Two days after the biggest rout in US stocks in 8 months, and one day after Brazil’s stock market was halted due to a circuit breaker, wiping out 8.8% of its market cap, traders are eager to put it all in the rearview mirror and in a quiet session on the last day of the week – there have been no “anonymously sourced Russian blockbusters” overnight by either the NYT or WaPo – S&P futures are set for a green open, up 0.2%, in line with Asian and European markets, all looking to close the week on a positive note.
And what a week it has been: the most eventful week of 2017 for markets started with stocks at record high but then saw one of the sharpest cross-asset routs in years. Yet despite early bullish sentiment, jitters have persisted, leaving safe-haven gold headed higher again for its best week since April and the dollar back on the slide after falling to its lowest level since Trump’s U.S election victory in November.
“The frustrating element is that we are now at the mercy of equity markets,” said Nick Parsons, global head of FX strategy at National Australia Bank’s. “We can be pretty confident that 10 points on or off of the S&P 500 is a big figure on or off of dollar/yen,” he added, saying the only thing likely to break the link would be a confident-sounding Federal Reserve at its next meeting.
One catalyst for today’s return of optimism is crude oil, with Brent rising above $53, and WTI back over $50 for the first time since late April, headed for a second weekly gain on growing optimism grows that OPEC and other nations will extend output cuts at exporter group’s meeting in Vienna next week, news which has been priced in several dozen times in the price anyway, but that never stopped it from being price in again.“Russia and OPEC are talking about extending cuts to the end of March and it’s widely expected there’ll be an extension,” ING commodity strategist Warren Patterson says: “If there are longer or deeper cuts then there could be further upside”
The gradual return of risk appetite on Friday also saw investors switch from highly rated U.S. Treasuries and European government bonds into higher-yielding Italian and Portuguese debt. Like the dollar, the U.S. yield curve has slumped back to levels not seen since Trump’s election, and the probability given by markets of the Fed raising rates next month has tumbled to below 60 percent from over 90 percent last week.
“Everything has turned upside down – European political risks have faded, the economy is looking strong, while in the U.S. everybody is worried,” said DZ Bank strategist Daniel Lenz, quoted by Reuters.
Asian stocks rose, with the MSCI Asia Pacific Index up less than 0.1%, with more stocks advancing than declining. Japan’s Topix index climbed 0.3 percent, after sliding 1.3 percent on Thursday. The gauge lost 1.3 percent for the week. The Hang Seng Index rose 0.2% and the Shanghai Composite was little changed.
European stocks pared their worst week since November, rising in quiet trading. The Stoxx Europe 600 Index rose 0.6 percent as of 10:56 a.m. in London, paring its weekly loss to 1.1 percent.
S&P 500 futures were up 0.3 percent. The benchmark index rose 0.4 percent on Thursday after plunging 1.8 percent in the previous session, its worst day since Sept. 9.Brazil’s Ibovespa Index tumbled 8.8 percent on Thursday, the most since October 2008, as political crisis returned to the country after last year’s impeachment process. A Japan-traded ETF tracking Brazil’s Ibovespa Index dropped 6.5 percent after an even larger decline on Thursday, closing at the lowest level of the year.
As has been the case for much of the week, the lack of any dramatic Trump-linked news resulted in the global mini relief rally. As Bloomberg confirms, market volatility eased after Trump’s administration sought to move past controversies surrounding Russia that have threatened to ensnare its plans for tax cuts and infrastructure spending.“Following the initial excitement about the chaotic situation in the White House market participants seem to have calmed down again,” analysts at Commerzbank AG including Thu Lan Nguyen said in a note to clients.
But while Trump may have briefly faded from the spotlight, especially with his first international trip on Friday afternoon, the sudden and unexpected Brazilian political crisis has added a fresh layer of worries for investors, for whom it served as a vivid example of how quickly the best performing emerging market can become the worst.
President Michel Temer has defied calls for him to step down, saying a Supreme Court probe will debunk allegations he participated in a cover-up. Meanwhile, geopolitics remained in the spotlight, amid reports that the U.S. Navy is moving a second aircraft carrier to the Korean peninsula and that Chinese jets intercepted a U.S. Air Force plane.
Elsewhere, Jakarta stocks soared as much as 3 percent to a record after S&P upgraded Indonesia to investment grade, revising its credit rating from BB+ to BBB-, stable outlook, due to better fiscal metrics.
In rates, the yield on 10-year Treasuries climbed two basis points to 2.25 percent. It is down eight basis points this week. Benchmark yields in Germany rose two basis points, while those in the U.K. added four basis points.
West Texas crude rose 1.1 percent to $49.87, poised for a weekly increase of 4.2 percent, on optimism OPEC will reaffirm efforts to drain a global glut at their meeting in Vienna on May 25. Copper rose 0.7 percent to $5,616 a ton, leading most industrial metals higher as sentiment steadied after strong U.S. jobs data. Soybeans were stable after the biggest one-day drop since August as farmers in Brazil rushed to sell at a “once in a decade” pace as a deepening political crisis sent the nation’s currency tumbling. The commodity was 0.5 percent higher at $9.495 a bushel.
