BLOG

After yesterday's violent selloff which was sparked by a series of negative tech stories including Facebook’s escalating data scandal and a fatal accident involving an Uber self-driving car, Tuesday trading has so far been relatively calm and muted with Europe bourses paring early gains and Asian stocks trading slightly lower...

... while S&P futures were hugging the unchanged line as Nasdaq futures pointed to more tech declines.

The tech dump, which took place one day after we noted that "FANG + Apple Now Account For A Quarter Of The Nasdaq, And Some Are Getting Worried" is prompting even more fears among investors that the glory days of the tech momentum trade are over.

"There certainly are some stocks where valuations look somewhat stretched ... so we’re focusing our exposure within the technology sector on the cheaper end of the market,” said Mike Bell, global market strategist at JPM Asset Management. "We’re a bit more cautious on the more expensive and some of the more popular names in the sector."

Gains are also muted as investors braced for new Federal Reserve Chairman Jerome Powell’s first policy meeting starting later in the day and amid concerns that U.S. President Donald Trump could impose additional protectionist trade measures.

“Investors lightened their positions ahead of the Fed’s policy meeting. The markets are completely split on whether the Fed will project three rate hikes this year or four,” said Hiroaki Mino, senior strategist at Mizuho Securities.

Following the tech selloff and with a Fed rate hike imminent, bullish sentiment appears scarce. Compounding concerns was a late Monday report that the White House plans to impose $60BN in tariffs on Chinese products as part of a battle over safeguarding intellectual property. It would be the latest phase of President Donald Trump’s protectionist agenda, and threatens to increase market fears of a trade war.

Underscoring the lack of an upside case, Morgan Stanley's chief equity strategist suggested that the highs of the year have already been seen.

Looking at regional markets, European shares eked modest gains as investors awaited Fed Chair Jay Powell's first meeting as the Federal Reserve’s new chairman while eyeing Facebook headlines. The Stoxx 600 Index gained 0.2%, after dropping the most in two weeks on Monday. Sectors are broadly in the red, with the exception of materials which has been supported after Rio Tinto (+0.6%) announced the sale of its Hail Creek and Valeria units in a USD 1.7bln deal with Glencore.

Earlier in Asia, stocks traded lower across the board following on bearish momentum from the US. Australia's ASX 200 (-0.4%) was weaker with miners pressured in Australia as Dalian iron ore futures extended on losses due to rising inventories, while Nikkei 225 (-0.5%) underperformed despite a weaker currency. Elsewhere, Hang Seng (+0.1%) & Shanghai Comp. (+0.3%) were subdued for a bulk of the session although the Shanghai Composite pushed back into positive territory in the latter stages of trade, after the PBoC skipped liquidity operations and amid trade war concerns with US President Trump said to be preparing a $60BN package of tariffs for China.

In FX, the USD slowly strengthened across G-10 and EMFX, while the pound was a notable mover, erasing early gains after U.K. inflation missed expectations, leaving the currency defending Monday’s advance as progress in the Brexit talks turns focus to Thursday’s BOE decision where Carney is expected to set the stage for a May rate hike. The dollar fluctuated amid lack of U.S. economic data before edging higher, while the yen whipsawed.

The Japanese yen was pushed lower after Japan’s Trade Minister said the nation is likely to get exemptions to U.S. tariffs, only to whipsaw higher later after comments from Deputy Governor Amamiya hit that the BOJ may adjust rates before the inflation target is hit (very unlikely). Separately, deputy governor Wakatabe stated that the BOJ will not hesitate to ease further if necessary, but any changes must not be premature. He also believes it is possible for monetary policy to be updated. Below are the key FX moves from Bloomberg:

