Stocks Dazed After Trump NAFTA Flop, Tax Plan Disappointment; ECB Looms

European shares are lower, pressured by disappointing results by Deutsche Bank and ending a six-session gain, as Asian equities and S&P futures were little changed after a record-setting rally in world stocks which pushed the MSCI World index to over $50 trillion yesterday, fizzled after Trump released unconvincing tax cut plans prompting traders to “sell the news” while caution set in as the ECB met.

Markets were disappointed after Trump’s plans to slash company tax rates to 15 percent from the current 35 percent and 39.6 percent for small firms offered no details on how they would be paid for. Billed beforehand as the biggest tax cut in history, it amounted to little more than a one-page plan and fueled the suspicion that it could run into opposition from U.S. lawmakers worried about increasing the country’s debt levels.

“There was virtually no new information, just as expected. He was essentially repeating his campaign promises,” said Tomoaki Shishido, senior fixed income strategist at Nomura Securities.

In Europe, key markets traded as much as 0.7% lower as traders pulled back after six days of unbroken gains fueled by relief at the outcome of the first round of France’s presidential election and encouraging earnings and economic data. As Reuters observes “Asia felt groggy too” despite the BOJ offering its most upbeat economic assessment in nine years but Asia-Pacific shares ended flat a day after hitting their highest in almost two years.The yen slipped as the Bank of Japan kept its stimulus policies unchanged.

Deutsche Bank shares fell as much as 3.5 percent even as its first-quarter net profit more than doubled following a rebound in bond trading. It shares have nearly doubled though after worries about its future late last year. Elsewhere, upbeat results from the likes of SKF, Bayer and Subsea 7, companies closely geared to economic growth, were cheered as more investors piled into the European recovery story.

For currency traders, it was a session full of drama as the Mexican peso and Canadian dollar jumped, reversing earlier declines, after the White House said it won’t immediately terminate participation in the North American Free Trade Agreement. As reported previously, Trump’s top advisers have been embroiled in a debate over how aggressively to proceed on reshaping U.S. participation in Nafta, with hard-liners favoring a threatened withdrawal as soon as this week and others advocating for a more measured approach to reopening negotiations with Canada and Mexico. Elsewhere in FX, a surprise move by Sweden to expand its stimulus program pushed the crown down sharply.

The focus now turns to the ECB and what its head Mario Draghi and his colleagues have made of the recent improvement in euro zone economic data. The bank is not expected to make any changes to its record low interest rates or mass-stimulus program, so market reaction to this meeting may hinge on just a few crucial words (see our ECB preview here).

“We would expect the commentary to remain relatively upbeat on the growth outlook,” Mike Bell, global market strategist at JPMorgan Asset Management said in a note. He expects the ECB to wait until January to begin withdrawing stimulus. “Despite the result of the first round of the French election soothing market fears of potential euro disintegration risk we still expect this week’s ECB meeting to be too early to signal any meaningful shift in policy.”  However, “it is possible that the ECB will remove the language stating that the risks (to the economy) “remain tilted to the downside,” Bell added.

Euro zone government bond yields nudged up along with the euro which dropped sharply below 1.0900 having been as high as $1.0950 this week after pro-EU centrist Emmanuel Macron topped the first round vote in France.

Investors are searching for fresh impetus after an underwhelming tax cut plan from U.S. President Donald Trump. The Nafta statement emerged as a distraction for the currency market, while in the bond market, the next flashpoint will be the tone of the European Central Bank’s meeting Wednesday. Emmanuel Macron’s ascent in the French election blunted euroskepticism, creating room for policy makers to chart out their stimulus exit plan.

China’s growth accelerated at the fastest pace since mid-2015 in the January-March quarter, while South Korea on Thursday also reported stronger than expected first-quarter growth, fueled by improving global demand.

Among commodities, industrial metals steadied though oil prices dipped again on concerns about globally bloated markets[O/R]. Brent futures dropped to $51.60 per barrel, down 22 cents, or 0.42 percent, from their last close. Brent is almost 9 percent below its April peak. The dollar, meanwhile, slipped to 111.23 yen from near a one-month high of 111.78 yen scored earlier on Wednesday.

Economic data include durable goods orders, initial jobless claims. Alphabet, Microsoft, Amazon and AbbVie are among companies scheduled to publish results.

