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European Market Update: Risk Aversion Sentiment Spreads Into Europe, Trump Trade Fades

Risk aversion sentiment spreads into Europe, Trump trade fades

Notes/Observations

Risk aversion simmering over concerns President Trump’s legislative agenda facing headwinds; health bill struggles; could jeopardize goal of big tax cuts

North Korea said to have launched missile tests towards Japan; likely failed

Safe haven flow back in spotlight; spot gold at 3-week highs; Japanese yen currency firms

Overnight:

Asia:

North Korea may have launched several missiles on Wednesday morning from its eastern area of Wonsan; launch might have failed; Type of missiles involved was unknown

Bank of Japan (BOJ) releases Jan meeting minutes: BOJ members rejected bond yield target increase; rejected suggestions the central bank should raise its 10-year government bond yield target to match expected gains in Treasury yields. Reiterated view that CPI likely to reach 2% around FY18

Bank of Japan (BOJ) Gov Kuroda: Raising rates on excess reserves or lowering monetary base would be needed to exit QQE

BOJ Member Funo: Vital for BOJ to continue with powerful easing despite market speculation for rate hikes. Now is not the time to consider a shift in BoJ easy policy nor adjustment to bond yield target

Japan Feb Trade Balance saw its surplus hit a 10-month high with exports rising at its best pace in two years

Europe:

German Foreign Min Gabriel: Germany should send new message to EU that investment is more important than austerity

UK House of Lords committee report: Upmost importance for the UK to secure a preferable Free Trade Agreement (FTA) with the European Union for non-financial services

Americas:

Fed’s Kaplan (moderate, voter): 2 more hikes this year was a "reasonable" base case, as long as labor market slack continued to decline and inflation continues to rise toward the Fed’s 2-percent goal.

Fed’s Rosengren (moderate, non-voter): run-up in US real estate prices could potentially amplify any future economic downturn; need to consider tools beyond interest rates that could help cool the sector

Fed’s Mester (hawkish, non-voter): Built in more than 3 hikes into her forecast for 2017; Would be concerned if there were less than 3 hikes this year if data hold up.

Energy:

Weekly API Oil Inventories: Crude: +4.5M v -0.5M prior (7th build in the past 9 weeks)

Economic Data

(JP) Japan Feb Nationwide Dept Sales Y/Y: -1.7% v -1.2% prior; Tokyo Dep Store Sales Y/Y: -3.1% v -1.5% prior

(ZA) South Africa Feb CPI M/M: 1.1% v 1.2%e; Y/Y: 6.3% v 6.3%e

(ZA) South Africa Feb CPI Core M/M: 1.1% v 1.2%e; Y/Y: 5.2% v 5.5%e

(ZA) South Africa Q4 Current Account (ZAR): -76B v -147Be; Current Account to GDP Ratio: -1.7% v -3.2%e

(EU) Euro Zone Jan Current Account (Seasonally Adj): €24.1B v €31.0B prior; Current Account NSA (unadj): €2.5B v €47.0B prior

Fixed Income Issuance:

(IN) India sold total INR100B vs. INR100B indicated in 3-month and 6-month Bills

(ZA) South Africa sold total ZAR2.35B vs. ZAR2.35B indicated in 2037, 2041 and 2044 bonds

(DK) Denmark sold total DKK1.11B in 2027 and 2039 Bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Index snapshot (as of 09:30 GMT)

Indices [Stoxx50 -0.7% at 3,402, FTSE -0.9% at 7,309, DAX -0.8% at 11,866, CAC-40 -0.9% at 4,957, IBEX-35 -0.9% at 10,119, FTSE MIB -1.0% at 19,719, SMI -0.9% at 8,534, S&P 500 Futures -0.2%]

Market Focal Points/Key Themes: European equity indices are trading sharply lower as the Health Care bill faces stiff opposition ahead of Thursday House vote; Market participants also jittery on political developments in France ahead of the highly-anticipated presidential election scheduled next month; Banking stocks generally lower across Europe with losses in the Eurostoxx led by shares of ING Groep after reports circulated that the company is under investigation by Dutch authorities for money laundering, international corruption; shares of Kingfisher leading the losses seen in the FTSE 100 after releasing FY16 results; Energy, commodity and mining stocks trading notably lower as oil and copper prices trade lower intraday.

Upcoming scheduled US earnings (pre-market) include Actuant, Amaya, EVINE Live, Acushnet, Perry Ellis, PetroChina, and Winnebago Industries.

