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Asia Superbubble Unstoppable: Hong Kong Up 10% In Past Week; Soaring Dollar Pushes Euro Back Under 1.06

Overnight market news was once again driven by the Asian superbubble, where as expected, the Hang Seng (+1.22%) soared once more and is now up 9.5% for the week, following news the Hong Kong Exchanges and Clearing Ltd (HKEx) expects it will "substantially increase" quotas for the stock connect program between Hong Kong and Shanghai, HKEx Chief Executive Charles Li said on Friday. The exchange could boost the current quotas, which cap how much mainland investors can buy Hong Kong stocks and vice versa under the trading link, by more than 20 or 30 percent, Li said at a media briefing in Hong Kong. Li did not give a precise date for when the quotas would be raised, but one thing is clear: everyone in China, and Hong Kong, must be all in stocks if the Chinese housing bubble can not be reflated. The Shanghai Comp closed higher by almost 2.0% following better than expected Chinese inflation data, while HK stocks continued their recent rally to closer higher by 9.5% for the week.

Hong Kong Volume turnover on the Index was ~120% above the 30-day average with Shanghai - Hong Kong stocks premium falling to around 24% vs. 35% last month. Shanghai Comp (+1.95%) broke back above 4,000 lifted by Chinese PPI and CPI data. Despite remaining in negative territory, PPI halted its 36 consecutive Y/Y declines (-4.6% vs. Exp. -4.8%, Prev. -4.8%), while CPI was unchanged vs. last month’s 3-month high (Y/Y 1.4% vs. Exp. 1.3%, Prev. 1.4%). To some this was evidence the PBOC will stop leaking stories of more imminent easing. To others this was merely confirmation that China's deflation isn't going anywhere and it is the PBOC's sworn duty to make the China stock bubble even greater.

In Europe, it was more of the same, with bond yields continuing to slide across the board, while equities trade higher in a continuation of the trend seen yesterday in the US while European newsflow is otherwise relatively quiet. On a sector specific basis, pharma names outperform, led by Shire after a positive drug update, while UK homebuilders were also lifted by a slew of positive broker moves by Jefferies. In fixed income markets, Bunds have been edged higher in early trade with some attributing the move to the ECB buying in the secondary market in a similar vein to the first half of yesterday’s session which saw June’15 Bunds print a contract high. In contrast, Gilts are underperforming as they pare yesterday's gains and with demand from foreign investors said to be dampened by election concerns, as noted by the Telegraph’s Ambrose Evans-Pritchard.

In the US, S&P futures are doing their now daily thing, flatlining before bursting higher some time before the open on yet another HFT stop hunt. The only question is when. Everyone is already positioned appropriately to capture the surge with ES calls.

In FX markets, once again the USD is providing a bulk of the action with the USD-index once again trading higher. More specifically, today has seen a continuation of the recent trend with gains supported by EUR weakness inspired by lingering concerns over Greece's liquidity issues, which has subsequently seen EUR/USD drift towards the 1.0600 level. Some analysts are also attributing USD strength to Wednesday’s FOMC minutes which still left the possibility of a June hike on the cards. Furthermore, GBP continues to be weighed on by political uncertainty amid the prospect of a hung UK parliament.

In the commodity complex, WTI and Brent crude futures saw a relatively tentative start to the session before both products were eventually weighed on by the aforementioned USD strength amid a lack of pertinent energy-related commentary. In precious metals markets, both spot gold and silver spiked to fresh session highs amid no fundamental news, while from a technical perspective, gold broke back above the USD 1,200 level. Elsewhere, Chinese iron ore futures tumbled around 4% overnight to touch a fresh record low, which looks set to print a fourth consecutive weekly decline as sentiment in China’s steel sector remains weak.

In summary: European shares rise with the health care and financial services sectors outperforming and basic resources, construction underperforming. The Stoxx 600 is heading for its best week since January. The German and Dutch markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields fall; U.K. yields increase. Commodities little changed, with WTI crude, Brent crude underperforming and nickel outperforming. U.S. monthly budget statement, import price index, due later.

