While traders eagerly await Theresa May’s speech set to begin in minutes, even if it was largely leaked last night to minimize “market shocks” and set the stage for a big squeeze in cable which at last check was over 100 pips higher overnight, the big catalyst setting today’s risk off mood was the previously noted Trump statement, published overnight by the WSJ, in which Trump called the US currency “too strong“, and attacked the Border-Tax Adjustment, expected to boost the value of the USD by as much as 15% should it be implemented.
As a result, European shares are sliding, S&P index futures are down 12 points, while the dollar has fallen all of its G-10 peers – with the USDJPY tumbling below 113 for the first time since December, and the USDCNH back under 6.80 – as investors flee the crowded USD trade amid concern for the future of the Trumpflation rally and worries Theresa May may say today that U.K. will leave European Union’s single market. And since the dollar is now a source of risk, traders are suddenly piling into gold, which has risen to $1,218 in early trading, the highest since November 22.
Britain’s pound was higher on the day but still close to Monday’s three-month lows, while the Japanese yen hit a six-week high as investors sought shelter from the mounting political risk of a week that also includes Trump’s inauguration.
“Sterling is trading higher ahead of Theresa May’s speech on Brexit but we’re expecting a wild ride for the pound today,” said Neil Wilson, senior market analyst at ETX Capital.
Investors are seeking clarity on his policies after campaign pledges on tax cuts and government spending helped lift stocks and the dollar and were deemed positive for economic growth.
“The dollar is the guiding light at this point and all eyes are on the shape U.S. policy will take,” said Fredrik Nerbrand, global head of asset allocation at HSBC Holdings Plc in London. “I would put today’s dollar weakness down to noise rather than a structural shift. If Trump wants to become as growth-generative as he’s planning to be and you don’t have the same fiscal push coming from the rest of the world, then it’s a question of where does the capital flow to. The dollar is the tallest pygmy.”
The twin themes of Brexit and Trump are set for significant developments this week after dominating markets this year and last. The comments from Trump, who will be inaugurated Friday, have left traders guessing at his meaning, while May’s speech is likely to give the clearest view yet of the U.K.’s exit strategy.
As noted yesterday, Prime Minister May is to rule out Britain staying in the European single market in her speech as she makes immigration controls a priority in Brexit talks. She is expected to state Britain should not be “half-in, half-out” of the EU or “hold on to bits of membership as we leave.” Her speech is set to begin at 6:45am ET. “We have taken back all of the move from yesterday morning. The speech has been so well telegraphed that I think people (betting against sterling) realize that is dangerous,” said Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.
Also overnight, BoE Governor Carney stated BoE sees slower UK growth and FX rate over next few years and there is evidence that consumption-led growth is less durable. Carney also commented that the central bank is prepared to act to protect economic growth in the face of Brexit triggered pressures. Carney also reiterated that the MPC has limits to the extent that above target inflation can be tolerated.
As a result of the above, Stoxx Europe 600 Index retreated 0.5 percent, with automakers among the biggest decliners for a second day. The FTSE 100 Index slipped 0.3 percent. Futures on the S&P 500 Index slid 0.6%. U.S. markets were closed Monday for a holiday.
Gold hit its highest in more than seven weeks, and was last trading at $1,213 an ounce, up almost 1 percent on the day XAU=. It has now risen for seven consecutive days. “Gold is going to do very well in the first half of the year due to Brexit concerns, Chinese currency pressure and uncertainty surrounding Donald Trump’s policies,” said Richard Xu, fund manager at China’s biggest gold exchange-traded fund, HuaAn Gold.
Market Snapshot
- S&P 500 futures down 0.6% to 2258
- Stoxx 600 down 0.4% to 362
- FTSE 100 down 0.3% to 7302
- DAX down 0.7% to 11469
- German 10Yr yield down 4bps to 0.28%
- Italian 10Yr yield down 6bps to 1.85%
- Spanish 10Yr yield down 10bps to 1.33%
- S&P GSCI Index up 1% to 403.7
- MSCI Asia Pacific up less than 0.1% to 140
- Nikkei 225 down 1.5% to 18814
- Hang Seng up 0.5% to 22841
- Shanghai Composite up 0.2% to 3109
- S&P/ASX 200 down 0.9% to 5699
- US 10-yr yield down 7bps to 2.33%
- Dollar Index down 0.29% to 100.89
- WTI Crude futures up 1.5% to $53.13
- Brent Futures up 1.1% to $56.48
- Gold spot up 1.1% to $1,216
- Silver spot up 1.3% to $17.03
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Looking at regional markets, Asian stocks traded mostly lower following the US market closure for Martin Luther King Jr. Day and negative lead from Europe due to hard Brexit concerns. ASX 200 (-0.9%) conformed to the downbeat tone and broke below the 5700 amid declines in financials as all Big 4 banks traded with losses after similar weakness in their European counterparts. Nikkei 225 (-1.5%) underperformed to plummet below the 19,000 level as JPY strengthened. In China, Shanghai Comp (+0.1%) saw choppy trade after the PBoC’s outstanding FX funds declined for the 14th straight month which suggested continued capital outflows. Furthermore, a firm CNY 330b1n injection failed to support as increased liquidity efforts are widely expected ahead of the Lunar New Year holiday later this month, while the Hang Seng (+0.6%) outperformed and traded with gains following some encouraging earnings reports. Finally, 10yr JGBs saw uneventful trade and edged minimal gains despite a risk averse tone and better than prior 20yr auction results. PBoC injected CNY 100bIn in 7-day reverse repos and CNY 230b1n in 28-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.8992 (Prey. 6.8874).
