European stocks are trading steady after Asia’s disappointing session as investors put Wednesday’s selloff behind them and as sovereign bond prices rally. The U.S. dollar is a tad stronger, while the yen has pared some of this week’s gains. Crude prices are little changed.
The yield on U.S. 10-year Treasuries has declined after China denied reports that state officials were recommending slowing or halting purchases of U.S. debt. They have also being further supported by a strong U.S. 10-year auction yesterday.
Current NAFTA partners, north and south of the U.S. border seem to be increasingly convinced that President Donald Trump will soon announce that the U.S. intends to pull out of the world's largest free-trade agreement. Both the ‘loonie’ and Mexican peso have been unable to stem the bleeding despite the White House signalling that there has been no change in Trump’s position on NAFTA.
Cryptocurrencies see ‘red’ as South Korean officials prepare a bill to ban the trading of cryptos on exchanges, stepping up its efforts to curb speculation (BTC -10.75% at $13,316).
What to watch: U.S. inflation data this Thursday and Friday – will price pressures remain mute for now?
1. Stocks mixed results
In Japan, the Nikkei share average ended lower overnight, pressured by declines in automakers and tech stocks as a strong yen dissuaded investors’ enthusiasm. The Nikkei lost -0.3%, while the broader Topix dropped -0.2%.
Note: Bitcoin-related stocks also tumbled after the South Korean government indicated they are preparing a bill to ban cryptocurrency trading.
Downunder, Australia’s S&P/ASX 200 closed down -0.5%, extending Wednesday’s biggest drop in six weeks. Stronger-than-expected November retail sales data helped support the Aussie (A$0.7870) outright.
In Hong Kong, benchmark stock indexes rallied for a 13th consecutive session overnight, as strength in financial shares offset losses for index heavyweight Tencent Holdings. The Hang Seng index was up +0.15%, while the Hang Seng China Enterprise (CEI) rose +0.05%.
In China, stocks were little changed on Thursday, with the benchmark index up for a 10th successive session. At the close, the Shanghai Composite index was up +0.11%, its highest in seven weeks, while the blue-chip CSI 300 index was down -0.05%.
In Europe, regional indices are trading mixed following a slightly negative session stateside yesterday. The U.K.’s FTSE 100 Index has rallied +0.1% to the highest on record – a weaker pound continues to help stocks.
Futures on the S&P 500 Index have gained +0.1% to the highest on record.
Indices: STOXX 600 -0.1% at 398.3, FTSE 100 -0.1% at 7743, DAX -0.1% at 1260, CAC 40 flat% at 5506, IBEX 35 flat% at 10432, FTSE MIB 0.4% at 23258 , SMI flat% at 9527, S&P 500 Futures +0.1%
2. Oil reaches multi-year highs despite signs of overheating, gold stronger
Ahead of the U.S. open, oil prices have hit a multi-year high despite warnings that this year’s double-digit rally was close to running out of steam.
Brent crude futures have rallied +27c to +$69.47 a barrel, its highest intra-day print in two-years, while U.S West Texas Intermediate (WTI) crude futures are at +$63.94, up +37c to their highest in three years.
This week’s rally has been supported by yesterday’s surprise drop in U.S. production numbers and lower U.S. crude inventory data.
Data from the U.S. EIA Wednesday showed that crude inventories fell by almost -5m barrels to +419.5m barrels in the week to Jan. 5. While U.S. production also fell by -290k bpd to +9.5m bpd.
Note: The drop in production is likely due to the recent extreme cold weather east coast stateside that halted some onshore output – it’s expected to be short lived.
Gold prices (+0.1% at +$1,318.49 an ounce) have edged a tad higher after hitting a four-month intraday high Wednesday, on a weaker dollar and as the equities rally made a pause.
3. Is China firing a warning shot on trade?
U.S. yields have retreated from yesterday’s highs after China overnight-dismissed reports of planning to slow purchases of U.S. Treasuries, implying it was ‘fake news.’
Was it China’s subtle attempt to warn the U.S. that being too aggressive on trade might have consequences for the U.S. bond market? China is the largest foreign holder of U.S. securities.
The Trump administration is expected to make a number of trade decisions this month that will provide insights into how aggressive trade policy will be in 2018.
Note: President Trump was not as aggressive on trade during his first year as the market had initially perceived – he did not withdraw the U.S. from NAFTA, nor impose broad-based tariffs, or label China a ‘currency manipulator.’
The yield on U.S. 10-years has fallen -2 bps to +2.54%, the first retreat in more than a week and the biggest drop in almost two-weeks. In Germany, the 10-year Bund yield has dipped -3 bps +0.52%, the largest decrease in more than two-weeks, while in the U.K., the 10-year Gilt yield fell -3bps to +1.256%, the biggest fall in more than a week.
4. Dollar rises, but are gains being capped?
The USD has found some relief after China refuted yesterday’s reports that it was considering “slowing or halting” purchases of U.S. Treasuries.
The EUR/USD (€1.1945) trades steady and off its early intraday lows as Germany political parties began their final day of holding preliminary coalition talks.
USD/JPY (¥111.49) has rebounded from yesterday’s low (¥111.26), but remains below the pivotal ¥112 level. Yen bulls continue to target a break of ¥10 in the short term.
GBP/USD (£1.3487) has extended its retreat for a fourth day and remains below the psychological £1.35 level.
Both the CAD (+0.3% at C$1.2589) and MXN (+0.1% at $19.2880) trade under pressure outright on reports Canada believes U.S. President Trump will announce the U.S. is pulling out of NAFTA.
Note: This has cause the Canadian bond market to trim expectations of a BoC rate increase next week, with odds falling to +73% from +88%. Governor Stephen Poloz hiked rates twice last year and another three increases are expected in 2018.
5. Eurozone manufacturing rises as Germany drives growth
Euro data this morning confirms that the region's factories are on course for a strong finish to last year, as a continuing upswing in the manufacture of capital goods meant output rose more rapidly than expected in November.
Eurostat said that industrial production (IP) was +1.0% higher than in October, and +3.2% higher than in November 2016. The market was expecting output to rise +0.6% on the month and +2.9% on the year.
Note: The agency also raised its estimate for IP in October.
Digging deeper, the November increase was driven by the manufacture of capital goods – fresh evidence that businesses are finally putting previously ‘hoarded cash’ to work as an increase in business investment spending has aided the fastest Euro economic expansion in over a decade.
Note: Despite the strong pickup in the headline, the distribution of growth will be of concern – Germany IP rose +3.6%, which is not a surprise, while there were declines in France and in the Netherlands.
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