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Global Markets Rebound To End Volatile Week, As Trump Rout Fades

DATE POSTED:May 19, 2017

Two days after the biggest rout in US stocks in 8 months, and one day after Brazil's stock market was halted due to a circuit breaker, wiping out out 8.8% of its market cap, traders are eager to put it all in the rearview mirror and in a quiet session on the last day of the week - there have been no "anonymously sourced Russian blockbusters" overnight by either the NYT or WaPo - S&P futures are set for a green open, up 0.2%, in line with Asian and European markets, all looking to close the week on a positive note.

And what a week it has been: the most eventful week of 2017 for markets started with stocks at record high but then saw one of the sharpest cross-asset routs in years. Yet despite early bullish sentiment, jitters have persisted, leaving safe-haven gold headed higher again for its best week since April and the dollar back on the slide after falling to its lowest level since Trump's U.S election victory in November.

"The frustrating element is that we are now at the mercy of equity markets," said Nick Parsons, global head of FX strategy at National Australia Bank's. "We can be pretty confident that 10 points on or off of the S&P 500 is a big figure on or off of dollar/yen," he added, saying the only thing likely to break the link would be a confident-sounding Federal Reserve at its next meeting.

One catalyst for today's return of optimism is crude oil, with Brent rising above $53, and WTI back over $50 for the first time since late April, headed for a second weekly gain on growing optimism grows that OPEC and other nations will extend output cuts at exporter group’s meeting in Vienna next week, news which has been priced in several dozen times in the price anyway, but that never stopped it from being price in again.  “Russia and OPEC are talking about extending cuts to the end of March and it’s widely expected there’ll be an extension,” ING commodity strategist Warren Patterson says: “If there are longer or deeper cuts then there could be further upside”

The gradual return of risk appetite on Friday also saw investors switch from highly rated U.S. Treasuries and European government bonds into higher-yielding Italian and Portuguese debt. Like the dollar, the U.S. yield curve has slumped back to levels not seen since Trump's election, and the probability given by markets of the Fed raising rates next month has tumbled to below 60 percent from over 90 percent last week.

"Everything has turned upside down - European political risks have faded, the economy is looking strong, while in the U.S. everybody is worried," said DZ Bank strategist Daniel Lenz, quoted by Reuters.

Asian stocks rose, with the MSCI Asia Pacific Index up less than 0.1%, with more stocks advancing than declining. Japan’s Topix index climbed 0.3 percent, after sliding 1.3 percent on Thursday. The gauge lost 1.3 percent for the week. The Hang Seng Index rose 0.2% and the Shanghai Composite was little changed.

European stocks pared their worst week since November, rising in quiet trading. The Stoxx Europe 600 Index rose 0.6 percent as of 10:56 a.m. in London, paring its weekly loss to 1.1 percent.

S&P 500 futures were up 0.3 percent. The benchmark index rose 0.4 percent on Thursday after plunging 1.8 percent in the previous session, its worst day since Sept. 9.  Brazil’s Ibovespa Index tumbled 8.8 percent on Thursday, the most since October 2008, as political crisis returned to the country after last year’s impeachment process. A Japan-traded ETF tracking Brazil’s Ibovespa Index dropped 6.5 percent after an even larger decline on Thursday, closing at the lowest level of the year.

As has been the case for much of the week, the lack of any dramatic Trump-linked news resulted in the global mini relief rally. As Bloomberg confirms, market volatility eased after Trump’s administration sought to move past controversies surrounding Russia that have threatened to ensnare its plans for tax cuts and infrastructure spending.  “Following the initial excitement about the chaotic situation in the White House market participants seem to have calmed down again,” analysts at Commerzbank AG including Thu Lan Nguyen said in a note to clients.

But while Trump may have briefly faded from the spotlight, especially with his first international trip on Friday afternoon, the sudden and unexpected Brazilian political crisis has added a fresh layer of worries for investors, for whom it served as a vivid example of how quickly the best performing emerging market can become the worst.

President Michel Temer has defied calls for him to step down, saying a Supreme Court probe will debunk allegations he participated in a cover-up. Meanwhile, geopolitics remained in the spotlight, amid reports that the U.S. Navy is moving a second aircraft carrier to the Korean peninsula and that Chinese jets intercepted a U.S. Air Force plane.

Elsewhere, Jakarta stocks soared as much as 3 percent to a record after S&P upgraded Indonesia to investment grade, revising its credit rating from BB+ to BBB-, stable outlook, due to better fiscal metrics.

