S&P futures point to a slightly lower open, while Asian and European stocks are likewise modestly in the red. Trading volumes are muted for most markets on Monday with investors spooked by rising geopolitical tensions in the Middle East and the Korean peninsula. It is also a holiday-shortened week in much of the West. As Bloomberg puts it, there is a “sense of unease” across markets, with global stocks mixed as investors weighed looming security risks and French bonds retreating ahead of the election following the surprising surge of far-leftist Melenchon in the polls.

The dollar inched towards three-week highs after Dudley’s Friday comments and overnight follow up from a hawkish Bullard who pushed for further tightening, drawing support from U.S. rate hike expectations while global stocks, reaching the point where some see them as expensive, were stuck in neutral ahead of U.S. earnings season this week.

Top aides to U.S. President Donald Trump differed on Sunday on where U.S. policy on Syria was headed after last week’s attack on a Syrian air base, while U.S. Secretary of State Rex Tillerson warned the strikes were a warning to other nations, including North Korea. “The risks of a conflict have certainly grown and that should keep the dollar supported against most Asian currencies with hawkish comments from the U.S. central bank also helping,” said Gao Qi, an foreign exchange strategist at Scotiabank in Singapore.

Meanwhile, with nothing but confusion coming out of the Fed, and with Bill Dudley himself saying on Friday that “some people misconstrued what I said last week”, we expect the market will closely watch what Janet Yellen says today in her ad hoc Q&A at the University of Michigan, where she will take questions from Twitter. Expect many questions on the Fed’s balance sheet normalization plans, as well as her thoughts on the future rate hikes, and – with unemployment tumbling to 4.5% without boosting inflation – NAIRU.

The Bloomberg Dollar Spot Index rises for the third day to touch the highest level in over three weeks as Treasuries trade steady before Janet Yellen’s speech

Global stocks have traded flat over the past month as investors after the 10 percent rise since last November’s lows has taken valuations above long-term averages. The MSCI AC World index trades at 16 times forward earnings, compared to a 15-year average of about 14 times.

S&P 500 futures advanced in early trading, then dipped back to unchanged as an American aircraft carrier bound for Australia was diverted to North Asia, sparking a selloff in South Korea on speculation the U.S. could take a more aggressive stance against Kim Jong-Un. French bonds fell, widening the yield spread over Germany to the highest since February after polls showed the country’s presidential election is becoming a four-way contest. European stocks traded mostly sideways as equities in France gave up ground. pushing the Stoxx Europe 600 Index some 0.2% lower even as shares of mining major BHP Billiton jumped more than 5 percent after activist hedge fund Elliot Management urged the company to pursue a spin-off of its U.S. business.

The MSCI All-Country World Index fell 0.1 percent.

The euro edged lower and France’s borrowing costs hit their highest level over Germany in six weeks as investors fretted over the rise of far-left candidate Jean Luc Melenchon in polls before this month’s presidential vote. Melenchon’s emergence over the past week has raised the possibility that he will square off against far-right leader Marine Le Pen in the decisive second round in May, making the final result far more unpredictable.

France’s bond yield spread over Germany hit 70 basis points in early trading on Monday, its highest since Feb. 27. “The market is focusing a bit too much on the extreme possibilities, but I guess with the elections coming up so soon some nerves are inevitable,” said DZ Bank strategist Christian Lenk. “But at the end of the day I think (the second round) will be Macron versus Le Pen.”

The Credit Suisse fear barometer, unlike the VIX, has been creeping steadily higher since the election, and is now at the highest since Trump’s presidential victory.

Some more thoughts from Bloomberg which notes that “while moves show demand for havens assets abating as financial markets attempt to shrug off Friday’s disappointing U.S. employment figures, a ratcheting up of geopolitical tensions and Europe’s looming test of populism look set to curtail optimism. Corporate results may provide the next fresh catalyst – they’ll accelerate this week with earnings due from the likes of JPMorgan Chase & Co., Tesco Plc and Prada SpA.”

“Geopolitics trumps economics as the main market driver, with strained U.S.-Russian relations and the dispatch of a U.S. aircraft carrier towards the Korean peninsula making the headlines,” Kit Juckes, a global strategist at Societe Generale, wrote in a note. “This week, it will be geopolitics and events outside the U.S. which drive markets.”

