 0.1% to 7205
- DAX down less than 0.1% to 11595
- German 10Yr yield up 2bps to 0.4%
- Italian 10Yr yield up 3bps to 2.02%
- Spanish 10Yr yield up 2bps to 1.5%
- S&P GSCI Index up 0.5% to 396.9
- MSCI Asia Pacific down 0.1% to 140
- Nikkei 225 up 0.3% to 19138
- Hang Seng down 0.7% to 22886
- Shanghai Composite up 0.7% to 3123
- S&P/ASX 200 down 0.7% to 5655
- US 10-yr yield up 3bps to 2.5%
- Dollar Index up 0.16% to 101.31
- WTI Crude futures up 1.2% to $51.98
- Brent Futures up 1.2% to $54.79
- Gold spot down 0.3% to $1,201
- Silver spot down 0.9% to $16.87
Top Global News
- Trump Arrives for Inauguration With Promise to Unify the Nation: Addresses supporters on eve of swearing-in
- Yellen Says Fed Not Behind the Curve, Backs Gradual Rate Rises: Yellen sees risk in allowing the economy to run too hot
- Data showed U.K. retail sales fell at the fastest pace in almost five years in December
- China’s central bank said it provided a “temporary liquidity facility’’ to some major commercial banks for 28 days to help ease a cash crunch before the Lunar New Year holiday
- Soros Says Markets to Slump With Trump, EU Faces Disintegration: Says incoming U.S. president will fail
- JPMorgan Boosts CEO Dimon’s Annual Pay 3.7% to $28 Million: Bank awards $19 million compensation packages to four deputies
- IBM Margins Narrow While It Struggles to End Sales Slide: Revenue slips for 19th quarter, margins shrink for fifth
- American Express Profit Falls 8.2% as Expenses Top Estimates: Lender increases forecast for full-year earnings- per-share
- Deutsche Bank Burden in Mortgage Settlement Eased by Fine Print: German bank is the first to negotiate such a provision
- Heineken in Discussions With Kirin to Double Down in Brazil: Price would be less than a quarter of what it paid in 2011
- TPG’s Cushman & Wakefield Said to Have Held Early IPO Talks: Company said to hold informal meetings on listing soon as 3Q
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Looking at regional markets, Asian stocks traded mixed following an uninspiring lead from Wall Street with participants cautious ahead of the US Presidential Inauguration and as the region digests Chinese GDP data. ASX 200 (-0.7%) lagged amid continued weakness in financials with mining names also pressured after iron ore prices fell over 1%. Conversely, Nikkei 225 (+0.3%) initially traded choppy alongside fluctuations in JPY, but was able to finish higher as JPY weakened slightly while Shanghai Comp (+0.7%) and Hang Seng (-0.6%) were mixed after a slew of tier-1 Chinese data including GDP in which the Y/Y figure beat expectations, although the pace of growth for 2016 was at its slowest in 26 years. Finally, 10yr JGBs traded higher amid a mostly cautious tone in the Asia-Pac region, while the BoJ were also in the market for a respectable JPY 1.12trl of JGBs ranging from 1yr-25yr-F maturities.
Chinese data
- Chinese GDP (Q4) Y/Y 6.8% vs. Exp. 6.7% (Prey. 6.7%)
- Chinese GDP YTD (Q4) Y/Y 6.7% vs. Exp. 6.7% (Prey. 6.7%): slowest yearly growth in 26 years.
