Silver as an investment

Global Stocks Dip; Bond Yields, Dollar Rise After Yellen’s Rate Guidance; All Eyes On Draghi

After yesterday’s speech by Janet Yellen which signaled a path of steady interest rate increases and was perceived as hawkish, the dollar rebounded, Asian shares slipped and government bond yields jumped to multi-week highs on Thursday.

European, Asian stocks and US equity futures all decline together with commodity metals while oil rises on the API reported drop in crude inventories. The euro rebounded as investors look to Mario Draghi to address quickening inflation that make his stimulative policies look increasingly out of sync, even if the market is confident the ECB won’t make any changes to its policy today. That said the ECB may struggle to downplay the recent spike in Eurozone inflation.

Top news stories include Netflix reporting its biggest quarter ever, Credit Suisse resolving U.S. mortgage probe, France’s Safran buying Zodiac in $10 billion aviation deal.

In markets, the main focus for the past 24 hours has been once again on the fairly large moves across rates and FX, albeit moves which largely ended up being a reversal of the previous day’s price action. 10y Treasury yields closed a shade over 10bps higher yesterday at 2.430% while the USD index rebounded +0.60% and finished higher for the first time in over a week. Those moves were given a late boost by comments from Fed Chair Yellen who said that “it is fair to say the economy is near maximum employment and inflation is moving toward our goal”. She also said that while “it makes sense to gradually reduce the level of monetary policy support” the actual timing of the next Fed rate hike “will depend on how the economy actually evolves over coming months”. So a fairly straight bat approach.

As a result, the dollar gained almost one percent from Thursday’s lows against a basket of currencies, yields climbed in Europe, catching up with Treasuries which sold off yesterday after Fed chair Janet Yellen said the American economy is strong enough to warrant higher interest rates, bringing the ECB’s quantitative easing into sharper relief as policymakers led by Draghi meet today. Stocks fell, led lower by real estate after an indicator of U.K. house prices fell for the first time in five months in December as values slumped in London. 

Yellen’s hawkishness appeared to be wearing off on Thursday, though, as investors, looking for further details on Trump’s plans to boost growth, remained cautious before the President-elect’s inauguration on Friday. As a reminder, Yellen will speak again later on Thursday, after European markets close, about the economic outlook and monetary policy.

The ECB is set to meet as the euro recovered some of the ground it lost overnight, but with no policy changes expected. However, hints of disagreements among the region’s monetary guardians could ruffle markets.

European stocks opened a tad higher with some big moves in single stocks, as Zodiac Aerospace surged following a takeover offer, and Moneysupermarket.com jumped after it reported strong results.

Asian shares edged down 0.2 percent, knocked back by the dollar. Bucking the trend of weaker Asian shares, Japan’s Nikkei stock index ended up 0.9 percent, helped by weaker yen.

“Of all the speakers we’re getting, either from Davos or from less ostentatious spots, the one I’m going to listen to most for now will probably still be Janet Yellen,” Societe Generale’s currency strategist Kit Juckes said cited by Reuters. “As the U.S. economy approaches full employment, as wages rise but inflation rises nearly as quickly, how hawkish the Fed dares to be will determine how much the dollar rises.”

Euro zone government bonds were still moving in the slipstream of Yellen’s speech with benchmark German bond yields spiking to one-month highs after U.S. equivalents rose to their highest since Jan. 9. Yields on 10-year German bunds jumped 3 basis points to 0.38 percent by 9:40 a.m. in London. Treasury yields were steady at 2.43 percent.

As Reuters adds, and as we previewed overnight, earlier in Asia, short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening heading into the Lunar New Year holidays at the end of this month.  “The market is typically short of liquidity ahead of the Lunar New Year,” said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.

Crude oil prices regained some ground lost in the previous session when the dollar strengthened as investors turned their attention to upcoming government data on U.S. inventories. A stronger dollar makes dollar-denominated commodities more expensive for those holding other currencies. U.S. crude added 0.8 percent to $51.50 per barrel, after shedding 2.67% on Wednesday. Brent crude rose 0.7 percent to $54.32 after slipping 2.79%.

