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STOXX 600 tumbles 1.2%
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Banking stocks plunge on SVB fallout
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Wall Street futures lower
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Eyes on NFP
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TIME TO GO SHORT USD/CHF SAYS DEUTSCHE (1250)
If you think the front end of the U.S. yield curve is due a turnaround, Deutsche Bank say the FX trade is to short the dollar against the Swiss franc.
Strategists at the investment bank believe the Swiss currency can materially outperform the U.S. dollar in the coming months and recommend a short USD/CHF trade with a 0.88 year-end target.
The dollar is currently at 0.9279 francs. Deutsche have three reasons for this: Firstly, inflation in Switzerland has proven stickier than in the eurozone, and so they expect a hawkish package from the Swiss National Bank at their next meeting. The SNB have generally been keeping the franc fairly steady against the euro of late, meaning this currency pair has less room to move. Secondly signs that the U.S. labour market is slowing mean they think it is tempting to buy short dated U.S. Treasuries. A good FX proxy for this is short USD/CHF as it's one of only two dollar pairs that have typically weakened during US front-end rallies since 1990, regardless of whether equities went up or down - the other one being USD/JPY. Thirdly, they think there could be some reallocation in global safe asset holdings from the US to Switzerland.
(Alun John)
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MOVE OVER VIX, BOND INVESTORS ARE GETTING TWITCHY (1235 GMT) Everyone is getting increasingly wary about what "higher for longer" is really going to look like in terms of the real economy, especially as money markets show investors ratcheting U.S. rate expectations up to at least 5.5% and possibly beyond. Market gauges of investor nervousness, which have jumped today as turmoil has engulfed the banking sector, had already been steadily trending higher over the last month. But this time, it's not the equity market that's showing more signs of investor angst, it's bonds.
The MOVE index of bond market volatility is heading for a month-on-month rise of 31%, its largest one-month increase since last July. It's risen by 28% since Feb 2, when the Federal Reserve last held a policy meeting. The VIX index , meanwhile, has risen by a more modest 22% in that same time.
U.S. Treasury yields reached their highest in years earlier this
week, with the rate-sensitive two-year note hitting 5% for the first time since July 2007, so
it's no big surprise to see the S&P 500 on track for its largest weekly loss since
mid-December.
(Amanda Cooper)
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SAYONARA KURODA-SAN (1210 GMT) A week can be a long time in markets. For outgoing Bank of Japan Governor Kuroda, the past decade must have felt like multiple lifetimes.
Tasked with pulling Japan out of deflation back in 2013, Kuroda is to bow out with a mixed legacy, finally achieving price rises but not necessarily with the durable expansion that he was looking for.
And Friday's policy meeting ended with Kuroda and co. maintaining ultra-low interest rates and their yield curve control (YCC) policy, leaving the controversial policy in place for incoming governor Kazuo Ueda.
"We think Governor Kuroda's approach was to give the new leadership a free hand for deciding all the specific procedures and timing surrounding the exit strategy for YCC," Goldman Sachs economists say in a research note.
Capital Economics expects that exit strategy to ramp up and sees an end to YCC next month.
"Current Governor Kuroda unleashed Quantitative and Qualitative Easing at his first policy meeting back in 2013," the consutlancy writes. "We suspect incoming Governor Ueda won't waste much time either and will end YCC at his first meeting in late-April." Capital Economics says BOJ board members are "increasingly convinced" that the recent acceleration in inflation has strong momentum and may eventually be sustained. Furthermore, the move in December to widen the bank's yield target was partly to improve market functioning, but Capital Economics say this had little success. "The Bank was forced to buy a record amount of bonds in January and its holdings have hit fresh record highs relative to their outstanding amount," Cap Eco says.
"Indeed, its latest Bond Market Survey showed that a record share of market participants think that the functioning of the bond market is low." For Capital Economics, the end of YCC is a question of when, not if.
(Samuel Indyk)
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HOW ABOUT A GAME OF PAYROLL POKER? (1116 GMT) Have nonfarm payrolls slipped your mind? It wouldn't be a surprise, given the bloodbath in markets this morning after a bank stocks sell-off triggered by issues at U.S. tech-lender Silicon Valley Bank . But the pivotal number is just hours away. Expected to show an increase of about 205,000, the figure follows January's larger-than-expected rise of 517,000. In its weekly flow show, BofA analysts advise a game of "payroll poker". As a guide, investors should watch the U.S. dollar, the best "risk-on, risk-off" barometer for the past 6 months, they say. The dollar is around 105.250 this morning, more or less flat.
A soft jobs report would lower interest rate hike expectations and push the dollar down, and the reverse is true.
