Dollar Diddles for the Middle as Stocks see Red

Tuesday January 30: Five things the markets are talking about

Are surging sovereign interest rates testing individual’s appetite for equities at elevated valuations or is it just another buying opportunity on dips?

European equities are currently following their Asian counterparts lower, while U.S stock futures retreat as the selloff in Treasuries eases and investors books some hard earned profits on this strong start to this New Year.

The ‘mighty’ dollar has again pared back some of this weeks early gains, while oil prices drop for a second consecutive day.

Tomorrow, Fed policy makers gather for Chair Janet Yellen’s final meeting on interest rates before her term ends on Feb 3.

Later this evening, President Trump delivers his first State of the Union address (9 pm EDT) – he is expected to build momentum for legislation on infrastructure and immigration.

It’s also jobs week stateside and on Friday U.S employers are expected to have added more jobs in January than in December (+184k vs. +148k).

1. Global equities see red

In Japan, the Nikkei share average dropped to a one-month low overnight, led by weakness in tech suppliers, while mining shares underperformed on lower oil prices. The Nikkei ended -1.4% lower, while the broader Topix fell -1.2%.

Down-under, broad selling across the region pushed Aussie stocks into negative territory for the month of January with one trading day left. The S&P/ASX 200 fell -0.9%, led lower by commodity names. In S. Korea, after three-straight record closing highs and five gains overall, the Kospi fell -1.2% and inline with the region’s wide declines.

In Hong Kong, the Hang Seng posted its biggest one-day loss in six-weeks, as yesterday’s Wall Street weakness prompted investors to book profits. At close of trade, the Hang Seng index was down -1.09%, while the Hang Seng China Enterprises index fell -1.98%.

In China, stocks extended their losses overnight, led by real estate and banking firms. At the close, the Shanghai Composite index was down -0.99%, while the blue-chip CSI300 index was down -1.07%.

In Europe, regional European indices are trading lower; following the lead from the U.S, but currently off the session lows.

U.S stocks are set to open in the red (-0.3%).

Indices: Stoxx600 -1.3% at 398.53, FTSE -0.4% at 7,639, DAX -0.2% at 13,299, CAC-40 -0.1% at 5,516; IBEX-35 -0.7% at 10,481, FTSE MIB -0.3% at 23,732, SMI +0.3% at 9,482, S&P 500 Futures -0.3%

2. Oil under pressure from a strong dollar, gold lower

Oil prices remain closely tethered to the dollar in an inverse relationship, and the greenback’s gains this week, albeit off their highs vs. G10 currencies, is helping push crude oil futures lower.

Brent crude futures are down -20c to +$69.26 a barrel, after having touched a session low of +$68.75, while U.S West Texas Intermediate futures have dropped -51c to +$65.05 a barrel.

U.S rig-count data last Friday showed a big jump in U.S oil-drilling activity – which could lead to even more output and supply – is also weighing on prices.

Other factors that are expected to sway oil markets this week include tomorrow’s FOMC decision, oil earnings from major oil companies and refiners, and weekly inventory reports.

Ahead of the U.S open, gold prices are under pressure for a second consecutive session, hitting its lowest in a week, as the U.S dollar strengthened a tad and U.S bond yields remain elevated. Spot gold is down -0.4% at +$1,335.49 per ounce, after a -0.7% drop in yesterday’s session.

3. Sovereign yields remain elevated

The recent backup in the U.S 10-year Treasury note has prompted some dealers to declare an end to the bull market in bonds. However, the longest-dated Treasury’s could suggest those calls may be premature.

With the yield on the benchmark U.S 10’s rising above +2.70% yesterday, above its 2017 peak, the U.S long-bond, the 30-year yield, is at +2.949% – still well below its 2017 high of +3.194%.

The back up in the U.S belly reflects bets that recent U.S tax cuts will increase the pace of growth and inflation, prompting the Fed to hike interest at a faster pace. Looking at the U.S 30-year bond yield suggests that the longer-term outlook may not be quite so rosy. Owners of this duration indicate that they are not convinced that a prolonged surge in U.S growth and inflation lies ahead.

Note: The Fed’s ‘dot plot’ forecasts three rate increases for 2018.

The odd’s for a Fed hike in March – the first meeting this year that has a press conference and fresh projections outlook, is around +70%.

The yield on U.S 10-year Treasuries fell -1 bps to +2.69%. In Germany, the 10-year Bund yield has declined -2 bps to +0.67%, the first retreat in a week, while in the U.K, the 10-year Gilt yield declined -1 bps to +1.441% and the biggest fall in a fortnight.

4. ‘Big’ dollars mixed reaction

Ahead of the U.S open, the USD’s price action is trading somewhat mixed. Initially the USD was firmer against the EUR (€1.2428) and GBP (£1.4083) as the session began in Europe aided by higher Treasury yields.

However, the rise in foreign sovereign yields yesterday has triggered a risk-off mentality and is supporting safe-haven currencies like JPY (¥108.55) and CHF ($0.9335).

Overnight, EUR/USD tested an intraday low €1.2335 before recovering, aided by various German State CPI data and stronger Euro GDP data (see below). Also supporting the ‘single’ unit is the German SPD and Merkel’s party is said to have reached an agreement on refugee family’s pact – a major hurdle for forming a German government.

GBP was softer in this morning’s session with the weakness attributed to an internal U.K government Brexit analysis that concluded that the U.K would be worse off outside the E.U under every scenario modeled. The pound tested £1.3980 before finding some support.

Note: U.K ‘s PM Theresa May is said to be under growing pressure from the party’s donors to quit as soon as the outline of trade deal is negotiated with the E.U in the autumn.

5. Euro, French and Spanish GDP (Q4)

Euro data this morning shows that Euro-zone GDP growth continued at a healthy pace in Q4. The so-called preliminary flash estimate of GDP showed that the economy expanded by +0.6% q/q, in line with the consensus expectation, but slightly slower than the +0.7% recorded in Q4, 2017.

Digging deeper, the breakdown for France and Spain indicates that the French economy’s healthy expansion in Q4 rounded off a strong year, while tensions in Catalonia had little impact on Spanish growth.

The +0.6% increase in French GDP was slightly sharper than the consensus forecast of +0.5%, leading to an annual GDP growth of +1.9% for 2017.

Note: That’s up from +1.1% in 2016 and marks the strongest year in six-years.

In France growth was broad-based, with consumer spending growing by +0.3% q/q, while investment growth accelerated, from +0.9% to +1.1%.

In Spain, GDP expanded by +0.7%, q/q in Q4. This was only marginally slower than the +0.8% recorded in Q3, suggesting that tensions in Catalonia had minimal impact.

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