On Opex Day, It’s All About The Dollar: Futures, Oil Levitate As USD Weakness Persists

It may be option expiration day (always leading to abnormal market activity) but it remains all about the weak dollar, which after crashing in the two days after the Fed’s surprisingly dovish statement has put both the ECB and the BOJ in the very awkward position that shortly after both banks have drastically eased, the Euro and the Yen are now trading stronger relative to the dollar versus prior.

As DB puts it, “the US Dollar has tumbled in a fairly impressive fashion since the FOMC on Wednesday with the Dollar spot index now down the most over a two-day period since 2009” which naturally hurts those countries who have been rushing to debase their own currencies against the USD.

For now this is felt most acutely in Japan, where the Nikkei continues to tumble, tracking every move in the USDJPY. “There’s concern for exporters,” said Nobuyuki Fujimoto, a senior market analyst at SBI Securities Co. “If the yen’s trading around 114 to the dollar, then companies will expect profits next fiscal year, but when it’s 110, most exporters will post losses.” Worse, after last night’s record plunge in the 10Y JGB yield (more shortly), the Japanese curve is now inverted and the BOJ will have to cut rates at least once more in the immediate future, in the process also forcing additional Yen weakness.

Europe will soon realize the same, because as Bloomberg writes, ECB bond buying backstop or no, following a 12% rebound since a low last month, the Stoxx Europe 600 Index is trading near its highest valuation of the year even as analysts keep slashing profit estimates for European companies. which is odd considering the same is taking place in the US and the strong dollar is blamed.

The flipside, of course, is that the weak dollar has provided a relief trade for commodities, and has pushed crude back up over $40/barrell (a price above which US shale production will soon return), and sending commodity metals to multi month highs. The combination of the weak dollar and higher commodities have pushed up the beaten down energy sector, although it remains to be seen if this will translate into actual earnings gains. The Fed “has provided a strong boost for commodities,” said Niv Dagan, executive director at Peak Asset Management LLC in Melbourne. “The fact that U.S. interest rates won’t rise any time soon – and we’ve seen the ECB announce additional stimulus and the Bank of Japan moving to negative interest rates – does provide that additional confidence to the market.”

The MSCI Asia Pacific excluding Japan Index is back to where it was in December, having rebounded 15 percent since hitting a four-year low in January. U.S. crude retreated, after soaring 11 percent in the last two days, and copper traded near a four-month high. South Korea’s won posted its biggest two-day gain since 2010 versus the dollar and the yen traded near a 16-month high. Ten-year bond yields sank to all-time lows in Japan and Taiwan.

In short, for now the “central bank accord” profiled yesterday is working, to give the impression that inflation is returning when really all the CBs have done is agree to weaken the dollar for the time being so as to not offset each other’s currency devaluation efforst.

Elsewhere, Chinese stocks jumped another 1.7%, bringing its weekly gain to 5.2% and closing just shy of 3,000 after data showed the Chinese housing bubble is accelerating, with prices increasing in the most cities since March 2014.

Market Wrap

• S&P 500 futures up 0.2% to 2035
• Stoxx 600 up 0.2% to 341
• FTSE 100 up 0.3% to 6221
• DAX up 0.3% to 9917
• German 10Yr yield down 3bps to 0.21%
• Italian 10Yr yield down 3bps to 1.24%
• Spanish 10Yr yield down 2bps to 1.41%
• S&P GSCI Index down 0.3% to 336.8
• MSCI Asia Pacific up 0.1% to 129
• Nikkei 225 down 1.2% to 16725
• Hang Seng up 0.8% to 20672
• Shanghai Composite up 1.7% to 2955
• S&P/ASX 200 up 0.3% to 5183
• US 10-yr yield down 3bps to 1.87%
• Dollar Index up 0.28% to 95.03
• WTI Crude futures down 0.2% to $40.11
• Brent Futures down 0.5% to $41.34
• Gold spot down 0.2% to $1,255
• Silver spot up 0.7% to $16.02

