Brexit divorce process set to begin

Notes/Observations

- Brexit process begins and formally sets off two years of negotiations

- European confidence data mixed (France in-line, Sweden misses, Italy beats)

 

Overnight:

Asia:

- BOJ's Sato: Labor market reforms and other measures to boost potential growth must accompany monetary easing to raise long-term inflation expectations

- PBoC skipped its open market operations (OMO) for 4th straight session; drained CNY70B v CNY70B prior; Shanghai Composite -0.4%

Europe:

- PM May signed letter invoking Article 50 that would begin the 2-year Brexit negotiation process; letter expected to be delivered to EU on Wed

- BOE's McCafferty (former hawk) stated that BOE would be raising interest rates when economy was strong enough. Did not know whether he would vote for a rate hike at next MPC meeting. Growth in UK would likely to become anemic rather than enter recession

- Germany Fin Min Schaeuble reportedly rejected deferment of Greek interest payments believing it would amount to a new loan

- SNB's Maechler stated that he expected world interest rate environment to persist at low levels for some time. Inflation was a large reason for SNB keeping monetary policy unchanged earlier this month; inflation outlook remains fragile

Americas:

- Fed Chair Yellen: job market has improved substantially since recession; pockets of persistently high US unemployment remain

- Fed's Powell (moderate, voter) Fed should be moving slowly toward a more neutral stance and saw scope for more rate hikes this year

- Fed's Kaplan (moderate, voter): reiterates Fed should be taking steps to raise rates patiently and gradually

- Fed's George (hawk, non-voter): FOMC is committed to raising rates gradually; quick rate hikes would be a shock to the economy

Energy:

- Weekly API Oil Inventories: Crude: +1.9M v +4.5M prior (8th build in the past 10 weeks)

 

Economic Data

- (JP) Japan Mar Small Business Confidence: 50.5 v 47.7 prior (1st time above the 50 level since Mar 2014)

- (DE) Germany Feb Import Price Index M/M: 0.7% v 0.4%e; Y/Y: 7.4% v 7.0%e

- (CH) Swiss Feb UBS Consumption Indicator: 1.50 1.44 prior

- (FR) France Mar Consumer Confidence (in-line): 100 v 100e

- (SE) Sweden Mar Consumer Confidence (miss): 102.6 v 104.0e; Manufacturing Confidence (miss): 112.7 v 117.0e; Economy Tendency Survey: 109.2 v 110.6e

- (TH)Thailand Central Bank (BOT) left its Benchmark Interest Rate unchanged at 1.50% (as expected)

- (IT) Italy Mar Consumer Confidence (beat): 107.6 v 106.6e; Manufacturing Confidence (beat): 107.1 v 106.0e, Economic Sentiment: 105.1 v 104.3 prior

- (CH) Swiss Mar Credit Suisse Expectations Survey: 29.6 v 19.4 prior

- (UK) Feb Net Consumer Credit: £1.4B v £1.3Be; Net Lending: £3.5B v £3.5Be

- (UK) Feb Mortgage Approvals: 68.3K v 69.1Ke

**Fixed Income Issuance:

- (IN) India sold total INR100B vs. INR100B indicated in 3-month and 12-month Bills

- (EU) ECB allotted $4.5B in 7-day USD Liquidity Tender at fixed 1.36% vs $1.01B prior

- (NO) Norway sold NOK4.0B vs. NOK4.0B indicated in 2027 bonds; Avg Yield: 1.70% v 1.74% prior; Bid-to-cover: 2.30x v 2.41x prior (IT) Italy Debt Agency (Tesoro) sold €6.5B vs. €6.5B indicated in 6-month Bills ; Avg yield: -0.294% v -0.294% prior; Bid-to-cover: 1.59x v 1.52x prior

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Index snapshot (as of 10:00 GMT)**

Indices [Stoxx50 +0.3% at 3,475, FTSE flat at 7,343, DAX +0.5% at 12,210, CAC-40 +0.3% at 5,061, IBEX-35 flat at 10,384, FTSE MIB flat at 20,327, SMI +0.2% at 8,615, S&P 500 Futures +0.1%]

Market Focal Points/Key Themes: European equity indices are trading higher as official Brexit negotiations are scheduled to begin later in the session, and as market participants digest Trump's failed health-care bill; Banking stocks trading generally higher across the board; shares of Engie leading the gains in the Eurostoxx after receiving an analyst upgrade overnight, with banking stocks Deutsche Bank, BNP and ING also trading higher; shares of 3I leading the gains in the FTSE 100 after receiving an analyst upgrade; energy, commodity and mining stocks also trading notably higher in the index as copper and oil prices trade higher intraday.

Upcoming scheduled US earnings (pre-market) include Omnova Solutions, Paychex, SecureWorks, and Unifirst Corp.

