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Stocks Struggle As Surging Dollar Snaps Commodity Rally

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World stocks, as tracked by the MSCI All-Country Index, struggled on Friday, dipping in early trading but were set for a second week of gains after a solid start to the the global Q1 earnings season, even as a rally in commodity prices fizzled pressured by the recent dollar spike.

U.S. equity index futures are modestly in the red, alongside Asian markets, where technology shares came under pressure after yesterday's unexpected Taiwan Semi warning, which saw the world's biggest semiconductor foundry cut its revenue target to the low end of forecasts and blamed softer demand for smartphones

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European stocks initially inched lower as traders assessed earnings results from companies including Reckitt Benckiser Group Plc and Ericsson AB, pushing the Stoxx Europe 600 Index slides 0.2%. However, since then Euro stocks erased all earlier losses as the Euro slumped, boosting exporters while the telecom sector outperformed after gains by Telia. The Stoxx Europe 600 Index rose 0.1% to session high with 11 of 19 industry groups advancing, telecom up 1.2% as Telia rallies following strong earnings.

Reckitt Benckiser falls after the company posted like-for-like sales for the first quarter that missed estimates, while Ericsson soars after posting results that were stronger than analysts had expected. ASM International heads for the worst performance on the Stoxx 600 after the semiconductor equipment maker’s results were seen as signaling a touch start to the year.

“Our base case is that investor focus will shift back to economic growth as some of the current uncertainties ease,” UBS strategists wrote in a note to clients. “In our base case we do not expect current tensions between NATO and Russia to escalate further than issues in the past, such as Crimea, and expect the trade dispute between the U.S. and China to be negotiated without escalating to a trade war."

Outside of the EU, the Swiss National Bank said it was "not in a hurry" to adjust policy despite the franc touching a milestone low of EURCHF 1.20, according to President Thomas Jordan. American sanctions on Russian oligarchs have had the effect the Trump administration wanted, Treasury Secretary Steven Mnuchin said. Both aluminum and nickel fall back after Thursday’s gains.

U.S. equity-index futures nudged lower were off session lows, and just barely in the red.

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Elsewhere, it has been a quiet, data-less, morning. USD is bid, EUR is under pressure and the Citi FX desk anticipates a move back up to the 90.55 area for the DXY Index – but we remain firmly within the same range. Commodities and risk-correlated currencies are suffering the most.  There is a general USD bid out there this morning, which emerged out of leveraged London account and has been linked to a few factors – positions feel as though they are being lightened up ahead of the weekend, EUR is under pressure.

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Thursday's treasury yield spike moderated overnight, and yields were little changed around 2.90%, though they remained on track for the biggest weekly surge since early February.

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Discussions this morning have revolved around the BoE, after Carney’s surprise comments overnight shook the general assumption that a May hike was on the way; as a result U.K. shares outperformed as the pound weakened also aided by reports of disagreements in Brexit talks on the Irish border. Short Sterling reds and greens open higher by 7-8 ticks, gilt curve steepens while according to Bloomberg, money-market pricing for a Bank of England interest-rate hike in May fell below 50% compared with about 80% on Thursday.

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Gilts surged and the pound slid a fourth day, set for its longest run of losses this month, as leveraged names have been unwinding longs in the past two days and macro accounts also seen on the offer after Carney’s remarks. However, returning some normalcy, in a speech on Friday, BOE policy maker Michael Saunders backed further rate increases.

Elsewhere the yen slid to a one-week low of 107.73 per dollar as appetite for haven assets kept declining amid receding geopolitical and trade risks and as rising U.S. yields boosted dollar demand. The Indian rupee weakened to the lowest level since March 2017 despite minutes from the country’s central bank meeting showing an unexpected hawkish tilt. Oil prices drifted.

Meanwhile, yesterday's big story - the surge in commodities - took a back seat even as WTI crude extended its advance to a three-year high, but the rally in metals market stuttered, driving the Bloomberg Commodity Index lower for a second day. Bond market breakevens showed an increase in expectations for U.S. inflation after the recent torrid gains in metals from aluminum to nickel. Trade remains in focus with the U.S. Treasury Department considering using an emergency law to curb Chinese investments in sensitive technologies.

Spot gold was down 0.2% at $1,342.56 an ounce even as the recent cryptocurrency surge continued on Friday.

In other overnight news, Fed's Mester (Voter, Hawk) said further rate hikes are appropriate in 2018 and 2019, adding gradual hikes would help avert overheating and financial stability risks. Across the pond, BoE’s Saunders (Hawk) said UK no longer needs as much stimulus as before, due to little slack and rising cost pressures. Adding that pace of further rate hikes are likely to be “gradual” not “glacial”. Saunders says significance of data points is questionable due to weather and history of upward revisions.

