If yesterday world markets were a sea of green as traders bought risk on news that threats of both a nuclear and trade war had sharply receded, today it’s the opposite, and while North Korea has yet to “unexpectedly” test fire an ICBM, Tuesday’s departure of Gary Cohn has all but assured market that a trade war is, after all, just a matter of time.
To be sure, Cohn’s departure – which is widely seen as a victory for the protectionists led by Peter Navarro and immigration hawks – is the only thing analysts and traders are writing about this morning, and while some thing the market’s overnight response, which has seen S&P futures slide over 20 points and the DJIA is set to open 330 points lower, has been exaggerated…
… others disagree, and fear that much more pain is in store, especially if Cohn’s departure is indicative of an imminent trade bombardment by the Trump administration.
The litany is summarized best by Bloomberg which notes that Cohn’s resignation “is a victory for figures who have sought to expunge the Trump administration of advocates for free trade and globalization, principles that have long been a hallmark of the Washington establishment. A registered Democrat, Cohn was regarded as one of the few political moderates close to the president. His absence will amplify voices like Commerce Secretary Wilbur Ross and trade adviser Peter Navarro who back the president’s impulses to buck convention and pick trade fights on a global stage.”
Citi went further, going so far as to compare Gary Cohn to Luke Skywalker:
While heavily-trailed in the press, the market is still mourning the sudden departure of Gary Cohn, the White House’s ‘lonely democrat’ – seen by some as the final bastion of tariff-free international trade. Alas, now the last Jedi has fallen, Trade Wars and a galaxy far, far away now all seems an awful lot closer than before. USD is caught between a more hawkish Fed (Kaplan, Brainard overnight) and an administration that appears ready to shoot from the hip with regards to trade wars.
Echoing what we said 2 weeks ago, when we correctly predicted the coming trade wars when we highlighted the little noticed Peter Navarro promotion, Bank of Singapore’s James Cheo said that “Cohn’s resignation shows that within the Trump administration the pendulum is swinging toward anti-trade,” adding that “what we should be watching out for is how other countries react in response to the tariffs.”
Whatever one thinks of Cohn’s departure, the rising prospect of escalating protectionism has finally spooked algos and sent European and Asian stock markets reeling on Wednesday. As shown above, S&P futures slumped, while most government bonds climbed, sending the yield on the 10Y to 2.84%, where it started the week.
European government bonds rallied, with yields across the euro zone falling by 1-3 basis points, following similar strengthening in U.S. Treasuries overnight.
In Europe, the Stoxx Europe 600 Index headed for the first drop in three days, led by mining and auto shares. European car-makers, which face the risk of a hike in import tariffs to the United States, were among the worst performers, falling 1.1%. The materials sector is underperforming, pressured by the fall in commodity prices fuelled by US API crude stocks printing a build more than twice as expected.
“The implication is that without the restraining influence of Cohn on Trump, the president will now have a free hand to press ahead with further tariffs and generally up the ante on trade,” said Neil Wilson, an analyst at ETX Capital.
“This in itself does not bode well for risk despite that small boost we saw on news that North Korea could consider de-nuking.”
Earlier in the day, Asian markets also slid earlier as investors contemplated how bad the hit to China would be once Trump unleashes his trade war, a fear which was magnified by the report that the White House is considering clamping down on Chinese investments and imposing broader tariffs added to the gloom. Australia’s ASX 200 (-1.0%) underperformed with sentiment also dragged by weaker than expected GDP figures, while Nikkei 225 (-0.8%) was choppy and briefly found reprieve, before a firmer JPY ultimately weighed. Elsewhere, Shanghai Comp. (-0.6%) and Hang Seng (-1.0%) initially outperformed despite reports US may consider broad curbs on Chinese imports and takeovers, as well as news that ‘China hawk’ Peter Navarro was among the top 2 candidates to replace Cohn as
Trump’s top economic adviser.
Stocks in China and Hong Kong gave up their morning gains, sliding along with other regional markets and U.S. futures; Shanghai Composite Index dropped 0.6%, trimming week’s advance to 0.5% while the ChiNext Index fell 0.7%, paring week’s gain to 0.8%. The Hang Seng Index slides 1% and is experiencing its wildest trading since 2016. The Hang Seng China Enterprises Index declines 1.1%
In other macro developments, the dollar initially tumbled on the Cohn news but has since recovered most losses, while the yen and the Swiss franc were once more in demand, as currencies sensitive to risk sentiment and from countries heavily reliant on trade were sold off as markets raised the odds for more U.S. barriers to trade. On Wednesday morning, the Bloomberg Dollar Spot Index was little changed, while European stocks followed Asia’s slide.
