Global markets slipped on Wednesday after two days of gains amid mounting concern over world growth and trade, as S&P500 futures were coiled around the critical 2,800 “quad top” support level again, European stocks edged higher, and Asian shares declined amid mounting concern over world growth and trade and ahead of a key “no deal” Brexit vote, where optimism that lawmakers were set to eventually delay Brexit sent the pound higher.

Europe’s Stoxx 600 index jumped into positive territory, gaining as much as 0.2%, led by oil stocks after a mixed open, as gains for car makers and miners offset a slide for retailers following disappointing earnings from Inditex, owner of the Zara chain, and Adidas.

Attempts to boost European optimism were unable to shake off the somber mood in Asian trading, where last week’s optimism over U.S.-China trade talks has faded after U.S. Trade Representative Robert Lighthizer said it was unclear whether gaps between the two sides could be closed. Meanwhile, Asian data continue to reinforce the picture of a slowing world economy. Japan’s machinery orders fell in January at the fastest pace in four months, pushing the Nikkei down more than 1%.

Australia also continued its run of weak numbers, as the country’s consumer sentiment slipped in March. while U.S. monthly inflation disappointed rising at the smallest pace since September 2016.

As a result, MSCI’s Asia-Pacific equity index lost 0.3%, although sentiment appeared to reverse as the session drew on, with European markets creeping into the green and the S&P set to open just above 2,800. The question, as for the past months is “will it last?

“Markets are still hopeful for a U.S.-China trade deal — my concern is that this is not necessarily going to ride to the rescue of the weak economy … ,” said Steve Barrow, G10 strategist at Standard Bank. “That means riskier financial assets like equities are going to struggle from here.”

All that’s kept MSCI’s world index off the 4 1/2-month highs it reached when Washington and Beijing appeared close to a trade agreement. The index has failed to make headway in March after two months of gains

Meanwhile, Britain’s political chaos is also weighing on sentiment. It hasn’t been able to agree on how to exit the EU by a March 29 deadline. On Tuesday, lawmakers defeated for a second time Prime Minister Theresa May’s proposed Brexit agreement. But they are expected to reject leaving the EU without a deal following a vote scheduled later today. Those optimistic expectations boosted the pound after this week’s volatile ride. Sterling rose as high as $1.3290 and as low as $1.2945. It was trading 0.7 percent higher at $1.3150. UK stocks and government bonds were flat.

Of course, even if lawmakers rejected no-deal Brexit, the eventual outcome was still unclear, with UBS advising clients to “remain cautious, and avoid chasing short-term rallies in sterling or increasing exposure to UK equities.”

The other big narrative fascinating world markets has been Boeing’s shares, as more and more countries ground its 737 MAX 8 planes after Sunday’s crash in Ethiopia, the model’s second fatal recent crash in les than six months. Boeing’s Frankfurt-listed shares shed another 2 percent to six-week lows. A 6% fall in New York on Tuesday pushed the Dow down 0.4%; Boeing was down another 1% overnight as more countries grounded their 737 Max 8 fleets.

However, the S&P 500 and Nasdaq benchmarks closed higher after a weak inflation report for February reinforced expectations the Federal Reserve will remain patient on rates and may sound more dovish at next week’s meeting.

Those expectations had taken U.S. 10-year bond yields to 10-week lows at 2.596 percent on Tuesday and pushed the dollar lower for a fourth straight day against a basket of currencies. German 10-year bond yields also fell, getting closer to zero percent.

In geopolitics, Iran’s Defence Minister said Tehran will respond firmly if Israel Navy acts against Iran oil sales. Senior Iranian Security official says some regional countries are spending money on “suspicious nuclear projects” which would force Iran to revise its defence strategy. Elsewhere, Secretary of State Pompeo criticized China, Russia, Venezuela and Iran in comments touting increasing US energy supplies, adds will use all economic tools at disposal to deal with Venezuela crisis. Finally, North Korea reportedly appeared close to missile site restoration, with South Korea stating the launch sites restoration is almost complete.

