Overnight, global stock indexes have declined along with U.S. futures, while the ‘big’ dollar has rallied a tad as U.S. Treasury yields back up towards their four-year highs.
No central bank meetings are scheduled for this week although minutes from the latest FOMC (Wed) and the ECB meetings (Thurs.) will be published.
Note: Given the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved.
In the U.K., there will be two major releases – the labor market report (Wed) and the second estimate of Q4 GDP (Thurs.) Elsewhere, Canada will post December retail sales (Thurs.) and consumer prices for January (Fri).
With little to no economic U.S. data on tap, the markets focus now turns to the U.S. Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week).
The U.S. debt sales should provide a better market understanding of how steep yields can back up in the short-term.
Note: Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S. Monetary Policy Forum in NY.
1. Global stocks see ‘red’
Asian equities took their cue from Monday’s European bourse direction as U.S. stocks and Treasuries took a break for the Presidents’ Day holiday.
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In Japan, the Nikkei fell -1%, surrendering some of its early-week rise thanks to weakness in its electronics and banking sectors. Selling came despite a slip in the yen outright (¥107.10). The Topix fell -0.7%.
Down-under, the Aussie’s S&P/ASX 200 ended flat. In S. Korea, the Kospi fell -1.1%, dragged lower by index heavyweight Samsung Electronics, which dropped another -2% after falling -1.3% on Monday.
In Hong Kong, the Hang Seng Index pared an early slide, down -0.2%, on its first full day of trading in nearly a week. The main benchmark in Singapore fell -0.2%; while Indian’s Sensex was last up +0.4%.
Note: With Chinese and Taiwanese markets still closed for the Lunar New Year holiday, investors should be cautioned against reading too much into recent price action due to thin volumes.
In Europe, indices trade mostly higher across the board following the weakness seen yesterday, with the FTSE under performing being weighed on by HSBC and BHP Billiton following results.
U.S. stocks are set to open in the ‘red’ (-0.8%).
Indices: Stoxx600 flat at 378.3, FTSE -0.5% at 7213, DAX -0.1% at 12373, CAC-40 flat at 5257, IBEX-35 +0.2% at 9829, FTSE MIB +0.1% at 22582 , SMI flat at 8907, S&P 500 Futures -0.8%
2. Oil markets mixed, Brent and WTI move in opposite directions
U.S. crude prices are still carrying momentum from Friday’s gains due to yesterday’s President Day’s holiday while international Brent prices have eased.
U.S. West Texas Intermediate (WTI) crude futures are at +$62.31 a barrel, up +63c, or +1% from Friday’s close. Ongoing supply reductions from Canada to the U.S. due to pipeline reductions are supporting WTI prices.
Brent crude has eased on the back of a dip in Asian stocks and a stronger dollar. Brent crude futures are at +$65.54 per barrel, down -13c, or -0.2% from yesterday’s close.
Note: Oil markets remain well supported due to supply restraint by the OPEC. Yesterday, OPEC Secretary-General Barkindo said the organization registered a +133% compliance with agreed output reduction targets in January.
However, soaring U.S. production is threatening to erode OPEC’s efforts. Last week, the amount of U.S. oilrigs drilling for new production rose for a fourth consecutive week to +798.
Ahead of the U.S. open, gold prices have slid for a third consecutive session as the ‘mighty’ buck rebounds from its three-year lows, while the market waits Wednesday’s Fed minutes for clues on the outlook for U.S. interest rates. Spot gold is down -0.2% at +$1,343.22 an ounce.
3. Sovereign yields trade atop record highs
This is a huge week for bond investors, as the U.S. Treasury prepares to sell +$258B worth of new debt, starting with today’s record sale of +$151B of three- and six- month bills. These debt sales should provide a better understanding of how steep U.S. yields could back up in the short-term.
After building up a record “short” position in U.S. 2-year futures and historically large short positions across other maturities, higher volatility this month has seen a sharp reduction in these record shorts over the past week.
The biggest reversal was in two-year product – net short positions were slashed by +76,772 contracts to -133,986.
The U.S. 10-year is now at +2.92% ahead of the first trading day this week after yesterday’s holiday.
In Japan, BoJ Governor Kuroda did not discuss monetary policy during an appearance in parliament. Speculation has been swirling about the possibility the BoJ might scale back its stimulus since they reduced their purchases of JGB’s last month.
Down-under, the Reserve Bank of Australia (RBA) reiterated in its minutes of this month’s policy meeting that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase.
4. Dollar gains against most G7 pairs
Ahead of the U.S. open, the U.S. dollar has seen some steady gains outright versus G7 currency pairs, aside from sterling. The gains are reflective of U.S. yields pushing a tad higher.
Sterling has jumped from its overnight low of £1.3934, to again trade north of the psychological £1.4000 handle on news that the European Parliament is putting a document together outlining its desire for an “association agreement” with post-Brexit Britain. This is a break from the position of the chief E.U. negotiator Barnier and could allow Britain to retain “privileged” access to the single market.
5. German ZEW Survey moves off from record highs
Germany’s ZEW Indicator of Economic Sentiment recorded a decrease of 2.6 points this month and currently stands at 17.8 points.
The indicator remains slightly below the long-term average of 23.7 points. The assessment of the current economic situation in Germany decreased by 2.9 points, with the corresponding indicator currently standing at 92.3 points.
Comments from ZEW President Wambach:
“The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months. Economic growth in Germany is substantially driven by the very good development of both the global economy and private consumption. Inflation expectations for Germany and the Eurozone have also started to increase.”