Financial market research and analysis

Traders were met with an improving economic outlook from China this morning courtesy of stronger than expected trade data. Exports surged 18.7% (in renminbi terms) during March, after declines in both January and February. Imports also stabilised, dropping just 1.7% compared with an 8% fall the previous month. Coupled with a more upbeat outlook in respect of growth from the International Monetary Fund earlier this week and moderation in producer price deflation it would seem that recent damning assessments on China’s economy, while not without substance, may be overtly negative in the short term.

Economic growth data due on Friday may well improve sentiment further.

Japanese government bond prices are softer with the 10 year yield rising 2 basis points and USDJPY has recouped some of its recent weakness- the Nikkei has rallied in the face of China data and news that pension funds are buying up equities. We still remain on alert in regard to potential FX intervention from the Bank of Japan should downside risks to outlook materialise.
Federal Reserve members are still playing swing ball with respect to market expectations. Williams thinks 2-3 hike this year is a reasonable possibility while Lacker feels that faster inflation may merit even more tightening – suggesting that roughly 4 interest rate hikes may be required within the year. Financial markets have so far failed to take the potential bait – with few expecting any more than 1 additional hike this year – and even then not till November.

While we are all aware that every move will be data dependent we need to be wary that a single data point alone will not be the trigger. Nevertheless, we can expect some volatility around the release of US retail sales and PPI (Producer Prices Index) later this afternoon. The former is expected to show a small gain of 0.1% m/m, while retail sales ex-autos may show a 0.4% gain – this is following a decline in both metrics last month.
PPI ex-food and energy is slated to show a small increase of 0.1% m/m.

With oil rallying ever since the decline in API (American Petroleum Institute) inventories last week, today’s EIA (Energy Information Administration) inventory report will also be the lynchpin on whether we continue to add gains ahead of next week’s meeting in Doha with key OPEC (Organization of the Petroleum Exporting Countries) members. Iran is not expected to attend and this may put some pressure on oil prices should the other members decide to maintain current production levels. A build of 0.9m barrels is expected today. WTI is down 2% in anticipation.

A softer euro, against both the pound and the dollar is also aiding risk sentiment amongst European equity indices. Back below $1.41 and 80p, we note consolidation ahead of Euro zone industrial production data. Not a lot is expected here, with a 0.6% m/m decline the consensus following a 2.1% m/m gain in February. CPI (Consumer Price Index) data tomorrow will likely cement the near term direction of the euro – the final CPI is expected to show a decline of 0.1% y/y with core faring better with a gain of 1% y/y.

Sterling has handed back some of its gains against the dollar – again tomorrow’s BOE (Bank Of England) are not expected to herald any surprises with all MPC (Monetary Policy Committee) members sticking to the script and keeping rates as is.

It makes a pleasant change to have decent macro news from China and equity markets have welcomed the idiosyncrasy.

Another pop higher in the metals complex, in the main owing to the better news from China has pushed miners higher again today.

Iron ore (+4.59%), Nickel (+2.72%) and Copper (0.5%).

The question is whether recent demand for iron ore is primarily front loaded and likely to taper off – this is something which concerns analysts at Liberum who have a sell rating on BHP Billiton (+4.39%) Rio Tinto (+4.91%) and Anglo American (+5.53%)

Despite better results from Tesco (-3.3%), with annual pre-tax profits swinging to £162m  after a record loss of £6.33bn a year ago. A 0.9 per cent rise in UK like-for-like sales for its fourth quarter, which marked its first full quarter of growth since 2013 also indicates that its recovery is gathering legs. Investors are marginally concerned with  long terms challenges with shares down 3.3% in early trade and pushing the stock to the bottom of the index. Profit improvement will be difficult as long as deflationary headwinds and the rise of German discounters continue to counter.

BP plc (+2.5%) despite some softness in oil prices this morning ahead of the EIA report, the oil producer is riding high. Having found a haven in Russia with a depreciating rouble and low operating costs, the sanctions have barely made a scratch on its pre-tax profit from there. BP earned 22% of adjusted pre-tax profit from its share of Rosneft.

We call the Dow Jones higher to 17798 from yesterday’s 17721 close.