The FOMC minutes yesterday made it clear that shrinking the +$4.5T balance sheet will be a priority for U.S policy makers in the coming years, but probably would start very “gradually” and not until late this year at the soonest.
The timing is the biggest issue; some Fed members indicated that the process would begin when a specific funds rate is achieved; while others argued they wanted to start based on a “qualitative” assessment of the economy.
Obviously, investors would like the certainty of a defined trigger because that provides some clarity in what will be an unprecedented move by the Fed.
A portion of communiqué was devoted to high stock prices, noting that prices are now above “some standard measures of valuations above historical norms” and that “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.” The net result, the main reason why global equities are having a tough go of it in the overnight session.
Worries about the “Trump trade” pro-business agenda is also a market concern now that U.S House Speaker Ryan indicated that the White House and Congress are still ‘not’ on the same page in terms of tax reform.
Market focus remains on today’s upcoming discussions between the leaders of the U.S and China in Florida.
1. Dollar sees mixed results on policy and geopolitical concerns
In Asia, safe haven demand on North Korean tensions saw yen rally to an intraday high of ¥110.30, before settling at ¥110.50’ish. AUD was the other main mover in the session, pressured by the banking regulator and China data (see below). The Australian Banking Regulator intends to make banks hold more capital against risky mortgage lending.
In Europe, it’s been a relatively subdued session with overall market focus remaining on upcoming discussions between the leaders of the U.S and China.
The EUR is softer after ECB’s Draghi dampened any speculation of any imminent change in its policy stance. The single unit hit a three-week low at €1.0630 following Draghi’s commentary on forward guidance (see below).
Earlier this morning, the Reserve Bank of India (RBI) narrowed its rate corridor (not expected); left its Repurchase Rate unchanged at +6.25%, but raised the Reverse Repo by +25bps to +6.00%.
2. Stocks struggle after valuation concerns
Global equities have slid and U.S futures have ticked lower now that the Fed has indicated they favor shrinking the bank’s balance sheet this year.
Japanese stocks led the losses, falling the most in two-weeks to sit at their lowest point in four-months. The Nikkei dropped -1.4% aided by a stronger yen (¥110.57), the lowest close since early Dec. The broader Topix dropped -1.6%.
In Hong Kong, the Hang Seng lost -0.4%, while the Hang Seng China Enterprises Index was down -0.6%. In China, the Shanghai Composite rose +0.3% following yesterday’s +1.5% jump.
Elsewhere, Australia’s S&P/ASX 200 Index fell -0.5%, while South Korea’s Kospi index also fell -0.5%.
In Europe, indices are trading lower as markets fret ahead of today’s ECB minutes of the latest policy meeting (07:30am EST). Banking stocks are weighing on Eurostoxx 600, while commodity names are providing some support to the FTSE 100.
U.S stocks are set to open in the red (-0.1%).
Indices: Stoxx50 -0.3% at 3,460, FTSE -0.6% at 7,288, DAX -0.5% at 12,162, CAC-40 -0.2% at 5,082, IBEX-35 -0.1% at 10,396, FTSE MIB -0.5% at 20,144, SMI -0.5% at 8,600, S&P 500 Futures -0.1%
3. Oil glut worries has bulls backing off, gold lower
U.S crude inventory data temporarily pressured global prices yesterday afternoon when the U.S Energy Information Administration (EIA) against an expected drop of -400k barrels reported a surprise jump of +1.6m barrels. It was very much in contrast to Tuesday’s API’s -1.8m drawdown.
However, because of the U.S glut issues, domestic crude exports have risen to a record +1.1m bpd. Most cargoes are going to Asia, where there are early signs of a “tightening” market due to efforts led by the OPEC cut in production. Technically, the global picture is more important (than just the U.S.) and stocks are being drawn, supporting prices.
Crude prices are on track for a weekly gain of around +3%. Ahead of the U.S open, Brent crude futures are up +6c at +$54.42 a barrel, U.S West Texas Intermediate (WTI) crude futures are up +1c at +$51.16 a barrel.
Gold has edged lower (-0.1% to $1,253.21 per ounce), pressured by a slightly firmer dollar and on profit taking after bullion’s recent challenge to the upside. Investors are waiting for tomorrow’s non-farm payroll (NFP) before fully committing to the next leg.
4. Fixed Income tries to decipher Fed’s actions
U.S yields have ticked up a tad after yesterday’s release of the Fed minutes as officials signal they will start paring back its massive balance. Any signal from the Fed to start ‘trimming’ could drive investors to sell Treasury bonds more aggressively and push yields substantially higher and make the dollar more attractive. The 10-year yield is +2.380% vs. +2.361% before the minutes.
Note: The effect could be moderate if the Fed takes a slow approach, which is to slowly taper its reinvestments without outright sales of Treasury holdings.
Yields on 10-year German Bunds are under pressure this morning, briefly touching an intraday low of +0.241%, on ECB Draghi’s speech. He noted that there is “scant evidence” that inflation will be durable and will stabilize at just under +2% – one of the central bank’s four criteria of a “sustained adjustment.”
Note: With the odd’s now stacking up against Marine Le Pen winning the French Presidential election, fixed income traders are focusing more on Italian debt since Beppe Grillo, founder of Italy’s Eurosceptic Five Star Movement, has a large lead in opinion polls as an Italian general election looms within 12-months.
5. Draghi ‘dovish,’ China data weaker
Draghi dampened any speculation of any imminent change in ECB’s policy stance. The ECB President reiterated that monetary policy stance remains appropriate; needed to see more inflation confidence before winding down the bank’s massive monetary stimulus. Currently, the markets are betting that the ECB will start to increase rates early in 2018, before it ends its bond-purchase program.
In China overnight, the Caixin Services and Composite PMI’s hit a six-month low (52.2 vs. 52.6 prior) with both manufacturers and service providers noting slower expansions in output.
Digging deeper, there is evidence of weaker growth in composite new-orders, weakest expansion of employment for this year and slowing input price inflation.
The Hong Kong composite PMI (49.9 vs. 49.6 prior) remained in contraction for a third-consecutive month, though it hit slightly higher levels thanks to first growth in output in two-years and another increase in total input costs during March.
Expectations for output over the next 12-months remains subdued amid economic downturn, political uncertainty, and higher housing rental costs.