Markets: Turns

There is a smell of hope in the air, of a risk and growth turn about as markets soak in the accolades of the first quarter for 2019. This was the best performance for China shares since 2014– and yet China growth doubts remain front and center. The stimulus efforts and the ongoing US/China trade talks are cited as the reason for today’s outsized performance (up over 3%) but perhaps its as simple as the passive money needs to fill-up on the benchmark with China MSCI EM share rising. This makes the news flow and the market price action remain a bit less obvious again. The focus on hope over doubt is welcome as its always easier to be a bull than a bear. The list of stories that may upset this turning point continues to start with Brexit and the noise of the UK politics. Then there is Turkey and the inability of officials to prevent capital flight. Then there is the ongoing fears about Europe and growth – with Italy the example - but those are countered by ECB tiered rate cut talk and value in shares arguments. Here is where the lower than expected German CPI, tame French and Italy prices mattered today. Finally, there is the US where the 1Q pain is set for 2Q gain expectations – this is where risk lies most as any data that puts the US divergence at risk may make the global risk turn about less obvious. The US/China trade talks were cited as the main reason for 1Q ending well – and so the USD/CNY maybe the best place to see if anything really has changed. Until then we are likely to see the low volatility enhance the search for yield in a world set up for further central bank easy money and the hunt for demand anywhere leading to USD stability rather than weakness. Wait for 6.60 CNY before trading on hope rather than month-end, quarter-end fillips. 

Question for the Day: Does the data today matter? There was a host of month-end data for the world today and most of it seemed to be weaker than hoped with the Japan and Korea industrial production being the most obvious examples.  There is something amiss with markets trading on hope other but the simple explanation of month-end and quarter end flows dominating holds and makes the risk for April 1 that much more difficult.  

The larger question for 1Q data and the tape is where the money has gone and whether it will be sustainable and lead to larger world growth. At the heart of it – China and its stock outperformance makes sense given the government push to keep growth at 6% plus and to force some stability in the economy. The cost of this has been to the rest of the world as capital inflation to China haven’t meant much for the rest of EM – notice ARS, BRL, TRY pain trades. Also notable is that Europe isn’t seeing more demand from China either. This will be something to watch for the data over the weekend as most expect some PMI bounce back in China for March along with better lending, more retail spending and the like. Whether the global allocation of capital in 1Q was right with make clear whether the divide between the present economic tape matters to the market tape. 

What Happened?

• Korea February industrial production drops -2.6% m/m, -2.7% y/y after +0.2% m/m, -0.2% y/y – weaker than -0.9% m/m, -0.5% y/y expected. The manufacturing fell -2.5% y/y after revised 0.0% y/y – also weaker than -0.3% expected. February revised from +0.2% y/y.  
• Korea February retail sales -0.5% m/m, -2% y/y after +0.1% m/m, +4.1% y/y –weaker than +0.3% m/m, 4.3% y/y expected. 
• Japan February unemployment rate drops to 2.3% from 2.5% - better than 2.5% expected- The jobs/applicant ratio held steady at 1.63 – as expected. 
• Japan March Tokyo CPI core 1.1% y/y – unchanged as expected – while the headline CPI rose 0.9% y/y after 0.6% y/y – more than the 0.5% y/y expected. 
• Japan February retail sales up 0.2% m/m, 0.4% y/y after -2.3% m/m, 0.6% y/y – less than the 0.3% m/m, 1.2% y/y expected. 
• Japan February industrial production +1.4% m/m, -1.0% y/y after -3.4% m/m, +0.3% y/y – near expectations.  
• Australia February private sector credit up 0.3% m/m, 4.2% y/y after +0.2% m/m, 4.3% y/y – as expected. 
• Swiss March KoF economic barometer 97.4 from 93 – better than 93.8 expected. February revised from 92.4. This is predominantly due to positive impulses from the manufacturing industry. However, the recovery also extended to the other components of the barometer. The positive tendency within the manufacturing industry is mostly driven by the electrical industry, followed by the metal industry, mechanical engineering and the textile industry.

• German February retail sales up 0.9% m/m, 4.7% y/y after revised 2.8% m/m, 3.1% y/y ( was +3.3% m/m, 2.6% y/y) – much better than -0.9% m/m, 2.8% y/y expected. 
• German February import prices up 0.3% m/m, 1.6% y/y after -0.2% m/m, 0.8% y/y - less than 0.5% m/m, 1.8% y/y expected. German March unemployment change -7,000 after -20,000 – less than -10,000 expected but rate drops to 4.9% from 5%.  
• French March flash HICP up 0.9% m/m, 1.3% y/y after 0.1% m/m, 1.6% y/y – less than the 1% m/m, 1.5% y/y expected.  The national CPI up 0.8% m/m, 1.1% y/y after 1.3% y/y – also less than 1.2% y/y expected.
• French February household consumption -0.4% m/m after revised 1.2% m/m (was 1.4% m/m) – weaker than -0.1% m/m expected. 
• Spanish February retail sales up 0.3% m/m, 1.2% y/y after 0.3% m/m, 0.9% y/y – more than the 0.2% m/m expected. 
• Spanish 4Q final GDP up 0.6% q/q, 2.3% y/y after 0.5% q/q, 2.5% y/y – weaker than 0.7% q/q, 2.4% y/y expected. 
• UK February mortgage approvals 64,340 after 66,700 – weaker than 65,000 expected.  The consumer credit holding up GBP1.145bn after GBP1.15bn – while mortgage lending slows to GBP3.457bn from GBP3.587bn – less than GBP3.7bn expected. 
• UK 4Q final GDP 0.2% q/q, 1.4% y/y after 0.7% q/q, 1.6% y/y – slightly better than 1.3% y/y expected.  The 4Q C/A deficit rises to GBP23.7bn after GBP23bn – more than expected.  The 4Q business investment –fell -0.9% q/q, -2.5% y/y after -1.2% q/q, -1.9% y/y – worse than -1.4% y/y expected. 

