Will it be a Valentines Day Massacre for the Dollar?

Wednesday February 14: Five things the markets are talking about

Are financial markets justified going from a growth story to an inflation narrative?

Today’s U.S consumer price index (08:30 am) is being touted as one of the most significant economic releases in a number of years as capital markets seek to understand the recent plunges in global equities and sovereign bonds.

With investors already on edge, they are expected to renew this months convulsion on any sign that U.S inflation is exceeding expectations at a rate that may entice the Fed to quicken its plans for tightening monetary policy.

Already this month, after a stronger U.S non-farm payroll (NFP) print and wage numbers, investors have sent U.S Treasury yields aggressively higher and instigated a rout in equities that pushed them into the first correction in 18-months.

Note: Market expectations are looking for the core-CPI (ex-food and energy) to rise +1.7% in January y/y compared with the +1.8% increase in December. U.S retail sales are also out this morning and are expected to have increased for a fifth consecutive month.

A higher CPI will give the USD strength, lead to higher yields and lower equity prices, but a tepid headline print could cause more of a problem, especially with record short U.S 10-year treasury position and a market focusing on President Trump’s proposed budget and the rise in U.S twin deficits.

Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

1. Stocks mixed reaction

In Japan, the Nikkei share average dropped to a fresh four-month low overnight as investor sentiment was again sapped by worries about U.S inflation data due this morning. The Nikkei ended -0.4% lower, its lowest closing since early October. The broader Topix fell -0.8%.

Down-under, the Aussie S&P/ASX 200 index fell -0.3%, following a +0.6% rise on Tuesday. In S. Korea the Kospi closed out the overnight session up +1.1%, helped by a +3% jump in Samsung.

In Hong Kong, shares rebound sharply ahead of Lunar New Year holiday. Trading will resume on Feb 20. At close of trade, the Hang Seng index was up +2.27%, while the Hang Seng China Enterprises index rose +2.14%.

In China, stocks rebounded overnight, but volumes were thin, as many traders had already left for the weeklong Lunar New Year holiday. Chinese markets will reopen on Feb. 22. At the close, the Shanghai Composite index was up + 0.46%, while the blue-chip CSI300 index was up +0.8%.

In Europe, regional indices trade higher across the board following a rebound in Wall Street yesterday and strength in U.S futures this morning.

U.S stocks are set to open in the black (+0.4%).

Indices: Stoxx600 +0.7% at 373.2, FTSE +0.7% at 7216, DAX +0.7% at 12286, CAC-40 +0.6% at 5139, IBEX-35 +0.5% at 9693, FTSE MIB +0.2% at 22071, SMI +0.9% at 8832, S&P 500 Futures -+0.4%

2. Oil dips on looming oversupply and weak U.S dollar, gold higher

Oil prices have dipped overnight, pressured by lingering oversupply including rising U.S inventories. However, the prospect of Saudi output dropping next month, economic growth hopes and a weaker U.S dollar all combined to limit losses.

Brent crude futures are at +$62.68 per barrel, down -4c. Brent was above +$70 a barrel earlier this month. U.S West Texas Intermediate crude futures are at +$59.06 a barrel, down -13c from yesterday’s close. WTI was trading above +$65 in early February.

On Wednesday, the Saudi energy ministry said that Saudi Aramco’s crude output in March would be -100k bpd below this month’s level while exports would be kept below +7m bpd.

Stateside, yesterday’s API report showed that U.S crude inventories rose by +3.9m barrels in the week to Feb. 9, to +422.4m.

Note: That is due to soaring U.S crude production, which has jumped by over +20% since mid-2016 to more than +10m bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

Oil traders will take their cue from today’s EIA print (10:30 am EDT) and U.S inflation release.

Ahead of the U.S open, gold prices have rallied for a third consecutive session overnight to hit a one-week high, buoyed by a weaker U.S dollar, while the market awaits U.S inflation data for clues on the pace of future Fed rate increases. Spot gold is up +0.3% at +$1,332 an ounce.