Global Market Snapshot

  • S&P 500 futures are unchanged to 2,383.
  • STOXX Europe 600 down 0.45% to 387.00
  • MXAP unchanged at 149.33
  • MXAPJ down 0.03% to 487.46
  • Nikkei down 0.2% to 19,251.87
  • Topix down 0.05% to 1,536.67
  • Hang Seng Index up 0.5% to 24,698.48
  • Shanghai Composite up 0.4% to 3,152.19
  • Sensex up 0.01% to 30,135.83
  • Australia S&P/ASX 200 up 0.2% to 5,921.48
  • Kospi up 0.07% to 2,209.46
  • German 10Y yield unchanged at 0.353%
  • Euro up 0.2% to 1.0920 per US$
  • Italian 10Y yield rose 4.4 bps to 2.016%
  • Spanish 10Y yield unchanged at 1.7%
  • Brent Futures down 1% to $51.29/bbl
  • Gold spot down 0.4% to $1,264.34
  • U.S. Dollar Index down 0.2% to 98.87

Top Overnight News from Bloomberg

  • Trump Rules Out Swift Nafta Withdrawal in Favor of Renegotiation
  • Trump’s Corporate Tax Rewrite Faces Major Obstacle: Its Cost
  • Samsung Gives Activist Elliott Concessions But Not Restructuring
  • World’s Most Indebted Developer Battles Short-Sellers Again
  • China Aims to Reach Airworthiness Pacts With U.S., EU This Year
  • Chinese Coal Miner Said to Vie for Singapore Mobile Carrier M1
  • Oil Declines as Investors Weigh U.S. Output Against Stockpiles
  • Draghi Has History Lesson to Tell in ECB’s Exit Discussion
  • New Cholesterol Drug Falls Short as Sales Driver for Amgen
  • BOJ Cuts Inflation Forecast While Keeping Stimulus Unchanged
  • STMicro Delays Succession as Apple, Cars Boost Chip Demand
  • Bayer Raises Profit Outlook on Chemicals, Crops Rebound

Asian equity markets traded mixed following the similar lead from Wall St. where the announcement of Trump’s tax plans left much to be desired and failed to provide the impetus many had hoped for. As such, mild weakness was seen in Nikkei 225 (-0.2%) with participants also uninspired following a mundane BoJ policy decision, while ASX 200 (+0.2%) was resilient as strength in financials offset losses across commodity-related sectors. Shanghai Comp. (+0.4%) and Hang Seng (+0.5%) benefited from encouraging Chinese Industrial Profits which surged 23.8% Y/Y last month. Price action in 10yr JGBs was also subdued as the BoJ provided no surprises, while a cautious tone in stocks only resulted to minimal support for the Jun’17 contract. BoJ maintained its QQE with yield curve control policy and kept NIRP at -0.10% as expected. BoJ raised its economic assessment and stated that Japan’s economy is turning towards moderate expansion. BoJ also said Japan is likely to see inflation hit 2% target around fiscal 2018, although added that momentum towards target is lacking and that risks for economy and prices are tilted to the downside.

Top Asian News

  • Mizuho Sec. Buys 8.59% of Seibu, Says It Will Sell Immediately
  • South Korea’s Economy Rebounds as Exports, Investment Improve
  • China to Step Up Measures Preventing Financial Risks: PBOC
  • Nomura Returns to Profit on Trading, Overseas Recovery

This morning has seen European earnings crank up a notch with plenty of large caps reporting including the likes of Deutsche Bank who stated that profits rose 143% Y/Y, however shares are trading lower as the bank announced a 9% fall in revenue. The broad tone in Europe in negative following the soft lead from their US and Asian counterparts with investors seemingly disappointed by Trump’s tax plan announcement. While the BoJ also stuck to the script by keeping all policy tools unchanged, as expected. In credit markets, price action has been somewhat tame with Bund yields a touch lower by 0.5bps, while many investors will be awaiting the ECB’s rate decision to guide price action. Additionally, as we approach the end of the month, Citi note that EGB’s are set to benefit from moderate month-end extension buying needs, while Gilts will only see a very marginal extension.