Market Recap:

Equities: The US S&P 500 futures up 0.2% after rising 0.36% yesterday. The Stoxx Europe 600 up 0.35% with focus on ECB policy/month-end while the MSCI Asia Pacific jumped 1% led by China trade deal hopes. 

• Japan Nikkei up 0.82% to 21,205.81
• Korea Kospi up 0.59% to 2,140.67
• Hong Kong Hang Seng up 0.96% to 29,051.36
• China Shanghai Composite up 3.20% to 3,090.76
• Australia ASX up 0.08% to 6,261.70
• India NSE50 up 0.47% to 11,623.90
• UK FTSE so far up 0.4% to 7,261
• German DAX so far up 0.4% to 11,472
• French CAC40 so far up 0.55% to 5,325
• Italian FTSE so far up 0.5% to 21,181

Fixed Income: Quarter end driving more than economics, but politics still key with US/China trade talk hope and Brexit noise. German 10-year Bund yields up 1bps to -0.07%, French OATs up 1bps to 0.32%, UK Gilts off 2bps to 0.99% while periphery mixed – Italy up 4bps to 2.49%, Spain up 5bps to 1.09%, Portugal off 3bps to 1.24%, Greece flat at 3.77%. 

• US Bonds are lower with equities driving, curve flatter– 2Y up 2bps to 2.26%, 5Y up 3bps to 2.23%, 10Y up 2bps to 2.41%, 30Y of 1bps to 2.81%.
• Japan JGBs see slight curve steepening, watching BOJ, equities– 2Y flat at -0.18%, 5Y off 1bps to -0.20%, 10Y flat at -0.09%, 30Y up 1bps to 0.50%. 
• Australian bonds see profit taking on US/China hopes, 1Q end  – 3Y up 3bps to 1.42%, 10Y up 6bps to 1.78% while NZ 10Y up 6bps to 1.84%. 
• China Bonds rally with 2Y off 1bps to 2.64%, 5Y off 3bps to 2.94%, 10Y off 1bps to 3.08%. 

Foreign Exchange: The US dollar index rose 0.1% to 97.30. Emerging markets are mixed with EMEA: RUB up 0.5% to 64.625, ZAR up 0.5% to 14.509 but TRY off 1.7% to 5.641; ASIA: INR flat at 69.155, KRW off 0.15% to 1136.80. 

• EUR: 1.1225 flat. Range 1.1210-1.1239 with ECB tiered cut hopes on one side, US data, FOMC on the other 1.1165 key. 
• JPY: 110.80 up 0.15%. Range 110.53-110.93 with EUR/JPY 124.35 up 0.1% - risk on and 110-112 still.
• GBP: 1.3080 up 0.3%. Range 1.3002-1.3096 with EUR/GBP -0.3% to .8575 – clueless with Brexit driving and 1.30 pivot for 1.26 risk
• AUD: .7080 up 0.1%.Range .7070-.7101 with NZD .6790 up 0.2% - bouncing with China  - watching .7110 and .6820 resistance. 
• CAD: 1.3425 off 0.1%.Range 1.3420-1.3442 – oil vs. politics and rates with data today key. 
• CHF: .9960 up 0.1%.Range with EUR/CHF 1.1780 up 0.1%. 
• CNY: 6.7085 off 0.45%.Range 6.7080-6.7390 with focus on China trade talks. PBOC fixed 6.2763 from 6.7141

Commodities: Oil up, Gold flat, Copper up 0.9% to $2.9215. 

• Oil: $60.06 up 1.3%.Range $59.41-$60.09 with $60 breakout to $62.50 next target – all about global growth hope, trade talks. Brent flat at $67.82. 
• Gold: $1295.70 flat. Range $1291.30-$1297.40 with focus on $1285 support and $1300 resistance. USD/rates against equities, geopolitics. Silver up 0.5% to $15.05 while Platinum up 1.1% to $853.60 and Palladium up 2.70% to $1345.00

Economic Calendar:

• 0830 am Canada Jan GDP (m/m) -0.1%p +0.1%e
• 0830 am Canada Feb PPI (m/m) -0.3%p 0%e (y/y) 1%p 1%e
• 0830 am US Feb personal spending -0.5%p 0.3%e / income -0.1%p +0.3%e / PCE core (y/y) 1.9%p 1.8%e
• 0925 am NY Fed William speech
• 0945 am US Mar Chicago PMI 64.7p 61.2e
• 1000 am US Mar final Michigan consumer sentiment 93.8p 97.8e
• 1000 am US Feb new home sales (m/m) -6.9%p +1.3%e / 0.607mn p 0.619mn e
• 1205 pm Fed Quarles speech