 

Equities (as of 09:45 GMT)

- Consumer Discretionary: [Flybe Group FLYB.UK -5.2% (trading update, analyst downgrade), Grammer GMM.DE +5.9% (FY16 results, raises div), TUI TUI.UK -0.1% (trading update)]

- Energy: [SMA Solar S92.DE +1.9% (sale of subsidiary SMA Railway Technology, outlook)]

- Financials: [3i Group III.UK +2.8% (analyst upgrade)]

- Healthcare: [Allergy Therapeutics AGY.UK +7.8% (H1 results), Circle Holdings CIRC.UK +21.9% (to be acquired by Toscafund for 30p/shr cash; FY16 results), Stada Arzneimittel SAZ.DE -0.8% (final FY16 results)]

- Industrials: [Daimler DAI.DE +1.3% (CEO comments), Stagecoach SGC.UK +3.2% (trading update, analyst upgrade), Sika SIK.CH +0.6% (raises dividend)]

- Technology: [Euromicron EUCA.DE +2.9% (FY16 results), Siemens SIE.DE +1.1% (unit awarded $4.13B DoD contract)]

- Utilities: [Engie ENGI.FR +2.9% (analyst upgrade)]

 

Speakers

- UK Chancellor Hammond expressed optimism that the UK could get a sensible and pragmatic deal with Europe. Sought a deep and special relationship with EU and understand that UK could not cherry pick. Confident could get a new EU customs agreement and wanted security and defense ties

- Swiss KOF Institute spring forecasts noted that Swiss economy was in good shape and growth prospects were encouraging. Sluggish employment growth was likely to hold back any major improvement of the unemployment rate. Inflation was back in the positive zone, a significant increase in prices was not expected

- South Africa Central Bank (SARB) stated that it would not bow to any pressure (**Reminder: SARB meets on Thursday, Mar 30th)

- Thailand Central Bank Policy Statement noted that the decision to keep policy steady was unanimous. Reiterated view that monetary policy to remain accommodative and ready to use appropriate policy mix. Govt spending was driving the economy and saw greater risks to growth. Reiterated view that THB currency (Baht) strength was not good for economy; FX could face higher volatility

 

Currencies

- The formal trigger of the Brexit process was the main theme in the session. PM May signed the letter invoking Article 50 that would begin the Brexit process while Sir Tim Barrow, the UK's permanent representative in Brussels would formally hand over Article 50 letter from the British government to the European council president, Donald Tusk later in the session.

- GBP/USD was under pressure as the Brexit process was being set in motion. The pair was off approx. 0.5% in early European trading. Dealers cited "Brexit anxiety' for the GBP's soft tone although some analyst pondered whether investors had already priced a ‘hard Brexit'.

- The USD was a tad firmer over the past 24 hours as impressive US economic strength kept the door open for continued gradual rate hikes by the Fed. Numerous Fed officials over the past day reiterated their view for steady pace in normalization. Interest rate divergences still remain in favor for the greenback (Both BOC and SNB hinted that was premature to consider tightening at their respective central banks at this time.

**Fixed Income:

- Bund futures trade at 160.57 down 3 ticks recovering from earlier 160.18 lows, as earlier equity strength begins to wain. Resistance remains at 160.74 then 161.06 followed by 161.44. Support remains at 160.04 followed by 159.73 then 159.41.

- Gilt futures trade at 126.83 down 24 ticks, as Britain formally triggers Article 50. Support remains at 126.30 followed by 126.05. Resistance remains at 127.35 followed by 127.89. Short Sterling futures trade flat to down 1bp with Jun17Jun18 spread inching higher to 23.5Bp.

- Wednesday's liquidity report showed Tuesday's excess liquidity rose to €1.347T a rise of €14B from €1.333T prior. Use of the marginal lending facility rose to €319M from €207M prior.

- Corporate issuance saw a pick up with $10.9B coming to market via 7 issuers headlines by Applied Materials $2.2B 2 part offering, Rockwell Collins $4.65B 5 part offering and Ford 3 part $1.75B offering. This puts monthly issuance at $119.5B.

 

Looking Ahead

- 05:30 (EU) ECB allotment in 3-month LTRO tender

- 05:35 (SE) Sweden Central bank (Riksbank) Dep Gov Floden

- 06:00 (RU) Russia to sell OFZ Bonds

- 06:00 (FI) Finland to sell €1.0B in 0.00% Sept 2023 RFGB bond

- 06:00 (CZ) Czech Republic to sell 0.95% 2030 bond

- 06:45 (US) Daily Libor Fixing

- 07:00 (US) MBA Mortgage Applications w/e Mar 24th: No est v -2.7% prior

- 07:00 (UK) PM May question time in House of Commons

- 07:30 (UK) UK official to deliver Article 50 letter to EU

- 08:00 (BR) Brazil Jan IBGE Services Sector Volume Y/Y: No est v -5.7% prior

- 08:15 (UK) Baltic Dry Bulk Index

- 08:45 (EU) EU President Tusk on Brexit - 09:20 (US) Fed's Evans (dove, voter)

- 09:30 (BR) Brazil Feb Total Outstanding Loans (BRL): No est v 3.074T prior; M/M: No est v -1.0% prior

- 09:45 (DE) German Chancellor Merkel attends conference in Berlin

- 10:00 (US) Feb Pending Home Sales M/M: +2.5%e v -2.8% prior; Y/Y: No est v 2.7% prior

- 10:30 (US) Weekly DOE Crude Oil Inventories

- 11:00 (EU) EU's Moscovici participates in Citizens Dialogue in Brussels

- 11:30 (US) Fed's Rosengren (moderate, non-voter) in Boston

- 11:30 (US) Treasury to sell 2-Year Floating Rate Notes Reopening

- 12:00 (CA) Canada to sell 2-Year Bonds

- 12:50 (BE) ECB's Praet (Belgium, chief economist) in Frankfurt

- 13:00 (US) Treasury to sell 7-Year Notes

- 13:15 (US) Fed's Williams (moderate, non-voter) in NY