3. Sovereign yields little changed

Earlier this morning, Sweden’s Central Bank (Riksbank) kept their repo rate unchanged at -0.5%. Deputy governor Henry Ohlsson voted to raise rates, but the central bank’s signals on inflation were more downbeat. The inflation forecast for this year was downgraded to +1.8% from +2%. The statement indicated that policy makers would start raising the rate in H2 of 2018. Policy makers stressed that was important not to raise the rate too early and was committed to stimulus to prevent inflation setbacks.

Elsewhere, fixed income seeks guidance from today’s U.S CPI release. The yield on U.S 10-year Treasuries fell less than -1 bps to +2.83%. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, while in the U.K, the 10-year Gilt yield dipped -1 bps to +1.618%. In Japan, the 10-year JGB yield decreased -1 bps to +0.07%, the lowest in more than five weeks.

4. Dollar on soft footing

The USD remains on soft footing ahead of key Jan CPI data for the U.S.

The EUR/USD is steady, trading atop of the €1.2350 area after various European GDP data highlighted better economic growth prospects (see below).

USD/JPY tested ¥106.85 overnight for 15-month lows. The pair came off its worst level to approach 107.50 just ahead of the N.Y session after Japanese officials reiterated that they had no comments on forex levels.

In S. Africa, political optimism that President Zuma would resign has sent the ZAR currency to its best level in nearly two-years outright. The South African Democratic Alliance (DA) leader Maimane (opposition) has stated that its motion to dissolve parliament was processed by Speaker. USD/ZAR is at $11.85 ahead of the open stateside.

The Swedish krona has been volatile after the Riksbank interest rate decision. The krona briefly rose soon after the announcement, but has since pared those gains EUR/SEK last trades flat on the day at €9.9163, compared with €9.8952 before the decision.

5. Euro-zone economy ends 2017 on a high note

Note: There were a number of European GDP releases in the Euro session highlighting better economic growth prospects – Germany mixed; Netherlands beat and Italy a miss.

Industry helped drive the euro-zone’s +0.6% expansion in Q4. This morning’s ‘flash’ estimate of Q4 GDP is the second release and confirms that quarterly growth slowed a tad from Q3’s +0.7% to +0.6%.

There is no breakdown until the next release; however, expenditure evidence would suggest that weaker consumer spending growth was the main driver of the slowdown, while investment expanded after Q3’s contraction and net trade again made a positive contribution to growth.

Digging deeper, industry appears to have made a stronger contribution to GDP growth than in Q3. Following the consensus-beating +0.4% monthly rise in IP in December.

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Equities Slump Deepens; Dollar Steady

Monday February 5: Five things the markets are talking about

Global stocks have extended their biggest decline in two-years overnight while the ‘big’ dollar steadies outright against G10 currency pairs. Sovereign treasury yields continue to creep higher, while crude oil prices again come under pressure as U.S explorers raised the number of rigs drilling for crude to the most since August.

This week is again dominated by monetary policy decision with four central banks meetings in the coming sessions – today, the Reserve Bank of Australia (RBA), Wednesday, the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of India (RBI) and its ‘super’ Thursday for the Bank of England (BoE) as it also publishes its quarterly inflation report.

Other data releases will focus on December industrial production (IP) and January composite PMI’s. China will release January data for its merchandise trade balance and its consumer and producer price indexes. North of the U.S border, Canada will close out the week reporting its January labor force survey. It’s December international trade balance is reported on Tuesday.

1. Stocks see red

In Japan, the Nikkei share average fell sharply on overnight as fear that U.S inflation may be finally gathering pace pound global equities. The Nikkei tumbled -2.5%, its biggest one-day drop since Nov 9, 2016, when President Trump won the U.S election. The broader Topix slumped -2.2%.

Down-under, Aussie shares fell overnight, dragged down by financial and materials. The S&P/ASX 200 index slid -1.6% ahead of Wednesday’s Reserve Bank of Australia (RBA) rate decision.

In Hong Kong, stocks ended lower on overnight, but recouped much of their earlier losses sparked by Friday’s slide on Wall Street. The Hang Seng index slumped -1.09%, while the Hang Seng China Enterprises index fell -0.43%.

In China, stocks bucked the region’s tumble as the Shanghai Composite index ended the session up +0.73%, while the blue-chip CSI300 Index also reversed its earlier losses, closing up +0.1%.