Top European News

  • Deutsche Bank Return to Growth Delayed as Trading Trails
  • Gazprom Profit Jumps on Currency Gain, Exports to Europe
  • U.K. Regrets Brexit for First Time Since Referendum, Poll Says
  • Switzerland March Watch Exports Rose 7.5% Y/Y
  • Total’s Profit Beats Estimates as French Giant Plans Growth
  • Nordea CEO Says Swedish HQ Exit Highly Likely Unless Rules Eased
  • Dijsselbloem Says He’s Confident of Greek-Aid Deal ‘Very Soon’
  • Italy Manufacturing Confidence Rises to Highest Since Early 2008
  • U.K. Seen Benefiting From Lower Cost of Offshore Wind in Auction

In currencies, it was a busy session so far, with the Bloomberg Dollar Spot Index was steady as of 10:13 a.m. in London, after increasing 0.3 percent on Wednesday. The Mexican peso jumped 0.8 percent after tumbling 1.7 percent on Wednesday. The Canadian dollar rose 0.2 percent, after a four-day selloff. The yen slid 0.3 percent to 111.36 per dollar, bringing its weekly loss to 2 percent. The euro was little changed at $1.0903, while the pound strengthened 0.4 percent. It will likely be a just as volatile session ahead as the market has ‘set’ some expectations from the ECB press conference later today. Early in the week, ‘source’ stories have suggested the governing council may take a less dovish stance (not hawkish as some have suggested), in preparation for some policy tweaking later on in the year. The EUR has adjusted higher in this respect, but clearly 1.0950 was a step too far, and we have held off this level this morning after a brief upturn. Back under 1.0900, buyers anticipated ahead of 1.0850, but the larger orders lie in the mid 1.0700’s, if not a little higher. A good morning for GBP as the Cable rate has put in another test on 1.2920 resistance higher up. We usually look to highlight resistance areas rather than levels, but in this case, this one data point looks fairly solid. An eventual breach is likely, but once the ECB trade is out of the way, we will watch out for more month end demand to kick in. EUR/GBP has slipped under the 0.8450 mark this morning, but with very little momentum. CAD has weakened again despite the Trump withdrawal of his threat to abandon NAFTA. In the wake of meeting hits counterparts in Canada and Mexico, the president has softened his tone — again — and this may have wider implications on his future remarks, but we will consider these points later. For now, USD/CAD has retested 1.3600, but held. This was a tech based re-push higher from the 1.3525-30 support, but lower levels may be a little more vulnerable given extended CAD levels.

In commodities, oil prices have pulled back in the wake of the EIA rally seen yesterday, with the drawdown in Crude inventories more than double what was expected. However, WTI met a wall of selling interest just in front of USD50.00, and we are back at the lows seen ahead of the report. We continue to hear talk from both OPEC and non OPEC members that they are open to an extension to the production cuts, but this is doing little to support price. Marginal movement seen in base metals as the risk mood largely dictates from here, with little impetus offered from the initial tax plans reported by the Trump administration last night. Precious metals remain heavy but Gold hold off USD1250.00 as Silver has now slipped under USD17.50.

It’s a busy session , with preliminary March data due for durable goods orders (+1.3% expected), capital goods orders (+0.5% expected) and wholesale inventories (+0.2%). We will also see March numbers for the advance goods trade balance (-$65.2bn expected; -$64.8bn previous), and pending home sales (-1.0% expected; +5.5% previous). We also get the initial and continuing jobless claims numbers, and the Kansas City Fed’s manufacturing survey for April (17 expected; 20 previous) . Earnings season also continues as Alphabet, Amazon, Intel, Ford Motor and Microsoft are due to report today amongst other

US Event Calendar

  • 8:30am: Advance Goods Trade Balance, est. $65.2b deficit, prior $64.8b deficit, revised $63.9b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.2%, prior 0.4%; Retail Inventories MoM, prior 0.4%
  • 8:30am: Durable Goods Orders, est. 1.3%, prior 1.8%; Durables Ex Transportation, est. 0.4%, prior 0.5%; Cap Goods Orders Nondef Ex Air, est. 0.5%, prior -0.1%
  • 8:30am: Initial Jobless Claims, est. 245,000, prior 244,000; Continuing Claims, est. 2.01m, prior 1.98m
  • 9:45am: Bloomberg Consumer Comfort, prior 49.9
  • 10am: Pending Home Sales MoM, est. -1.0%, prior 5.5%; Pending Home Sales NSA YoY, prior -2.4%
  • 11am: Kansas City Fed Manf. Activity, est. 16.5, prior 20