Equities (as of 09:25 GMT)

Consumer Discretionary: [Kingfisher KGF.UK -5.2% (FY16 results, Chairman to step down), Hermes RMS.FR -1.2% (FY16 results)]

Financials: [ING Groep INGA.NL -5.0% (reportedly under investigation by Dutch authorities for money laundering, international corruption), Savills SVS.UK -1.8% (FY16 results)]

Healthcare: [Novartis NOVN.CH -1.8% (Phase III RELAX-AHF-2 study did not meet primary endpoints)]

Industrials: [Clarkson CKN.NL -4.5% (confirms secondary placing at £27.50/shr), Groupe Gorge GOE.FR -1.0% (FY16 results), Jenoptik JEN.DE -2.8% (outlook, raises div), Kuka KU2.DE -2.9% (final FY16 results), Lenzing LNZ.AT +0.3% (FY16 results), Meyer Burger MBTN.CH -2.4% (FY16 results)]

Materials: [Akzo Nobel AKZA.NL -3.3% (Rejects second proposal from PPG)]

Technology: [Gemalto GTO.NL -21.2% (cuts outlook), Suess MicroTec SMHN.DE +1.1% (Q1 outlook)]

Speakers

ECB’s Villeroy (France) stated that ECB was clearly progressing towards its inflation target and confident that headline and core inflation would converge and be close to target in 2019. Reiterated ECB view that accommodative policy was still needed; not the time to stop stimulating the economy; debate was not predetermined

Sweden Central Bank (Riksbank) reiterated that expansionary monetary policy was having the intended effect; domestic economy was developing well. Inflation had risen to be close to target and long-term inflation expectations are back around 2%

BOE Q1 Agents Summary of Business Conditions: Reiterates inflation is edging higher due to weaker GBP currency(Pound Sterling)

BOJ Gov Kuroda was in his Parliament and informed G20 that BOJ would continue with its powerful easing in order to achieve its 2% inflation target

Bank of Korea (BOK) Suh Bong-gook: Many factors that support a strong USD. Talks on currency manipulation might lead to won appreciation, but KRW currency (won) movement was mostly affected by the level of dollar

Currencies

Risk aversion provided another headwind for the USD as US Treasury yields moved sharply lower over the past day thus eroding the greenback’s interest rate allure. safe-havens flows (yen and gold) were the main beneficiaries

USD/JPY was lower for the 6th straight session and near 4-month lows over concerns President Trump would struggle to deliver promised tax cuts that propelled the the greenback since his Nov victory. North Korea said to have launched missile tests towards Japan in a failed test that added to the cautious sentiment. Pair probing the lower end of the 111 handle

EUR/USD softer as the yen component was the driver in price action. Pair at 1.0780, lower by approx 0.2% just ahead of the NY morning.

Fixed Income:

Bund futures trade at 160.17 up 61 ticks continuing its rebound higher on risk aversion flows on weaker European Equity trade. Resistance moves to 160.45 followed by 160.66. Support moves to 159.41 followed by 159.12 then contract low of 158.73.

Gilt futures trade at 126.55 up 55 ticks reversing yesterdays Inflation inspired losses, on steep losses in US and Asian Stocks overnight. Support moves to 125.80 followed by 125.24. Resistance moves to 126.75, 126.87 followed by 127.35. Short Sterling futures trade flat to up 1bp with Jun17Jun18 spread flattening to 20/21Bp flattening some 3bp from yesterday’s peak.

Wednesday’s liquidity report showed Tuesday’s excess liquidity fell to €1.322T a fall of €15B from €1.337T prior. Use of the marginal lending facility fell to €117M from €176M prior.

Corporate issuance saw $10.95B come to market via 9 issuers headlined by ING $4B 3 part offering and Medtronic $2B 3 part offering. Issuance for the week now stands at $16.6B.

Looking Ahead

(IL) Israel Feb Leading ‘S’ Indicator M/M: No est v 0.2% prior

05:50 (EU) ECB allotment in 7-day USD Liquidity Tender

06:00 (EU) Daily Euribor Fixing

06:30 (UK) DMO to sell £2.0B in 1.5% 2047 Gilts

06:30 (DE) Germany to sell €3.0B in 0.25% Feb 2027 Bunds

06:30 (FR) ECB’s Villeroy (France)

07:00 (US) MBA Mortgage Applications w/e Mar 17th: No est v 3.1% prior

07:00 (IE) Ireland Feb PPI M/M: No est v 0.2% prior; Y/Y: No est v 1.6% prior

07:00 (RU) Russia to sell combined RUB40B in 2019 and 2026 OFZ bonds

07:00 (CZ) Czech Republic to sell 2020 and 2027 bonds

07:30 (CL) Chile Central Bank’s Traders Survey

07:30 (EU) ECB’s Lautenschlaeger (Germany)

07:45 (US) Daily Libor Fixing

08:00 (BR) Brazil Mid-Mar IBGE Inflation IPCA-15 M/M: 0.2%e v 0.5% prior; Y/Y: 4.7%e v 5.0% prior

08:00 (UK) PM May weekly question time in House of Commons

09:00 (US) Jan FHFA House Price Index M/M: 0.4%e v 0.4% prior

09:15 (UK) Baltic Dry Bulk Index

10:00 (US) Feb Existing Home Sales: 5.56Me v 5.69M prior

10:30 (US) Weekly DOE Crude Oil Inventories

11:00 (CA) Bank of Canada (BOC) Dep Gov Schembri speech

16:00 (NZ) New Zealand Central Bank (RBNZ) Interest Rate Decision: Expected to leave Official Cash Rate unchanged at 1.75%

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