Top Global News

• TransCanada Locks in Growth With $10.2 Billion Pipeline Deal: Will pay $25.50 a share, representing a 10.9% premium to Columbia’s closing price on March 16, will also assume ~$2.8b of debt; will fund the purchase with proceeds from asset sales and a C$4.2b offering of new shares; is its biggest-ever deal
• TransCanada Bought a Power Plant Only to Sell It Six Weeks Later
• Adobe Beats Estimates as Demand Surges for Cloud Services: 1Q adj. EPS 66c, est. 61c; 1Q rev. $1.38b, est. $1.34b.
• Pearson Moves to Reassure Staff That Valeant Isn’t Going Broke: CEO Mike Pearson took a step to reassure his employees on Wed., saying in a memo to workers that the co. won’t go bankrupt, apologizing for recent turmoil, shrs down 51% Tues.
• Ackman’s Horror Week Gets Worse as Valeant Fall Threatens Rating: Standard & Poor’s warned it might cut Pershing Square’s credit rating to the cusp of junk-bond status
• Apple Prepares to Unveil Smaller IPhone With Narrower Ambitions: Analysts see Apple selling 15 million lower-end devices a year
• Apple Embraced by Bond Buyers While Others Left Out in the Cold
• JPMorgan Boosts Buyback by $1.88 Billion With Fed’s Blessing: Would be on top of the $6.4b in buybacks approved by regulators in last year’s capital plan
• CFTC Brought in to Police Murky Market for Biofuel Credits: Refiners spent at least $1b on ethanol credits in 2015
• Fed That Can’t Go It Alone Pulls Carpet From Under Bond Yields: Treasury 10-year yields see biggest weekly drop since Jan. 29; shallower rate path consistent with global backdrop: Barclays
• Dow’s Freakish Bounce Makes Investors Whole, Can’t Erase Doubts: Crude rally, patient Fed boost benchmark by 12% since Feb. 11
• Lockheed’s GPS Satellites Face New Delays Over a Cracked Part: Flawed capacitors from Harris Corp. may add 3 months to delays
• Viacom Gets Interest From 3 Dozen Cos. on Paramount Stake: WSJ: Players “include some Asian interests,” WSJ cites CEO Philippe Dauman in an interview.
• Facebook, Twitter in Race to Win Right to Stream Live TV: NYP: Facebook, Twitter approached programmers about a deal for rights to stream conventional TV programming: New York Post
• Orix Said to Plan $1b on Acquisitions Via U.S. PE Firm: Reuters: Plans to spend $1b over 3-5 yrs on acquisitions via a private equity firm it has set up in the U.S., Reuters reports
• Twitter to Shut TweetDeck for Windows on April 15: VentureBeat

Looking at regional markets, we as usual start in Asia where stocks traded mostly higher following a strong US lead where DJIA and S&P 500 closed in positive territory YTD after continued USD weakness boosted the commodity complex.

ASX 200 (+0.3%) coat-tailed on the commodity advance in which iron ore gained around 5% and WTI rose above USD 40/bbl to its highest since Dec. Nikkei 225 (-1.25%) underperformed after JPY continued to strengthen against USD to the detriment of local exporter competitiveness.

The Shanghai Composite Index advanced 1.7 percent and was up 5.2 percent
for the week, its best performance in four months. New-home prices
gained in 47 Chinese cities in February, compared with 38 in January,
according to a government report; also helping was the PBoC which upped its liquidity injections as not a day passes any more with some central bank engaging in drastic asset price reflating easing.

Hong Kong’s Hang Seng Index
rose to a two-month high. Tencent Holdings Ltd. jumped as much as 4.5
percent as investment in social networking and games helped Asia’s
biggest Internet company post a better-than-expected 45 percent jump in
quarterly sales.

10yr JGBs traded higher amid the risk-averse sentiment seen in Japanese stocks, with firm bids seen in afternoon trade after strong results from the BoJ’s JPY 1.26tr1 JGB purchasing operations which saw 10yr and 20yr yields decline to new record lows, while the BoJ were also said to purchase government debt under repo agreements for the 1st time in 5 years.

BoJ minutes from January 28th-29th policy meeting stated that negative rates were desirable to reach price goal and that underlying inflation trend is steadily progressing. BoJ minutes also stated that negative rates are to permit additional easing in 3 dimensions and that BoJ offered 2 options which were to expand QQE or adopt QQE with negative rates.

