Article / 06 April 2017 at 7:00 GMT

Morning Markets: FTSE braced as Fed plan causes jitters

Former managing editor, TradingFloor.com / Saxo Bank
Denmark

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Watchlist

  • Germany: Factory Orders        (0600 GMT) 
  • Eurozone: Retail PMI                (0810 GMT) 
  • US: Initial Jobless Claims          (1230 GMT) 


The Federal Open Market Committee meeting minutes had not been expected to cause much controversy but the revelation it is considering shrinking its $4.5 trillion balance sheet sent indices into a spiral that could see FTSE100 take a hit Thursday.

FTSE100 is tipped for a near 1% fall after Nikkei 225 was standing at a 1.5%-plus loss for the day in the hour into the European open while Hang Seng racked up a 0.5% loss following on from sharp losses in the US. With oil also on the retreat, it punctured the risk-on sentiment as effectively as a pricked balloon after the Federal Reserve's surprise disclosure.

Any shrinking of the balance sheet is negative for liquidity, a likely brake on the interest rate-hike cycle, and a change of tack given the amount of cash poured into markets by central banks since the great financial crisis. USDJPY weakened in the aftermath to the 110.35 area but has since settled into the 110.50 zone but gold was unable to take advantage of the safer-asset push petering out at around a peak of $1,258/oz as resistance at $1,261/oz continues to cap the precious metal.

US 10-year Treasuries yields meanwhile held at 2.33%. While that is at the lower end of the recent range that has largely held since Donald Trump's victory on November 8, the failure to test more convincingly towards 2.3% in the wake of last night's FOMC minutes reveal probably owes much to a strong ADP report on the US labour market that offset some of the nervousness and will keep a firm focus on tomorrow's keenly-anticipated nonfarm payrolls number for March.

Speaking of Trump, he'll sit down with his Chinese counterpart Xi Jinping later today and it will be fascinating to see how the stony-faced Xi will respond to the backslapping, hand-grabbing antics of the US president. Markets are not expected to move much around the high-level summit which will focus on geopolitical concerns revolving around North Korea and the South China Sea, but any revival of trade-war talk and branding China as a currency manipulator might have an impact on markets already on edge.

And it could well be that the two-day summit ultimately doles out another lesson to Trump after his failure to get his healthcare bill through Congress while speaker Paul Ryan has also come out and said tax reform could take much longer than expected, hurting the Trump trade in the process. A likely about-turn on Syria following the dreadful use of sarin on civilians Tuesday also looks instructive —. Trump hasn't yet moved against Russia which stands solidly behind the regime of president Bashar al-Assad but a shift on position is likely to have severe implications for his bromance with Russian leader Vladimir Putin. 

The first 100 days of Trump are not yet complete. But the realities of power have already altered the agenda, dramatically.

Market signals

Asian session

  • Investors weigh minutes from FOMC March meeting, viewed as hawkish
  • Investors are looking ahead to the Xi-Trump meeting
  • China's Caixin Services PMI was 52.1 in March, falling from 52.6 in February 
  • This signals the slowest increase in Chinese business activity for six months 
  • Asian markets traded in the red following falls on Wall St, the exception being China
  • The Nikkei fell more than 1%, its lowest in four months
  • The ASX200 index was off 42 points or 0.7% by mid-afternoon
  • During Asian trade, Brent futures traded lower by 0.5% to $54.09/barrel 
  • US crude fell 0.57% to $50.86/barrel

Forex ahead

  • The NZD remained out of favour and fell on most of the crosses
  • USDJPY was lower for the fifth consecutive session ahead of the Xi-Trump summit
  • The Australian dollar slipped 0.4% to 0.7533 against the USD, its lowest since March 13
  • ECB meeting minutes could see EURUSD movement 

From the Floor

Game over? "The key is this focus on the frustration with the Trump trade," says Hardy.

Under pressure. "10-year Treasuries are testing the 2.3% level again but we probably won't see a break until the figures tomorrow," says Boye.

Get all the latest from Saxo Bank's trading floors in From the Floor, within the hour.

In opinion

1..2..3
Economists expect Germany's factory orders to bounce back sharply in March after tumbling in the previous month, says James Picerno.

Temporary trigger
Emmanuel Macron looks likely to be the victor at the second round of the French election but while markets will rejoice, the fillip is only set to be temporary, explains Stephen Pope.

Hawkish Fed
Asian markets opened lower following Wall St's lead after the FOMC minutes, writes the Saxo APAC Sales Trading team.

Early surge
Oil is rallying on the back of an anticipated return of refinery demand some four weeks prior to the usual upsurge,
says Ole Hansen.

New blueprint
The divergence in the first quarter between stocks and oil will not necessarily set the blueprint for Q2, explains Neil Staines.

Summit goin' on
China's president Xi sits down with the mercurial Donald Trump today for a summit that could define the future relationship of the world's two biggest economies, writes Steen Jakobsen.

The ungovernable
Whatever the outcome of the French presidential elections, there is trouble looming for France in the June legislative elections that could leave it ungovernable, Christopher Dembik writes in his Quarterly Outlook.

Primarily speaking
The primary bonds market is heating up as corporations like Bayer and Volkswagen vie with a whole host of national governments for attention, says Michael Boye.

Fear not
The fear trade based on a strong Le Pen performance in the French presidential elections seems to be on the wane although it's a fool's game to predict as Trump's victory has shown, according to #SaxoStrats.

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 Xi Jinping is not the type to give too much away. Photo: Shutterstock

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