In FX, the dollar lost steam after the London open as fresh demand helped the pound rose ahead of another key U.K. parliamentary vote on Brexit. The Australian and New Zealand dollars slid 0.3 percent, whacked by Australia’s weak consumer confidence figures. The euro was flat against the dollar around $1.129, up from the 20-month lows of $1.1174 it hit after the European Central Bank pushed back its rate-rise schedule and announced a cheap-loans program for banks.

On commodity markets, the dip in the dollar helped gold hit its highest in two weeks at almost $1,307 per ounce. Brent crude oil futures edged up around 0.3 percent to $66.88 a barrel after a Saudi official said the kingdom planned to reduce oil exports and the U.S. government cut its forecast for domestic output growth.

Expected data include mortgage applications, PPIs and durable-goods orders. Empire Co. and MongoDB are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures little changed to 2,798.50
  • STOXX Europe 600 up 0.2% to 373.80
  • MXAP down 0.5% to 158.10
  • MXAPJ down 0.3% to 521.90
  • Nikkei down 1% to 21,290.24
  • Topix down 0.8% to 1,592.07
  • Hang Seng Index down 0.4% to 28,807.45
  • Shanghai Composite down 1.1% to 3,026.95
  • Sensex up 0.6% to 37,740.80
  • Australia S&P/ASX 200 down 0.2% to 6,161.19
  • Kospi down 0.4% to 2,148.41
  • German 10Y yield rose 1.1 bps to 0.066%
  • Euro up 0.07% to $1.1296
  • Italian 10Y yield fell 2.1 bps to 2.185%
  • Spanish 10Y yield rose 0.2 bps to 1.172%
  • Brent futures up 0.7% to $67.13/bbl
  • Gold spot up 0.4% to $1,306.45
  • U.S. Dollar Index little changed to 96.88

Top Overnight News

  • Britain will confront head-on the threat of a no-deal Brexit in a parliamentary vote with huge ramifications for Prime Minister Theresa May. On Wednesday, lawmakers will decide whether to tear the country out of the European Union with no agreement in place in 16 days’ time, or give themselves the chance to delay Brexit in the hope of securing better terms
  • The U.K. government won’t apply tariffs on most goods imported into the country in the event of a no-deal Brexit, under a temporary plan announced Wednesday
  • Frustration among U.K. businesses is reaching boiling point after Prime Minister Theresa May’s latest attempt to get Parliament to back her exit deal from the European Union failed again. “Enough is enough. This must be the last day of failed politics,” said Carolyn Fairbairn, director-general of the Confederation of British Industry. “It’s time for Parliament to stop this circus.”
  • The U.K. Debt Management Office is expected to announce a hike in its gilt sales to GBP123b for fiscal 2019-20, up a quarter from GBP97.5b in the past year, according to a Bloomberg survey of eight primary dealers. While this is the highest since 2016, nearly GBP100b of redemptions will make net supply the smallest for 17 years, and continued Brexit uncertainty means demand should stay robust
  • President Donald Trump’s top trade negotiator said the U.S. must keep the option of raising tariffs on Chinese imports as a way to ensure Beijing lives up to a trade agreement that could be finalized in a matter of weeks
  • Australia’s consumer confidence slumped in March as households were shaken by a slowdown in economic growth and the prolonged downturn in the property market.
  • ECB chief economist Peter Praet calls general idea behind modern monetary theory a ‘dangerous proposition’. “The general idea that government debt can be financed by central banks is a dangerous proposition. In the past, this has resulted in hyperinflation and economic turmoil. That’s why central banks are independent”
  • Japan’s machine orders released Wednesday were unexpectedly bad, a warning sign for capital investment which follows other data suggesting the economy is off to a rough start 2019
  • Industry gave the euro-area economy a surprisingly strong lift at the start of 2019 after months of disappointing data cast clouds over the region’s outlook. A 1.4% month-on-month jump in industrial output in January — higher than the 1% gain forecast — was driven by a rebound in some of the bloc’s largest economies, including France, Italy and Spain

Asian equity markets traded mostly lower following the mixed lead from Wall St and after UK PM May’s Brexit deal was voted down in parliament, while soft data releases also contributed to the subdued tone. ASX 200 (-0.2%) and Nikkei 225 (-0.9%) declined at the open as broad weakness and poor Westpac Consumer Confidence data weighed on Australia, while the Japanese benchmark underperformed on currency effects and after a larger than expected contraction in Machine Orders. Hang Seng (-0.4%) and Shanghai Comp. (-1.1%) conformed to the negative tone but with losses stemmed as the region digested some corporate updates. Finally, 10yr JGBs tracked the recent upside in T-notes which were lifted after soft US CPI numbers, while prices were also supported on safe-haven demand and with the BoJ in the market for JPY 710bln of JGBs in the belly to the super long-end.