In a risk-on scenario, the dollar index drops to 103, on the assumption that there's a 25bps hike from the Fed in March, BofA said. Under that scenario, they recommend going "long 30-year Treasury, oil, China high-yield, REITs, US/EU investment-grade bank bonds, Asian equities." On the other hand, in a risk-off situation, the dollar could touch 107, the market would price in a 50-bp hike from the Fed and it would be time to short: "silver, copper, semis, tech, private equity, banks, industrials, Europe luxury, US defense, Mexico, long EM CDX." So not that much, then.
(Lucy Raitano)
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NO REAL CONTAGION FOR EUROPE'S BANKS FROM "SILLY-CON VALLEY": EXANE (0922 GMT) The problems at U.S. tech-lender Silicon Valley Bank have spooked markets and prompted a mass sell-off in banking stocks on both sides of the Atlantic. Investors are preparing for the possibility of U.S. rates going beyond 5.5% and anything even vaguely rate-sensitive is taking a kicking this morning. While the issues at SVB, which is trying to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio, have caused a stir, they're unlikely to cause a wider systemic problem, according to broker Exane. The company has an idiosyncratic business model that prone to declining deposits and problems with its liquidity position.
"As mentioned, there is no systemic issue and hence there should be no contagion or readacross to European banks. Similar to U.S. peers, European banks have been gradually marking to market their bond portfolios as rates have been going up, with no significant impact to CET1 ratios as sensitivity is low. The system remains robust and healthy," Exane says. "We would buy the on weakness, including preferred names such as Unicredit, Commerzbank and Caixa. Eyes will remain on the US for now as banks and regulators will move to stabilise the SIVB-specific situation," they said.
(Amanda Cooper)
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BANK ON A BLOODBATH (0820 GMT) European banks have opened up deeply in the red, after tech-lender SVB Financial launched a share sale to shore up its balance sheet, prompting an exodus from financial stocks. The STOXX banks index fell by as much as 4.9%, which, if it closes down that much, will mark it biggest one-day fall since last June. There were steep drops in the likes of heavyweights such as HSBC , which is down by more than 5%, Deutsche Bank is off 7.2% and BNP Paribas is down 4.3%.
Given the weight of its banks, the FTSE 100 is lagging other major indices this morning, down 2%, while Frankfurt's DAX is down 1.9%, and the STOXX 600 is also off 1.9%.
Adding to the volatility is the all-important U.S. monthly non-farm payrolls report at 1330 GMT. Investors are avid to see if January's bumper increase was a fluke, or whether February's data will show similar strength in the labour market.
(Amanda Cooper)
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EUROPEAN STOCKS SET FOR A SAVAGING (0738)
European shares are set for a savage start a day after tumbling banking stocks sent U.S. shares down sharply.
STOXX 50 futures are down 1.45% with sharp falls in both German and British index futures. Wall Street's three major stock indexes closed between 1.6% and 2% lower on Thursday, with the S&P 500's bank index finished down 6.6% after tech-industry lender SVB Financial Group launched a share sale to shore up its balance sheet due to declining deposits from startups struggling for funding. Big European banks were down in pre market trading, and U.S. banks' Frankfurt-listed shares slid.
In other company news, Robert Walters, founder and CEO of recruitment firm named after him will retire and will step down from the board on April 27 after 38 years at the group.
U.S. payrolls data due later on Friday will also be a major factor for markets.
(Alun John)
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MORNING BID EUROPE-JUMPY AROUND JOBS (0530)
Fed Chairman Jerome Powell has made sure there is heightened focus on today's U.S. payrolls
data. In his speech to Congress, Powell curiously mentioned this data point as one among a
couple of indicators framing the Fed's thinking around how far and fast interest rates need to
rise.
That nervous anticipation isn't the only thing weighing on markets. Asian banking and tech stocks are weak, after a plunge in the S&P 500 bank index overnight marking its biggest one-day drop in nearly three years.
That was triggered by startup lender SVB Financial Group's share sale announcement
and crypto bank Silvergate's decision to wind down operations.
Investors head into Friday pricing in a roughly 63% likelihood of a larger, 50 basis point
increase to the Fed funds target rate this month, after Thursday's U.S. jobs report showing a
rise in jobless claims pushed Treasury yields down and reduced inversion in the front
of the curve.
The nail-biting around payrolls has meant investors barely reacted to other unsurprising but
orchestrated developments in Asia.
Xi Jinping secured a precedent-breaking third five-year term on Friday as China's president
as he tightens his grip as the country's most powerful leader since Mao Zedong.
Haruhiko Kuroda concluded his last policy meeting as Bank of Japan governor, leaving Japan's
ultra-low interest rates and controversial bond yield control policy an issue for successor
Kazuo Ueda to tackle.
Key developments that could influence markets on Friday:
U.S. February payrolls U.K. January industrial production
(Vidya Ranganathan)
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