European shares and S&P futures fell amid mixed earnings from corporate heavyweights, while Asian stocks were fractionally higher. The dollar slump continued against all its major peers after the Federal Reserve gave dollar bulls little to be optimistic about.  The U.S. currency dropped toward the lowest close since November after the Fed reiterated its intention on Wednesday to lift rates only gradually.

Dollar bulls had hoped that Yellen would provide a stronger signal about the pace of interest-rate increases this year after comments by the new Trump administration overshadowed data showing economic growth is picking up steam, prompting some skeptics to ask “what does the Fed know that we don’t.” With all the political uncertainties about, the big central banks appear to be lying low – or at least trying not to add to the volatility. It sent the dollar to its lowest level since mid-November against a six-strong group of other top world currencies, to add to January’s worst start to a year in three decades.

As DB’s Jim Reid put it, “the message from the Fed overnight was a fairly steady one which acknowledged improvements in the outlook but didn’t really further the debate on when the next rate rise will occur. There was a mention of improving “measures of consumer and business sentiment” although interestingly there was a notable omission of the recent improvement in business fixed investment which they continue to say “remained soft”. We also got the usual “some further strengthening” in the labour market while on the inflation front the Fed noted that “inflation increased in recent quarters but is still below the committee’s 2% longer-run objective”. There was nothing new to take from the language concerning the rates path or balance sheet policy – the latter having been a fairly topical discussion amongst Fed officials recently. One thing that is worth noting though is the change in the composition of the voting members this year. Both George and Mester have dropped off and both were previously seen as having a strong hawkish leaning and so implying a more dovish Fed overall.”

Others were more cheerful: “this is a confirmation of the strength of the U.S. economy and an affirmation rate increases will be gradual,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc. in Manila. “It’s a silver lining for Asia and the rest of the world against the dark clouds brought by the lack of clarification in the policies and direction of” U.S. President Donald Trump.

Investors will now be keeping one eye on Friday’s jobs report and
another on the narrative from the White House for signs of pro-growth
policies.

“The dollar and other currencies are in a push-pull situation,” said Andrew Milligan, head of global strategy at Standard Life Investments Ltd. in Edinburgh. “On the one hand economic fundamentals imply the dollar should rise, but on the other hand there is political risk. If the political risk premium rises too much, then it’s contrary to what the fundamentals are actually saying.”

Back in the currency market, sterling also pounced on the weakened dollar to hit a 12-week high as construction sector data showed builders, like manufacturers the day before, are seeing a sharp rise in their costs. It set the stage nicely for the Bank of England’s first meeting and economic forecasts of the year. With Brexit looming it may take a leaf out of the Fed’s book and choose to play a straight bat, although it may implicitly send a less dovish signal than normal as it’s likely to be forced to upgrade growth and inflation forecasts.

In markets, European stocks dropped with S&P 500 futures. The Stoxx Europe 600 Index dropped 0.2 percent at 10:39 a.m. in London as investors assessed disappointing corporate outlooks with health-care shares falling the most. Deutsche Bank tumbled 5.4 percent after its quarterly trading revenue missed analysts’ estimates. Reckitt Benckiser Group Plc added 2.9 percent after saying it’s in advanced talks to acquire baby-food maker Mead Johnson Nutrition Co. Futures on the S&P 500 lost 0.3 percent, after the underlying gauge rose less than one point to close at 2,279.42 on Wednesday.

That was also despite Asian shares ex-Japan hitting their highest since mid-October as Korea’s markets climbed to their best level since July 2015.

In commodities, oil began to edge higher again after news of a sharp rise in U.S. crude and gasoline stockpiles triggered a pause overnight. Brent crude futures nudged up 8 cents to $57.02 a barrel threatening its highest level of the year, while key industrial metals like copper and nickel, but also safe-haven gold, moved higher too.

Earnings are coming thick and fast, with mixed results clouding the picture on the state of the global economy. While Facebook Inc.’s sales topped forecasts, Sony Corp. and Mazda Motor Corp. cut their profit outlooks. In Europe, Deutsche Bank AG and Royal Dutch Shell Plc missed estimates. “There was a clear impact from the negative news flow around Deutsche Bank in the fall, especially on the global markets unit,” said Daniel Regli, an analyst with MainFirst whose recommendation on the stock is under review. “It remains to be seen whether this effect will be reversed in 2017.”