Top Asian News

  • Japan’s Top Life Insurer Taps Derivatives to Fight Low Yields
  • China’s Hot Stocks Turn Upside Down in Widest Swings Since 2016

European Equities are marginally firmer [Euro Stoxx 50 +0.2%] shrugging off the poor performance seen overnight in Asia where the Shanghai Composite (-1.0%) finished firmly in negative territory on the risk tone following Brexit and a mixed lead from Wall Street. Sectors are mixed, with outperformance seen in energy names as the oil complex is higher by around 0.8%. Notable movers include, Stoxx 600 heavyweight Nestle (+0.4%) in the green after the Co. are said to have selected second round bidders for their skin care unit, which may be valued as high as USD 10bln. Separately, and towards the top of the Stoxx 600 are Pandora (+1.5%) as the Co. are to initiate preparations to identify a new chairman at their annual general meeting today. Elsewhere, and lagging the Stoxx 600 are Inditex (-4.0%) as their FY figures missed on some analysts’ expectations, and in spite of the Co. lifting their dividend by 17%. Adidas (-3.9%) are similarly underperforming as the Co. expect H1 to be impacted by supply chain problems, particularly in the US, may have a 1-2% impact on 2019 sales growth. On the pre-market front Spotify (SPOT) have filed a complaint against Apple (AAPL) stating that Apple abuses its market dominance and engages in anti-competitive behaviour.

Top European News

  • Inditex Drops as Earnings Growth Slows to Weakest in Five Years
  • Martin Gilbert Loses Out as Standard Life Aberdeen Picks One CEO
  • EON Promises Higher Dividend But Earnings Seen Flat in 2019
  • Ronaldo Hat-Trick Seals Another Stock Market Moving Comeback

In currencies, sterling continues to withstand Brexit-related bearish impulses/knocks and has staged another impressive looking comeback from lows vs the Usd and Eur in wake of a 2nd big defeat for UK PM May on the Withdrawal Agreement, even with legally binding assurances from the EU. In fact, the Pound sits proud at the top of the G10 rankings with Cable back above 1.3100 and briefly through technical resistance in the form of a 50% Fib (1.3148) and the psychological 1.3150 level, while Eur/Gbp has reversed from circa 0.8650 through 0.8600 again.

  • DXY – The broad Dollar and index remain on the back foot following yesterday’s benign US CPI release, as the data focus switches to PPI, durable goods and construction spending, while the Gbp resilience noted above along with similar resistance in other rival currencies is also impacting. The DXY has subsequently slipped back from 97.000+ yet again and is currently just off a 96.839 base, eyeing chart support at 96.764 (also a 50% retracement) having breached 96.987 (38.2% Fib).
  • CAD/AUD/NZD – The non-US Dollars are bucking the overall trend of gains vs the Greenback, albeit to varying degrees as the Loonie continues to hold up better around 1.3350 against the backdrop of firmer crude prices. Conversely, the Aussie and Kiwi are underperforming, with Aud/Usd slipping back towards 0.7050 following downbeat Westpac consumer sentiment overnight, and Nzd/Usd retreating through 0.6850 ahead of NZ GDP data that may miss consensus and the RBNZ’s forecast, according to Westpac. However, the Aud/Nzd cross remains weak after a sub-1.0300 dip at one stage.
  • CHF/EUR/JPY – The Franc has marginally extended recovery gains vs the Dollar to just shy of 1.0050, while the single currency has crossed 1.1300 with the aid of firmer than expected Eurozone IP and bullish near term technical impulses as the headline pair clears 200 hourly a 10 daily MAs (1.1290 and 1.1294 respectively). However, Tuesday’s 1.1305 peak remains (just) intact and the 21 DMA comes in at 1.1313, while decent expiry options sit between 1.1300-10 (2.1 bn). The Jpy has been hampered somewhat by disappointing Japanese data in the form of machinery orders and is currently close to the bottom of a 111.15-38 band.