Coming up in the NY session, the focus is on the Canadian March CPI print where expectations are looking for a 0.4%MoM. After that, Eurozone consumer confidence for April may generate some interest, but there’s a really sunny Friday feeling to proceedings thus far. Baker Hughes, GE, Honeywell, State Street and Waste Management are among companies due to report earnings.

Bulletin Headline Summary from RanSquawk

  • FTSE the outperforming bourse following Carney’s comments reducing hike expectations
  • Oil stable near multi year highs as OPEC JMMC meets
  • Looking ahead, highlights include Canadian CPI, Fed’s Evans and Williams

Market Snapshot

  • S&P 500 futures down 0.1% to 2,691.25
  • STOXX Europe 600 down 0.2% to 381.19
  • MSCI Asia Pacific down 0.8% to 174.03
  • MSCI Asia Pacific ex Japan down 1.2% to 567.61
  • Nikkei down 0.1% to 22,162.24
  • Topix up 0.05% to 1,751.13
  • Hang Seng Index down 0.9% to 30,418.33
  • Shanghai Composite down 1.5% to 3,071.54
  • Sensex down 0.2% to 34,375.71
  • Australia S&P/ASX 200 down 0.2% to 5,868.78
  • Kospi down 0.4% to 2,476.33
  • German 10Y yield unchanged at 0.6%
  • Euro down 0.1% to $1.2328
  • Italian 10Y yield rose 6.4 bps to 1.527%
  • Spanish 10Y yield rose 1.5 bps to 1.299%
  • Brent futures up 0.1% to $73.84/bbl
  • Gold spot down 0.3% to $1,341.03
  • U.S. Dollar Index up 0.2% to 90.14

Top Overnight News

  • Trump praised James Comey for his honorable conduct during the 2016 presidential campaign, sought out his loyalty, and asked the FBI director to let go of an investigation into his former national security adviser, according to memos Comey wrote to document private conversations
  • Treasury is considering using an emergency law to curb Chinese investments in sensitive technologies as the Trump administration looks to punish China for what it sees as violations of intellectual-property rights
  • Labour Party has given its clearest signal yet that it will join forces with rebel Tories in an attempt to defeat May on Brexit, threatening a political crisis that may bring down her government
  • Swiss National Bank is “not in a hurry” to adjust policy President Jordan said despite the franc breaking through the 1.20-per-euro mark for the first time since early 2015
  • U.S. Deputy Attorney General Rosenstein told President Trump last week he isn’t a target of any part of Special Counsel Robert Mueller’s investigation, according to several people familiar with the matter
  • European Union officials are set to reject a potential U.K. solution to the crucial issue of what happens to the Irish border after Brexit, deepening the stalemate in negotiations
  • U.K’s Brexit payments to the EU may exceed the 39b pound ($55b) ceiling of the Treasury’s estimate, the government auditor said
  • Keir Starmer, chief Brexit spokesman of the opposition Labour party, indicated in an interview with Bloomberg that his party could join forces with rebels from PM Theresa May’s Conservatives in an attempt to defeat the government on a vote on staying in the EU customs union
  • In a further escalation of rhetoric over trade, China accused the U.S. of throwing its weight around, saying it advocates principles of fairness but isn’t living up to them

Asia stocks traded lower after the subdued tone rolled over from Wall St where all major indices finished in the red, amid tech woes after semiconductor giant TSMC downgraded its revenue forecasts on concerns of softer smartphone demand. ASX 200 (-0.2%) and Nikkei 225 (-0.1%) opened negative although losses were mostly pared as the Energy sector remained afloat in Australia and with the Japanese benchmark finding some relief from a weaker JPY. Elsewhere, Taiwan’s Taiex (-1.7%) is the laggard as TSMC slumped following the weak revenue outlook, while Hang Seng (-0.9%) and Shanghai Comp. (-1.5%) were lacklustre after the PBoC skipped open market operations and as trade tensions lingered. Finally, 10yr JGBs were subdued as yields tracked their US counterparts higher, although the downside to JGBs was also limited amid the BoJ’s presence in the market for JPY 710bln in the belly to super-long end and with the amounts of the Rinban announcement unchanged.

