April 18,2018
United States:
U.S. Stock Futures Climb on Earnings, Geopolitics: Markets Wrap
U.S. stock futures rose, extending gains a third day as investors took heart from a solid start to the earnings season and signs of improving relations between America and North Korea. The pound slumped and euro briefly dropped on disappointing inflation data. The U.S. gains followed sweeping increases across Asian equities, though shares in Europe turned lower in the wake of a jump on Tuesday. The dollar strengthened as many of its major peers had a bad day, with the Swiss franc extending declines and Europe’s common currency roiled when euro-area inflation data was revised downward. Sterling tumbled as U.K. price growth slowed to the weakest level in a year. Treasuries and European bonds were mostly steady. There’s once again no shortage of catalysts for investors across the globe, from corporate fundamentals and geopolitics to simmering trade tensions and growth concerns. For now the bulls appear to have the upper hand as the earnings season ramps up and the U.S. says it’s already started direct talks with North Korea. Separately, Russian leader Vladimir Putin was said to be seeking to dial down tensions with America. Still, nickel surged to the highest in more than three years on the London Metal Exchange on worries that the metal used in stainless steel could be caught in the crossfire of any further U.S. sanctions against Russia. Earlier in Asia, Japanese shares outperformed amid gains across the region, boosted by a drop in the yen as President Donald Trump met Japanese Prime Minister Shinzo Abe. China’s 10-year bond yield tumbled after the People’s Bank of China cut the reserve-requirement ratio for banks, part of its efforts to support credit amid a crackdown on shadow lending. Lenders in the country advanced. But automakers fell after the government moved to allow foreign players to take full ownership of their local ventures.
Europe:
Bank of England Seen Hiking Rates Just Once in 2018
For those still guessing what the Bank of England means when it says the tightening cycle will be “limited and gradual,” most economists expect just one interest-rate hike in 2018. About three-quarters of analysts in the latest Bloomberg survey now see a rate increase in May — up from 54 percent last month — although the long term view is less certain. While a significant minority see more action this year, the median forecast for a subsequent hike is not until February 2019. That outlook is also reflected in markets, where a hike on May 10 is seen as almost a sure thing, and a follow-up in November merely a toss-up. The pound has rallied, with the currency hitting $1.4377 on Tuesday, its strongest level since the day of the result of the Brexit vote. The central bank has stressed that it would follow a “limited and gradual” path away from record-low interest rates since at least 2014, long before officials hiked rates for the first time in more than a decade in November. It’s doubled down on the language since the move last year, even with signs that slack has been used up and wage growth is accelerating. They’re now set to hike for the second time in six months — a faster pace than markets predicted following last year’s move. Still, doubts about the outlook for future hikes remain. Some economists are concerned that, with Brexit continuing to cloud the horizon and growth and inflation at risk of slowing faster than policy makers expect, the case for further action after May could be derailed. Recent data has fallen short of forecasts, partly as a result of bad weather. Analysts will get another snapshot of the economy this week as the Office for National Statistics reports on inflation and retail sales.
U.K. Households Are Still Holding Back on Spending, Visa Says
British households continue to curb their spending, leading to the worst quarter for consumers in over five years, according to a report from Visa. Spending dropped by 2.1 percent in March following a 1 percent annual decline in February. Spending in stores and online both declined compared to a year ago, with transport and communication the weakest sectors. The figures show a continuing deterioration of one of the biggest parts of the U.K. economy. Britons have been struggling to maintain borrowing and consumption, with inflation accelerating in the wake of the U.K.’s 2016 vote to leave the European Union. Bad weather, including a storm dubbed the “Best from the East” in March, could also have kept shoppers at home. “We are in the midst of a dip in consumer confidence and this — coupled with other economic factors — is causing shoppers to continue to restrain themselves,” said Mark Antipof, chief commercial officer at Visa. “The negative impact that the ‘Best from the East’ had on U.K. economic activity last month has been widely reported, but this doesn’t entirely explain March’s lackluster consumer spending.” The Bank of England said last week that tightening criteria from lenders was reducing the availability of unsecured credit to households. The Office for National Statistics will report March retail sales figures on Thursday, and economists expect them to fall from a month earlier.
Asia:
Hong Kong Interbank Rate Jumps as HKMA Defense Hits $4.3 Billion
The Hong Kong dollar’s interbank borrowing costs rose to their highest level this year, as the city’s de facto central bank bought more of the currency to defend its peg to the greenback. The three-month interbank rate — known as Hibor — climbed for a fourth day to reach 1.32 percent, the highest since Dec. 27, as the Hong Kong Monetary Authority took its buying of the local dollar since last week to HK$33.7 billion ($4.3 billion). More than half of the purchases have taken place within the past two days. The gap between Hibor and the interest rate on the greenback stayed around one percentage point, which still makes shorting the Hong Kong dollar attractive. “The pace of Hong Kong dollar buying is not particularly aggressive relative to history,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “To defend the linked exchange rate system, the HKMA could also sell extra exchange fund bills.” Traders are increasingly pricing in higher borrowing costs. One-year interest rate swaps climbed for a fifth day, hitting 1.94 percent, the highest since December 2008. The Hong Kong dollar was little changed at HK$7.8499 per greenback, next to the end of its permitted trading band, as of 6:12 p.m. local time. The city’s aggregate balance of interbank liquidity will fall to HK$146.2 billion on April 19, according to the HKMA.
Japan Exports Surprisingly Weak on Stronger Yen, Trade War Fears
The unexpectedly weak growth in exports suggests that while the global economy is growing, concerns about a brewing trade war may be hurting sentiment. Exports to China recovered after a decline in February but imports fell due to the lingering effects of factory shutdowns over the lunar new year. Exports are weak, and the big factor is the weakening momentum in global manufacturing, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “I now see a possibility it could be worse than a soft patch,” with today’s data indicating exports may be weakening as a trend. The trade balance is likely to shrink in coming months as the stronger yen continues to weigh on exports while rising oil prices push up imports, Muto said. “I think this confirms that the economy slowed at the start of the year,” according to Masaki Kuwahara, senior economist at Nomura Securities. “Considering trends in global demand, I don’t think exports are going to slow down further from here.” “There’s obviously lots of volatility related to the Chinese New Year, so it’s a bit difficult to read too much into the latest numbers,” said Marcel Thieliant, senior Japan economist at Capital Economics Asia. The slower growth is “basically due to the stronger yen, which is reducing the yen value of exports and imports invoiced in foreign currency,” he said.