Market Wrap

  • S&P 500 futures down 0.1% to 2084.4
  • Stoxx 600 up 0.5% to 411.1
  • US 10Yr yield little changed at 1.96%
  • German 10Yr yield little changed at 0.16%
  • MSCI Asia Pacific up 0.3% to 152.3
  • Gold spot up 0.7% to $1202.6/oz
  • Eurostoxx 50 +0.4%, FTSE 100 +0.3%, CAC 40 +0.2%, DAX +1%, IBEX little changed, FTSEMIB +0.2%, SMI +0.5%
  • MSCI Asia Pacific up 0.3% to 152.3; Nikkei 225 down 0.2%, Hang Seng up 1.2%, Kospi up 1.4%, Shanghai Composite up 1.9%, ASX up 0.6%, Sensex up 0%
  • 7 out of 10 sectors rise with energy, financials outperforming and health care, materials underperforming
  • Euro down 0.52% to $1.0604
  • Dollar Index up 0.21% to 99.36
  • Italian 10Yr yield down 3bps to 1.28%
  • Spanish 10Yr yield down 2bps to 1.22%
  • French 10Yr yield down 1bps to 0.44%
  • S&P GSCI Index up 0.1% to 406.6
  • Brent Futures down 0.3% to $56.4/bbl, WTI Futures down 0.8% to $50.4/bbl
  • LME 3m Copper up 0.9% to $6050/MT
  • LME 3m Nickel up 2% to $12770/MT
  • Wheat futures down 0.1% to 517 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European stocks trade higher with the DAX extending on record highs, following on from the positive US and Asia close
  • USD continues to climb higher, weighing on EUR and GBP, with the latter subject to further political uncertainty
  • Looking ahead, today sees the release of the Canadian employment report and potential comments from Fed’s Kocherlakota
  • Treasuries steady, heading for weekly decline after 3Y/10Y/30Y auction cycle, better than forecast jobless claims, $20b investment-grade issuance.
  • Japanese stocks rose for a second week, with the Nikkei 225 Stock Average briefly trading above 20,000 on Friday for the first time in 15 years
  • QE may be helping Europe achieve its economic targets, but it’s also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency
  • Fed’s Daniel Tarullo is quizzing Wall Street after big lenders and asset managers said clearinghouses pose their own threats, said three people with knowledge of the discussions who weren’t authorized to speak publicly
  • Deutsche Bank is set to pay more than $1.5b in fines as global regulators wrap up a probe into Libor manipulation, according to a person familiar with the matter
  • U.K. industrial production gained 0.1% in Feb., less than forecast, as an increase in manufacturing output was offset by a drop in oil and gas
  • U.S. states have a little more than half the reserves they’d stashed away before the 18-month recession that ended in June 2009, according to a Pew report last month, making them even more vulnerable to another fiscal shock
  • Democratic senators backing a bill that would give Congress  authority to review an Iran nuclear deal are caught between the White House and the pro-Israel lobby as they assert their prerogative to vet foreign policy
  • Iranian Supreme Leader Ayatollah Ali Khamenei refrained from endorsing a framework nuclear deal agreed with world powers and said all sanctions must be lifted once a final accord is reached
  • The State Department has recommended that Obama remove Cuba from the list of state sponsors of terrorism, according to an aide on the Senate Foreign Relations Committee
  • Sovereign bond yields mostly lower. Asian stocks mostly higher. European equities and U.S. equity-index futures gain. Crude oil lower, copper and gold higher

US Event Calendar

  • 8:30am: Import Price Index, March, m/m, est. -0.4% (prior 0.4%)
  • Import Price Index, March, y/y, est. -10.2% (prior -9.4%)
  • 2:00pm: Monthly Budget Statement, March, est. -$43.4b (prior -$36.895b)

Central Banks

  • 8:45am: Fed’s Lacker speaks in Sarasota, Fla.
  • 12:20pm: Fed’s Kocherlakota speaks in Bloomington, Minn.

DB's Jim Reid completes the overnight event recap

It’s an early start today with the latest Chinese inflation numbers. Despite still being relatively subdued, the numbers are slightly better than expected with the March CPI (+1.4% yoy vs. +1.3% expected) and PPI (-4.6% yoy vs. -4.8% expected). With the inflation number in particular still well below the PBOC target, further stimulus measures appear likely however. Equity markets in China have reacted as such with the Shanghai Comp (+1.40%) and CSI 300 (+1.18%) both higher. The Hang Seng (+0.38%) appears to be taking more of a breather following strong gains in the last two days while the Nikkei is +0.05%. Asian credit markets are around 2bps tighter meanwhile.