- Chinese Industrial Production (Dec) Y/Y 6.0% vs. Exp. 6.1% (Prey. 6.2%); YTD (Dec) Y/Y 6.0% vs. Exp. 6.0% (Prey. 6.0%)
- Chinese Retail Sales (Dec) Y/Y 10.9% vs. Exp. 10.7% (Prey. 10.8%); Sales YTD (Dec) Y/Y 10.4% vs. Exp. 10.4% (Prey. 10.4%)
Top Asian News
- Mystery $9 Billion in Cash With Indians After Modi Shock Ban: Public withdrew more cash than currency in circulation: report
- Indonesia Tax Agency Demands Meeting With Top Google Executives: Google paid 5.2b rupiah in 2015 taxes: documents
- China Says It Offered Temporary Funding Support to Big Banks: ‘The central bank has a new liquidity tool,’ analyst says
- Mnuchin Says He’ll Tag China an FX-Manipulator If Warranted: Trump had backed away from pledge to add label immediately
In Europe, it has been a quiet morning with European bourses failing to find any firm direction, slight underperformance however has been observed in basis materials with Rio Tinto shares leading the FTSE 100 lower amid the declines in Iron prices.11 out of 19 Stoxx 600 sectors fall with basic resources, retail underperforming and oil & gas, construction & materials outperforming. 51% of Stoxx 600 members decline, 46% gain. While large UK supermarkets, Tesco’s and Sainsbury’s are soft today amid a negative note from Exane. Fixed income markets trade marginally in the red with Bunds lower by around 14 ticks, breaking below the 163.00 level, while slight outperformance in the curve has been notable in 5s and 10s.
Top European News
- U.K. Retail Sales Fall Most Since 2012 as Price Rises Bite: Sales drop 1.9% from November, decline 2% excluding auto fuel
- Lloyds Said to Shuffle Executives, Preparing for Strategy Review: CEO protege takes role examining group design, costs
- BofA, UBS Said to Lead Banks Sharing $427 Million UniCredit Fee: Fees represent about 3% of deal size vs 2% average
- Maersk IPO Plans Won’t Derail Bid for Dong’s $2.8 Billion Unit: Potential Dong bidders include DEA, PGNiG, BI analyst says
- Close Brothers Says Had Strong Performance at Start Fiscal Year: Confident of strong 1H result, good outcome for full 2017
- Tryg 4Q Net Misses Estimates; CEO Says 2017 on Track for Targets: Tryg 4Q profit after tax DKK560m vs est DKK664m
In currencies, the Bloomberg Dollar Spot Index was up 0.2 percent as of 10:38 a.m. in London after falling as much as 0.3 percent. The gauge is heading toward its first weekly advance since the period ending Dec. 23. The pound dropped 0.3 percent to $1.2301 and the euro retreated 0.3 percent to $1.0637. Nerves among USD longs were telling in late Asia and first thing in London were telling as the presidential inauguration ahead carries the ever-present risk of way lies ahead in terms of trade and currency policy in particular. This has since been reversed to some degree as UST yields push higher towards the highs seen at the very start of the year, but USD gains look a little more hesitant given events later in the day. USD/JPY is eyeing a return to the mid 115.00 highs seen yesterday, but notable was the EUFt/USD return to the upper 1.0600’s again despite was an unchanged status quo at the ECB Thursday, with tapering considerations dismissed out of hand to see the accommodative stance maintained despite rising headline inflation. For GBP, a softer than expect retail sales read in the UK for Dec has put a modest dent in the Pound based on the EUR/GBP upturn, which as yet struggles for momentum above the .8650 mark. Cable has slipped below 1.2300, but partly due to the broader USD impact. 1.2250 support has yet to be tested.
In commodities, the Trump inauguration ahead is prompting much caution across all asset classes, but given the prospective impact on infra structure spending and trade policy which has ramifications for China in particular, base metals in particular have been trading flat to marginally lower over the last 24-36 hours or so. Gold was finding a modest bid as the USD retreated a little this morning, but with US Treasuries pulling back again, we have seen the yellow metal slip back below USD1200.00, although it is likely that general risk sentiment will provide some support given today’s key events In Washington. Oil prices have stabilised after some notable losses in recent sessions, but the USD50.00 handle looks safe for now.