The Stoxx Europe 600 Index dropped 0.2 percent at 10:39 a.m. in London as investors assessed disappointing corporate outlooks with health-care shares falling the most. Deutsche Bank tumbled 5.4 percent after its quarterly trading revenue missed analysts’ estimates. Reckitt Benckiser Group Plc added 2.9 percent after saying it’s in advanced talks to acquire baby-food maker Mead Johnson Nutrition Co. Futures on the S&P 500 lost 0.3 percent, after the underlying gauge rose less than one point to close at 2,279.42 on Wednesday.

Rattled euro zone bond market drew some comfort from the Fed’s apparent lack of urgency to push up rates. Yields, which move inverse to price, drifted down across the board with those on benchmark Bunds down to 0.48 percent. France’s bonds went with the flow but the gap over German peers was near its widest level in three years on nerves about far-right Marine Le Pen polling strongly ahead of elections in April and May. The yield on Spanish 10-year bond added two basis points to 1.7 percent, the highest level in almost a year. German bunds gained, with the yield on the benchmark note due in a decade dropping two basis points to 0.45 percent. The yield on the 10-year U.S. Treasury note was little changed at 2.46 percent, after adding two basis points on Wednesday.

* * *

Overnight bulletin summary

• Earnings dictate play in Europe this morning, with Deutsche Bank the notable underperformer after their report, with Daimler and Shell also among the large caps to have announced their results
• FX markets have continued to see USD softness, with participants looking ahead to BoE rate decision and QIR
• Looking ahead, as well as the BoE QIR, today also sees weekly US jobless data and possible comments from ECB’s Draghi as well as earnings from Amazon and Visa

Market Snapshot

• S&P 500 futures down 0.3% to 2267
• Stoxx 600 down 0.2% to 363
• FTSE 100 down less than 0.1% to 7104
• DAX down 0.3% to 11623
• German 10Yr yield down 1bp to 0.46%
• Italian 10Yr yield up 1bp to 2.33%
• Spanish 10Yr yield up 4bps to 1.72%
• S&P GSCI Index up 0.2% to 402.7
• MSCI Asia Pacific up 0.1% to 142
• Nikkei 225 down 1.2% to 18915
• Hang Seng down 0.6% to 23185
• S&P/ASX 200 down 0.1% to 5645
• US 10-yr yield down 1bp to 2.46%
• Dollar Index down 0.37% to 99.27
• WTI Crude futures up 0.2% to $53.98
• Brent Futures up 0.4% to $57.03
• Gold spot up 0.6% to $1,218
• Silver spot up 0.8% to $17.68

Top Global News

• Fed Waiting to See Economic Results From Flurry of Trump Actions: Economic impact of executive orders still hard to gauge
• Reckitt Targets Mead Johnson With Surprise $16.7 Billion Bid: $90-a-share offer represents 29% premium for shares
• Facebook Invests for Future After Posting Another Revenue Beat: Mobile ad revenue made up 84% of company’s total ad sales
• MetLife Pins Hopes on Trump as Kandarian Reshapes Insurer: Operating profit of $1.28 a share misses analysts’ estimates
• NXP’s Revenue Rises Ahead of Qualcomm’s $47 Billion Purchase: Fourth-quarter revenue rose 52 percent to $2.44 billion
• Deutsche Bank Misses Estimates as Client Jitters Hit Trading: CEO Cryan is cutting assets, jobs, bonuses to shore up capital
• AstraZeneca Sees 2017 Profit Drop, With Elusive Sales Growth: Revenue in 2016 fell as sales of Crestor blockbuster plunged
• Rio Said to Get Approaches on Last $1.5b of Coal Assets: Company weighs options including sale for Hail Creek, Kestrel
• Hexagon to Buy California’s MSC Software for $834 Million: Private equity including CVC, Veritas said to have been outbid
• BC Partners, Bain Said to Weigh Offers for Nature’s Bounty: Entire company could fetch a value of as much as $6 billion

Asian markets were subdued amid a lack of drivers, despite the upbeat close on Wall St where the S&P 500 snapped a 4-day losing streak and tech outperformed following strong Apple results, while the FOMC meeting was also perceived as somewhat dovish. ASX 200 (-0.1%) traded indecisively, although gold and resource names stemmed losses in the index, while Nikkei 225 (-1.1%) suffered from a firmer JPY. The Taiwanese Taiex (-0.2%) was lower on return from its week-long closure but still the Apple supply chain mildly supported in reaction to the tech giant’s encouraging Q1 results, while the Hang Seng (-0.6%) was dampened amid underperformance in property stocks and a lack of drivers with mainland Chinese participants still away before reopening tomorrow. 10yr JGBs were initially higher alongside weakness in riskier Japanese assets, although gains were later wiped out following a weak 10yr auction in which average and lowest accepted prices slumped from last month and the tail in price also widened.