In Europe, regional indices are trading lower across the board, but off the session lows as markets have faded a large part of the earlier move lower, on the back of a slight pullback in Euro Bond yields as well as a bounce in U.S futures.

U.S stocks are expected to open little changed.

Indices: Stoxx600 -1.0% at 384.1, FTSE -1.0% at 7366, DAX -0.5% at 12715, CAC-40 -0.9% at 5317 , IBEX-35 -0.6% at 10145, FTSE MIB -0.7% at 23048 , SMI -1.0% at 9132, S&P 500 Futures flat

2. Oil trades atop one-month lows, gold prices higher

Oil prices are under pressure for a second consecutive session overnight, as rising U.S output and a weaker physical market added to the pressure from a widespread decline across equities and commodities.

Brent crude futures are down -36c at +$68.22 a barrel, while U.S West Texas Intermediate (WTI) crude has fallen -13c to +$65.32.

Oil is caught up in the markets general risk-off move, not helped the strength of the U.S dollar in the past two trading sessions.

Adding to the pressure on oil, which hit its highest price in nearly three-years in January, has been evidence of rising U.S crude production, which could threaten OPES’s efforts to support prices.

Data from the U.S government last week showed that output climbed above +10m bpd in November for the first time in nearly fifty-years, as shale drillers expanded operations.

Ahead of the U.S open, gold prices have inched higher as declining equities lend support to the yellow metal even though robust U.S. jobs data potentially increased the chances of more interest rate hikes this year. Spot gold is up +0.1% at +$1,334.23 per ounce, after declining -1.2% on Friday in its biggest one-day fall since early December.

3. Sovereign yields continue to back up

Investors on both sides of the Atlantic are dumping government debt, but for different reasons. In the U.S, investors see more inflation coming; while in the eurozone, they see stronger economic growth.

On Friday, the 10-year Treasury yield closed at +2.852%, the highest yield in two-years, compared with +2.410% at the start of the year. German 10-year sovereign Bunds have edged up to +0.701% from 0.430% over the same period.

Note: Inflation-linked Treasuries’ (TIP’s) show that almost two-thirds of the U.S bond selloff that started at the beginning of December is explained by inflation expectations.

Elsewhere, the RBA looks set to continue lagging the trend toward higher interest rates globally. It’s first policy meeting this year on Tuesday will likely see the RBA’s official cash rate steady at +1.5%, with interest in whether its guidance will be more upbeat reflecting a stronger job market.

Aussie policy makers continue to face the problem of weak wages growth, soft inflation reads and an elevated AUD (A$0.7934). Forecasts for the first interest rate hike have been pushed back lately.

4. Dollar under constant pressure

The U.S. dollar remains relatively contained after rebounding at the end of last week, when a strong non-farm payroll (NFP) suggested the currency’s weakness might have gone too far, too fast.

The EUR/USD (€1.2426) has managed to eek out a small gain overnight as optimism continued to flow about a grand coalition in Germany – political parties have said to seek a grand coalition by tomorrow (Feb 6th).

GBP/USD (£1.4102) is little changed despite the Jan. U.K PMI Services reading missed expectations (see below).

USD/JPY ‘s strong correlation with U.S interest yields seems to have broken down as the pair tested ¥109.80 in the session overnight despite the BoJ’s rhetoric that it would continue advocating an easy monetary policy.

Bitcoin (BTC) is down -6.7% at $7,637.

5. U.K services expansion slides to 16-month low, Europe expands

In the U.K, services PMI fell to 53, from 54.2 in December, below the expected consensus for an increase to 54.5. This morning’s data is now following weaker-than-expected manufacturing and construction PMI data last week.

Note: This January slowdown pushes the all-sector PMI into ‘dovish’ territory as far as the Bank of England (BoE) monetary policy is concerned. The BoE announces its latest interest rate decision and inflation report on Thursday.

Elsewhere, the composite PMI for the eurozone in January was revised up to 58.8 from 58.6, hitting its highest level in a dozen years and further proof that the eurozone economy started this year on a very strong footing.

At a national level, Italy stood out, recording its highest reading in a dozen years, as businesses hired at the fastest pace in 17-years.

Note: The ECB will be encouraged to expect acceleration in wages growth that would help it meet its inflation target in the coming years.

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