US MARKET WRAP – 8 MAR 2018: Trump declares trade wars; Canada/Mexico indefinitely exempt from tariffs

* SNAPSHOT: Equities up; DXY up, EUR down, JPY uneventful; Treasuries flat; crude down.
* REAR VIEW: Mexico/Canada indefinitely exempt from Tariffs, AP reports; ECB drops pledge to increase QE.
* AHEAD: BOJ overnight, China CPI overnight, US non-farm payrolls tomorrow.


* TARIFFS: Trump confirmed he would apply tariffs on aluminium and steel (10% and 25% respectively) though news that Canada and Mexico may be indefinitely exempt (based on NAFTA progress) provided a late catalyst for choppy price action. Both countries currencies sharply strengthened against the USD, while equities saw a small bounce, though failed to print session highs. AP also reported that other countries will be able to negotiate exclusions.

* ECB: The ECB dropped/softened its easing bias, as was expected, removing references in its statement to increase/extend QE (Draghi said it was a remnant from 2016 – when the economic landscape was very different). The move helps to prepare markets for an end to its QE programme, which was taken as hawkish. However, the ECB’s updated forecasts (revised 2019 HICP forecast down slightly), and Draghi’s press conference (impressed uncertainties due to US protectionism, reiterated the need for substantial stimulus, repeated inflation is yet to show signs of a sustained move to target) was more dovish, seeing the EUR weaken in wake of the meeting/presser. Late in the day, the customary post-meeting sources story suggested that ECB staff calculations on future path of monetary policy assume asset purchases of EUR 30bln in Q4 (the QE programme is currently slated to end in Sepp/2018), according to unnamed Euro area officials, raising the possibility of a tapered rate of asset purchases through the end of this year (at a rate of EUR 10bln/month).

* PAYROLLS: Macroeconomic evidence augurs well for the February payrolls report. Wage growth expected to ease slightly but continue to hint at wage pressures. Full RANsquawk preview here.

* BOJ: The BoJ is to conclude its latest 2-day policy meeting on Friday with the consensus one-sided for the central bank to maintain its QQE with Yield Curve Control and keep NIRP at -0.10%. Furthermore, Kuroda et al. are also seen to keep policy settings unchanged throughout the year with 22 out of 34 economists surveyed expecting the 10yr yield target to be kept at around 0% for the whole of 2018.


* Crude is struggling to find bullish catalysts. Recent jawboning energy officials (OPEC+, CERA, etc) is once again being offset by bearish factors. Today, the narrative focussed once again on the difficulties in bringing inventories down: Genscape forecast Cushing stocks have built in the week (+293k from 2/Mar), Motiva’s Port Arthur refinery (600k BPD) is said to be raising production on its large crude unit after restart, and additionally, the threat of trade wars has kept commodities under pressure (more barriers to trade is likely to see global growth slow, reducing demand for crude/industrial commodities). Also, at the margin, a firmer dollar was contributing to the bearish narrative.

EQUITIES: SPX +0.4%, DJI +0.4%, NDX +0.5%

* US STOCKS bounced to fresh session highs in late trade after AP reported that Canada and Mexico would be indefinitely exempt from Trump’s steal/aluminium tariffs, spurring risk sentiment as traders welcomed a watered-down version of trade wars. However, the gains proved fleeting, and after Trump began his announcement, the sellers returned, as the trade war narrative gripped the news cycle.

* SECTORS: CONS DISC (XLY): +0.18%, CONS STAP (XLP): +0.74%, ENERGY (XLE): -0.24%, FINANCIALS (XLF): +0.09%, HEALTH CARE (XLV): +0.48%, INDUSTRIALS (XLI): +0.33%, MATERIALS (XLB): -0.05%, TECH (XLK): +0.26%, TELECOMS (XTL): +0.26%, UTLITIES (XLU): +0.60%.


* TREASURIES seem blasé about almost everything, ahead of tomorrow’s payrolls data, and it was another subdued day with limited price action. For parts of the early day, Tsys were following their German counterpart during the ECB press conference. Moves were muted, but the net impact was a compression of the spread between the two. As expected, the US Treasury said it would auction $62b in 3s/10s/30s next week.


USD, CAD, MXN: Sharp strength against the USD after the Associated Press reported that Mexico and Canada would be indefinitely exempt from tariffs, sending both currencies to session highs against the greenback. DXY also extended gains on the news, breaking above 90.000; CAD found support at 1.29, though testing the week’s lows around 1.2850 proved too much ahead of Trump’s official statement; The MXN, meanwhile, rose to week-highs against the buck.

EUR: A volatile EUR finished lower after a masterful balancing act by ECB president Draghi, who managed to hawkishly tweak forward guidance on QE, though struck a dovish message in his post-meeting presser. The result was the EUR falling, breaching 1.23 to the downside in late US trade. The focus for EURUSD now falls on the USD part of the pair, with Trump to detail steel/aluminium tariffs later on Thursday, and tomorrow’s NFP (specifically the wages data) in focus.

JPY: Ahead of the BOJ meeting overnight, USDJPY has largely stayed out of trouble, refusing to participate in the choppy FX trade, patrolling a range between 105.90 to 106.25.

GBP: Sterling was always on the back foot amid the USD strength. But there were also idiosyncratic reasons for the pounds slippage in late trade, after reports said UK govt officials don’t see a #Brexit deal being reached until next year, which pushed GBPUSD beneath 1.38 to session lows, though EURGBP seemed more reticent about another test of 0.8850, given the generally EUR weakness post-ECB today. Some desks are targeting have been targeting a full correction of GBP (from 1.4350 region) to 1.3650; earlier in the day, some desks were reported to have been interested in adding shorts on a break of 1.3850.