  • Sterling erased its advance after data showed U.K. inflation slowed more than forecast in February, but the currency stayed above 1.40; GBP/USD little changed 1.4024, holding its 0.6% advance in the past two days; it strengthened 0.1% to 87.84 pence per euro
  • The Bloomberg Dollar Spot Index gains 0.2% as markets await Wednesday’s Fed policy decision; Treasuries dip with the 10-year yield rising to 2.87%
  • The yen pared an earlier decline after remarks from BOJ’s Amamiya that while there was no current need to hike rates, it is something they wouldn’t rule out; USD/JPY climbs 0.3% to 106.41, having earlier touched 106.61
  • The euro reversed early gains to trade 0.2% lower at 1.2307 amid light volumes

While long-term U.S. bond yields were muted, short-dated yields rose ahead of an expected rate hike from the U.S. Federal Reserve after its two-day policy meeting starting on Tuesday. The yield on 10-year Treasuries was little changed at 2.857%, 10 basis points below the four-year high of 2.957% touched a month ago. But the yield on two-year notes hit a 9 1/2-year high of 2.32% on Monday as the Fed appears set to bump up its policy interest rates to 1.50-1.75 percent from the current 1.25-1.50 percent. Still, with a Fed rate rise already fully priced in, the dollar barely gained from the prospect of a rate hike.

In geopolitical news, US and South Korea agreed to resume joint military exercises on April 1st following the postponement due to Winter Olympics, while North Korea has been notified of the schedule for the drills. In the US, Saudi Crown Prince Bin Salman and US President Trump will discuss Iran nuclear deal this Tuesday, according to a senior administration official.

In commodities, WTI and Brent remain in close proximity to yesterday’s highs which were seen after reports that the US was exploring sanctions on Venezuelan oil. Elsewhere, energy newsflow remains light with markets now awaiting the latest API report. In metals markets, gold is sat in negative territory albeit modestly so alongside the slightly firmer USD. Elsewhere, Chinese iron ore continued its decline overnight after yesterday’s slump as mounting inventories and soft domestic demand hampers prices while copper was also lacklustre amid the risk-averse tone.

No major economic data is expected. FedEx is among companies set to report earnings.

Bulletin Headline Summary From RanSquawk

  • European equities sit in modest positive territory in what has been a relatively choppy session thus far
  • BoJ Deputy Governor (Amamiya) suggested that rates could be adjusted before inflation reaches the 2% target
  • Looking ahead, today sees a lack of tier 1 highlights

Top Overnight News from Bloomberg

  • Trump may plan to impose $60b in annual tariffs against China by Friday, double what senior aides had proposed, Washington Post reports, citing people familiar
  • German Mar. ZEW Expectations: 5.1 vs 13.0 est; Current Situation 90.7 vs 90.0 est.
  • U.K Feb. CPI y/y: 2.7% vs 2.8% est; Core CPI 2.4% vs 2.5% est, ONS cites base effects of GBP depreciation starting to fall out of the calculation
  • BOJ’s Amamiya: does not rule out the BOJ adjusting rates before inflation hits 2%; however no need to consider a rate hike now
  • China made further promises to protect the intellectual property of foreigners investing in its economy, addressing a long- standing U.S. grievance as President Donald Trump plans new tariffs aimed at Beijing
  • Japan will keep pressing for exemptions from U.S. tariffs and it’s highly likely that it will secure them for specific goods, Japanese Trade Minister Hiroshige Seko said at a press conference in Tokyo on Tuesday
  • The EU will consider offering the U.K. “improved equivalence” for financial services after Brexit, according to the bloc’s latest negotiating guidelines, a system Britain has rejected as “wholly inadequate”
  • The broad transition deal announced on Monday might be too late to stop some of the Brexit fallout: nearly one in seven EU companies with U.K. suppliers have moved some of their business out of Britain, according to the Chartered Institute of Procurement & Supply. Ministers of the bloc are set to sign off to EU Summit conclusions, post-Brexit relationship negotiating guidelines later Tuesday
  • Facebook Inc. has failed to contain the fallout from the Cambridge Analytica revelations as the company’s efforts to get ahead of the media firestorm backfired
  • Norwegian krone pares Monday’s drop after Justice Minister Sylvi Listhaug resigned to avert a government crisis ahead of a no-confidence vote in parliament