The Canadian dollar and the Mexican peso both retreated by around 0.5 percent against the dollar as Cohn’s departure was seen as raising risks that Washington could walk away from NAFTA negotiations. Other emerging market currencies that typically move in sympathy with the dollar were lower, with the South African rand and Russian rouble both down around 0.5 percent against the dollar.
Separately, overnight we got comments from two Fed speakers, a hawk and a dove: Fed’s Brainard (voter, dove) said gradual US rate hikes are likely appropriate and that there is greater confidence inflation will reach target, while she added that she is encouraged by substantial fiscal stimulus, full employment and above-trend economic growth. Brainard also stated that headwinds are turning into tailwinds, although they are ready to slow or speed up pace of hikes if forecasts are incorrect. Meanwhile, Fed’s Kaplan (non-voter, soft hawk) reiterated that baseline scenario is for 3 rate hikes in 2018 and said that it is too early to change forecasts due to tariffs as it is not yet known what will be implemented. Kaplan added that anything that jeopardizes trade relations with Mexico or Canada is not in US interest.
Commodities fell on worries that trade friction could slow global growth, with Brent crude futures giving up the previous day’s gains to drop 1.2 percent. Copper on the London Metal Exchange lost 0.9 percent, paring a 1.4 percent gain from the previous session. WTI and Brent crude futures are trading with losses of over 1% this morning, largely following last nights API report which showed a wider than expected build in crude inventories (5.7mln vs. Exp. 2.7mln). As such, WTI initially traded south of the USD 62/bbl level, with Brent briefly below USD 65/bbl before reclaiming the levels. Elsewhere, gold has been trading relatively sideways throughout the morning, having pared its gap higher overnight after initial support from reports of Cohn’s resignation. Good news out of Australia, which reported record high iron ore exports from Port Hedland (largest iron ore loadings port in Australia).
Bulletin Headline Summary From RanSquawk
- White House Economic Adviser Gary Cohn is to resign and is expected to leave in next few weeks
- Asian stocks and to a lesser extent their EU counterparts, were seen lower on the news as fears continue to
- mount over ‘trade-wars’
- Looking ahead, highlights include US ADP, BoC rate decision, DoEs, Fed’s Bostic, and Dudley
- S&P 500 futures down 1% to 2,697.75
- STOXX Europe 600 down 0.2% to 370.55
- MSCI Asia Pacific down 0.6% to 174.05
- MSCI Asia Pacific ex Japan down 0.6% to 570.66
- Nikkei down 0.8% to 21,252.72
- Topix down 0.7% to 1,703.96
- Hang Seng Index down 1% to 30,196.92
- Shanghai Composite down 0.6% to 3,271.67
- Sensex down 0.8% to 33,049.36
- Australia S&P/ASX 200 down 1% to 5,901.99
- Kospi down 0.4% to 2,401.82
- German 10Y yield fell 0.8 bps to 0.667%
- Euro up 0.09% to $1.2415
- Italian 10Y yield fell 0.6 bps to 1.729%
- Spanish 10Y yield fell 4.2 bps to 1.449%
- Brent Futures down 1.2% to $65.03/bbl
- Gold spot down 0.2% to $1,332.27
- U.S. Dollar Index down 0.06% to 89.57
Top Headline News from BBG
- Gary Cohn’s absence will amplify voices like Commerce Secretary Wilbur Ross and trade adviser Peter Navarro who back the president’s impulses to buck convention and pick trade fights on a global stage
- The import taxes U.S. is considering would affect companies that help fuel the about $450 billion in Chinese goods imported to America annually. But Chinese manufacturers won’t be the only ones hurt in a trade war, as their close relationships as suppliers to American brands will likely create a ripple effect
- China’s foreign currency holdings decreased for the first time in more than a year, as rising U.S. Treasury yields weighed on valuations
- President Donald Trump signaled he’s open to talks with North Korea, even as his advisers expressed skepticism that Kim Jong Un is serious about suspending his nuclear weapons program and engaging in real negotiations.