In commodities, oil prices rose, supported by strong demand and uncertainty over the conflict in Syria, although another run-up in U.S. drilling activity kept a lid on gains. Brent crude futures, the international benchmark for oil prices, were up 0.7 percent at $55.63 per barrel. U.S. West Texas Intermediate crude futures were up 0.6 percent at $52.55 a barrel. Spot gold was little changed.

Overnight Media Digest from RanSquawk

• European bourses trade modestly lower amid mounting geopolitical tensions as the holiday-shortened week begins.
• GE-FR spread widens as support for left-wing candidate Melenchon surges.
• Looking ahead, highlights include comments from ECB’s Constancio and Fed Chair Yellen

Market Snapshot

• S&P 500 futures up 0.1% to 2,354.50
• STOXX Europe 600 down 0.2% to 380.76
• MXAP down 0.05% to 146.39
• MXAPJ down 0.1% to 478.73
• Nikkei up 0.7% to 18,797.88
• Topix up 0.7% to 1,499.65
• Hang Seng Index down 0.02% to 24,262.18
• Shanghai Composite down 0.5% to 3,269.39
• Sensex down 0.3% to 29,631.01
• Australia S&P/ASX 200 up 0.9% to 5,912.88
• Kospi down 0.9% to 2,133.32
• German 10Y yield fell 0.4 bps to 0.224%
• Euro down 0.1% to 1.0578 per US$
• Brent Futures up 0.7% to $55.65/bbl
• Italian 10Y yield fell 4.9 bps to 1.926%
• Spanish 10Y yield rose 0.2 bps to 1.616%
• Gold spot down 0.1% to $1,253.29
• U.S. Dollar Index up 0.07% to 101.25

Overnight News

• Barclays’s Staley Faces Probe, Bonus Cut Over Whistleblower
• BHP Urged by Elliott to Spin Off U.S. Oil Unit in Overhaul
• Stada Accepts $5.6 Billion Takeover Offer From Bain, Cinven
• Fresenius SE Confirms Talks With Akorn for Potential Purchase
• South32, GE in 3-Yr Partnership for Digital Tech to Support Ops.
• BioTelemetry to Buy LifeWatch AG for CHF260m in Cash, Stock
• Swift Set to Announce Merger With Knight Transportation: WSJ
• Intrawest Said to Near Sale to KSL-Backed Operator: Reuters
• McCormick Said Considering Bid for Reckitt Brands: Telegraph
• Apple Warns Vietnam Stores About Logo Violations: Tuoi Tre
• Ford CEO Says Glad to See Trump-Xi Meet, Optimistic on Relations
• N.Y. Agency Denies Permit for Proposed Northern Access Pipeline
• Morgan Stanley Targets 2017 Return on Equity 9%-11% Range

Asia equity markets traded mixed following the subdued Wall Street close on Friday where participants digested the US strike on Syria and NFP, as well as the fireworks in the Eurodollar complex. ASX 200 (+0.8%) rose above the 5,900 to post a 2-year high amid upside in financials and energy, with the latter buoyed after WTI broke back above USD 52/bbl, while Nikkei 225 (+0.7%) advanced after the JPY weakened against its major counterparts. Hang Seng (-0.1.) and Shanghai Comp. (-0.5%) saw lacklustre trade after the PBoC continued to refrain from open market operations, while KOSPI (-0.9%) underperformed on increased geopolitical concerns after the US deployed an aircraft carrier group in the Korean peninsula as a show of force. Finally, 10yr JGBs were marginally lower amid spill-over selling from USTs and after the BoJ refrained from a Rinban announcement, while the curve steepened amid underperformance in the super-long end.