Market Snapshot

  • S&P 500 futures up 0.06% to 2,724.50
  • STOXX Europe 600 up 0.2% to 374.44
  • MXAP down 0.2% to 176.54
  •  
  • MXAPJ up 0.08% to 583.57
  •  
  • Nikkei down 0.5% to 21,380.97
  • Topix down 0.2% to 1,716.29
  • Hang Seng Index up 0.1% to 31,549.93
  • Shanghai Composite up 0.4% to 3,290.64
  • Sensex up 0.1% to 32,958.29
  • Australia S&P/ASX 200 down 0.4% to 5,936.38
  • Kospi up 0.4% to 2,485.52
  • German 10Y yield rose 1.2 bps to 0.581%
  • Euro up 0.02% to $1.2338
  • Brent Futures up 0.8% to $66.55/bbl
  • Italian 10Y yield fell 1.8 bps to 1.708%
  • Spanish 10Y yield fell 1.5 bps to 1.326%
  • Brent Futures up 0.8% to $66.55/bbl
  • Gold spot down 0.2% to $1,314.31
  • U.S. Dollar Index up 0.2% to 89.92

Asian stocks traded lower across the board amid a spill-over effect from Wall St where all majors saw firm losses heading into the week’s key risk events and amid a sell-off in tech led by Facebook on reports of data breaches. ASX 200 (-0.4%) was weaker with miners pressured in Australia as Dalian iron ore futures extended on losses due to rising inventories, while Nikkei 225 (-0.5%) underperformed despite a weaker currency. Elsewhere, Hang Seng (+0.1%) & Shanghai Comp. (+0.3%) were subdued for a bulk of the session (Shanghai Comp. ebbed back into positive territory in the latter stages of trade) after the PBoC skipped liquidity operations and amid trade war concerns with US President Trump said to be preparing a USD 60bln package of tariffs for China. Finally, 10yr JGBs were lacklustre alongside subdued trade in T-note futures during Asia hours, and with price action also restricted amid an enhanced liquidity auction for long to super-long bonds which saw a lower b/c then prior.

Top Asian News

  • U.S. Is Said to Plan Heavy China Tariff Hit as Soon as This Week
  • China Pledges Action on Tech Transfer as Trump Plans Tariff Hit

European stocks have seen a choppy session thus far (Eurostoxx 50 +0.2%) following a softer US and Asia-Pac session. Sectors are broadly in the red, with the exception of materials which has been supported after Rio Tinto (+0.6%) announced the sale of its Hail Creek and Valeria units in a USD 1.7bln deal with Glencore. The media-sector initially outperformed at the open after the world's third-largest advertising group Publicis (-0.5%) reported its latest strategy action, before Co. shares were dragged lower as markets continued to digest the update. Elsewhere, banks are showing mild gains across the region lifting financials, ahead of tomorrow's widely expected Fed rate hike.

Top European News

  • U.K. Will Be Colder Than Normal in April, Weather Co. Says
  • Crisis Ends as Norway’s Listhaug Resigns Claiming ‘Witch Hunt’
  • EU Offers U.K. ‘Improved Equivalence’ for Financial Services
  • Glencore Buys Rio’s Stake in Hail Creek, Valeria for $1.7B Cash

In FX, the Jpy extended overnight losses amidst what seemed to be a stop-driven run in early European trade, with Usd/Jpy up through 106.50 and its 20 DMA (106.50-55) to circa 106.60 at one stage, while Eur/Jpy spiked to around 131.70 as the single currency retains a bid in its own right on hawkish ECB source reports. However, recent comments from one of the new BoJ Deputy Governor’s (Amamiya) suggesting that rates could be adjusted before inflation reaches the 2% target has prompted some Jpy demand/short covering. Meanwhile, Eur/Usd has rallied further above 1.2300, reaching 1.2355 at best and eyeing offers at 1.2360 next, while bids are seen in the 1.2330-20 area, but in terms of the G20 arena overall, Sterling remains the top performer after yesterday’s UK-EU Brexit transition deal and despite weaker than expected UK inflation data almost across the board that only sparked a knee-jerk Pound sell-off. Cable is back to mid-range between 1.4067-20 parameters and Eur/Gbp still sub-0.8800 as attention switches to the latest labour/wage update on Wednesday and then the BoE on Thursday. At the opposite end of the spectrum the  Aud and Nzd remain laggards with the former not helped by very neutral, still in wait and see mode RBA minutes or a further dump in iron ore prices and around 0.7700 vs the Usd, while the Kiwi is just keeping its head above 0.7200 vs  the Greenback awaiting the RBNZ. Conversely, Usd/Cad is attempting to retrace a bit further below 1.3100 on better  NAFTA vibes.