In rates, the yield on 10-year Treasuries climbed two basis points to 2.25 percent. It is down eight basis points this week. Benchmark yields in Germany rose two basis points, while those in the U.K. added four basis points.

West Texas crude rose 1.1 percent to $49.87, poised for a weekly increase of 4.2 percent, on optimism OPEC will reaffirm efforts to drain a global glut at their meeting in Vienna on May 25. Copper rose 0.7 percent to $5,616 a ton, leading most industrial metals higher as sentiment steadied after strong U.S. jobs data. Soybeans were stable after the biggest one-day drop since August as farmers in Brazil rushed to sell at a “once in a decade” pace as a deepening political crisis sent the nation’s currency tumbling. The commodity was 0.5 percent higher at $9.495 a bushel.

Gold was set for the biggest weekly gain in more than a month as
investors weigh political risks in U.S. Bullion for immediate delivery
climbed 0.4 percent to $1,252.37 an ounce, on track for a 2 percent
advance this week.

It’s worth noting that President Trump will travel to Saudi Arabia, arriving tomorrow and following that will visit Israel and the Vatican on Monday and Wednesday, before moving on to the NATO Summit and G7 Summit later in the week. This is the start of an eight-day foreign trip which is also his first outside the US as the President so it’s likely that his every word and move is closely watched.

* * *

Bulletin Headline Summary from RanSquawk

  • A modest risk appetite in Europe thus far in what has been a quiet session as markets digest the fallout from yesterday's Comey news
  • After a steady start, FX markets have livened up a little, with an improved risk mood seeing the JPY on the back foot across the board
  • Looking ahead, highlights include Canadian retail sales, ECB's Praet, Coeure, Constancio and Fed's Bullard

Global Market Snapshot

  • S&P 500 futures up 0.2% to 2,369
  • STOXX Europe 600 up 0.4% to 390.88
  • MXAP up 0.09% to 150.73
  • MXAPJ up 0.2% to 491.45
  • Nikkei up 0.2% to 19,590.76
  • Topix up 0.3% to 1,559.73
  • Hang Seng Index up 0.2% to 25,174.87
  • Shanghai Composite up 0.02% to 3,090.63
  • Sensex up 0.08% to 30,458.19
  • Australia S&P/ASX 200 down 0.2% to 5,727.41
  • Kospi up 0.07% to 2,288.48
  • German 10Y yield rose 1.5 bps to 0.358%
  • Euro up 0.4% to 1.1147 per US$
  • Brent Futures up 1.2% to $53.15/bbl
  • Italian 10Y yield fell 0.6 bps to 1.855%
  • Spanish 10Y yield fell 0.7 bps to 1.56%
  • Brent Futures up 1.2% to $53.15/bbl
  • Gold spot up 0.2% to $1,249.22
  • U.S. Dollar Index down 0.3% to 97.55

Top Overnight News from Bloomberg

  • Trump On Tour: Trump Travels Abroad With Unwanted Baggage of Troubles at Home
  • Cooperman Agrees to Lighter SEC Deal; Investors Digest Brazilian Audio Tapes
  • Broadcom Ltd. and a group led by KKR & Co. are emerging as the two leading bidders for Toshiba Corp.’s semiconductor unit as of Friday’s deadline for second-round offers
  • Brazilian markets sink as President Michael Temer vows to stand his ground amid calls for his ouster
  • Billionaire hedge fund manager Leon Cooperman paid $4.9m to put an end to the SEC’s insider-trading allegations
  • Treasury Secretary Steven Mnuchin said breaking up the biggest banks would be a “huge mistake,” easing concerns that the Trump administration plans a major revamp of Wall Street
  • S&P Global Ratings raised Indonesia’s credit rating to investment grade, bringing it in line with the other two main rating companies and paving the way for more fund inflows into Southeast Asia’s largest economy
  • Uber Threatens to Fire Engineer at Center of Waymo Lawsuit
  • Americans Die When They Have to Work at Being Healthy
  • Ireland Says Intensively Working to Recover Apple Money
  • Saudis Said to Forge $6b Lockheed Deal for Littoral Shipss
  • Gap’s Old Navy Chain Helping Fuel Rebound After Long Slump
  • Salesforce Sees Increasing Demand on Expanded Cloud Lineup
  • Iron Risks Plunge to $40s as Marex Sounds Second-Half Alarm
  • Total U.S. Video Game Sales Rose 10% Y/y in April to $636m: NPD
  • Freeport Union Plans to Extend Grasberg Strike Beyond May 30
  • Shanghai Disneyland Meets 10m Visitors Expectation Since Opening
  • NRG Panel Said to Recommend Southeast Asset Sale: SparkSpread
  • Blackstone Said Likely to Buy Assets of India’s UIOF: TOI
  • MGM Resorts Decides Against Investing in Philippines: BWorld
  • Johnson & Johnson Unit Plans $500m Drug R&D in China: Daily
  • Vistra Said to Have Made Takeover Approach to Dynegy: WSJ

