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Global Stock Rally Fizzles As Commodity Buying Frenzy Takes Over

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After yesterday's disappointing close for US stocks, which saw the Dow close down thanks to IBM's 7.5% plunge and after some early upside VIX manipulation, ending a 3-day upside streak and the S&P closing just barely in the green, U.S. futures are in the red this morning, after Asian shares rose and European equities were little changed.

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Having traded in a narrow range, S&P futures are near session lows, just fractionally back over 2,700.

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European stocks similarly struggled for traction following two days of increases and in the wake of a mixed bag of corporate earnings, even after shares in Asia rose following gains from the prior day. The Eurostoxx remains roughly flat with FTSE as the outperforming index (+0.2% due to FX effects) and SMI (-0.07%) the underperformer amid domestic earnings. In large cap stocks news, ABB beat EBITDA expectations (+4.9%) pushing industrials to be the sector outperformer whilst Novartis (-1.9%) dragged down healthcare. Nestle (+0.3%) falling in line with expectations, Unilever (-1.9%) disappointed and Pernod Ricard (-0.9%) announcing an earnings beat.

Earlier in Asia, miners rose amid the commodity rally, with Australia's ASX 200 (+0.3%) lifted by commodity names as miners outperformed amid strength in metals prices, which also boosted BHP shares despite a disappointing quarterly iron ore production update. The Nikkei 225 (+0.2%) was also led higher by metal stocks and in tandem with a weaker currency, while China’s benchmark index rebounded above a key level, driven by an advance in material shares. Hong Kong stocks rose for a second day, led by oil producers and financial institutions. The Shanghai Composite Index rose 0.8% to 3,117.38, rising above the 3,100 level, amid speculation the government is once again in the market.; blue-chip energy stocks in Hong Kong also cheered the higher oil prices and with sentiment also helped by another firm liquidity operation by the PBoC.

But if the overnight action in equities was muted, it was very different story in commodities where a buying frenzy has been unleashed as the U.S. sanctions against Rusal reverberated in metals markets, sending aluminum and nickel to multi-year highs on Wednesday.

Nickel jumped the most in 6.5 years on talk Nornickel - the world’s second-biggest producer of the metal - could be targeted.  Aluminum prices also reached their highest since 2011, its raw material alumina touched an all-time peak, while iron ore leapt 5 percent. Such increases, if sustained, could fuel inflationary pressures and investors hedged by selling sovereign bonds.

In any case, it was set to be the strongest day for the commodity complex in eight months as Brent crude futures climbed past $74 a barrel after a near 3% jump overnight, one day after Dennis Gartman said he had gone short gold. The surge came on a Reuters report that OPEC’s new price hawk Saudi Arabia would be happy for crude to rise to $80 or even $100, a sign Riyadh will seek no changes to a supply-cutting deal even though the agreement’s original target is now within sight. “The Saudis and their colleagues in OPEC need higher oil for their fiscal positions and the Kingdom is on a bold – and costly – reform program,” Greg McKenna, chief market strategist at CFD, told Reuters.

On Thursday, metals extended their stellar gains, driving another rally in Bloomberg’s commodity index (BCOM), which is now back to levels seen in late 2015, as investors continue to fret about how Russian sanctions will impact the market.

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In currency markets, the U.S. dollar remained rangebound with its index a fraction firmer at 89.669. It gained a touch on the yen to 107.46 yen, but stayed short of recent peaks at 107.78. Meanwhile, the Swiss franc has kept traders chained to their desks given its ongoing struggle to stay off the historic 1.20 handle versus the euro - which was so famously breached in early 2015 when the SNB ended its peg to the euro...

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... as the USD gains traction after another set of U.K. data comes in lower than forecast. The EURCHF got as high as 1.1999 in the session in what appears to have been an algo attempt to trigger stops, before immediately sliding following a counterattack by other algos.

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The USDJPY rose as the Japan-U.S. summit so far hasn’t stoked concerns of heightening trade tensions, helping to improve risk sentiment while a weak outcome at a 20-year JGB debt sale sent Japanese bonds lower.  Elsewhere, the sterling dropped a third day, dragging the euro lower amid relatively low volumes in the currency market. The strength in commodity prices helped the Australian dollar easily weather unexpectedly soft jobs data, with  employment rising by a meager 4,900 in March, and the AUD turned higher amid the commodity rally.