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European bourses are broadly trading in the red as markets await UK Prime Minister May’s press conference at 1145GMT. Rolls Royce are among the best performers in Europe today after the Co. settled its bribery investigation and confirmed it will pay GBP 671 min. Elsewhere in the FTSE 100 British American Tobacco have agreed their merger with Reynolds American for USD 59.64 per share and also trade higher this morning. Fixed income prices have moved higher in line with the risk off theme this morning, led by a 6.4bps decline in the French 30-year. Looking ahead, today sees the German Schatz auction, while Gilts have outperformed as traders and investors anticipate PM Mays’s speech.
Top European News
- German Investor Confidence Surges as Economic Momentum Picks Up
- Bank Bosses Prep Plans to Move Abroad as May Signals Hard Brexit
- U.K. Inflation Surges to Fastest in 2 1/2 Years as Pound Slumps
- European Auto Sales Jump to Nine-Year High as Renault Gains
- Zurich Cuts Technology Spend as Greco Seeks $1.5 Billion Savings
- Carlsberg Cold War Analyst Says New Russia Status a Game Changer
- Deutsche Bank May Withhold 90 Percent of Bonuses, NY Post Says
- EU Parliament Votes on New Chief as Six Candidates Vie for Post
In currencies, the Bloomberg Dollar Spot Index lost 0.7 percent at 10:34 a.m. London time, set for the lowest level in a month. The pound rose 0.7 percent to $1.2133, erasing an earlier decline. The euro climbed 0.6 percent to $1.066. The yen traded at 113.26 per dollar, up 0.8 percent. The currency has strengthened 3.2 percent over seven sessions. All eyes will be on UK PM May’s key speech on Brexit but unlike the jitters experienced in early Monday, GBP has recovered some ground in the meantime, but some are discounting this down to market mechanics as we close the gap left by Asian markets yesterday. We saw Cable dipping below 1.2000 at the time, but tentative gains saw a London close around the 1.2040-50 area, with buyers taking the pair up to highs just shy of 1.2200 before the latest drop back. This has come in line with USD weakness across the board, with notable losses in USDJPY taking us below 113.00, as recent Trump rhetoric on USD strength has been underlined by his advisers speaking in Davos at the present time. Protectionist talk on China’s devaluation of the Yuan has also sparked fresh concerns on what may lie ahead after his inauguration this Friday, and this points to nerves spreading into the equities markets with the European bourses generally lower on the day so far. Elsewhere, EUR/USD has been pushed back into the upper 1.0600’s, and calls for a test on the 1.0700-1.0800 are back on the table with the ECB meeting on Thursday also adding to the mix of risk event this week.
In commodities, gold climbed 1.1 percent to $1,215.51 per ounce, extending its winning streak to seven days, the longest since November. Spot gold prices are at the highest since Nov. 22. Crude oil added 1.8 percent to $53.29 a barrel. Bloomberg’s commodity index rose for a fifth day, heading to the highest close since July 1. Oil markets have somewhat slipped back from the limelight in the commodity complex, but it is enough to say that the USD50.00 handle looks comfortable in WTI, with the backdrop of the OPEC agreement serving as a firm prop. Instead, the focus is on Gold, and while today’s drivers are coming from USD softness, the safe haven aspect may come into play as some of D. Trump’s protectionist rhetoric begins to unnerve the markets. Base metals could move the other way given the infrastructure spending implications — in both the US and China — but some near term consolidation seen in the likes of Copper as USD weakness translates into higher commodity prices across the board.
Looking at the day ahead, in the US the sole release is the NY Fed’s empire manufacturing survey. Away from the data, clearly the big focus today will be on UK PM Theresa May’s hotly anticipated Brexit speech. Also due to speak today are the Fed’s Dudley and Williams. We’ll also get the latest quarterly earnings report from Morgan Stanley, prior to the open. If that wasn’t enough, the annual World Economic Forum gets underway in Davos today where a number of key speakers are scheduled including China President Xi Jinping. So that is also well worth keeping half an eye on. Finally the European Parliament will begin the process for electing a new president today.
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Jim Reid concludes the overnight wrap
Unsurprisingly markets have been spending the best part of the last 24 hours preparing themselves for Prime Minister Theresa May’s hotly anticipated Brexit speech today. The Sunday Times story served up the first few clues that May will signal plans for a ‘hard Brexit’ today. This morning the newswires are dominated by references to leaked reports from May’s planned speech, all of which is helping to further underscore a potential hard line stance strategy from the UK government.