Top Asian News

• Singapore Sees Little Growth in Investment This Year: Investment in 2016 was lowest since at least 2007
• China Oil Trader’s Mideast Spree Shakes Up World Crude Flows: Chinaoil buys Mideast crude as part of Platts pricing process
• Sony Cuts Outlook on Film Unit Writedown, Profit Decline: Struggling movie division weighs on full-year profit outlook

European Indices trade mixed this morning (DAX -0.4%) as earnings dictate play, Deutsche Bank (-5%) after poor earnings although revenues did slightly improve. Shell also underperformed against analyst expectations, however shares are trading higher this morning by 1.7% as the market was buoyed by comments from the CEO who stated with higher oil prices the companies fate may turn. In terms of sectors, IT outperform after Facebook posted a stellar set of results. Core fixed income markets gapped lower at the open but have subsequently pared those losses now up over 40 ticks and above the 162 level. Heading in to the auction, Spanish paper was weighed on with the GE/SP 10Y spread widening around 3.2bps.

Top European News

• Shell’s Falling Debt Burden Shows Worst of Oil Slump May Be Over: Investors look beyond earnings miss, shares rise
• Novo Nordisk Trims Outlook, Expects Lower Prices in U.S.: Environment is ‘increasingly volatile,’ new CEO says
• Delta Lloyd Boards Recommend NN’s $2.7 Billion Takeover Offer: Extraordinary general meeting to be held on March 29
• Vodafone Falls as Indian Competition Crimps Profit Forecast: Full-year Ebitda will be at lower end of 3%-6% growth range
• Daimler Gives Cautious 2017 Profit Outlook Amid Spending Push: 4Q profit rose 3% as trucks slump hurt results
• UniCredit Sets Discount for $14 Billion Rights Offer at 38%: Bank selling shares at 8.09 euros each and offers 13 for 5
• Swatch Profitability Falls to Lowest in 20 Years on Glut: CEO Hayek sees growth in 2017 after recent improvement
• Nokia Quarterly Earnings Beat Estimates as Decline Slows: CEO Rajeev Suri sees stabilization after sharp decline in 2016

In currencies, the Bloomberg Dollar Spot Index lost 0.5 percent as of 11:02 a.m. in London, extending its decline this year to 2.9 percent. The euro added 0.4 percent to $1.0810 and the pound reversed earlier gains. The follow through from last night’s FOMC reaction continued in early London, with USD losses seen across the board after the statement highlighted low inflation and gave a slightly ‘less hawkish’ (rather than dovish), view of the rate profile ahead. The pendulum edges back to 2 rather than 3 hikes through 2017 as a result, and this has pushed EUR/USD back above 1.0800, while USD/JPY is back testing yesterday’s lows ahead of 112.00. USD/CHF remains below 0.9900. The risk ahead if for the GBP as we wait for the BoE announcement and QIR. Many anticipate revisions (higher) to both growth and inflation, and a significant chunk of this may be priced in as Cable has tipped 1.2700 but faces heavy resistance through here. The Brexit White Paper brings another layer of risk into the equation, so caution at the highs looks to be in play as EUR/GBP also pulls away from 0.8500 — partially in the wake of the higher than expect EU PPI numbers — topical due to the (re)focusing on inflation levels. UK construction PMIs came in south of consensus, but discounted due to seasonal factors, while input prices also rose.

In commodities, nickel led industrial metals higher, advancing 2.2 percent to $10,480 a metric ton after the Philippines announced mine closures and suspensions. Coppers prices are also buoyant, in anticipation of China’s return, pushing better levels but struggling ahead of USD6000p/t.  Gold rose 1 percent to $1,222.42 an ounce, the fourth gain in five sessions. Silver also added 1 percent. Oil rose as the biggest expansion of U.S. stockpiles in three months countered output cuts by Russia, the largest non-OPEC member that’s joined the group in trimming supply. West Texas Intermediate climbed 0.7 percent to $54.26 a barrel. The weaker dollar has also played a role.