Top Asian News

• HNA to Offer $1 Billion for CWT in Deal to Add Logistics Network
• Hong Kong Concerned About Risks From Developer Mortgages
• Indonesia Bad Loan Problem to Worsen, Bank Bailout Chief Says
• Google’s AlphaGo AI Takes on China After South Korean Triumph

European equities have started the week on the back foot in what could potentially be a quieter week given the upcoming market holidays and lighter economic calendar. That said, geopolitical concerns continue to remain at the forefront of investor sentiment amid weekend reports of North Korea criticising the US response to last week’s chemical weapons attack in Syria with the US subsequently deploying an aircraft carrier to waters near the Korean peninsula. In terms of a sector breakdown, materials, pharma and financial names outperform with equity specific news relatively light for a Monday morning. That said, headlines have mounted around Barclays amid reports that their CEO is under investigation by NY and London regulators, nonetheless Co. shares have managed to brush off any selling pressure at this stage. From a fixed income perspective, trade has been relatively uneventful thus far with Bunds modestly supported by the general risk sentiment. Aside from the German benchmark, French paper has seen some selling pressure as commentators continue to contemplate the recent rise of left-wing candidate Melenchon following a relatively successful performance in TV appearances and campaign rallies. In peripheral markets, the SP-GE spread is modestly wider this morning while Italian paper has pulled away from recent contract highs with investors also eyeing the Italian government approving a budget adjustment of EUR 3.4bIn tomorrow.

Top European News

• French Election Becomes a Four-Way Race as Melenchon Surges
• Agrokor Bonds Slump to Record as Company Starts State Revamp
• Croatia Names Consultant Ramljak to Lead Agrokor Restructuring

In currencies, the Bloomberg Dollar Spot Index rose less than 0.1 percent at 10:30 a.m. in London, after advancing 0.3% on Friday. The euro was little changed. A very quiet morning in FX, with little of major significance to trade off, with the short week into the Easter break keeping volumes to a minimum. We have seen some EUR/GBP selling going through, pushing the cross rate back into the lower 0.8500’s, but as we saw last week, we ran into some decent buying interest here. Even so, the move has pushed Cable back to 1.2400, but with minimal traction through this level as we now see previous support turning into resistance. A cluster of EUR/USD support seen below 1.0600 also helps prop up the cross rates, and for now, 1.0570 represents the low for the day. With the upcoming French elections set to pressure the single currency in the meantime, there is unlikely to be any major push higher, especially with ECB members ‘underlining’ the current accommodative policy stance. Earlier today, the Apr Sentix investor confidence index rose from 20.7 to 23.9. USD/JPY has struggled into the mid 111.00’s, and despite Friday’s ramp up in Treasury yield post payrolls, risk aversion hangs in the air to keep the JPY supported to a degree for now. Cross JPY also heavy, with EUR/JPY an attractive sell given the above.

In commodities, West Texas Intermediate crude rose 0.7 percent to $52.59 a barrel, after climbing more than 1 percent in each of the previous two sessions. WTI has gained for five straight days, the longest winning streak of the year. Iron ore futures slipped 2.1 percent after falling into a bear market on Friday. Gold was fractionally lower at $1,253.20 per ounce. The bid tone in Oil prices can be largely put down to the US airstrikes on Syria, prompting fresh tensions over the region, WTI has been driven back into the middle of the USD50-55 range, but given some of the correlation trades, ie CAD, there seems to be caution over whether these gains can be held in the face of high inventory. Elsewhere, supply issues continue to hamper base metals, along with conflicting reports/views on demand. Copper has slipped back towards USD2.60, but has held so far. Gold prices are back to more familiar levels as last week’s events late in the week led to a rally to just above USD1270.00. USD1245.00 should provide support in the interim as risk sentiment remains in the balance. Silver is trading back under USD18.00 again.

US Event Calendar

• 10am: Labor Market Conditions Index Change, est. 1, prior 1.3
• 4pm: Fed’s Yellen Speaks at University of Michigan

DB’s Jim Reied concludes the overnight wrap

It’ll probably be a quiet week due to the holidays but there are a few important things to look out for. As you’ll see in the week ahead there’s a lot of global inflation numbers ahead. We think inflation has overtaken employment across the world as the key variable for the pace of monetary stimulus removal. Also this week, JPM, Citi and Wells Fargo kick off bank reporting in the US on Thursday and today we have the first post tapering CSPP numbers which we’ll preview below.

With regards to the weekend news, much of the focus has been on the outcome of the meeting between US President Trump and China President Xi Jingping. The main thing to note was some progress on agreeing to balancing bilateral trade. Indeed our China economist Zhiwei Zhang notes that the two sides agreed to work on a plan in the next 100 days to address trade imbalances and improving US companies’ market access to China, particularly in the services industry. He suggests that it may also involve cutting China’s export tax rebates and reducing import tariffs, although this is less important in Zhiwei’s mind.