Asian Top News

• Yuan Strengthens After PBOC Raises Fixing by Most Since November: Dollar declines to 5-mo. low following Fed comments
• China Overseas Land Profit Advances 22% as Property Values Rise: Profit attributable to shareholders rose to HK$33.3b ($4.3b) last year, from HK$27.2b in 2014
• Emerging-Market Stocks Near Bull Market After Fed Turns Dovish: Rally will probably last for next 3 mos., CBA’s Ji says
• BOJ Minutes Show No Talk of More QQE Before Adopting Minus Rate: BOJ voted 5-4 on rate, one opponent of policy is leaving board
• Default Jitters Calm for Indian Lenders on $12 Billion Boost: RBI allowed banks to treat some balance sheet items as equity
• Leissner’s Work With Indonesia Financier Drew Goldman Scrutiny: Bank ended work on Newmont copper deal after in- house review
• Indonesia Group Seeks $1 Billion for Newmont Copper Asset: Financing would include $750m loan, rest in mezzanine

In Europe, equities have kicked off the final session of the week in a tentative fashion, with major indices relatively flat amid light news flow . In terms of a sector breakdown, energy names are once again among the underperformers, with the commodity complex coming under modest pressure as WTI futures reside around the USD 40/bbl level. Bunds have continued their move higher this morning, on track to end the week over a point higher, with today’s price action bolstered by dovish rhetoric from ECB’s Praet and Draghi.

European Top News

• UBS Bonus Pool Surges 14%, as Other Lenders Cut Compensation: Bonus pool swelled to CHF3.5b from CHF3.06b; CEO Ermotti received bonus of 11.5 million francs, up 37%
• Praet Says ECB Rates Can Still Fall If Shocks Worsen Outlook: Central bank’s chief economist says recovery remains fragile
• Generali Fourth-Quarter Profit Rises on Higher Operating Income: Net income rose to EU304m from EU81m million yr earlier
• Former Porsche Executives Acquitted in Stuttgart Trial: Former Porsche CEO Wendelin Wiedeking and ex-CFO Holger Haerter were acquitted of charges they manipulated shares of Volkswagen in 2008 in a failed bid to buy the carmaker
• Sunrise Gains After Germany’s Freenet Takes Stake in Carrier: Gained as much as 9.8% after Freenet agreed to buy a 23.8% stake
• EDF Said to Plan Approval of Hinkley Point Nuclear Plant by May: Still plans to make the final decision to go ahead with an GBP18b nuclear power plant in the U.K. before its AGM in May
• trategists Now See Virtually No Europe Stock Gains in 2016: Newest forecasts see weakest year since 2011 for region

In FX, it has so far been a very quiet session in Europe this morning, but with some notable volatility — against the USD — a welcome period of consolidation playing through across the board. The USD index has attempted a modest recovery of sorts, regaining some ground against GBP, where Cable has dipped back into the low 1.4400’s after the rejection of 1.4500. EUR/USD has drifted down into the mid 1.1200’s, but the commodity currencies have conceded lesser ground as risk sentiment has stabilised again.

In this respect, we have seen some basing out in spot and cross JPY rates also, but USD/JPY especially, is looking fragile above 111.00, though a move back to 112.00 would settle nerves . Little on the data slate until North American comes in; Michigan sentiment in the US and CPI in Canada are stand out, while Fed speakers Dudley, Rosengren and Bullard all make an appearance later today. NOK towards the better levels seen in the wake of the rate cut yesterday, but CHF trade very tight after the SNB provided the familiar rhetoric.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, gained 0.2 percent following a two-day slide of more than 2 percent that drove it to an eight-month low. The Fed cited weaker global growth and turmoil in financial markets for its decision to reduce the number of interest-rate increases forecast for 2016.

In commodities, WTI prices have started to consolidated around the USD 40/bbl after reaching highs of USD 40.55/bbl, and Brent has also slightly fallen of its recent highs and currently resides at USD 41.17/bbl. In addition to the dollar’s decline, crude was supported this week by data showing U.S. output fell to the lowest level since November 2014 as well as a planned freeze on production by countries including Saudi Arabia and Russia.