In commodities, WTI and Brent futures are marginally firmer on the day but remain in within the March range of just over USD 3.0/bbl. WTI futures are approaching the March high of USD 57.86/bbl whilst Brent is also around USD 0.50 from this month’s highs. In terms of production numbers, Russia oil output has reportedly fallen to 11.307mln vs. 11.336mln in February. As a reminder, under the OPEC+ deal, Russia agreed to curb output by 228K BPD in Q1 2019 from the October baseline of 11.418mln. Traders will be eyeing the release of the weekly DoE inventory data which will be released at 1430GMT due to the US clock change. Metals markets are higher across the board as the complex benefits from the pullback in the Greenback. Gold hit a two week high and reclaimed USD 1300/oz to the upside whilst breaching its 50 DMA at USD 1303/oz whilst copper gains more ground above its 100 WMA (USD 2.8993/lb). Finally, zinc prices hit levels last seen eight months ago (USD 2848.50/tonne) as concern grows about an tight market for the metal.

US Event Calendar

  • 8:30am: PPI Final Demand MoM, est. 0.2%, prior -0.1%;  PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
    • Final Demand YoY, est. 1.9%, prior 2.0%; PPI Ex Food and Energy YoY, est. 2.6%, prior 2.6%
  • 8:30am: Durable Goods Orders, est. -0.4%, prior 1.2%; Durables Ex Transportation, est. 0.1%, prior 0.1%
  • 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.2%, prior -1.0%; Cap Goods Ship Nondef Ex Air, est. -0.2%, prior 0.0%
  • 10am: Construction Spending MoM, est. 0.45%, prior -0.6%

DB’s Jim Reid concludes the overnight wrap

There is only one place to start this morning and that’s with another tumultuous day in the ongoing Brexit saga. As was expected as soon as the Attorney General offered his legal advice in the morning, Prime Minister May’s amended Withdrawal Agreement was defeated in parliament – this time by a margin of 391-242. That was around a 40-swing improvement from the prior vote on her deal, but still a comprehensive defeat for May’s government.

After the vote, Prime Minister May reiterated that she believes her deal is the best and only option that can be negotiated, as long as Parliament wants to deliver both 1) an exit from the EU per the referendum result, and 2) an exit that does not result in a no-deal, disorderly Brexit. To avoid the latter, May will, as promised, table a new motion today, which will ask Parliament to commit to eliminating the possibility of a no-deal outcome. It should pass, setting up a Thursday vote on an extension to Article 50.

In her remarks, May also suggested that after the Thursday vote on an extension, Parliament needs to work out what it does want to vote on and thus hinting that indicative votes may be likely. The key moving forward will be how any ‘indicative votes’ on new options (revoke Article 50, second referendum, another attempt at a new deal) will be structured for Parliament to express its preferences. It’s not clear what type of outcome would command a majority though. At this stage it’s also difficult to rule out Withdrawal Agreement 3 returning. As someone said on Twitter last night, the WA is like the “Fast and Furious” franchise. It’s never ending.

As for the EU response, chief negotiator Barnier said “the EU has done everything it can (…) the impasse can only be solved in the UK.” Other officials took the same line, indicating zero appetite from Brussels to renegotiate the deal. Notably, a spokesman for EU Council President Donald Tusk said that the EU would consider an extension to Article 50, but it would need to include a “credible justification for a possible extension and its duration.” He also said that the EU’s “smooth functioning” was a priority, signaling that if an extension goes beyond the European Parliamentary elections in May, the UK would need to participate. So watch out for tonight’s vote and all relevant amendments.

After rallying yesterday morning, the pound had shed as much as -1.79% from its early highs following Attorney General Cox’s legal advice. His opinion suggested that the legal risks around the withdrawal were unchanged even with the newly negotiated additions to the deal, with the UK still having no internationally lawful means of exiting the protocol’s arrangements. The pound rallied back to flat on the day as rumours swirled ahead of the vote, but ultimately weakened back toward the lows as it became clear that the motion would be thoroughly defeated. This morning sterling is trading slightly higher (+0.12%).