Market Snapshot

  • S&P 500 futures down 0.2% to 2263
  • Stoxx 600 down 0.3% to 362
  • FTSE 100 down 0.6% to 7206
  • DAX down 0.1% to 11585
  • German 10Yr yield up 2bps to 0.38%
  • Italian 10Yr yield up 3bps to 1.99%
  • Spanish 10Yr yield up 3bps to 1.48%
  • S&P GSCI Index up 0.2% to 395.9
  • MSCI Asia Pacific down 0.2% to 140
  • Nikkei 225 up 0.9% to 19072
  • Hang Seng down 0.2% to 23050
  • Shanghai Composite down 0.4% to 3101
  • S&P/ASX 200 up 0.2% to 5692
  • US 10-yr yield down less than 1bp to 2.42%
  • Dollar Index up 0.18% to 101.11
  • WTI Crude futures up 0.6% to $51.40
  • Brent Futures up 0.7% to $54.28
  • Gold spot down less than 0.1% to $1,204
  • Silver spot down 0.5% to $16.98

Top Global News

  • Netflix Soars, Esquire Goes Dark as More TV Viewers Move Online: Online video leader beats projections in U.S., foreign markets
  • Credit Suisse Resolves U.S. Mortgage Probe for $5.3 Billion: Bank to pay $2.5 billion fine, $2.8 billion in consumer relief
  • Safran to Buy Zodiac for $10 Billion in All-French Aviation Deal: Struggling seat supplier accepts bid from aero-engine maker
  • Goldman Says Aluminum Poised for Big Gains If China Widens Cuts: China seen widening capacity cuts to aluminum from steel, coal
  • Kremlin Said to Fear Trump Won’t Be a Great Deal After All: Top officials fret furor in U.S. over hacking could hurt thaw
  • Russia Weighs FX Purchases as Strong Ruble Hits Exporters: Russia considers how to cut volatility of real exchange rate
  • Vegemite Heads Back to Australia in $345 Million Bega Deal: Bega Cheese to acquire global trademark rights for Vegemite
  • CSX Jumps on Report Hilal, CP Rail’s Harrison Targeting Company: WSJ reports, citing unidentified people familiar
  • Oclaro Jumps 5.5% After 2Q Preliminary Revenue Tops Estimate
  • Plexus Drops 2.6% Post-Mkt; Sees 2Q Revenue Below Estimates
  • Canadian Pacific Railway 4Q Adj. EPS Misses Est.

Looking at regional markets, Asia stocks traded mixed following a similar lacklustre lead from Wall St, although exporters in Japan have been buoyed by a weaker JPY. This saw the Nikkei 225 (+0.9%)  outperform with the power sector underpinned by TEPCO plans to resume bond issuances for the 1st time since the 2011 Fukushima disaster, while there were also reports that the nuclear regulator passed safety screenings for 2 Kyushu reactors. Elsewhere, ASX 200 (+0.2%) was marginally positive with healthcare outperforming after CSL upgraded its FY net guidance, while Hang Seng (-0.5%) and Shanghai Comp. (-0.4%) had been dampened following a reduced liquidity operation by the PBoC. Finally, 10yr JGBs saw spill-over selling to track T-notes lower amid heightened risk appetite for Japanese stocks, while a discouraging 5yr auction also pressured in which b/c fell from prior and lowest accepted price missed the consensus.

Top Asia News

  • Takata Bidders Said to Favor Japan Bankruptcy; Shares Tumble: Takata says no decision has been made on turnaround plan
  • Asia’s Worst EM Currency Seen Most Resilient in 2017 Survey: Philippine peso is forecast to be the most resilient to external risks this year
  • Toshiba Drops 16 Percent on Reported Writedown Losses: the writedown may exceed 700 billion yen, Kyodo reports
  • Indonesia, Malaysia Hold Rates as Fed Fuels Currency Weakness: Most economists predicted decision by the two central banks
  • China Signals It May Aim Lower on Cleaner-Burning Fuel Target: Natural gas share in total energy mix will be 8.3% to 10%

European equities (Euro Stoxx 50: -0.2%) trade modestly in the red after a choppy start to the session. Earnings are beginning to come into focus, with Royal Mail (-5.2%) the notable laggard in the FTSE 100, with the Co.’s shares at 11 month lows. Similarly, Carrefour (1.3%) are among the worst performers in the CAC in the wake of their pre market earnings. Elsewhere, on a sector specific basis, commodities dictate play with materials seeing upside this morning, while energy names weigh on European indices. Fixed income markets have seen pressure throughout the morning, with Bunds back below the 163 level in tandem with some of the softness seen in T-Notes in the wake of comments from Fed’s Yellen yesterday, who suggested she sees a few hikes a year as the economy continues to recover. Elsewhere, ahead of today’s ECB rate decision and press conference, source reports have emerged that the ECB lacks a deal on how to buy bonds below deposit rate but will do so despite the lack of a deal.