Top Asian News

  • India Is Said to Tell U.S. It Doesn’t Manipulate the Rupee
  • India’s Central Bank Makes Surprising Tilt Toward Rate Hike
  • Ex-Barclays Quants Move to Old House by Sea to Try to Do Good

In Europe, approaching the week's end equity bourses are marginally higher (Eurostoxx +0.1%), with positivity noted in the FTSE (+0.5%), following lowered expectation of a UK rate hike, and a weaker GBP. The telecom sector is currently outperforming (+1.1%) driven by Telia’s strong earnings results. The sector underperformer is currently energy (-0.4%), driven by falling oil prices. Significant individual stock news was noted in Shire (-4.5%) with Allergan pulling out of the acquisition deal leading to underperformance, Pfizer and Abbvie, however, are said to be suitors. Earning outperformance was noted at Ericsson (+16%), and underperformance at Reckitt Benckiser (-5.8%)

Top European News

  • U.K. Money-Market Pricing for May BOE Rate Hike Falls Below 50%
  • Benettons Are Said to Plan Wireless Tower Champion With Cellnex
  • FdR Offers to Buy Remaining Stake in Landlord Beni Stabili
  • Billionaire Rokke Likely to Return to Oil Rigs With Odfjell

In FX, DXY is back on the 90.000 handle, but again largely on the back of the travails of others in the G10 fold, and the index still needs to establish a firm foothold above the big figure to mount a serious challenge of nearest upside resistance levels ahead of 91.000. Note, 90.362, 90.600 and 90.900 have all been tested, but rejected, and more recently 90.273. GBP: 3 UK data misses (albeit with some parts of the latest jobs and earnings report relatively strong) put a serious dent in Sterling’s seasonal advance, but ‘confirmation’ from BoE Governor Carney that this week’s disappointing releases could keep the MPC on hold in May has thrown a real spanner in the works, as Cable looks in danger of losing grip of 1.4000 and Eur/Gbp approaches 0.8800. Technical support around 1.4020 holding in for now, and remaining (some might say foolhardy) Pound longs/bulls have received a reprieve from broadly hawkish comments from Saunders, that leaves a hike at the next meeting in the balance.  EUR/JPY/CHF: All softer vs the Dollar, though within recent/familiar ranges on the wide, as Eur/Usd meanders between 1.2290-1.2390,  Usd/Jpy sits in the middle of 107.35-75 parameters and Usd/Chf is even more tightly bound from 0.9705-30. However, for those unsure on Thursday Eur/Chf clearly crossed the 1.2000 line earlier amidst more SNB assurances that policy is not about to change even though the Franc is less highly valued.

In commodities, oil was lower on European equity close on Thursday, and currently trading flat on the day with WTI at USD 68.38 and Brent at USD 73.85. This comes as some profit taking is being seen following a touch on over 2 year highs. OPEC specifically we have heard from various oil ministers speaking at the OPEC JMMC meeting, as well as comments from Russia’s Novak saying OPEC and Non-OPEC countries could ease output reductions as soon as 2018, but no move was noted on this. Gold tracking lower for the day, currently down -0.3%, largely due to a strengthening USD. Saudi energy minister Falih says there is a need to strengthen OPEC and Non-OPEC cooperation beyond the current   agreement as this is critical to restore market confidence. Russia says it is committed to OPEC/Non-OPEC supply cut agreement until the end of the year; according to sources.

Looking at the day ahead now and March PPI in Germany and April consumer confidence for the Euro area are the highlights. There are no key data releases in the US. The Fed's Evans and BOE’s Saunders are due to speak. General Electric is due to report earnings.highlights.

US Event Calendar

  • No economic events scheduled
  • Riksbank’s Ingves, Jansson at IMF, World Bank Spring Meetings
  • 9:40am: Fed’s Evans Speaks on the Economy and Monetary Policy
  • 11am: Riksbank’s Ingves Gives Speech in Washington

DB's Jim Reid concludes the overnight wrap

Yesterday was the hottest April day in London since 1949. We saw 29.1 degrees. If my eyes are anything to go by it was also the worst day for birch pollen since about 1524. I’m currently overdosing on my hay fever tablets. I’m hoping that one of the side effects is fast growing hair. Anyway the sudden heatwave has also coincided with a sudden boost in the rising yield and inflation story. This story - which we thought would be the main 2018 theme - has been overtaken by events over the last two months. However is it back to being front and centre now?

Indeed we’ve come a long way very quickly. As we started last week WTI Oil was trading at $62 and 10 year Treasuries at around 2.78%. 10 days later and yesterday oil peaked at $69.5 (currently $68.3) and Treasuries ended at 2.911% yesterday. Oil is at the highest since December 2014 and US 10yrs are within 4bps of their mid-February highs which in turn were the highs since late 2013/early 2014. As an aside we haven’t been above 3.05% since 2011. For the record, 10 year Bund yields were also around 3% back then as opposed to the still moribund (pardon the pun) 0.598% close yesterday which was nearly 7bps higher on the day. Meanwhile US 10 year breakevens marked a fresh high since July 2014 while the 2s10s and 5s30s steepened 3.7bp and 1.4bp respectively.

Interestingly the probability (according to Bloomberg) of four Fed rates hikes in 2018 is now at the highest of the year - at around 33% - from 18% at the start of last week. A reminder that DB has long felt 4 rates hikes (one done) this year and 4 next year are likely.