Zhiwei also notes that the subject of North Korea remains contentious and it was clear that the US gave a strong signal that they may chart their own course if China does not coordinate with the US on the issue. On that subject, US Secretary of State Rex Tillerson said over the weekend that the US isn’t interested in a “regime change” in North Korea. This follows the news that a US aircraft carrier was diverted to waters off the Korean Peninsula.

Markets were actually fairly resilient on Friday in the face of rising geopolitical tensions and as you’ll see shortly, a well below market nonfarm payrolls reading. This morning in Asia it’s been a fairly mixed start for equity markets. While the Nikkei (+0.65%), Hang Seng (+0.08%) and ASX (+0.71%) are all higher, the Shanghai Comp (-0.25%) and Kospi (-0.77%) are both in the red. The Korean Won (-0.65%) has also been the worst performing currency this morning, reflecting perhaps the fact that the Trump-Xi summit failed to really produce a clear result about North Korea.

Back to payrolls, March’s 98k number (vs. 180k expected) also came with a cumulative 38k of downward revisions attached to the prior two months, while the March figure was the lowest since the 43k reading last May. Private payrolls also came in at a soft 89k (vs. 170k expected). All the chatter though was about the impact of winter storm Stella being responsible for the soft reading. Indeed the household survey was not impacted by the storm with hiring jumping 472k and the most since February last year. Our US economists also note that 3.1m people reported that they could not work a full work week because of “bad weather”. Significantly, the jump in household employment and a decline in the number of people unemployed pushed the unemployment rate down two-tenths to 4.5% (vs. 4.7% expected) and the lowest since May 2007. Wage pressure remains subdued however with average hourly earnings increasing +0.2% mom as expected and so making them up just +2.7% over the past 12 months. Its worth noting that our US economists saw nothing in the March employment report to suggest any change in the monetary policy outlook and continue to forecast for a 25bp hike in June and September, with policy then remaining unchanged in December.

Speaking of forecasts, our US fixed income strategist Dominic Konstam noted in his weekly over the weekend that he is now revising his rates’ forecasts lower on the basis that the bear market that he had expected to continue through 2017 seems to be on hold mainly due to the lack of progress on structural tax reform, and his expectations that this doesn’t change anytime soon. He notes that his fair model indicates that 10y yields should be around 2.25% in the near term and he now expects a move towards 2.75% by year end, reflecting at least some progress on the tax front.

Moving on. Perhaps the most interesting stat today will be the ECB CSPP number which will include 3 days worth (out of 5) of settled secondary purchases under the new tapering regime. A big debate has been as to whether they taper CSPP in line with the PSPP or leave it running at a similar pace. Obviously the latter would be very good for credit technicals. For choice I think they do taper CSPP. We won’t know for sure today but we’ll perhaps get some clues in the size of the purchases. The last two weeks have seen daily numbers of EU335m and 308m respectively down from the average of 365m since the  program started so there’s a little clue here that they have been scaling back a touch. We also have to adjust for the slightly below 20% of primary in the number which due to longer settlement periods won’t be under the new regime in today’s number. So an interesting release to follow this afternoon.

Quickly wrapping up Friday’s session. As we highlighted above markets were fairly resilient in the face of both the geopolitical headlines which hit early Friday morning and then a well below market payrolls print. Equity markets chopped and changed but the S&P 500 (-0.08%) and Dow (-0.03%) only closed with very modest losses while prior to this in Europe the Stoxx 600 (+0.13%) staged a late bounce into the close. This was also despite some sharp moves across commodities. WTI Oil continued its impressive climb from the lows after finishing higher (+1.04%) for the fourth day in a row and above $52/bbl for the first time since March 7th. The bigger moves came in base metals however with Iron Ore slumping nearly 7% while Copper (-0.41%), Zinc (-1.32%) and Lead (-1.92%) also fell sharply.