Looking at the day ahead, we’ll get the BoE meeting outcome at 12pm GMT where we’ll also get the release of the inflation report and also the post meeting press conference with BoE Governor Carney. In a quick preview, the BoE is at or close to the limits of its tolerance of above-target inflation. Recent strength in activity indicators could tip the MPC in favour of a tightening bias. A case can be made for waiting though. The Brexit forecast error may be about to resolve itself as evidence of the real income shock and business relocations begin to appear; the cost of a policy mistake is asymmetric; the role of easy financial conditions in buffering the economy from uncertainty should not be underestimated; and with the latest QE tranche wrapping up this month, the BOE has all the more reason to proceed slowly as the post-referendum monetary stimulus unwinds. Elsewhere in the US the only data of note is the Q4 nonfarm productivity and unit labour cost readings, as well as the latest initial jobless claims print. Earnings wise we’ve also got 36 S&P 500 companies set to report including Amazon (after the close) and Merck (prior to the open).

DB’s Jim Reid concludes the overnight wrap

The message from the Fed overnight was a fairly steady one which acknowledged improvements in the outlook but didn’t really further the debate on when the next rate rise will occur. There was a mention of improving “measures of consumer and business sentiment” although interestingly there was a notable omission of the recent improvement in business fixed investment which they continue to say “remained soft”. We also got the usual “some further strengthening” in the labour market while on the inflation front the Fed noted that “inflation increased in recent quarters but is still below the committee’s 2% longer-run objective”. There was nothing new to take from the language concerning the rates path or balance sheet policy – the latter having been a fairly topical discussion amongst Fed officials recently. One thing that is worth noting though is the change in the composition of the voting members this year. Both George and Mester have dropped off and both were previously seen as having a strong hawkish leaning and so implying a more dovish Fed overall.

The lack of anything materially new coming out of the Fed last night meant that the Greenback, which had been staging a decent rebound, pared most of the pre- FOMC gains. The Dollar index had been trading as high as +0.53% in the minutes prior but actually wiped out all of that move in the 30 minutes or so following the meeting, before rebounding modestly into the close to finish +0.13%. There was a similar move for Treasuries with the 10y yield peaking at 2.516% intraday before then closing at 2.476%. Equity markets were a bit more subdued with the S&P 500 (+0.03%) generally passing between gains and losses, although it did end up snapping a four-day losing streak. That was largely as a result of a decent rally for tech names with Apple (+6.19%) leading the charge following those better than expected revenue and earnings numbers the evening before. The Nasdaq finished the day up +0.50%. Prior to that in Europe the Stoxx 600 had finished +0.86%.

Meanwhile, in comparison to the last few days, yesterday was actually a fairly Trump newsflow free day aside from some headlines suggesting that Trump had “humiliated” Mexico President Nieto last week with more chatter about Trump supposedly forcing Mexico to pay for the wall with a tax on Mexican exports. That aside, the market was instead able to turn some of the focus over to what was a broadly decent day for data. In the US the most notable was the ADP employment change reading which came in at 246k in January (vs. 168k expected). That’s actually the biggest gain since June last year and should point to some upside risk in tomorrow’s payrolls. Meanwhile the manufacturing data was also positive. The final manufacturing PMI revision for January was set at a solid 55.0 (from 55.1 in the initial flash) while the ISM manufacturing reading rose 1.5pts to 56.0 (vs. 55.0) with both new orders (+0.1pts to 60.4) and employment (+3.3pts to 56.1) components higher. Elsewhere total vehicle sales in January were pretty much bang on the money at 17.5m annualised but construction spending weakened unexpectedly (-0.2% mom vs. +0.2% expected). The Atlanta Fed shifted their Q1 GDP forecast up fairly significantly post the ISM data to 3.4% from 2.3%.

Over in Europe we also got the final January manufacturing numbers and a first look at the data for the periphery. The Euro area reading was nudged up marginally to 55.2 while a slightly softer reading for Italy (-0.2pts to 53.0) was offset by a similar gain for Spain (+0.3pts to 55.6). The UK printed at 55.9, a fall of -0.2pts.

So with it being ISM and PMI manufacturing day we thought we’d update our numbers looking at the manufacturing print through history versus the YoY change in equity markets for the US, Germany, France, the UK and Italy. The numbers do a good job of showing why equity markets remain resilient in the face of rising political risk. On this crude measure equities are just 1% over priced in the US relative to activity, 3% cheap in both France and Germany, 5% too expensive in the U.K. (obviously this can’t adjust for the big fx moves over the last 12 months), and 5% cheap for Italy (likely due to elevated political  risk). We try to not to be overly country specific when looking at this analysis and prefer to use it as a broader starting point as to whether equities are cheap or expensive. Very simplistically it appears like they are broadly in line with where they should be given the data but perhaps being a touch cheap in Europe at the moment.