- The Trump administration is considering clamping down on Chinese investments in the U.S. and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter.
- Federal Reserve Governor Lael Brainard said more confidence on inflation warrants gradual interest-rate hikes; suggests tailwinds could speed pace of Fed rate hikes.
- Opponents of Brexit are looking into whether Britain could postpone its exit from the European Union to give lawmakers and voters more time to weigh up whether they really want to leave.
Asian stocks were mostly lower as US political discord took the limelight once again after reports that National Economic Council Director Gary Cohn is to resign amid tariff disagreements. This latest high-profile and ‘market- friendly’ White House departure dampened the risk appetite and weighed on US equity futures in which Emini S&P gapped lower by about 1% and DJIA futures saw losses of nearly 400 points. ASX 200 (-1.0%) underperformed with sentiment also dragged by weaker than expected GDP figures, while Nikkei 225 (-0.8%) was choppy and briefly found reprieve, before a firmer JPY ultimately weighed. Elsewhere, Shanghai Comp. (-0.6%) and Hang Seng (-1.0%) initially outperformed despite reports US may consider broad curbs on Chinese imports and takeovers, as well as news that ‘China hawk’ Peter Navarro was among the top 2 candidates to replace Cohn as Trump’s top economic adviser. However, gains in Chinese money market rates eventually proved to be the deciding factor and tipped bourses into the red. Finally, 10yr JGBs pared the opening safe-haven inflows to return flat, amid a similar indecisive risk tone in Japanese stocks and following an unchanged BoJ Rinban purchase announcement. PBoC skipped open market operations, but later announced CNY 105.5bln 1yr MLF operation.
Top Asian News
- Malaysia Central Bank Holds Benchmark Rate as Inflation Eases
- China Stocks Retreat as Volatility Intensifies on Trade Concerns
- China’s FX Reserves Snap Yearlong Rising Streak on Valuations
- Widodo Clears Hurdle for Indonesia to Set Domestic Coal Price
The European cash open took the negative lead from Asia with most major bourses in the red, albeit losses have been pared throughout the session after the departure of NEC Director Cohn spooked investors as the US trade policy may be steered further into protectionist territory while reports from a US administration official stated that White House adviser Peter Navarro and commentator Larry Kudlow are the top two candidates to replace Gary Cohn. Asia-Pacific stocks reacted with a decline across the board. FTSE 100 (+0.1%) outperforming, supported by a weaker sterling. The materials sector is underperforming, pressured by the fall in commodity prices fuelled by US API crude stocks printing a build more than twice as expected. Rolls-Royce (+12.8%) outperforming on the back of strong earnings. Smurfit Kappa (+3.3%) after US based International Papers confirmed its EUR 8bln offer to the company which was then rejected as an “opportunistic” takeover bid. Telecom Italia (-0.2%) is trading in a choppy fashion after company CEO stated the joint venture with Vivendi’s Canal+ will be put on hold.
Top European News
- U.K. House Price Growth Slows to Four-Year Low, Halifax says
- Europe’s Populist Godfather Suddenly Has a Fight on His Hands
In FX, USDJPY and USDCHFto a lesser extent, continues to provide the clearest if not best barometer of broad risk sentiment and the headline pair’s latest retreat from 106.00+ levels highlights the resurgence of aversion prompted by the US President’s import tariff plans. The failure to extend gains on conciliatory gestures from North Korea on the nuclear front to and beyond a key upside Fib just ahead of 106.50 is deemed to be bearish in terms of the technical outlook, while the departure of chief White House economic adviser Cohn is widely perceived as negative from the global trade wars perspective given his more temperate approach towards protectionist policies. 105.50 bids/support now being tested again, and the 2018 low around 105.25 is back on the radar ahead of reportedly big barriers at 105.00. Usd/Chf is sitting roughly in the middle of 0.9400-0.9350 parameters, and the pseudo safe-haven Eur is looking to climb further above 1.2400 vs the Greenback, while eclipsing its previous ytd base against the still Brexit-weighted Gbp to circa 0.8965 (having breached 0.8950 resistance more convincingly). Back to G10 majors, and it’s all change again for the commodity bloc that has reversed gains vs their US Dollar counterpart. Usd/Cad has rebounded over 1.2900 with the Loonie underperforming on the tariff proposals and NAFTA ahead of the BoC policy meeting, which is now even more likely to underscore the need for caution. Aud/Usd is pivoting around 0.7800 after mixed Aussie GDP data overnight and Nzd/Usd is back below 0.7300 as the Aud/Nzd cross holds above 1.0700 in wake of the latest GDT auction showing a dip in prices.