Looking at today’s calendar, there’s nothing of note in the US this afternoon although we will hear from both the Fed’s Harker (2pm GMT) and Williams (6pm GMT). Of course the main event today will be Donald Trump’s inauguration as the 45th US President. The swearing-in ceremony is due at 2.30pm GMT. Before we wrap up, in addition to all things Trump related this weekend it’s also worth highlighting a couple of other potentially interesting events. French presidential candidate Marine Le Pen and Holland’s Freedom Party head Geert Wilders are amongst political leaders speaking at a rally of European nationalist parties in Germany tomorrow. Meanwhile on Sunday, France’s leftist parties are due to hold the first round of their primary. So worth keeping an eye on both those events.
US Event Calendar
- 9am: Fed’s Harker Speaks in New Jersey on Economic Outlook
- 9:45am: Markit US Manufacturing PMI, Jan P, est. 54.3 (prior 54.3)
- 10am: Existing Home Sales, Dec., est. 5.55m (prior 5.61m)
- 10am: Richmond Fed Manufacturing Index, Jan. (prior 8)
- 1pm: Baker Hughes rig count
- 1pm: Fed’s Williams Speaks at Event at San Francisco Fed
Government:
- 12pm: President-Elect Donald Trump takes oath of office
- Senate to hold confirmation votes on some Cabinet nominees
- 3pm: Congressional Hispanic Caucus holds news conference with House Democratic leaders on immigration policy
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DB’s Jim Reid concludes the overnight wrap
In my 2017 outlook presentation in Paris I asked 4 questions where the audience were able to vote on the answer. The first was when will the next US recession occur? The audience voted 45% for 2019 and 45% for 2020 or beyond. The rest were 2017 and 2018. So they were pretty optimistic that the cycle will extend. When I asked this question to two big audiences on my travels last year around 70% answered 2017 or 2018 so expectations have seemingly changed. I also asked whether Italy will still be in the single currency in 5 years time. 91% said yes. Last year around 80% said yes in similar polls so again a more optimistic crowd. When asked whether the ECB will be fully out of QE by YE 2018 around 80% said no so it seems investors, although optimistic, still feel the ECB need to keep stimulus high over the next two years. Finally I asked what was the most likely event to occur out of the following four by the end of 2018? a) 10 year USTs above 5%, b) the S&P 500 trading below 1500, c) England winning the football World Cup or d) France electing Le Pen. Interestingly answer a) won with nearly 50% and the biggest shock was that England winning the World Cup scored 40% on this measure with the other two making up the last 10%. So only a few French investors thought a Le Pen victory was more likely than 5% yields, the S&P 500 below 1500 or England winning the World Cup.
So overall an optimistic crowd contrasting with surveys I did last year at various conferences. So there’s no doubt sentiment has changed in 2017 even if markets are in a bit of a lull. This should change soon one way or another as Donald Trump’s inauguration today marks the start of what promises to be a fascinating ride with a wide range of outcomes. Trump is set to speak at 2.30pm GMT and all we know right now is that Trump was said to have prepared the speech himself, with some advice and counsel from advisers as well as from some historians specifically regarding the length of the speech. Trump was also said to have told reporters that the speech will aim to unite America but we know little more than that at this stage. So it remains to be seen just how market moving this will be.
One topic which is certainly hogging the spotlight right now is the administration’s views on the US Dollar. Treasury secretary nominee Steven Mnuchin was the latest to address the currency debate yesterday and added to the confusion by saying that Trump’s observation on Monday that the Dollar is too strong was not meant as a “long-term comment”. Instead, Mnuchin said that “long-term strength over long periods of time is important” and that “I believe that’s a reflection of (the US having) the most attractive investment environment in the world”. Mnuchin also made comments about bank regulation, saying he supports the Volcker rule. On top of this he also said that he would look to raise the debt ceiling sooner rather than later, while also saying that he would label China a FX manipulator if warranted.
Over in markets, Dollar strength was again a theme yesterday after the USD index closed up +0.22% although it did pare earlier gains of as much as +0.80%. The other theme yesterday was the second successive day of Treasury yields climbing higher. In fact 10y Treasury yields closed up 4.4bps higher yesterday at 2.475% – which is a YTD high – and have all of a sudden risen 17bps from the intraday lows on Tuesday. The data helped at the margin but it appeared to be Yellen’s speech the day before and then those comments from Mnuchin which helped drive yields higher. The Fed Chair spoke again this morning but it seems to largely be a repeat of what she said previously, with little new information to highlight. Meanwhile US equity markets never really got going yesterday with the S&P 500 finishing -0.36% with rate sensitive sectors in particular underperforming.