Wider risk sentiment in Asia has turned negative this morning with the Nikkei (-1.11%), Hang Seng (-0.60%), Shanghai Comp (-0.37%) and Kospi (-0.64%) all heading down. Elsewhere, futures on the S&P 500 are down -0.18% and the Australian dollar is down -0.38% on weak consumer confidence data for March (fell -4.8% mom to 98.8). In yet another sign of the global soft patch, Japan’s January core machine orders came in at -5.4% mom (vs. -1.5% mom expected), marking the third consecutive negative monthly read. However, the series tends to be volatile.

The moves this morning come after risk assets generally stayed above water last night in the US. A slightly softer US CPI print appeared to help keep the carry trade in play, while US Trade Representative Lighthizer played a bit of a straight bat in his testimony in front of the Senate. He said that talks with China were in the final weeks but that he couldn’t predict the outcome at this point. He did reiterate however that “we are going to have an enforceable agreement or the President won’t agree”. For what it’s worth Lighthizer was quiet on the 232 auto tariffs subject however the WSJ did run a story saying that Trump was facing increasing headwinds to imposing tariffs on car imports from congressional opposition, legal challenges, and consumer opposition.

When it was all said and done, the S&P 500 finished +0.30% and NASDAQ +0.44%, however, the DOW again lagged, closing down -0.38% with Boeing (-6.13%) hit by the news of multiple countries grounding the Boeing 737 Max 8 indefinitely. The S&P 500-DOW differential, at 0.68%, joins Monday in being in the top 10 since 2009. Boeing cash bonds were fairly quiet again however, with the 3.2% 29s trading close to flat.

In Europe, the STOXX 600 finished -0.06% after passing through gains and losses with the various Brexit headlines. European Banks (-0.38%) did likewise with a bit of focus also on headlines out of the ECB. Reuters reported that the ECB did not discuss a tiered deposit system, and that only one governor expressed “deep concern” about negative rates. The same story also suggested that the plan for the TLTRO rate not going below zero was still in discussion and that growth weakness could change the terms. Further headlines also suggested that the ECB committee proposed a new TLTRO premium at 25bps above the main refi rate but it was pushed back as being too high. The comment on tiered deposits shouldn’t be a surprise at the moment, however, the TLTRO premium line didn’t appear particularly encouraging for markets.

On a related subject the ECB’s Villeroy also said that the ECB does not do “monetary policy to please banks nor to punish them”, which was notable as the Central Bank of France has been one of the more vocal on the impact of negative rates. Bunds closed (-1.2bps) at the lows of 0.052% having earlier in the session hit as high as a gravity defying 0.101%. Gilts (-1.6bps) were also well off their yield highs while Treasuries closed down -4.1bps to 2.598% post that below market inflation print. This is the lowest yield since 3 January and that was the only day it closed lower than the previous night since mid-January 2018.

Indeed core CPI came in at +0.1% mom (+0.11% unrounded), which compared to expectations for a +0.2% reading with the weakness concentrated mostly in medical care and recreation. It also nudged the year over year rate down to +2.1% from +2.2% with the headline at +1.5%. So modestly lower but unlikely to change the Fed’s view too much. The other US data yesterday was the February NFIB small business optimism reading which rose half a point to 101.7, albeit slightly behind expectations for 102.5. The only data of note in Europe came in the UK, where January industrial production (+0.6% mom vs. +0.2% expected) and January GDP (+0.5% mom vs. +0.2%) both surprised notably to the upside. Much of that was to do with the very weak December data, however, it completely played second fiddle to all the Brexit newsflow in any case.

Finally, while it should be another day of Brexit headline watching, for those wondering, there is the distraction of the January industrial production print for the Euro Area this morning, while in the US we’ll get February PPI (+0.2% mom core expected) and preliminary January durable and capital goods orders (+0.2% nondefense capital orders expected) data. The ECB’s Coeure will also speak this afternoon while EU ambassadors meet in Brussels.

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