Gold prices have started to retrace after recent strengthening following the FOMC with the 1250.00/oz level firmly in its sights. Copper prices have erased recent gains after a recent rally over the last week and Iron Ore prices increase slightly on the session after continued improvement in the Chinese property sector. The Bloomberg Commodity Index held near a three-month high.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities have started the session off on a tentative footing with newsflow and data very much on the quiet side after what has been another busy week in the market
• The USD index has attempted a modest recovery of sorts, regaining some ground against GBP, where Cable has dipped back into the low 1.4400’s after the rejection of 1.4500
• Looking ahead, highlight Include Canadian CPI, US U. of Mich. Sentiment, Fed’s Dudley, Bullard and Rosengren
• Treasuries higher in overnight trading, global equity markets mixed and oil drops; today’s economic calendar brings U. of Michigan Sentiment and three Fed speakers.
• Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord
• European Union leaders risked a showdown with Turkey over efforts to create a legal migration route to end the chaotic crossings of the Aegean Sea, as pressure from countries including Cyprus led the EU to retreat from earlier sweeteners
• UBS, which cut its securities unit to focus on wealth management, raised its bonus pool by 14% in 2015, to 3.5 billion francs ($3.6 billion) from 3.06 billion francs, leaving it the only major European lender to award bankers with higher compensation
• The ECB still has room to cut interest rates should the euro area’s economic recovery falter, Executive Board member Peter Praet said
• Deutsche Boerse AG and London Stock Exchange Group Plc want to create a European trading champion. They just don’t want regulators to think it’s too big to fail
• Investors at home and abroad can’t get enough 10-year Japanese government bonds, driving the yield to an unprecedented minus 0.135%
• The yuan headed for the biggest two-day gain in a month after China’s central bank raised its reference rate by the most since November following a decline in the dollar. The PBOC boosted its fixing by 0.51% to 6.4628 against the greenback
• $10.775b IG corporates priced yesterday; weekly volume $30.385b, March $116.805b, YTD $411.055b
• No HY priced yesterday, MTD 13 deals for $7.315b, YTD 38 deals for $22.165b
• BofAML Corporate Master Index OAS 2bp lower yesterday at +178, -32bp MTD, +0bp YTD; T1Y range 221/129
• BofAML High Yield Master II OAS 12bp lower yesterday at +682, -53bp MTD, -12bp YTD; T1Y range 887/438
• Sovereign 10Y bond yields lower; European, Asian equity markets mixed; U.S. equity- index futures rise. WTI crude oil, copper, gold fall

US Event Calendar

• 10:00am: U. of Mich. Sentiment, March P, est. 92.2 (prior 91.7)
  • Current Conditions, March P, est. 106.8 (prior 106.8)
  • Expectations, March P est. 82.5 (prior 81.9)
  • 1 Yr Inflation, March P (prior 2.5%)
  • 5-10 Yr Inflation, Mar P (prior 2.5)

Central Banks

• 9:00am: Fed’s Dudley speaks in New York
• 11:00am: Fed’s Rosengren speaks in New York
• 2:30pm: Fed’s Bullard speaks in Frankfurt

DB’s Jim Reid concludes the overnight wrap

Twenty-four hours on and there’s been little stopping the positive sentiment feeding its way through risk assets. With a dovish Fed to thank for that, yesterday saw the Dow (+0.90%) close in positive territory (+0.32%) for the first time in 2016. As a reminder it was down as much as -10% on the year during the February lows. The S&P 500 (+0.66%) had also joined the positive YTD club briefly but just failed to hold onto the stronger earlier gains by the end of play, while it was another strong session for US credit with CDX IG closing 2bps tighter. European equity markets were a little softer (the firmer Euro to blame) but, and playing catch-up, European credit markets were in rally mode with iTraxx Main and Crossover 6bps and 16bps tighter respectively.

Meanwhile the US Dollar has tumbled in a fairly impressive fashion since the FOMC on Wednesday with the Dollar spot index now down the most over a two-day period since 2009. It is emerging market currencies which have been the biggest beneficiaries of that, while yesterday also marked a landmark day for Oil as we saw WTI (+4.52%) close above $40/bbl for the first time in 2016. It’s now up a fairly remarkable +54% from the intraday lows of last month.

Doing little to hurt matters was further evidence of an improving US manufacturing sector yesterday. Indeed, on the back of a much better than expected improvement in the NY Fed empire manufacturing survey earlier this week, yesterday’s Philly Fed manufacturing survey showed the headline business conditions index rising an impressive 15.2pts to 12.4 (vs. -1.5 expected) and the best print since February last year. The details of the survey were encouraging also with new orders in particular a standout with the monthly increase the most since 2005, while shipments and employment also improved. All-in-all the data is certainly an encouraging sign for hopes of further improvement in this month’s ISM manufacturing reading which we’ll get two weeks today.