DB’s Jim Reid concludes the overnight wrap

The Trump administration has much loftier ambitions fiscally and yesterday we received the long awaited tax principles that will start negotiations. It mirrors much of the campaign promises albeit with differences including one repealing a code allowing individuals to deduct state and local taxes from their reported income. This will apparently hit high tax states like California, NJ and NY and may cause problems for Republicans there. Elsewhere the highlights of the plan are reducing 7 tax brackets to 3 (10%, 25%, 35%) and cutting the top rate from 39.6%, a 15% business rate tax, a territorial tax to “leveling the playing field” for US companies and a onetime repatriation tax. However details remain vague in this one-page document, especially on the costing side and as we know unless its budget neutral (which it’s hard to see at this stage) then all we may get is a temporary tax cut for a decade. However such a temporary cut might still boost short-term activity but at what point would worries about the deficit kick in (assuming blockbuster growth didn’t offset it) and at what point would we debate Ricardian equivalence. Maybe not for a while but as we’ll see below markets were left a little disappointed after all the anticipation. If we’re right in our long held belief that helicopter money will become more normal across the globe over say 3-10 years maybe we need a big unfunded budget expansion to set the wheels in motion. We definitely think 2016 marked an inflection point in the balance between global monetary and fiscal policy even if the journey will be full of bumps.

On a very busy day in Washington we also saw speculation from Politico that Mr Trump was close to scrapping Nafta but the same organisation claiming that a White House compromise on Obamacare government payments is reducing the risk of a shutdown on Friday. It really was hard to keep up. Overnight we’ve learnt from the White House that Mr Trump won’t immediately abandon Nafta after speaking with the leaders of Mexico and Canada and agreeing to renegotiate the accord “to the benefit of all three countries”.

The S&P 500 gave up gains of around half a percent to close -0.05% with the reversal seemingly coinciding with the abandon Nafta story, although a lack of tax reform detail didn’t help. Earlier European equities (STOXX +0.5%) continued to gain, with the STOXX now posting its sixth straight day of gains and hitting its highest levels since August 2015. However Eurozone banks finally ran out of steam with the index dropping by -0.3% after five consecutive days of positive returns. The CAC (+0.2%) and DAX (+0.1%) edged higher on the day.

Over in government bond markets we saw the US yield curve flatten somewhat as 2Y yields fell 1bp while the 10Y and 30Y points were about -3bp lower after the late sell-off in stocks, and thus ending a 5 day climb in yields. European bond markets saw Bund and OAT yields drop across all maturities, with the 10Y points falling by -3bps and -1bp respectively. However BTP yields rose across the curve with 10Y yields up by +5bps on the day.

Asian equities have retreated after a 5 day rally with the Nikkei -0.2%, the Hang Seng flat and Shanghai Comp -0.55% as we go to print. The BOJ meeting has just ended and they’ve kept their policy settings unchanged but have lowered their inflation forecast which backs up comments last week from Governor Kuroda that accommodative policies and asset purchases will continue for some time on low inflation. China is weak on continued concerns of governmental crackdown in financial markets. Elsewhere overnight the dollar has fallen with the Mexican peso and Canadian dollar reversing the declines after the initial Nafta fears. There was no market moving data out yesterday. Over in Europe French consumer confidence for April came in at 100 as expected, unchanged from the month before. There was no data of note out of the US.

It’s a busier day ahead today and the key event in Europe will be the ECB rate decision around midday with Draghi due to speak afterwards. The consensus remains that there will be no change of policy rates, and DB rates strategist Abhishek Singhania reiterated this view in a note yesterday. He noted that despite the market friendly outcome of the first round of the French presidential election the ECB is unlikely to indicate any change in its policy stance as yet. He argues that (from the ECB’s perspective) there is still limited evidence of self-sustaining improvements in underlying inflation – the recent fluctuations in  Eurozone core inflation due to the timing of Easter could make the ECB wait for inflation to settle down before being able to decisively interpret the recent dynamics. The link to the report is as follows: A reminder that the house view is for forward guidance to be adjusted in June, tapering to be pre-announced in September and a one-off deposit rate hike in December; the probability of the latter has declined but it remains the baseline. Our economists expect tapering in H1 2018 and the first refi hike around the end of 2018.

Aside from the rate decision we’ll get preliminary German CPI numbers for April (+1.9% YoY expected; +1.5% previous). In terms of other data we will get the German GfK consumer confidence survey indicator for May (9.9 expected; 9.8 previous) as well as the final Euro area consumer confidence reading for April which is not expected to be revised from the preliminary reading (-3.6).

It’s a busier session over in the US as well, with preliminary March data due for durable goods orders (+1.3% expected), capital goods orders (+0.5% expected) and wholesale inventories (+0.2%). We will also see March numbers for the advance goods trade balance (-$65.2bn expected; -$64.8bn previous), and pending home sales (-1.0% expected; +5.5% previous). We also get the initial and continuing jobless claims numbers, and the Kansas City Fed’s manufacturing survey for April (17 expected; 20 previous) . Earnings season also continues as Alphabet, Amazon, Intel, Ford Motor and Microsoft are due to report today amongst others


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