In commodities, WTI and Brent crude futures remain in close proximity to yesterday’s highs which were seen after reports that the US was exploring sanctions on Venezuelan oil. Elsewhere, energy newsflow remains light with markets now awaiting the latest API report. In metals markets, gold is sat in negative territory albeit modestly so alongside the slightly firmer USD. Elsewhere, Chinese iron ore continued its decline overnight after yesterday’s slump as mounting inventories and soft domestic demand hampers prices while copper was also lacklustre amid the risk-averse tone.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

A bit like this nasty cold spell in the UK, markets received a fairly rude awakening yesterday as a freefalling tech sector spread collateral damage across most risk assets. Much of the blame was placed at the hands of Facebook with the stock plummeting -6.77% for the biggest one-day fall since March 2014. This followed the news that a political advertising company had retained information on 50 million of its users without consent. In addition, the Apple news concerning efforts to develop its own screens and a European Commission proposal suggesting that large digital companies operating in the EU could face a 3% tax on their gross revenues also added to the pain for the sector. Indeed a broad measure of large tech stocks including the FAANG names fell -2.90% yesterday for the biggest decline since February 8th while the Nasdaq tumbled -1.84%, also the biggest drop in over 5 weeks.

That tech tantrum seemed to ricochet across other markets with the likes of the S&P 500 (-1.42%) down for the fifth time in the last six sessions, and the Stoxx 600 (-1.07%) and DAX (-1.39%) also down prior to this in Europe. The VIX also spiked above 20 at one stage before paring back at the close to finish just above 19, albeit up 3pts from Friday. Credit indices weren’t immune either with CDX IG and iTraxx Main about 1.5bps wider while 10y Treasuries rallied nearly 5bps fromearly highs and Gold was up about +0.70% from the lows as safe havens were quick to outperform.

So some decent moves. Yesterday might well be an isolated case but it fits in with our view that we are likely to see more tantrums in markets this year, certainly relative to the incredible calm that was 2017. Indeed, it’s fairly amazing that the S&P 500 has now seen 16 days of plus or minus 1% moves in either direction since the start of February, which compares to only 10 occasions through the 13 months ending in January.

This morning in Asia it’s been more of the same with bourses broadly lower across the board, although moves are slightly more modest, with the Nikkei (-0.66%), Hang Seng (-0.49%), ASX 200 (-0.39%) and Kospi (-0.02%) all down as we type. Speaking at the conclusion of the NPC, China’s Premier Li noted that China “will further reduce the overall tax level for imported goods”, particularly on consumer products and will pursue a further opening up in sectors such as pensions, financial services and manufacturing. Li addressed the trade war debate by saying that “there’s no winner in a trade war, and war is going against the rules of trade”.

In other news, away from markets there was better news to come from the latest Brexit developments with the UK and EU agreeing to the terms around a 21- month transition period. This will kick in at the Brexit date of 30th March 2019, or 376 days for those counting down the days. The biggest news to come from yesterday’s announcement though was that in reaching the transition the UK also agreed to the principle of the EU’s backstop solution for Northern Ireland post Brexit. As DB’s Oliver Harvey noted yesterday, this is a bigger surprise, and while details have yet to be agreed, enhances the credibility of yesterday’s deal.