Top European News

  • ECB Said to Lack Agreement on How to Buy Debt Below Deposit Rate: Hold-up linked to complexity of $2.4 trillion QE program
  • Goldman May Cut London Staff by 50% on Brexit, Handelsblatt Says: Firm says no decision has been made, doesn’t recognize figures
  • U.K. House Price Gauge Declines for First Time in Five Months: Home prices in London decrease for 10th consecutive month
  • May Says U.K. Must Accept the Road Ahead Will Be Uncertain

In currencies, much of the FX price action from Fed chair Yellen’s comments late yesterday played out through NY and Asia, while London tried to push USD/JPY towards 115.00, though sellers here have contained the move for now. The limited pullback shows intent on retesting these levels and higher, with higher UST yields recovering well as ‘skew’ moves to the right of the 2-3 rate hike expectation range for this year. Headwinds for EUR/USD though as the market remains wary of any taper talk at today’s ECB meeting. Sellers above 1.0700 will be a little unnerved by the lack of follow through on the downside, as we held off 1.0600 before the latest modest recovery, but this may all change past the press conference later today. The post Brexit speech analysis continues to pull Cable either side of 1.2300 in the meantime, but widespread reports of investment banks transferring some of their operations over to the continent have added some weight, helping to contain the short squeeze in the low 1.2400’s. EUR/GBP is now also in consolidation mode, trading the .8600-.8700 range over the last 24 hours.

In commodities, oil prices have have staged a modest rebound with no major catalyst seen other than longs perhaps unnerved by the US inauguration ahead. The API report suggested an inventory drawdown, but to little effect, offset by a surge in gasoline stocks, as such WTI maintains a USD51.00 handle. Gold has taken a hit after the USD rallied on Fed Chair Yellen’s comments late yesterday alluding to a steeper rate path as she highlighted the dangers of allowing the economy to overheat. Silver is down 1.5% this morning. This does not seem to have done the rest of the commodity complex much harm (the USD rise), with copper more or less flat on the day.

Looking at the day ahead, this morning in Europe there’s little in the way of data which instead clears the path to the aforementioned ECB policy meeting outcome at 7.45am ETwith Draghi due at 8.30am ET. Over in the US the data consists of December housing starts and building permits numbers, initial jobless claims and the Philly Fed business outlook. In addition to the data, the corporate reporting calendar today consists of American Express, IBM and Schlumberger, all after the close. Away from that, keep one eye on the apparent press briefing from Trump’s team at 2.15pm GMT. Finally after the US close Fed Chair Yellen will speak again, this time on Thursday evening (8pm) when she speaks to the Stanford Institute for Economic Policy Research. Any reaction to that will come during the Asia session.

US Event Calendar

  • 8:30am: Housing starts, Dec., est. 1.188m (prior 1.090m)
  • 8:30am: Building permits, Dec., est. 1.225m (prior 1.201m)
  • 8:30am: Initial jobless claims, Jan. 14, est. 252k (prior 247k)
  • Continuing claims, est. 2.075m (prior 2.087m)
  • 8:30am: Philadelphia Fed Business Outlook, Jan., est. 15.3 (prior 21.5)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 15 (prior 45.1)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: DOE Energy Inventories
  • 8pm: Fed’s Yellen Speaks at Stanford

US Government events

  • President-elect Donald Trump inaugural festivities begin
  • 9:30am: Senate Energy and Natural Resources Cmte hearing on nomination of Rick Perry for Energy secretary
  • 10am: Senate Finance Cmte hearing on nomination of Steven Mnuchin for Treasury secretary
  • 1pm: Sen. Patty Murray, top Democrat on Senate Health Cmte, joins Democratic Sens. Debbie Stabenow of Mich. and Elizabeth Warren of Mass. to discuss “who would be hurt” by Obamacare repeal

DB’s Jim Reid concludes the overnight wrap

Today is ECB day and with that it means another Draghi press conference at 1.30pm GMT. Given the big tapering story at the last meeting in December, it’s hard to see this one as being quite as exciting. In terms of the message, our economists are expecting patience to be the key theme today. They don’t think that the ECB will feel challenged by recent strong data but if the current data trends continue, the outright taper decision could accelerate to June rather than September – although the latter remains their baseline for now. The key on this front is whether inflation, especially core, is becoming more likely to exceed ECB  forecasts.

Yesterday we got confirmation that headline inflation rose to +1.1% yoy in December and +0.9% yoy at the core. Headline CPI could rise to +1.6% yoy and +1.8% yoy in January and February, respectively, according to our colleagues, although the earliest that the core will satisfy the minimum conditions for tightening is likely mid-year. That said the ECB won’t be afraid to change plans if necessary but today seems far too early but we’ll see what Draghi has to say later.