So in the past 8 days we’ve seen the ECB, BoJ and Fed meetings come and go and we can add the BoE, SNB and Norges Bank to that list after their respective policy meetings yesterday. Of the latter three the only change was a 25bps cut from the Norges Bank (as expected) to a record low 0.5% with plenty of signs that the Bank may be prepared to ease further later in the year. Despite only two of those six central banks actually having loosened policy, there’s no doubt that it’s been a decidedly dovish period. In the Fed’s case we’ve seen expectations for tightening scaled back, while the remainder appear to either be on hold in the near term or weighing the prospects for potential future easing later in the year. It’s worth taking a look at what the above action/lack of action has done for asset prices lately. Covering the period in the moments prior to the ECB last Thursday up to last night’s closing prices, the biggest impact has been in credit markets which is unsurprising given the news of potential corporate-bond buying from the ECB. In Europe we’ve seen Main and Crossover tighten 16bps and 53bps respectively, while US cash credit spreads have also performed very well with IG and HY 11bps and 75bps tighter respectively. Interestingly European equities are virtually unchanged with the Stoxx 600 -0.1% in that time. The S&P 500 is +2.6% however, driven by the last two days of gains. The USD index is 2.7% weaker, while the Euro (+3.0%) has failed to stick to the immediate post-ECB weakening script. Oil has rallied a robust +5.2%, Gold is +0.7% while moves in sovereign bond markets are perhaps most interesting. That’s more due to the lack of change in yields in the time period than anything substantial with 10y Treasuries just 2bps higher in yield, 10y Bund yields 1bp higher and 10y BTP yields (as a proxy for peripherals) 10bps lower. Clearly the volatility in between for all assets has to be acknowledged however.

Glancing at our screens this morning, bourses in Asia are closing the week on a high note generally and following much of the lead again from Wall Street last night. There are gains for the Hang Seng (+0.62%), Shanghai Comp (+1.88%), Kospi (+0.18%) and ASX (+0.33%), although bourses in Japan are weaker again have been weighed down by an appreciating Yen. The Nikkei is currently -1.28%. The other notable news this morning is out of China where the PBoC has strengthened the Yuan fix by the most since November (+0.51%) following those moves in the US Dollar yesterday. Elsewhere, Oil is continuing to hold those big gains, while credit markets in Australia and Asia are a couple of basis points tighter. The lone data has come out of China where property prices have continued to firm in February, gaining in 47 cities compared to 38 cities in January.

Moving on. With regards to the remainder of yesterday’s data, initial jobless claims printed at 265k for last week (vs. 268k expected) which was up a modest 7k on the prior week. There was further labour market data in the form of JOLTS job openings covering the month of January which came in slightly ahead of consensus at 5.54m (vs. 5.50m expected). Both the hiring and quits rates were reported as declining. Finally the Conference Board’s leading index was up a less than expected +0.1% mom in February (vs. +0.2% expected). Meanwhile in Europe the only data of note was the final revision to the February CPI report for the Euro area which was confirmed at -0.2% yoy at the headline, but revised up one-tenth at the core to +0.8% yoy.

Over at the BoE, as expected we saw no change in policy after a unanimous confirmation vote of 9-0. The bulk of the minutes showed little in the way of new information with domestic consumption reported as being robust and that the near term outlook for inflation was little changed since the inflation report last month. More interesting were the comments around the upcoming June Brexit referendum. The minutes made mention to there appearing to be ‘increased uncertainty surrounding the forthcoming referendum’ and that ‘uncertainty is likely to have been a significant driver of the decline in sterling’. The minutes also noted that ‘it may also delay some spending decisions and depress growth of aggregate demand in the near term’.

Looking at the day ahead now and what is a slightly lighter calendar relative to that of recent days. This morning in Europe the only data of note are the February PPI data for Germany and Q4 wage data out of France. In the US this afternoon the lone release will be the first read of this month’s University of Michigan consumer sentiment survey, where current consensus is for no change to current conditions but a modest pickup in expectations. Today will also see the first Fedspeak post FOMC so it’ll be worth keeping an eye on the individual comments from Dudley (due 1pm GMT), Rosengren (due 3pm GMT) and Bullard (due 7pm GMT).

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