Over in rates Treasury yields crept higher with 10y yields rising 4.1bps to close at 2.383%, while the US Dollar index also closed up +0.51% and back at the highest level in nearly a month. That in part seemed to reflect some comments made by the NY Fed President Dudley. Speaking to an audience in New York, Dudley seemingly sought to clarify some of the comments he made the week prior when he suggested that the Fed might be prompted to make a “little pause” in the hiking cycle when it begins its process of reducing the balance sheet. Dudley said that “presumably at the time that you make the decision on the balance sheet you might want to forgo the decision on short-term rates just to make sure that the balance sheet decision doesn’t turn out to be a bigger decision than you thought you were making”. With that he also said “so I would emphasize the words little pause”. Dudley also made a few comments on financial regulation. Specifically he said that he thinks its “time to rethink major Wall Street regulations, including the Volcker Rule and the Fed’s annual stress tests of banks, now that almost a decade has passed since the financial crisis”.

In Europe the main data of note was the various industrial production reports. In Germany IP surprised to the upside after printing at +2.2% mom in February (vs. -0.2% expected) thanks to a big surge in construction spending. In contrast IP declined -1.6% mom in France (vs. +0.5% expected) while in the UK IP was also reported as declining (-0.7% mom vs. +0.2% expected).

Staying in Europe, it’s worth quickly updating the latest on the French presidential polls where the most notable shift has been the recent rising support for Melenchon. A Kantar Sofres Poll from the weekend showed Macron and Le Pen tied at 24% in the first round however Melenchon has now seen his support rise to 18% and putting him 1% ahead of Fillon. Melenchon’s support is now up about 6% from mid-March. While there is still a gap to the top 2 candidates in the first round it’s worth seeing if the positive momentum for Melenchon continues and whether the gap gets closed at all.

To the week ahead now. This morning in Europe the only data of note is the Bank of France business sentiment reading and Sentix investor confidence reading for the Euro area. Over in the US the sole release is the labour market conditions index reading for March. Tuesday kicks off in the UK where we will get the March CPI/RPI/PPI data docket, while Euro area industrial production for February and the April ZEW survey for the Euro area will also be closely watched. Over in the US tomorrow data includes the NFIB small business optimism reading for March and JOLTS job openings in February. Japan gets things going on Wednesday where PPI and machine orders data is due out, while shortly after we’ll get the March CPI and PPI prints in China. During the European session the focus is likely to be on the UK again with the February and March employment indicators due out. In the US the only data is the March import price index and March monthly budget statement. Thursday looks set to be an important morning for data in China with the March trade numbers due out. In Europe we are due to do get CPI reports in Germany and France along with the BoE credit conditions and bank liabilities surveys in the UK. In the US the calendar finally picks up with initial jobless claims, March PPI and the preliminary University of Michigan consumer sentiment reading all due. As a reminder, Friday is Good Friday with equity markets closed in the US and most of Europe (Treasury market shuts at midday too) however there is some important data due in the US still with the March CPI report and also March retail sales data and February business inventories.

Away from the data, the only Fedspeak this week is from Fed Chair Yellen this evening when she is due to speak at the University of Michigan (with Q&A expected) and then Kashkari on Tuesday. Away from that, the IMF is due to release the analytical chapters from its April 2017 World Economic Report today. The ECB’s Constancio is also due to present the ECB’s annual report to an EU parliamentary committee today. With regards to earnings, JP Morgan, Citigroup and Wells Fargo all report on Thursday.

With the US now engaged in military conflict with, and targeting Syrian army forces, what the Trump administration has (un)wittingly done is provide support to Islamic State, al-Qaeda, and al-Nusra and other terrorist forces, all of which have been engaging with the Assad regime in a fight in which the Syrian president has gradually seen the tide of war turn in his favor. At least until last Friday’s US cruise missile attack that is.

Which is why it should probably come as no surprise that, emboldened by US actions, moments ago the WSJ reported that Islamic State militants attacked a US-led coalition base (at least we now have official confirmation that there are US military bases in Syria) in southern Syria on Saturday, “triggering a fierce fight that required coalition airstrikes to repel, U.S. military officials said Sunday.”

The complex attack began on Saturday when Islamic State fighters detonated a vehicle bomb at a base in al-Tanf, a town in southern Syria along the Jordan border used by American special operation forces and Syrian rebels working with the U.S. coalition, the officials said.

 

Between 20 and 30 Islamic State fighters, including some with suicide vests, then attacked the base, which is a staging ground and training facility for the U.S.-backed Syrian rebels.

As the WSJ adds, Coalition forces and Syrian rebels engaged in firefights with the attackers and then called in airstrikes to repel the attack, officials said.