This implied that the UK has backed down from PM May’s initial stance. David Davis confirmed in the press conference that the UK’s preferred solution to the Northern Ireland border remains a close enough future UK/EU relationship that no hard border is needed, or technological solutions. However, that doesn’t take away from the fact that the agreement is a positive and unless there is a huge walk back, we should get official signoff at this week’s EU Council on Thursday and Friday, where the EU will also formally release guidelines for negotiations on the future economic relationship. Sterling rallied as much as +1.26% at one stage to close in on $1.41, before settling down to close at $1.402 and the highest since mid-Feb. The stronger Pound did weigh on the FTSE 100 (-1.69%) however which all of a sudden is at the lowest since December 2016.

The Euro was also kept busy yesterday by headlines suggesting that ECB policymakers have begun shifting the debate towards the steepness of the rate path with even the most dovish members accepting that QE should end this year. Specifically, it was a Reuters story which caused a few heads to turn. The story also suggested that policy makers were comfortable with market pricing, including for a rate hike by mid-2019, but that no big decision was likely to be made at the April meeting and instead only small changes to the statement is expected for now. Confirmation of the market pricing isn’t a huge surprise but – if the story has some legs to it – the prospect of ECB officials already moving to debate around rate hikes is fairly significant. The story helped 10y Bund yields actually rise nearly 4bps and back above 0.60% at one stage before the broad flight to safety across markets put the brakes on that move and saw Euro bond markets close more or less unchanged by the end of play.

Staying with the ECB, one of the bank’s policy makers, Yves Mersch, noted yesterday that inflation has recently risen “more significantly than foreseen in October” and that “given the improving inflation outlook, we can gradually reduce our net purchases while maintaining a sufficiently loose monetary policy” He also added that “the trend in wages and underlying inflation seem to have turned a corner”. It’s worth noting that Mersch is considered one of the more
hawkish ECB officials.

Across the pond, it won’t come as a great surprise to hear that the White House wasn’t kept fully out of the headlines yesterday. Indeed, news that President Trump could be preparing to fire Special Counsel Robert Mueller quickly spread across the wires although a White House spokesman announced last night that the President is just “frustrated by the ongoing investigation”, rather than preparing to dismiss Mueller. Away from this there was an Axios story suggesting that Trump wasn’t done with just the aluminium and steel tariffs, and his administration was in fact tentatively planning to put tariffs on hundreds of Chinese products by the end of this month. In the late afternoon Canadian Prime Minister Justin Trudeau also told a conference that President Trump was “enthusiastic” about getting to a NAFTA deal, although the story was slightly light on specifics so the devil will really be in the details.

Over at the G20 meetings, most global finance chiefs warned against protectionism with BOJ Governor Kuroda noting “the G20 will continue to emphasize the importance of free trade” while France’s Finance Minister Le Maire reiterated that there will only be losers in a trade war and that EU members want a full exemption from US steel and aluminium tariffs. On the other side, a senior unnamed US Treasury official told Reuters that the President strongly believes in free trade, but “where the expectation is America totally subordinates its national interest for free trade, is just one we don’t accept” and that instead “we believe in free trade with reciprocal terms that leads to more balance trade relationships”. Earlier on, senior EU officials told Bloomberg that the US will grant waivers to tariffs provided the EU meet five conditions, including limiting exports of the two materials to the US and actively addressing China’s various trade distorting practices.

Finally, it was mostly second tier economic data releases yesterday but for completeness, the Euro area’s January trade surplus was below market at €19.9bn (vs. €22.5bn expected), while Italy’s January IP fell more than expected at -1.9% mom (vs. -0.6% expected).

Looking at the day ahead, the main focus will likely be the UK’s February CPI, RPI and PPI data. German PPI for February will also be released, while the March ZEW survey should also be closely watched. In the afternoon the Euro area consumer confidence reading for March is due out. Away from this President Trump is scheduled to meet with Saudi Crown Prince Mohammed bin Salman. Illinois will also hold a primary election for governor and congressional seats ahead of the midterms later in the year.