Government bonds retreated amid an upbeat global growth outlook, allowing U.S. curve flattening to take a breather. 10-year Treasury yields climbed to 2.89% after leaping on Wednesday in the wake of the Federal Reserve’s Beige Book report, which showed a solid outlook for the economy despite trade concerns. Still, optimism over expansion has been tested by the flattening yield curve, though there’s also been some respite for traders as geopolitical tensions showed signs of dissipating.  European bonds played catch up, and yields in the region jumped.

In other news, overnight Fed president Quarles (Voter, Neutral) said he does not view current yield curve flattening as a signal for a recession. Separately the Fed's Rosengren (Non-voter, Hawkish) suggests US lacks buffers for next downturn. Meanwhile, RBNZ Governor Orr says expects very benign inflation ahead, adds doggedly determined to aim for inflation at 2%.

Data include jobless claims and Philadelphia Fed Business Outlook. Bank of New York Mellon, BB&T, Blackstone, Danaher, Philip Morris, and P&G are among companies reporting earnings

Bulletin Headline Summary from RanSquawk

  • Equity markets mostly flat as macro effects subside, focus turns toward earnings
  • UK Retail sales falls below expectations pulling cable below the 1.42 level
  • Looking ahead, highlights include US weekly jobs, Philly Fed and a slew of central bank speakers

Top Overnight News

  • Abe acknowledged that the U.S. is interested in a bilateral deal but said that Japan’s position remains that the multilateral Trans-Pacific Partnership “is the best for both of the countries." Trump said he’d rejoin TPP if offered ‘a deal I can’t refuse.’
  • Russia’s central bank deviated from its standard practice and used off-market conversion of ruble revenue into foreign currency for a wealth fund to avoid adding to volatility gripping the currency, according to S&P Global Ratings
  • Hong Kong rates reach 2008 high after HKMA spends $6.5b on intervention to support the local dollar since the currency hit the weak end of its trading band a week ago for the first time since 2005. The HKMA’s purchases have been orderly and outflows aren’t too big, Deputy Chief Executive Howard Lee said on Thursday
  • President Donald Trump is methodically laying the groundwork for a landmark meeting with North Korean leader Kim Jong Un with the meeting increasingly likely to occur by early June
  • JPMorgan is said to plan on moving “far greater” numbers of staff and traders to Paris than the 60-80 bankers previously known, AFP reports
  • Australian employment rose less than forecast in March and the previous month’s gain was revised to a decline, suggesting the central bank will keep interest rates on hold
  • Hong Kong rates reach 2008 high after HKMA spends $6.5b on intervention to support local dollar. HKMA said the size of the outflows isn’t too big
  • To Citigroup, the chances are slim the U.S. enters a recession anytime soon. Fed officials feel the same way. Yet both camps agree that an inverted Treasuries yield curve would be an ominous sign for growth

Market Snapshot

  • S&P 500 futures down 0.1% to 2,706.50
  • STOXX Europe 600 down 0.03% to 381.76
  • MXAP up 0.5% to 175.49
  • MXAPJ up 0.9% to 574.75
  • Nikkei up 0.2% to 22,191.18
  • Topix up 0.03% to 1,750.18
  • Hang Seng Index up 1.4% to 30,708.44
  • Shanghai Composite up 0.8% to 3,117.38
  • Sensex up 0.2% to 34,397.84
  • Australia S&P/ASX 200 up 0.3% to 5,881.00
  • Kospi up 0.3% to 2,486.10
  • German 10Y yield rose 2.9 bps to 0.56%
  • Euro down 0.05% to $1.2368
  • Italian 10Y yield fell 4.2 bps to 1.463%
  • Spanish 10Y yield rose 3.9 bps to 1.256%
  • Brent futures up 0.9% to $74.13/bbl
  • Gold spot up 0.2% to $1,351.80
  • U.S. Dollar Index up 0.1% to 89.70