In commodities, WTI and Brent crude futures are trading with losses of over 1% this morning, largely following last nights API report which showed a wider than expected build in crude inventories (5.7mln vs. Exp. 2.7mln). As such, WTI initially traded south of the USD 62/bbl level, with Brent briefly below USD 65/bbl before reclaiming the levels. Elsewhere, gold has been trading relatively sideways throughout the morning, having pared its gap higher overnight after initial support from reports of Cohn’s resignation. Good news out of Australia, which reported record high iron ore exports from Port Hedland (largest iron ore loadings port in Australia). US API Crude Stocks (Mar 2) 5.661M vs. Exp. 2.700M
US Event Calendar
- 7am: MBA Mortgage Applications, prior 2.7%
- 8:15am: ADP Employment Change, est. 200,000, prior 234,000
- 8:30am: Nonfarm Productivity, est. -0.1%, prior -0.1%; Unit Labor Costs, est. 2.1%, prior 2.0%
- 8:30am: Trade Balance, est. $55.0b deficit, prior $53.1b deficit
- 2pm: U.S. Federal Reserve Releases Beige Book
- 3pm: Consumer Credit, est. $17.7b, prior $18.4b
- 8am: Fed’s Bostic Speaks on the Economic Outlook
- 8:20am: Fed’s Dudley Speaks in Puerto Rico
- 2pm: U.S. Federal Reserve Releases Beige Book
DB’s Jim Reid concludes the overnight wrap
It all feels a bit 2017 this morning with the two main stories from the past 24 hours revolving around President Trump and North Korea. The big difference now though is that markets appear to be at least hoping that Kim Jong Un’s statement about potentially giving up nuclear weapons has some legs to it, while Trump’s war of words about tariffs doesn’t, although as you’ll see below the news overnight that Gary Cohn is to step down from his role as an economic advisor and also that Trump is considering broad curbs on Chinese imports and investments following an investigation into China intellectual property practices suggests otherwise.
We’ll come to that shortly, but first with regards to North Korea, headlines struck the wires at just after 11am GMT yesterday morning suggesting that North Korea is open to denuclearizing so long as the country’s safety can be guaranteed. North Korea’s leader Kim Jong Un will now meet with South Korea President Moon Jae-in at the end of April to discuss the matter. President Moon Jae-in’s office released a statement saying that “North Korea has clearly expressed its intention for denuclearization on the Korea peninsular, and if there is no military threat, and North Korea’s regime security is promised, they have clarified that there is no reason to hold nuclear weapons”.
President Trump responded by telling reporters that “they seem to be acting positively” and that ”I’d like to be optimistic”. He also suggested that the US would be open to talks with North Korea although Director of National Intelligence, Dan Coats, also added that he was “quite sceptical” and that he was doubtful that this was any sort of breakthrough. After initially starting on the front foot the S&P 500 then ebbed and flowed for much of the session – not helped by some soft corporate earnings numbers in the consumer sector – before eventually ending +0.26% by the closing bell. That’s actually the first <0.50% move up or down since February 22nd.
Meanwhile 10y Treasury yields bounced as much as 4bps from the intraday lows before falling again into the close to finish more or less unchanged at 2.886%. Core European bond markets were broadly 2-3bps higher in yield while BTPs actually rose 7bps from the lows at one stage. The Greenback was weaker versus pretty much all currencies with EM currencies in particular the big winner.
That generally positive sentiment in markets was also attributed to some of the pushback of Trump’s tariff talk from his own administration and party, however that optimism is fading this morning. Initially it started with House Speaker Paul Ryan on Monday night, then yesterday Gary Cohn (an economic advisor to the White House) called on executives from major US companies to meet with the President this week with a view to persuading Trump to back down. However late last night news emerged that Cohn is to resign from his role as Trump’s economic advisor, suggesting that Trump is leaning heavily towards some form of protectionist measures. Needless to say that Cohn’s resignation also leaves further question marks around Trump’s economic agenda. On a similar note, overnight, news has also emerged that Trump is considering further measures, specifically for China imports and investments, supposedly following theft of intellectual property rights. An investigation by the US Trade Representative’s office into China’s intellectual property practices is expected in the coming weeks.