European equities had another good day yesterday as the Stoxx 600 recorded a fresh record all-time high. The Stoxx 600 and DAX closed +1.11% and +1.08% respectively and again left the S&P 500 (+0.45%) behind even though there was a late rally in the US due to a bounce in Oil. A lot of people are suggesting that our big trade of the year - namely European over US equities - is becoming consensus. Whilst it’s true it’s more mainstream than it was at the back end of last year it could be that the trade continues to work for an extended period given that QE has only just started in Europe. The speed of the out-performance might depend on the dovish/hawkishness of the Fed though. A dovish Fed may sharply slow down the magnitude of the move.

Back to yesterday's US session, a late 3% rally in oil markets helped push energy stocks (1.53%) higher yesterday, leading US equities to close more or less at their highs for the day. Both WTI (+0.73%) and Brent (+1.84%) did actually pare back some of those gains post market close though. Comments from Iran President Rouhani saying that the nation will only agree to the nuclear accord if all economic sanctions are lifted from the start, appeared to attract some attention. Iran Supreme Leader Khamenei then appeared to back up the earlier comments from the President, saying that ‘all sanctions should be removed when the deal is signed’. A State Department spokesman for the US had earlier noted that sanctions would be suspended in a phased manner once they had verifications that Iran had met specific commitments. With geopolitical risk clearly still at play, Reuters is reporting that negotiators from Iran, the US, Germany, France and the UK will resume talks in a bid for a final deal in the coming days.

The weakness in US Treasuries this week continued overnight as 5y (+5.1bps), 10y (+5.5bps) and 30y (+6.9bps) yields all widened. The 10y yield is in fact now 12bps off the lows post payrolls last Friday. A weak 30y US auction appeared to contribute to some of the weakness in the bond space with the bid-to-cover ratio of 2.18 well down on the 2.46 average over the past ten sales. The Dollar continued its strong week however with the DXY closing +1.24%. Data offered little in the way of surprises as initial jobless claims printed at 281k (vs. 283k expected) - taking the four-week moving average to 282k and the lowest since June 2000. Elsewhere, wholesale inventories for February were a touch above market at +0.3% mom (vs. +0.2% expected).

News that Greece repaid its €450m IMF loan - as largely expected since the weekend - helped support the better tone in European markets. Headlines that the ELA cap for Greek banks was once again raised as well as comments from finance minister Varoufakis saying that the government is looking at restarting the privatization process of public assets also probably helped. Interestingly, Greek press Ekathimerini is reporting that during the Euro Working Group meeting on Wednesday, technical staff gave Greece a six working days deadline to present its reform proposals while the Greek side continues to suggest that the government expects to run out of cash by April 24th. The ECB Governing Council meeting next Wednesday should attract attention with time now ticking down.

Bond markets were a bit more mixed in Europe as peripheral yields softened while 10y Bunds (-0.3bps) extended its record lows to 0.157%. With the Dollar extending its gains meanwhile, the Euro continued to weaken (-1.13%) taking the currency to $1.066. Elsewhere, Gilts were little moved as the BoE – as expected – kept the benchmark interest on hold at 0.5%. Despite data being on the more positive side, subdued inflation in the near term will likely keep the BoE on hold for now. With one eye also on the upcoming election, the FT is reporting that the latest opinion polls are showing Labour edging slighting ahead of the Conservatives, although the numbers read for a close call with no majority likely. The report shows the Populus/Hanover election outcome (which uses the latest polling data) as Labour edging ahead with 278 seats and the Conservatives falling to 270 seats.

Wrapping up yesterday’s data, German industrial production showed a small +0.2% mom gain in February (vs. +0.1% expected) however the strong January +0.6% result was revised down to -0.4%. Finally business sentiment in France ticked up one point in March to 97 (below consensus of 98).

In terms of the day ahead, focus in Europe this morning will be on the industrial and manufacturing production readings out of France, UK and Spain in particular. It’s fairly quiet in the US this afternoon meanwhile with the import price index and the monthly budget statement the highlights. The Fed’s Lacker and Kocherlakota are also due to speak.