Asian stocks were higher across the board following the mostly positive lead from Wall St, where earnings remained in focus and the energy sector outperformed after crude rallied over 3% to its highest since 2014. ASX 200 (+0.3%) was lifted by commodity names as miners outperformed amid strength in metals prices, which also boosted BHP shares despite a disappointing quarterly iron ore production update. Nikkei 225 (+0.2%) was also led higher by metal stocks and in tandem with a weaker currency, while Hang Seng (+1.4%) and Shanghai Comp. (+0.8%) conformed to the commodity-led gains with the blue-chip energy stocks in Hong Kong cheering the higher oil prices and with sentiment also helped by another firm liquidity operation by the PBoC. Finally, 10yr JGBs were subdued as upside in riskier assets sapped safe-haven demand, and with price action also kept tame by mixed 20yr auction results which showed reduced demand but higher accepted prices.  The PBoC injected CNY 190bln via 7-day reverse repos. US President Trump said will shrink the US trade deficit with Japan and hopefully a balance will be reached, while he later stated that they are negotiating a one-on-one trade deal with Japan. There were also comments from Japanese PM Abe that he agreed with US President Trump to begin discussions on fair, free and reciprocal trade, while he also commented that TPP is the best trade deal for both Japan and US

Top Asia News

  • Hong Kong Rates Reach 2008 High After $6.5 Billion Intervention
  • China Asks Qualcomm For More Remedies to Win NXP Approval
  • Itochu to Pay $1.1 Billion for Majority Stake in FamilyMart
  • World’s Most Unloved Stocks Pummeled Further by Rate- Hike Fears

Equities have seen the narrative subside from macro effects and move toward individual stock news as the Eurostoxx remains roughly flat (-0.05%), with FTSE as the outperforming index (+0.2% due to FX effects) and SMI (-0.07%) the underperformer amid domestic earnings. Large cap stocks news are as follows, with ABB beating EBITDA expectations (+4.9%) pushing industrials to be the sector outperformer whilst Novartis (-1.9%) have dragged down healthcare. Nestle (+0.3%) falling in line with expectations, Unilever (-1.9%) who were disappointing and Pernod Ricard (-0.9%) announcing an earnings beat. In the M&A scope, Merck (+0.5%) confirmed their decision to offload their consumer unit to P&G for around EUR 3.4bln

Top European News

  • Debenhams Stock Sinks as Retailer Loses CFO and Warns on Profit
  • Novartis Names Amgen’s John Tsai to Oversee Drug Development
  • U.K. Retail Sales Fall More Than Forecast Amid Snow Chaos
  • Spanish Mayor Offers to Help Gibraltar Insurers Get Round Brexit

In FX, the DXY remains contained in a relatively tight range around 89.500, and mostly firmer for choice, but narrowly mixed vs G10 counterparts. The commodity currencies are gleaning support from underlying price gains, while comments from China’s SAFE contending that the Dollar may decline further as other global economies catch up has also aided EMs to recoup more recent losses. GBP: Sterling’s April winning streak has hit another potential obstacle in the shape of much weaker than expected UK retail sales data, and Cable has fallen back below the 1.4200 handle as a result to re-test and marginally breach lows seen in wake of Wednesday’s CPI miss. Market contacts report sell-stops through 1.4170, but there has been limited follow-through so far with Gbp/Usd finding buyers around 1.4160 and Eur/Gbp capped just ahead of 0.8740. AUD: A marginal outperformer as broad risk appetite and extended rallies in oil/metals more than offset a disappointing Aussie jobs report overnight, but Aud/Usd is still finding the atmosphere above 0.7800 tough to reside in, with some key chart resistance levels also keeping the pair in check (200 DMA at 0.7817 and a 0.7831 Fib. EUR/JPY: Both sticking rigidly to recent ranges, with key chart levels restraining price action alongside hefty and some mega option expiries. Eur/Usd looks bid below 1.2350 and offered on treks above 1.2400, while Usd/Jpy has been supported just under 107.00 and mostly resistant around 107.50-55.

In commodities, WTI (+0.8%) and Brent (+1%) remain close to highs that were last seen in 2014 amid reports yesterday Saudi Arabia would favour crude prices to rise US 80/bbl, or even USD 100/bbl. The upside is also followed the DoE inventory report which mirrored the API release and showed drawdowns across all product components. In the metals bloc, gold is trading softer amid pressure from a slightly firmer dollar, whilst Dalian iron ore rose almost 7% overnight, and Nickel soared 9% to a three-year high amid Russian sanction by the US on major Russian aluminium producer Rusal. Nickel has now risen over 16% in the last two sessions, whilst the Shanghai Futures Exchange cut intra-day transaction fees for nickel futures contracts for May to CNY 6 from current CNY 30. OPEC and Non-OPEC committee are said to have seen stockpiles nearly cleared

Looking at the day ahead now, the most notable data due in Europe is the February current account balance reading for the Euro area and March retail sales data for the UK. In the US we'll get the latest weekly initial jobless claims reading, March leading index and April Philly Fed business outlook print. The Fed's Brainard, Quarles and Mester as well as the BoE’s Cunliffe and Brazier are due to speak. Worth noting also is talks between Germany's Merkel and  France's Macron with EU reforms and trade conflicts with the US expected to be high on the agenda.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 230,000, prior 233,000; Continuing Claims, est. 1.85m, prior 1.87m
  • 8:30am: Philadelphia Fed Business Outlook, est. 21, prior 22.3
  • 9:45am: Bloomberg Economic Expectations, prior 56; Consumer Comfort, prior 58
  • 10am: Leading Index, est. 0.3%, prior 0.6%

Central Banks

  • 8am: Fed’s Brainard Speaks on Regulatory Reform
  • 9:30am: Fed’s Quarles Testifies on Supervision Before Senate Panel
  • 6:45pm: Fed’s Mester Speaks on Economic Outlook and Policy

DB's Jim Reid concludes the overnight wrap

With Spring finally deciding to make a long overdue appearance here in London, it feels like the dark clouds full of trade spats, tech tantrums and geopolitics have cleared, at least temporarily for markets, leaving the last few days feeling much more 2017-esque compared to some of the volatility swings that had become all too commonplace in 2018 so far. Indeed stronger equities, tighter credit spreads, lower volatility across the board and flatter yield curves seem to have come back to the forefront.

On the former, despite stalling a bit into the close last night, equity markets generally made headway yesterday with the S&P 500 (+0.08%), Nasdaq (+0.19%) and Stoxx 600 (+0.29%) all closing up on the back of an energy-sector driven boost and a smattering of decent earnings reports including Morgan Stanley. The Dow (-0.16%) did lag a bit however following the IBM results. Still, relative to the intraday lows back on April 2nd the S&P 500 and Dow are now up over +6% while the Nasdaq is up over +7%. The Stoxx 600 is also up nearly +5% from the lows on April 4th. At the same time the VIX – which was marginally higher yesterday – is down 10pts over the same time horizon.

Meanwhile, US HY credit spreads have quietly gone about rallying 40bps in the last two and a bit weeks and are now approaching their January tights while the US 2s10s curve touched 41bps yesterday and a new post GFC tight. The 2s30s curve also temporarily broke below 60bps for the first time in nearly 11 years. As we know the flattening has been driven by the front end with 2y Treasury yields now at 2.423% and up 18bps since April 2nd while 10y yields are up 14bps in the same time. Yesterday also saw the MOVE Index (Treasury Vol) nudge down another 1.5pts to close at 48 and within 4pts of the January lows. As a reminder that index got as high as 72 back in February.

The other big story in recent days has been moves in the commodity complex. Following another 3% jump yesterday Brent Oil is back up at nearly $74bbl and the highest since November 2014. Silver (+2.45%) also jumped by the most since late January yesterday and is above $17/oz for the first time since February 1st while Nickel rallied by more than 7% yesterday alone on the back of the Russia sanctions concerns. The broad CRB commodity index is now up over 6% from the April lows and at the highest level since 2015.

This morning in Asia, markets are following the US lead with the Nikkei (+0.48%), Hang Seng (+1.35%), Shanghai Comp (+0.97%), ASX 200 (+0.41%) and Kospi (+0.24%) all up as energy sectors lead gains. Futures markets in the US and Europe are also pointing to another positive start while Oil is up another half a percent and bond markets are slightly weaker.

To be honest there wasn’t a great deal of newsflow to highlight yesterday. President Trump confirmed that CIA Director Mike Pompeo had travelled to North Korea and met with Kim Jong Un ahead of a possible summit with Trump calling it a smooth meeting. Sweden and Switzerland are being mooted as possible destinations for the meeting and early June potential timing. Overnight, Trump added that “if I don’t think it’s a meeting that’s going to be fruitful, we won’t go”, although did not elaborate on what he means by fruitful. Also, Trump is now favourite with odds of 2/1 for the Nobel Peace Prize for those interested. Elsewhere, Bloomberg reported that Russia President Putin was seeking to smooth his relationship with Trump following the recent sanctions with a story suggesting that the Kremlin had  ordered to dial back on anti-US rhetoric.