Asia equity markets were mixed after the region somewhat shrugged off the positive lead from Wall St where stocks rebounded from their biggest loss in 8 months, as a lack of drivers kept price action relatively muted ahead of the weekend. ASX 200 (-0.2%) failed to maintain opening gains with underperformance in financials and miners weighing on the index, while Nikkei 225 (+0.3%) was choppy alongside JPY price action. Indian markets were the biggest gainers after officials kept the majority of items under the Goods and Services Tax scheme below the 18% tax rate, while Shanghai Comp. (flat) and Hang Seng (+0.3%) were indecisive after the PBoC refrained from operations today, although its efforts for the week still amounted to a net liquidity injection of CNY 160Bn vs. Prey. CNY 120Bn drain. 10yr JGBs were choppy as an indecisive risk tone was counterbalanced by a reserved Rinban announcement by the BoJ, while the curve slightly flattened amid outperformance in the super-long end.

Top Asian News

  • From Hair Oil to Cement, India Revamps Taxes: Winners and Losers
  • After Shutting Asia Hedge Fund, Ex-Goldman Trader Seeks Answers
  • S&P Raises Indonesia One Notch to Investment Grade
  • Rupiah Advances as S&P Raises Indonesia to Investment Grade
  • HKMA Chief Executive Norman Chan to Meet Press at 5:15pm HKT
  • Buyer’s Regret Spurs Japan Utility to Mull Swapping U.S. LNG
  • Largest Indian Bank’s Profit Surges as Loan Provisions Fall

European bourses gaining this morning, however the move to the upside is somewhat contained with the Eurostoxx 50 up a marginal 0.2% as material names lead the way in Europe. In stock specific news, Hikma Pharmaceuticals underperform in the FTSE 100, after they announced that they have cut their FY revenue guidance. Elsewhere, crude futures took another leg higher following source reports that the OPEC panel are considering a scenario in which deepening the current output cut may take place, as opposed to just an extension to the current agreement. In credit markets, yields have been ticking up this morning following the modest risk on sentiment, in turn the German curve has shown a flattening bias. While peripheral debt is slightly tighter to the German benchmark with markets seemingly choosing to look through this weekend's primary vote for the Spanish socialist party.

Top European News

  • STOXX Europe 600 up 0.4% to 390.88
  • German 10Y yield rose 1.5 bps to 0.358%
  • Euro up 0.4% to 1.1147 per US$
  • Brent Futures up 1.2% to $53.15/bbl
  • Italian 10Y yield fell 0.6 bps to 1.855%
  • Spanish 10Y yield fell 0.7 bps to 1.56%

In currencies, the Bloomberg Dollar Spot Index fell 0.3 percent, erasing Thursday’s increase. The gauge is 1.3 percent lower for the week. The euro strengthened 0.6 percent to $1.1164, bringing its gain this week to 2.1 percent, the most since the five days ending June 3. The British pound stood 0.6 percent higher at $1.3011. The yen was little changed at 111.45 per dollar after falling 0.6 percent on Thursday. The currency is up 1.8 percent for the week, its strongest performance in a month. Emerging-market currencies rebounded. The South African rand climbed 1 percent after tumbling 2.6 percent over the previous two sessions. Russia’s ruble strengthened 1 percent as oil prices rose. After a steady start, FX markets have livened up a little, with an improved risk mood seeing the JPY on the back foot across the board. Late yesterday social media reported evidence of Comey stating that there was no interference in the investigations in question. This saw the USD snap higher across the board, but has been reversed in all the major pairings other than USD/JPY. Sideways trade here continues to find resistance ahead of 112.00. EURUSD is back on the trail for higher levels, as a longer term perspective here sees the market keen to get in on dips. Gains have been outpaced to a very modest degree by Cable, which has now shrugged off the sharp hit suffered in NY, and is now trading above levels when targeted at the time, moving cautiously through the low 1.3000's. EUR/GBP is marginally off better levels, but continues to struggle ahead of 0.8600.

In commodities, West Texas crude rose 1.1 percent to $49.87, poised for a weekly increase of 4.2 percent, on optimism OPEC will reaffirm efforts to drain a global glut at their meeting in Vienna on May 25. Gold was set for the biggest weekly gain in more than a month as investors weigh political risks in U.S. Bullion for immediate delivery climbed 0.4 percent to $1,252.37 an ounce, on track for a 2 percent advance this week. Copper rose 0.7 percent to $5,616 a ton, leading most industrial metals higher as sentiment steadied after strong U.S. jobs data. Commodity markets have recovered with an easing in the risk mood all round, partly down to some Trump friendly news — not often we hear that lately! Oil prices higher as we look to the OPEC meeting next week, but with the OPEC panel meeting with non-members today, the prospect of further 'extension deal' news has seen WTI putting in initial tests on USD50.00, but somewhat unconvincingly as yet. Brent is through USD53.00. Elsewhere, metals are higher across the board, with Copper gains back to USD2.55, outpaced by those seen in Zinc and Lead. As a result, Gold has trickled lower, in line with Silver, but we are still very much inside well worn territory, with little likelihood of retesting the stronger support levels seen towards USD1220.00 or so.

Looking at today’s calendar, with a distinct lack of macro data due out it’s likely that politics continue to remain the number one focus for markets again. The only releases due out are in Europe with PPI in  Germany, which came in stronger than expected at 3.4% Y/Y, vs Exp. 3.2%, and up from 3.1%. There is some ECB-speak with both Praet and Constancio scheduled at a conference in Brussels today. Over at the Fed we’re due to hear from Bullard and Williams. As a reminder President Trump will visit Saudi Arabia over the weekend, so  it’ll be worth keeping an eye on anything interesting to come from that.

US Event Calendar

  • Nothing major scheduled
  • 9:15am: Fed’s Bullard to Speak about U.S. Economy and Monetary Policy
  • 1:40pm: Fed’s Williams Speaks to High School in San Francisco

DB's Jim Reid concludes the overnight wrap

This week political risk has caught up on the market but it's still unclear whether it has any legs. Since the back end of last year we've felt that 2017 would be a reasonable year for risk given the baseline view on growth but we did expect volatility spikes and occasional sell-offs. However despite a large spike in VStoxx before the French Election we've been surprised how little it's filtered through into risk assets on even a temporary measure. A big part of this view was that political risk remained very elevated around the world. While we continue to think Trump will still be able to push through a decent sized fiscal package we always felt there would be enough doubt about his administrations' ability to pass through reforms to do so to encourage volatility.

Whether this latest Trump bout of volatility lasts depends on what Mr Comey really has on the President but there wasn't much new news to report on the story yesterday which helped US equities to recover. The S&P 500 closed +0.37% with the vast majority of sectors climbing while the Dow (+0.27%), Nasdaq (+0.73%) and Russell 2000 (+0.38%) bourses were also firmer. It’s worth noting that for all the shockwaves going through markets this week the S&P 500 is only 1.67% off the all time intraday highs made on Tuesday and only down -1.05% this week. The VIX also edged down 6% yesterday to close at 14.66. Putting it in perspective that level is less than 3pts above the YTD average which as we know is one of the lowest of all time. Credit also pared back about 30% of Wednesday’s move wider yesterday with CDX IG finishing just over 1bp tighter. There was a similar reversal for safe havens with Gold (-1.13%) and the Yen (-0.60%) weaker, and 10y Treasury yields closing about 5bps off the day’s low yield at 2.229%.

Yesterday there was a general feeling that the appointment of Mueller as the special counsel into the Russia-US Election investigation was a low vol-friendly outcome in the short term as it’s expected that it will take some time for the investigation to get underway with some suggestions that it won’t start until July. Mr Trump welcomed the appointment but also called the investigation a “witch hunt” and when Trump was also pressed at a news conference as to whether or not he had put pressure on Comey he replied – unsurprisingly – “no, no next question”. In terms of the next steps, as we know the Senate and House Oversight Committee has requested for Comey to testify in both open and closed-door hearings but as of yet we are still to hear of this being confirmed. In fact the NY Times quoted the House Oversight Committee chairman Jason Chaffetz as saying that “since he’s (Comey) left government, the old telephone number that I had for him, I haven’t been able to get through”. The same article said that Chaffetz hoped Comey would appear before the House Oversight Committee next Wednesday.

In the mean time, it’s worth noting that President Trump will travel to Saudi Arabia, arriving tomorrow and following that will visit Israel and the Vatican on Monday and Wednesday, before moving on to the NATO Summit and G7 Summit later in the week. This is the start of an eight-day foreign trip which is also his first outside the US as the President so it’s likely that his every word and move is closely watched.

Staying in the US, yesterday we also heard from US Treasury Secretary Steven Mnuchin when he spoke to the Senate Banking Committee. He said that no decision has been made on any potential ultra-long bond issuance and also downplayed the idea of a national sales tax. Mnuchin also said that breaking up the biggest US banks would be a “huge mistake” and that doing so “would have a very significant” impact on markets.

There was another big story in markets yesterday and it was also of a political nature, this time in Brazil. It centred around what we reported in yesterday’s EMR concerning the alleged approval of hush money payments by President Temer to silence a former coalition ally. Temer has said, adamantly, that he will not resign in the wake of this allegation and is demanding a full investigation. The subsequent moves in Brazilian assets were eye catching though. The Ibovespa closed -8.80% (although was down as much as -10% at one stage triggering a circuit breaker) which was the biggest fall since 2008. The Brazilian Real is also about -7.75% weaker since the news broke (and saw its biggest slide since 1999) versus the Greenback. Bonds were hammered too with 10y hard currency bond yields 55bps higher. Vol surged with the CBOE Brazil ETF Volatility Index up 38% and by the most since the series started in 2011. Refreshing our screens this morning it’s been a fairly mixed start in Asia but moves have been notably modest for the most part with no real new developments to highlight. The Nikkei (-0.16%) and ASX (-0.29%) are both down, while the Hang Seng (+0.24%), Kospi (+0.085) and Shanghai Comp (+0.04%) are a touch higher.  US equity futures are flat along with Treasuries and Gold.

Moving on. Away from the obvious political developments yesterday, the other point of interest for markets was some of the musings out of the ECB. In yesterday’s minutes from the April meeting policy makers said that new staff projections and data will mean the ECB is “in a better position to take stock and reassess the sustainability of the recovery and outlook for inflation” at the next policy meeting. The minutes also revealed that “some members” considered risks to growth could be now characterized as “broadly balanced” while “other members maintained that downside risks to growth still prevailed”. Officials also felt that communication “should be adjusted in a very gradual and cautious manner as, at the current juncture, monetary and financial conditions were particularly sensitive to changes”.

This guidance on communication is consistent with comments that we have heard from Praet and Constancio recently but it was interesting to see Benoit Coeure say yesterday in an interview with Reuters that the ECB runs the risk of changing policy signals too slowly, specifically saying that the risk is that “communication deviates from economic reality, which could cause a more forceful adjustment down the road”.

In terms of data yesterday, in the UK we learned that retail sales excluding fuel jumped a better than expected +2.0% mom in April (vs. +1.0% expected) to push the annual rate up to +4.5% yoy. Sterling traded as high as $1.305 following that data (+0.60%) before an unexplained crash saw it plummet a full cent to $1.290 at one stage in a matter of minutes. The suggestion was that it was algo driven. In France we saw the unemployment rate dip to 9.6% in Q1 (from 10.0%). In the afternoon in the US the main release of note was the Philly Fed manufacturing survey which surged 16.8pts at the headline to 38.8 in May (slightly below the February high). The details did however reveal some weakening in both the new orders and employment components though. Meanwhile the conference board’s leading index rose +0.3% mom in April and initial jobless claim edged down another 4k to 232k. Away from that the Fed’s Mester also spoke but didn’t really move the dial, playing down the impact of recent volatility on her economic outlook and the read through for the Fed.

Glancing at today’s calendar, with a distinct lack of macro data due out it’s likely that politics continue to remain the number one focus for markets again. The only releases due out are in Europe with PPI in  Germany, the UK’s industrial trends survey for May and the flash consumer confidence reading for the Euro area, also for May. There is some ECB-speak with both Praet and Constancio scheduled at a conference in Brussels today. Over at the Fed we’re due to hear from Bullard (at 2.15pm BST) and Williams (at 6.40pm BST). Before we wrap up, a reminder that President Trump will visit Saudi Arabia over the weekend, so  it’ll be worth keeping an eye on anything interesting to come from that. Also noteworthy is an internal leadership election for Spain’s socialist party where the chatter is that a win for former leader Pedro  Sanchez could lead the socialists into greater open conflict with PM Rajoy’s government.