Trump ‘Trade’ Back On

Friday February 10: Five things the markets are talking about

After some respite of late, the "Trump trade" is in vogue once again with investor flows returning to the market. Treasuries and gold trade down, while global indexes straddle atop of new highs.

The 45th U.S President, with a couple of words yesterday – "phenomenal" tax breaks – has refocused on his pro-business agenda, promising significant tax announcement within a few weeks.

This ‘risk-on’ trade has not even being dented by a U.S Court of Appeals upholding the suspension of Trump’s travel ban.

Helping the risk hungry bulls is the overnight China trade data. The world’s second largest economy trade balance is "officially" at multi-month highs as imports and exports top estimates.

Today, the market will focus on Japan’s PM Abe ‘meet and greet’ with Trump. While POTUS may discuss his concerns over a ‘strong’ dollar with Abe, it’s expected that whatever is said publicly will focus on trade and investment deals.

Canada’s employment report is out at 08:30am.

Note: China’s January Trade surplus hit a five-month high with both exports and imports exceeding expectations (+$51.4B vs. +$48.5Be); exports hit a ten-month high while imports hit 45-month high.

1. Equities soar in Asia, flattish in Europe

In Asia, regional bourses took the baton from Wall Street and pushed stocks to multi week and monthly highs.

The MSCI Asia Pacific Index jumped +0.9%, to the highest level since July 2015. Japan’s Topix rose +2.2%, the most since January 4, to bring it back above its average price for the past 50 days.

In Australia, the S&P/ASX 200 Index climbed +1% for a fourth-straight gain and the best weekly performance since early December. Benchmarks in Singapore and Taiwan climbed +0.7% percent, while Malaysian shares rose to the highest level since April.

In Hong Kong, the Hang Seng added +0.2%, while China’s main stock indexes posted their biggest gains in three months.

However, the Australasian euphoria has not been carried over to Europe. Indexes there are trading mixed as geopolitical uncertainties across the region continue to weigh on the markets. The FTSE 100 is outperforming as energy, commodity and mining stocks trade sharply higher after the IEA raised 2017 global oil demand in its monthly report. Financial stocks are weighing in the Eurostoxx, especially French banks.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx50 +0.1% at 3,283, FTSE +0.4% at 7,260, DAX +0.5% at 11,698, CAC-40 +0.3% at 4,840, IBEX-35 +0.1% at 9,450, FTSE MIB -0.2% at 18,903, SMI -0.2% at 8,423, S&P 500 Futures +0.1%

2. Oil prices surge on compliance reports, gold prices lower

This morning IEA monthly oil report is very bullish for crude oil price. The data highlights a +90% compliance rate from last Novembers OPEC production cut agreement – which is a record for OPEC.

Brent crude futures are up +66c at +$56.29 a barrel, U.S West Texas Intermediate (WTI) crude futures have rallied +56c to +$56.56 a barrel.

The IEA has also indicated that if the "current compliance levels are maintained, the global oil stocks overhang that has weighed on prices should fall by about -600k bpd in the next six-months.

On Monday, investors will get the "official" OPEC compliance data.

Crude ‘bears’ will take some comfort in the fact that the higher oil prices go should encourage more U.S producers (shale) to come back on line.

Precious metals are trading under pressure from a firmer dollar. Spot gold is down -0.5% at +$1,223.93 per ounce ahead of the U.S open. On Wednesday, it touched its highest since November at +$1,244.67.

3. Sovereign yields are on the rise

U.S Treasury yields backed up +6bps yesterday, successfully halting a rally that took yields to the lowest level in three-weeks (+2.34%). Ahead of the U.S open, U.S 10’s have rallied another +2bps to +2.42%.

In Germany 10-year bond yields have increased +2bps to +0.33%, while French yields have increased +5bps to +1.03%.

Note: The fear of "Frexit" – France’s far-right candidate Marine Le Pen presented her program for such an exit yesterday – should continue to widen periphery/bund spreads.

In Japan, the BoJ has acted in its QE operations to stem the rally in bond yields on the long end. Again, the bank has slightly increased its purchases of the 10 to 25-year debt basket in an effort to keep yields lower.

While down-under, the Aussie and Kiwi bonds fell, sending 10-year yields up +5bps to +2.70% and +4bps to +3.20%.

4. The ‘Big’ dollar gets the thumbs up

Of all the asset classes, the FX market will be the first to react as dealers focus on results from today’s discussions on trade and FX issues between Japan’s PM Abe and President Trump in Washington.

Note: Abe has previously suggested that currency discussions should be left to G20 or G7 meetings, but Trump and his Twitter account may be the outlier.

At today’s press conference, investors might only hear about Japan’s message that the BoJ’s monetary policy so far has been to raise inflation.

The USD/JPY pair is higher (+0.4% to ¥113.34) overnight on yield differentials, while the EUR is little changed trading atop of €1.0645. The techies are still looking for lower levels for the single unit, believing a clear break of €1.0610 would suggest a new "bear" cycle.

Note: Weak growth potential and political uncertainty (Frexit and Netherlands) will continue to pressure the ECB with "lower for longer" rate policy.

The pound (£1.2492) is a tad higher after better trade and industrial production data (see below).

5. U.K growth balanced in December

Data this morning shows that the U.K.’s trade deficit with the rest of the world narrowed in December and that both manufacturing and construction output rose. This would suggest that the U.K economy ended Q4 more balanced rather than consumer-led growth.

The deficit in trade in goods and services narrowed to -£3.3B from -£3.6B m/m – a weak pound has being supporting exports of aircraft, gold and oil.

Manufacturing output rose +2.1% on the month, construction output grew +1.8%.

Note: A faster inflation rate should squeeze consumer spending in 2017, thus making growth in other parts of the economy critical to maintaining economic momentum ahead of Brexit talks.

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