Separately, the FT reported that EU trade official Cecilia Malmstrom had warned the White House that the EU would not start talks on easing commercial tensions until the US removed the threat of hitting the EU with punitive tariffs. Also in the spotlight yesterday was some softer inflation data in Europe (more on that below) and chatter from the ECB’s Villeroy. Notably, the Governing Council member said that ECB officials were broadly in agreement of supporting a tapering later this year and that timing (September or December) was not a deep existential question for officials. Also, he highlighted that the ECB views the recent data as reflecting a temporary pull-back from high levels and does not alter the inflation outlook over the medium term. So overall a fairly unified signal from the ECB despite some softer data of late.

Back to that inflation data, in the UK core CPI dipped one-tenth in March to +2.3% yoy, a miss relative to expectations for +2.5%. Headline CPI also missed (+0.1% mom vs. +0.3% expected) meaning the annual rate fell by two-tenths to +2.5% yoy. RPI (+0.1% mom vs. +0.3% expected) also missed to the downside. That said the details were a bit more encouraging given that most of the weakness was in one-off items, perhaps meaning that there is some scope for a pullback next month. Indeed Sterling initially fell as much as -0.80% versus the Greenback following the data before closing -0.59%, although weakened again after the House of Lords voted heavily against  Prime Minister May’s amendment to seek a post-Brexit customs union with the EU. Meanwhile, 10y Gilt yields rallied as much as 8bps to touch an intraday low of 1.357% (and the lowest in 2 weeks) before paring much of that to close at 1.413% and -2.1bps on the day. Market expectations for a BoE hike next month also didn’t appear to change much and continue to hover north of 80%.

For Europe, core CPI printed at +1.0% yoy and in line with the flash estimate however headline CPI was revised down one-tenth to +1.3% yoy – albeit in line with what country level data had suggested so it wasn’t a great surprise. Moves for European bond markets were also short lived with 10y Bunds touching an intraday low of 0.494% before ending the day +2.4bps higher at 0.527%. It was a similar story for OATs (+1.9bps to 0.744%) although BTPs did rally -4.3bps to close at 1.708% and a new 2018 low in yield. That coincided with a notable political development in Italy as President Mattarella asked Senate Speaker Casellati to explore whether there is a majority likely to support a potential government between a centre-right alliance and the Five Star Movement. Casellati has supposedly been given until Friday to report back. So worth seeing how things progress.

Across the pond, while there wasn’t much in the way of economic data it was another fairly busy day for Fedspeakers. In the early afternoon we heard from the Dallas Fed’s Kaplan who confirmed that his base case for the remainder of the year is two more rate hikes by the Fed. He did also highlight that he thinks “the path of rate increases is probably going to be flatter than people are accustomed to and one of the reasons is this moderating out-year growth”. On that he mentioned that energy has gone from a growth headwind to tailwind. It’s worth highlighting a report that our US economists put out on Tuesday (see link here) where they look at how much oil prices have to go up to offset the positive effect from tax cuts.

In the evening we also heard from the Fed’s Bullard, Quarles and Dudley. A wellknown dove, Mr Bullard said “we should stay flat with the policy rates, at least over the policy horizon”, in part as he is “getting concerned over the flattening yield curve”. He added that if cash rates go higher while longer rates don’t cooperate, “we could have an inverted yield curve within six months”. Further, he noted that “I do want to flag the yield curve issue because it’s   time to have that debate right now”. On the same subject, Mr Quarles said he is “not viewing the current flattening of the yield curve as a particular signal of recession”. Finally, the soon to be retiring Mr Dudley reiterated a gradual path of rate hikes remains appropriate, but added that “even though unemployment is low, inflation remains below 2% target. As long as that is true, the case for tightening policy more aggressively does not seem compelling”. That said, he also conceded that over time, rates “will need to become slightly restrictive in the years ahead”.

Following on, the latest Fed Beige book noted that the “outlook remained positive, but contacts in various sectors…expressed concern about the newly imposed and/or proposed tariffs”. The text also suggested more of the same on  growth, with all 12 districts noting “modest to moderate” economic growth, while price increases nationally were described as “moderate” and overall wage growth remained “only modest”.

Looking at the day ahead now, the most notable data due in Europe is the February current account balance reading for the Euro area and March retail sales data for the UK. In the US we'll get the latest weekly initial jobless claims reading, March leading index and April Philly Fed business outlook print. The Fed's Brainard, Quarles and Mester as well as the BoE’s Cunliffe and Brazier are due to speak. Worth noting also is talks between Germany's Merkel and  France's Macron with EU reforms and trade conflicts with the US expected to be high on the agenda.

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