Luckily, there was no word of any American fatalities in the attack, although next time the US forces on the ground may not be so lucky, and the resulting media storm would prompt a full reappraisal of Trump’s action which by weakening Assad implicitly and directly is boosting the relative strength of the Islamic State.

The Islamic State attack comes as the U.S. military is deepening its presence in Syria as part of an intensifying campaign to drive the extremist group from its de facto capital in Raqqa. For weeks, the U.S. military has been strengthening its presence along the Jordan-Syria border, according to U.S. and Jordanian officials.

* * *

Meanwhile, confirming that the US is not nearly close done bombing Assad, on Sunday the Qatar-owned (the country which at long last hopes to have its gas pipeline cross Syria to Europe) Al Jazeera, reported that Syrian jets have bombed the town of Idlib using White Phosphorus.

One almost wonders what must have gone through the head of the Al Jazeera producers when told to report on such a story.

One thing we can imagine, however, is sequence of thoughts inside Assad’s head: “Well, I just got bombed by the US and I will surely get bombed even more at even the slightest additional provocation that can be splashed across the front pages of western newspaper. So… yes, brilliant idea – I will use a banned, toxic substance – White Phosphorus – and hope it appears on all media channels around the developed world, just to make sure the next US airstrike aims right for my palace.”

Sure, why not.

Expect to hear much more about white phosphorus in the coming days: it will be the “catalyst” for the next round of Syrian airstrikes.

end

On Friday, Sweden became the latest European target of terrorism after a man plowed a hijacked beer delivery truck into a crowd in central Stockholm, killing five people and wounding more than a dozen (we covered the situation here:  “Swedish Police In Manhunt For Terrorist Truck Driver Who Killed Five“).

And while such attacks typically tend to unify populations in the common goal of hunting down, capturing and punishing the responsible assailants, that sense of camaraderie apparently doesn’t apply in Sweden’s so-called “no-go zones” which have become home to 1,000’s of migrants flooding into Europe from Syria and elsewhere in the Middle East and Africa.

According to the Daily Mail, rather than help police arresting a suspect in Friday’s horrendous attack, migrant residents of the suburb of Rinkeby apparently decided instead to pelt the arresting officers with rocks.

Police officers responding to the Stockholm terror atrocity were attacked by a gang of youths who pelted them with stones last night, Swedish policemen have said.

 

The attack happened last night near Rinkeby, part of the ‘immigrant no-go zone’ that gained notoriety when President Trump referred to it in a controversial speech in February.

 

It is thought that the officers were taking part in an operation to arrest a 17-year-old and his mother at an address linked to the 39-year-old prime suspect.

Meanwhile the attack was confirmed by Abdallah Ahmed via social media:

‘During the night my colleagues were exposed to stone throwing in [the suburb of] Tensta, in the middle of an ongoing terror operation.

 

‘Some people will never learn,’ Abdallah Ahmed, a police officer, said in a social media post.

 

‘To terror I want to say one thing, in pure Swedish: go to hell. My thoughts go to those affected in every way.’

Of course, Rinkeby is the Swedish town that drew international attention back in February after Trump highlighted it as a prime example of the unintended consequences of allowing 100,000s of migrants to flow into Europe.  In light of Trump’s comments, independent journalist Tim Pool decided to head to Stockholm for a first-hand look at the “crime-ridden migrant suburb” of Rinkeby.  Unfortunately, upon arrival Pool didn’t get to do much investigating before arousing the suspicion of a couple of masked men who proceeded to follow him through the streets eventually leading to his prompt police escort out of the city out of fear for his crew’s safety.

Pool sent out the following tweets about the incident saying that around 2:30 in the afternoon “several men started masking up” and following his crew which prompted the police to escort his team out of town with the warning that “it would get really dangerous if we don’t leave Rinkeby.”

This ’60 Minutes’ crew got a similarly “warm welcome” from a couple of migrants when they visited Sweden on February 19th with the express goal of discrediting Trump’s comments.

Irony at its finest: ’60 Minutes’ goes to Sweden to show how peaceful refugees are.. Entire crew gets assaulted by refugees!#SwedenIncidentpic.twitter.com/7ZnCejuMFo

— Tennessee (@TEN_GOP) February 19, 2017

In conclusion: