What started off in familiar fashion, with Asian stocks rising, and Europe hitting multi-month highs and US futures in record territory has stumbled in recent minutes following a continued rush for safety in short-dated German Bunds (the 2Y is now trading at -0.92%) and ongoing selling in the USDJPY, which has pushed Stoxx 600 back to unchanged, and S&P futures to modestly red for the session.
Â
The exact catalyst is unclear although traders are citing continued French political risks, as the recent OAT selloff continued this morning on Le Pen fears.
Earlier in the session, global stocks hit record highs on Wednesday, pushing gains for the year above those for all of 2016, while the dollar rose before Federal Reserve minutes that will be scoured for clues on the timing of the next U.S. interest rate rise. MSCI’s main index of global stocks, which tracks share prices across 46 countries, hit a second successive record high. It has risen some 5.7 percent so far this year, beating the 5.6 percent gains of 2016. The MSCI Asia Pacific Index was at the highest level since July 2015 as Chinese shares traded in Hong Kong resumed a rally. Japanese equities managed to end higher even after fluctuations in the yen pressured the Topix.
European shares followed Asian bourses higher, buoyed by all main indexes on Wall Street touching record closing highs on Tuesday with Britain’s Lloyds Banking Group was up 3 percent after reporting its highest full-year profit in a decade, although that early optimism appears to have faded.
As a result, markets painted a mixed picture of investor sentiment on Wednesday, as political risk sent both the euro and German two-year bond yields lower while global equities tracked a U.S. rally. The dollar edged higher before the release of Fed minutes, up 0.3% at 101.64, gaining against the euro and sterling, pressuring oil lower.
The day’s most anticipated event for markets will be the release of the minutes of the Fed’s last policy meeting. Fed Chair Janet Yellen said last week it was likely the central bank would need to raise rates at an upcoming meeting. Markets have priced in only a slim chance of a rise next month but a much greater likelihood in May or June. The dollar rose 0.2 percent against a basket of major currencies and 0.3 percent versus the euro.
Economists expect to see further discussion in the minutes of the Fed’s balance sheet strategy given that many monetary policymakers have been publicly discussing the topic, even though it is clear that policymakers have not yet reached a consensus on the particulars ofthe Fed’s reinvestment policy. Additionally, DB economists expect the Fed to announce tapering of reinvestments this December, effective in January 2018. However they also expect a slower pace of tapering because the Fed will likely want to put as much distance between the Fed funds rate and the zero rate lower bound before risking greater disruptions to the long end of the Treasury curve. Thus, they still see the Fed hiking four times next year. Another key question many will hope to see some clarity on is whether March is “live” despite the Fed’s generally less than hawkish announcement: it is not clear how the Fed will bridge its actual dovish statement to hawkish minutes that suddenly make the March meeting in play.
Back to markets, where the Euro has dropped for a fourth day, dropping below 1.05 per dollar for the first time in more than six weeks. That lent early momentum to stocks, with the Stoxx Europe 600 Index advancing for a fourth session, however the rally has since fizzled. Germany’s Dax Index, already at an almost two-year high, briefly crossed the 12,000 level.
Technology stocks outperformed with Ericsson surging following an upbeat Bank of America-Merrill Lynch note. Basic resources sector fell, Goldman Sachs strategists wrote in a note commodity markets need proof of demand to rally further. Lloyds Banking Group Plc rose 3.7 percent as the mortgage lender swung to a quarterly profit and boosted its dividend. Futures on the S&P 500 were trading modestly in the red. The index added 0.6 percent Tuesday, with the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 200 Index closing at all-time highs.
EU data saw the inflation rates as expected: core y/y unchanged at 0.9%. German IFO current conditions and expectations both exceeded consensus forecasts at 118.4 and 104 respectively.
European politics and the prospect of higher U.S. rates pushed the gap between short-dated U.S. and German benchmark government bond yields to its widest in nearly 17 years. German two-year yields hit a record low of minus 0.92 percent while U.S. equivalents touched 1.24 percent.
Oil prices dipped. Brent crude, the international benchmark, traded at $56.50 a barrel, down 17 cents. Copper also fell, as traders reduced their positions before the Fed minutes, though supply disruptions supported prices. The metal last traded at $6,030 a tonne, down 0.5 percent on the day. Gold edged up 0.1 percent to $1,236 an ounce.
On today’s calendar are the above mentioned minutes from the latest Fed meeting, which traders hope will provide details on whether March is indeed “live” as a bevy of recent Fed speakers have suggested.
Market Snapshot
- S&P 500 futures down 0.1% at 2,357.75
- STOXX Europe 600 down less than 0.1% to 373.33
- MXAP up 0.6% to 146.14
- MXAPJ up 0.6% to 470.46
- Nikkei down 0.01% to 19,379.87
- Topix up 0.1% to 1,557.09
- Hang Seng Index up 1% to 24,201.96
- Shanghai Composite up 0.2% to 3,261.22
- Sensex up 0.4% to 28,879.78
- Australia S&P/ASX 200 up 0.2% to 5,805.10
- Kospi up 0.2% to 2,106.61
- German 10Y yield fell 2.6 bps to 0.275%
- Euro down 0.3% to 1.0504 per US$
- Brent Futures down 0.6% to $56.32/bbl
- Italian 10Y yield rose 6.3 bps to 2.247%
- Spanish 10Y yield unchanged at 1.683%
- Brent Futures down 0.6% to $56.32/bbl
- Gold spot up 0.1% to $1,237.29
- U.S. Dollar Index up 0.3% to 101.64