Before we go any further we’re straight to China now where the latest monthly data dump is in. It has revealed that China’s economy grew 6.8% yoy in Q4 last year which was slightly more than the 6.7% expected by the market. For full year 2016, China reported growth of 6.7% which, while being the slowest pace since 1990, did end up right in the middle of the government’s official target. Meanwhile other activity indicators were mixed. Retail sales rose +10.9% yoy in December (vs. +10.7% expected) which is a tenth higher than that in November, although industrial production did slip two-tenths to +6.0% yoy (vs. +6.1% expected). Finally fixed asset investment was reported as rising +8.1% yoy for the full year (vs. +8.3% expected).
In terms of the market reaction Chinese equity markets are higher in response with the Shanghai Comp and CSI 300 +0.54% and +0.69% although a Bloomberg report suggesting that the China Financial Futures Exchange is to relax curbs on trading might also be helping the positive tone. Elsewhere it’s more mixed. The Nikkei is +0.14% although the Hang Seng (-0.58%), Kospi (-0.19%) and ASX (-0.58%) are down.
Moving on. The other focus for markets yesterday was the ECB meeting outcome. As we’d expected, a patient message was preached. Our European economists noted that the Bank is looking through the rise in headline inflation as the ECB’s patience and willingness to wait to extract the underlying trend from inflation was emphasized. Draghi said the Council will “continue to look through” HICP inflation “if judged to be transient and to have no implications for medium-term price stability”. The ECB President also outlined a framework for judging the “sustained adjustment” of inflation. In the view of our colleagues, “looking through” inflation implies less risk of an early tightening move in March. June is still the earliest timing for a tapering decision.
Away from that it was interesting to hear comments (Bloomberg) from hedge-fund manager George Soros yesterday in Davos. Speaking about Brexit he said that “it is unlikely that Prime Minister May is actually going to remain in power” and that Britons are in denial about what the economic impact of Brexit could be. When commenting about Europe Soros added that the laws that govern the EU are “not appropriate to the current circumstances” and that while he acknowledges it can still be saved, those making decisions in Brussels “know that Europe is not functioning”.
Before we look at the day ahead, it was an overall decent day for economic data in the US yesterday. Housing starts were reported as rising a bumper +11.3% mom (vs. +9.0% expected) in December while the November data was also revised up. Building permits (-0.2% mom vs. +1.1% expected) did miss but again we saw upward revisions to prior months. Meanwhile initial jobless claims declined to 234k from 249k which is the lowest since November. Finally the Philly Fed manufacturing survey ticked up 3.9pts to 23.6 (vs. 15.3 expected). That’s actually the highest level since November 2014 and more importantly, the detail revealed broad-based improvement which is indicative of a decent improvement in business spending this year according to our US economists.
Looking at today’s calendar, this morning in Europe the early data comes from Germany where the December PPI print will be released. Thereafter we’ll get retail sales numbers in the UK for the month of December which is expected to show a -0.4% mom decline excluding fuel. There’s nothing of note in the US this afternoon although we will hear from both the Fed’s Harker (2pm GMT) and Williams (6pm GMT). Of course the main event today will be Donald Trump’s inauguration as the 45th US President. The swearing-in ceremony is due at 2.30pm GMT. Before we wrap up, in addition to all things Trump related this weekend it’s also worth highlighting a couple of other potentially interesting events. French presidential candidate Marine Le Pen and Holland’s Freedom Party head Geert Wilders are amongst political leaders speaking at a rally of European nationalist parties in Germany tomorrow. Meanwhile on Sunday, France’s leftist parties are due to hold the first round of their primary. So worth keeping an eye on both those events.
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