Interestingly, Draghi’s press conference coincides with another press briefing from the Trump camp at 2.15pm GMT. That said it appears that it won’t actually feature the President-elect himself and will instead be left to his team to brief the media so it remains to be seen how market moving this will actually be. At this stage there are no details about what is to be discussed but it’s possible that some questions are directed at the recent confusion over both the border tax and about the incoming administrations’ views on the dollar.

Yesterday’s comments out of the Davos shindig and in particular from commerce secretary nominee, Wilbur Ross, may have also added some spice to proceedings. Ross directed some tough talking at China, saying that the nation is the “the most protectionist country” amongst the large nations. He also said that “they talk much more about free trade than they actually practice” and “we would like to levelize that playing field and bring the realities a bit closer to the rhetoric”. Away from China Ross also said that the NAFTA discussion will happen very soon after Friday’s inauguration while also pitching that his “number one objective will be expanding our exports”. So it’ll be interesting to see if any of this gets brought up too.

Over in markets the main focus for the past 24 hours has been once again on the fairly large moves across rates and FX, albeit moves which largely ended up being a reversal of the previous day’s price action. 10y Treasury yields closed a shade over 10bps higher yesterday at 2.430% while the USD index rebounded +0.60% and finished higher for the first time in over a week. Those moves were given a late boost by comments from Fed Chair Yellen who said that “it is fair to say the economy is near maximum employment and inflation is moving toward our goal”. She also said that while “it makes sense to gradually reduce the level of monetary policy support” the actual timing of the next Fed rate hike “will depend on how the economy actually evolves over coming months”. So a fairly straight bat approach.

Meanwhile equity markets continue to trudge along in a fairly directionless pattern. The S&P 500 finished +0.18% with gains for financials offset by losses for telecoms and energy stocks. The latter were under pressure after WTI Oil tumbled -2.67% and back to $51/bbl after the IEA Chief warned that OPEC reigning in supply will likely result in a “significant” boost to US shale output. With regards to the gains for financials it was interesting to see that both Goldman Sachs (-0.62%) and Citigroup (-1.70%) closed in the red despite both banks adding to what has been a decent reporting season for US banks. Both reported beats at the profit line with the theme of stronger than expected FICC revenues once again playing out.

Over in Europe the Stoxx 600 also closed +0.18% while there was a similar weak theme in rates where 10y Bund yields crept up 3.3bps to close at 0.351%. Staying in Europe, another comment which caught our eye yesterday was that from JP Morgan CEO, Jamie Dimon. Commenting about the impact of Brexit and the potential for further nationalist politicians to come to power, Dimon said that the “eurozone may not survive” in an interview with Bloomberg TV. Quite fascinating for such a high profile banker to doubt it publically.

This morning in Asia we’ve seen the US Dollar continue to press on (+0.30%) which is putting some pressure on currencies in the region. Away from that equity bourses have been mixed once again, albeit on limited newsflow. The Nikkei is currently +0.81% with the Yen retreating a touch, while the Hang Seng (-0.59%) has weakened. Bourses in China, Korea and Australia are flat as we type. Moving on. Yesterday’s economic data didn’t sway too much from market expectations. In terms of the US December inflation report, headline CPI was reported as rising +0.3% mom which matched the consensus estimate and helped push the YoY rate up to +2.1% from +1.7%. The core rose +0.2%, also as expected, and helped nudge the YoY rate back up one-tenth to +2.2%. Away from that, industrial production was confirmed as rising +0.8% mom in December following a downwardly revised -0.7% mom in November. Finally the NAHB housing market index was a little softer than consensus, falling 2pts to 67. In the UK the ILO unemployment rate was unchanged at 4.8% in the three months to November, which matched expectations.

Before we look at today’s calendar, yesterday we got confirmation that the UK Supreme Court appeal decision about whether or not the UK Government has the authority to trigger Article 50 without  parliamentary appeal, will be made next Tuesday (on January 24). One to mark in the diary for next week.

Looking at the day ahead, this morning in Europe there’s little in the way of data which instead clears the path to the aforementioned ECB policy meeting outcome at 12.45pm GMTwith Draghi due at 1.30pm GMT. Over in the US the data consists of December housing starts and building permits numbers, initial jobless claims and the Philly Fed business outlook. In addition to the data, the corporate reporting calendar today consists of American Express, IBM and Schlumberger, all after the close. Away from that, keep one eye on the apparent press briefing from Trump’s team at 2.15pm GMT. Finally after the US close Fed Chair Yellen will speak again, this time early on Friday morning (1am GMT) when she speaks to the Stanford Institute for Economic Policy Research. Any reaction to that will come during the Asia session so we’ll have a review on Friday morning.