Elsewhere, the other notable news to report yesterday was the announcement that UK PM Theresa May’s Brexit law had been approved in the House of Commons by 498 votes to 114. That allows May to commence divorce talks with the EU although as the FT pointed out, dozens of pro-EU MP’s were said to refuse to back the bill suggesting a tense road ahead still. May is set to release a “substantial” white paper today detailing her negotiating objectives, so we will be keeping a close eye on that.

This morning in Asia it has for the most part been a fairly weak session with bourses largely edging lower. The Nikkei (-0.72%), Hang Seng (-0.62%), Kospi (-0.47%) and ASX (-0.25%) are all in the red. The Dollar has continued its move lower post the FOMC with the Dollar index down -0.14% while commodities are mixed (Gold +0.46% and WTI Oil -0.58%).

Moving on. As discussed at the top, overnight we have published our latest HY monthly where we highlight that despite rising government bond yields in Europe the measures of financial market volatility that we follow have generally fallen in the past month or so. We don’t think such a low vol environment will last. A potential risk to our view is that it remains stubbornly low even in the face of some fairly aggressive moves in rates. We show how HY credit spreads have outpaced these moves lower in volatility with BB and B spreads now 35bps and 55bps tighter than the volatility implied levels. IG credit spreads have actually underperformed the same volatility implied measures and the spread ratio between HY and IG is at its lowest level in more than a decade with our analysis suggesting that relative returns in the coming months are likely to favour IG credit over HY. Although absolute returns for both asset classes might be negative in 2017. We also show that there are limited attractive yield opportunities within the higher rated part of the HY spectrum although yields do rise with duration. For lower rated HY (B, CCC) there is no evidence that extending duration provides more attractive yield opportunities. In fact short-dated single-Bs still provide upside vs. longer-dated BBs. So we would argue that investors are still presented with the dilemma of whether they prefer increased credit risk or increased duration risk. For now with a still benign default outlook and the potential for higher government bond yields it might continue to benefit shorterdated / lower rated credit.

Before we look at today’s calendar, the saga in France’s presidential race continued yesterday with the spotlight still firmly placed on Francois Fillon. Reuters suggested that his party may consider substitute candidates in the wake of the revelations about his wife’s employment. In the mean time another poll was released yesterday (Elabe poll for Les Echos and Radio Classique). It showed that that Le Pen would lead the first round of voting at 27% versus 20% for Fillon and 23% for Macron. The second round voting shows that Macron would defeat Le Pen by 65% to 35% while Fillon versus Le Pen comes out at 59% to 41% in favour of Fillon (Pollster). French bonds underperformed again yesterday with the 10y yield edging up 4.9bps to 1.080% (versus 3.2bps for Bunds). France’s 10y bond yields are now 40bps above where they started the year and at the highest since September 2015. The spread between France and German 10y bonds (at 62bps) has also now reached a 3-year high.

Looking at the day ahead, this morning in Europe it’s fairly quiet data wise with just the Euro area PPI reading in December due. That clears the path for the BoE meeting outcome at 12pm GMT however where we’ll also get the release of the inflation report and also the post meeting press conference with BoE Governor Carney. In a quick preview, DB’s Mark Wall believes that the BoE is at or close to the limits of its tolerance of above-target inflation. Recent strength in activity indicators could tip the MPC in favour of a tightening bias. Mark also thinks that a case can be made for waiting though. The Brexit forecast error may be about to resolve itself as evidence of the real income shock and business relocations begin to appear; the cost of a policy mistake is asymmetric; the role of easy financial conditions in buffering the economy from uncertainty should not be underestimated; and with the latest QE tranche wrapping up this month, the BOE has all the more reason to proceed slowly as the post-referendum monetary stimulus unwinds. Elsewhere this afternoon in the US the only data of note is the Q4 nonfarm productivity and unit labour cost readings, as well as the latest initial jobless claims print. Earnings wise we’ve also got 36 S&P 500 companies set to report including Amazon (after the close) and Merck (prior to the open). Royal Dutch Shell headlines the reporters in Europe.