As discussed above Oil has certainly played its part in the recent move but other commodities have also contributed. For metals (although yesterday was a down day - see below), the big driver appears to be the sanctions imposed on Russia's Rusal (the largest aluminium supplier outside of China) by the US which has seen a significant volume of metals (namely aluminium) removed from the market. Tariffs talk has also contributed and LME Aluminium is up 24.0% in April alone. At the same time our commodities strategists noted that this has come at a time when China's primary supply growth in Aluminium is set to decelerate sharply this year on a combination of limited new capacity and cost pressures.

For Oil, the story is more one of fundamentals with OPEC highlighting that high inventories, which had weighed on the market for the last few years, have now been largely wiped out, helping to rebalance the market. The demand side of the equation is also said to have improved of late in the lead up to the northern hemisphere summer. It's worth noting that OPEC energy ministers have been meeting over the last 36 hours. Watch out for any headlines.

In addition our Chinese economists have recently upgraded their near-term GDP forecasts (link) which seems to be a little off consensus and if correct we could be seeing evidence of this better growth outlook in the recent  commodities rally.

In terms of supporting data, the prices paid component of yesterday’s Philly Fed was at the highest since May 2008 and this would have been collated before the latest commodity price surge. DB’s Alan Ruskin showed a graph suggesting that at these levels and with the usual lead time, this is consistent with core YoY US CPI close to 3% by H2 2019.

This morning markets in Asia are trading lower with the Nikkei (-0.05%), ASX200 (-0.24%), Kospi (-0.35%), Hang Seng (-0.42%) and Shanghai Comp. (-1.20%) all down as we type. Datawise, Japan’s headline and core March CPI (ex-food) were both in line at 1.1% yoy and 0.9% yoy respectively. Elsewhere, Bloomberg noted the US Treasury Department is considering using an emergency law that would allow President Trump to block Chinese related investments in sensitive technologies.

Now recapping other markets performance from yesterday. The S&P initially traded down c1%, impacted by tech and consumer staple stocks as the world’s largest contract chipmaker (Taiwan Semiconductor) cut its 2Q revenue forecasts by c10% while Philip Morris dropped a stunning -15.6% post its results. Eventually, the index pared back losses to close -0.57%, in part as Bloomberg reported that Deputy Attorney General Rosenstein told President Trump last week that he is not a target of any part of the Special Counsel Mueller’s investigations.

Elsewhere, the Nasdaq (-0.78%) and Dow (-0.34%) trended lower while the Stoxx 600 edged up +0.02%. The VIX rose for the second straight day to 15.96 (+2.3%). In the UK, the BOE Governor Carney has reiterated that Britain should prepare “for a few interest rates over the next few years” and that a rate hike this year was “likely”, but he seemed to dampen down the expectation for a May hike by noting that there was also “other meetings” this year. The Euro and Sterling ended -0.23% and -0.82% lower respectively, while the USD dollar index rose for the third straight day (+0.35%). In commodities, precious metals were little changed (Gold -0.29%; Silver +0.32%) while other base metals retreated, in part as Bloomberg reported Russia may provide support to Rusal given the current US sanctions on the firm (Copper -0.73%; Zinc -0.86%; Aluminium -1.86%).

Turning to the four Fed speakers overnight on inflation and financial stability. Ms Mester who is a voter this year said she “doesn’t expect inflation to pick up sharply” and that “further (gradual) increases in interest rates will be appropriate this year and next”, in part to allow inflation to move back up to the 2% target. Elsewhere, Ms Brainard noted that while economic activity has improved, “we cannot afford to be complacent”. She added that the current level of bank capital is a “sign of strength” but she is “reluctant” to see big banks reducing their capital buffers and voiced her support for a lift in the counter-cyclical buffers on banks from 0% currently. Following on, Mr Rosengren noted that the US fiscal and monetary policy are poorly positioned to respond to economic stresses, in part as higher level of government debt to GDP may limit the ability of authorities to offset a financial or economic shock. Finally on trade, the soon to be retiring Mr Dudley said “we’re watching (the trade negotiations) very, very closely”, in part as it could deliver a good outcome, “but it could also go on a much less favourable way”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the April Philly Fed index edged up 0.9pts mom and was above market at 23.2 (vs. 21 expected) while the March Conference board leading index was in line at 0.3% mom. Elsewhere, the weekly initial jobless claims (232k vs. 230k expected) and continuing claims (1,863k vs. 1,845k expected) were slightly above expectations. Back home, the UK’s March core retail sales fell more than expected at -0.5% mom (vs. -0.4% expected), with the weakness partly due to harsh weather during the quarter. My has that changed now!!!

Looking at the day ahead now and March PPI in Germany and April consumer confidence for the Euro area are the highlights. There are no key data releases in the US. The Fed's Evans and BOE’s Saunders are due to speak. General Electric is due to report earnings.highlights.

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