So it feels like these stories have some way to run yet and it’s worth noting that yesterday we also saw the EU respond to Trump’s threats by imposing some of their own, namely putting punitive tariffs on imports of US products including Harley-Davidson, Levi Strauss and Kentucky bourbon. So already some signs of tit for tat but the China developments is not to be underestimated as the investigation has been an issue which has somewhat flown under the radar for markets so far.
This morning in Asia the tone in markets has noticeably shifted following those overnight developments. The Nikkei (-0.80%), Hang Seng (-0.67%), Shanghai Comp (-0.16%) and ASX (-1.01%) are all lower as we go to print, while S&P 500 futures are down over 1%. 10y Treasury yields have also rallied back 3.7bps while bond markets in Asia more generally are stronger. The USD has also continued to weaken (-0.15%) with safe havens like the Yen (+0.49%) and Swiss Franc (+0.34%) stronger.
Staying with politics for now, on this continent markets have quickly accepted that Italy’s political stalemate is likely to drag on for some time. Indeed if you wanted evidence that the market is not particularly concerned then look no further than the 10y BTP-Bund spread which now at 132bps (4bps tighter yesterday) and pretty much back to Friday’s pre-election level. Keep in mind that it was as wide as 212bps last year in April at one stage. The FTSE MIB bounced back strongly yesterday, notching up a +1.75% gain which was the strongest since February 14th and which also pushed the index back into positive territory YTD.
The DAX (+0.19%) and Stoxx 600 (+0.13%) also finished higher, despite fading a bit, although still remain in the red YTD. It’s worth noting that there was a story yesterday which attracted a bit of attention on Bloomberg suggesting that a rebellion within Renzi’s ruling Democratic Party could support a 5SM led government so it’s worth seeing if that has any legs.
Moving on. While politics continues to dominate the main stories at the moment, central banks should come back to the forefront from Thursday with the ECB and then Friday with the BoJ. In the meantime we’ve also had some Fedspeak to digest with the Dallas Fed’s Kaplan (neutral/non-voter) yesterday speaking live on CNBC. He reiterated that 3 rate hikes is appropriate in 2018 but also that “I think we should get started sooner rather than later”. He also highlighted that the US economy is “either at or beyond full employment now” and so therefore a gradual pace of hikes is necessary. Kaplan was also asked a question about Trump’s tariffs threats although had a fairly straight bat approach response, saying that “our trading relationship with Canada and Mexico is critical to US competitiveness and US jobs”. Overnight we’ve also heard from the Fed’s Brainard, with her tone sounding a bit more upbeat than usual. Specifically she said that “stronger tailwinds may help re-anchor inflation expectations at the symmetric 2% objective” and that “with greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate”.
Here in the UK, the most significant Brexit news yesterday was comments from DUP leader Arlene Foster following a meeting with the EU’s Michal Barnier. Foster said that the current draft “has omissions and overreaches” and that there will therefore “be a need to negotiate”. So expect this to rumble on despite time clearly not being on the UK’s side.
Switching to the data now, yesterday’s releases were a bit of an afterthought but for completeness, in the US January factory orders printed at -1.4% mom which was bang in line with the consensus, while final durable and capital goods orders for the same month were revised up one-tenth to -3.6% mom and down one-tenth to -0.3% mom. There was no data of note in Europe yesterday.
To the day ahead now. The highlight this morning in Europe should be the final revision to Q4 GDP (consensus for no change to +0.6% qoq) along with the various growth components. Away from that we’ll get February house price data in the UK and the January trade balance in France. This afternoon in the US the most notable release should be the February ADP employment change report which is generally seen as a bit of a precursor for payrolls. The consensus is for a 200k print while our US economists are slightly below that at 175k. Also due out are the final Q4 revisions for nonfarm productivity and unit labour costs, along with January consumer credit. The Fed is also due to release the Beige Book in the evening. The Fed’s Bostic will also speak this afternoon at 1.00pm GMT on the economic outlook while the Fed’s Dudley is scheduled to speak at 1.20pm GMT although his speech is expected to concern the status of hurricane recovery efforts in the Caribbean. Finally keep an eye on Brexit related headlines once again with ambassadors from all EU countries (except the UK) due to meet in Brussels to hold their first meeting on draft guidelines between the EU and UK.