The stories suggest that May will set out a 12-point plan for Brexit which includes gaining control of Britain’s borders, preserving the Union, signing major free trade deals, taking the UK out of the jurisdiction of the European courts and maintaining workers’ rights. Significantly though, the PM is expected to say that this will not involve “partial membership of the EU, associate membership of the EU, or anything that leaves us half-in, half-out”. In addition the leaks suggest that May will also say that “we do not seek to adopt a model already enjoyed by other countries” and “we do not seek to hold on to bits of membership as we leave”.
Instead it’s expected that the PM will say that “we seek a new and equal partnership between an independent, self-governing, Global Britain and our friends and allies in the EU”. Sterling closed down -1.11% yesterday at $1.205 after briefly testing the waters below $1.200 although it has actually pared some of those losses this morning and is hovering around $1.208. Implied overnight volatility in Cable has also spiked to 27% as we type versus 10% on Friday and is at the highest level since the BoE cut rates back in August. As a prelude to today’s speech, this morning DB’s Oliver Harvey published a short note highlighting some of the other key questions that the market will be looking for answers for. Oliver notes that the speech is expected at 11.45am GMT this morning so strap in and prepare to hold onto your hats.
Leading into this and coming off the back of what was a broadly risk-off session in Europe yesterday with those Brexit concerns at the forefront, it’s been a much more mixed session for Asian equities this morning. While there are further losses for the Nikkei (-0.71%), Shanghai Comp (-0.50%) and ASX (-0.85%) we have seen gains for the Hang Seng (+0.44%) and Kospi (+0.44%). US equity futures are currently -0.26% while 10y Treasury yields have rallied just over 3bps.
Back to yesterday. Indeed, despite the US holiday it was a fairly rough start to the week for European equity markets yesterday with the likes of the Stoxx 600 and DAX closing -0.81% and -0.64% respectively. The FTSE 100 (-0.15%) outperformed relatively speaking boosted by the Sterling weakness but finally closed in the red for the first time since December 21st. In doing so that brings to an end a remarkable and record run of 14 consecutive days of gains and in which the last 12 were record highs for the index. Meanwhile rates benefited from the risk off moves yesterday with 10y Gilt yields in particular ending the day down 5.2bps at 1.308%. Gold (+0.45%) extended its positive start to the year and has now closed the day up in 10 of the 11 trading sessions in 2017 so far. Meanwhile credit markets were a touch wider while it was interesting to see the first Tier 3 sterling bond issue from the UK insurance sector yesterday when Phoenix Group priced a £300m bond, according to the FT.
Elsewhere we didn’t really know what to expect from BoE Carney yesterday however in the end his speech ended up being a bit of a non-starter. He did say that “recently there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally” and at the same time that the British consumer appears to be “looking through Brexit-related uncertainties”. From a policy standpoint, Carney said that the “MPC will monitor developments in the light of its inflation tolerance and will explain its assessment and policy stance accordingly”. He also suggested that there are “limits to the extent to which above-target inflation can be tolerated”.
Away from this and over at the ECB, the Bank released its latest CSPP holdings data yesterday. Following a holiday-impacted first week, total holdings last week were reported at €54.01bn which implies net purchases settled during the week of €2.17bn. That works out to a €434m daily run rate which is well ahead of the €355m average since the programme. So in other words it appears that buying is back to pre-holiday levels and still going strong.
Before we move onto what is a fairly packed day ahead, yesterday the IMF also released their latest global growth forecasts. The fund maintained their 3.4% forecast for global growth in 2017 made in November, while also leaving their 3.6% forecast for 2018 as is. For the US and reflecting the impact of the Trump administration, the fund now expects growth of 2.3% in 2017 and 2.5% in 2018 which is a cumulative 0.5% upward revision. For the UK, the fund revised up their growth forecast by 0.4% in 2017 to 1.5% but revised down 2018 by 0.3% to 1.4%. Finally growth in China this year was revised up 0.3% to 6.5%, but the fund continues to expect a slowdown in 2018 to 6.0%.
Looking at the day ahead, this morning in Europe the early data comes from France where we’ll get the November budget balance. The focus then turns to the ECB’s bank lending survey, which as a reminder was a bit soft last quarter although the rebound for the sector into year-end may help to firm it up. The UK will then report December inflation numbers where the consensus is for a +0.3% mom rise in headline consumer prices. Later on we’ll then get the January ZEW survey in Germany. Over in the US this afternoon the sole release is the NY Fed’s empire manufacturing survey. Away from the data, clearly the big focus today will be on UK PM Theresa May’s hotly anticipated Brexit speech. Also due to speak today are the Fed’s Dudley (at 1.45pm GMT) and Williams (at 11pm GMT). We’ll also get the latest quarterly earnings report from Morgan Stanley, prior to the open. If that wasn’t enough, the annual World Economic Forum gets underway in Davos today where a number of key speakers are scheduled including China President Xi Jinping. So that is also well worth keeping half an eye on. Finally the European Parliament will begin the process for electing a new president today.
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