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LIVE MARKETS-Why the dollar may start flagging

Mon, 10th Jun 2019 14:35

* STOXX 600 up 0.2%, extending last week's gains * Renault, Fiat rise on hopes carmakers reviving merger * German, Swiss markets shut for holiday June 10 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Josephine Mason. Reach her on Messenger to share your thoughts on market moves: josephine.mason.thomsonreuters.com@reuters.net WHY THE DOLLAR MAY START FLAGGING (1335 GMT) The dollar's ascent was one of the most impressive aspects of markets in 2018. It outperformed the S&P 500 and U.S. Treasuries, along with countless other assets, for the first time in years. The dollar index is up an impressive 8% since late April last year when the trade war kicked off for good. While it has risen further so far this year, Goldman Sachs thinks its strength won't last. "The various pillars of dollar support seem to be giving way," they write. First and foremost, the Trump administration's continued stoking of trade wars with China, Europe, and Mexico risks hurting the domestic economy through a tightening of financial conditions as trading partners threaten retaliation. On top of that, U.S. cyclical outperformance has waned, and the monetary policy outlook has turned less dollar-friendly (with the market now pricing in Fed rate cuts), GS economists point out. "We see near-term outperformance for the euro and yen, and underperformance for the Chinese yuan - with USD/CNY breaching 7.00 within the next three months," they write. Any dollar depreciation is, however, likely to be quite choppy, as tensions could also boost the safe-haven appeal of the greenback. As you can see below, periods of trade tension in recent history have usually culminated in the dollar depreciating - helping improve the trade deficits that caused the tension in the first place! (Helen Reid) ***** BUY EVERYTHING (1154 GMT) Friday's weak U.S. labour report proved a boon for both safe-haven and risky assets with U.S. Treasuries flattening and stocks surging. That "buy everything" is a continuation of a trend seen over much of this year as expectations of a more accommodative Fed have seen all boats rising together. The chart below shows how the Fed Funds futures and S&P stocks are pricing in the Fed taking a more proactive approach towards interest rate cuts rather than reactive. Powell's reassurance last week that the Fed would act "as appropriate" underscored those expectations. Rabobank analysts say that move in tandem by haven and risky assets will not necessarily last and as such are more bullish safe haven bonds. The thinking is that either the Fed continues to support stocks through promises of policy accommodation (buy everything) or it digs in its heels (sell risk and buy safety). "Either way, (U.S. Treasuries) are set to rally with the former implying a bullish steepening of the curve and the latter a bullish flattening," they say in a note this morning. Indeed, the asset classes aren't moving together this morning - shares are rising and European bond yields are climbing after Trump withdrew his threat of tariffs on Mexican imports, quelling worries about the potential damage to global economic growth and whetting investors' appetite for risk. (Josephine Mason) ***** SLOWBALISATION? (1133 GMT) Morgan Stanley analysts believe irrespective of how the near-term trade negotiations turn out, the era of globalisation has now ended and we might be in a new period of "slowbalisation". Equity strategist Graham Secker says absent of any de-escalation signs in U.S.-China trade spat, now the focus should turn to the impact of increased tensions on economic activity. "We see this as a key driver of asset markets from here," Secker adds, cutting his expectations for global GDP growth to 3.2% from 3.4%. European stocks are inching higher today after the U.S. U-turn on Mexico, which raises hopes of averting a fully-blown global trade war. UBS analysts, however, say that if the U.S.-China trade war isn't defused soon European equities could have further downside until sentiment indicators and valuations reach more extreme levels. (Thyagaraju Adinarayan) ***** "THIS PEACE IS FRAGILE" (0933 GMT) Markets may be holding up relatively well today after the U.S. U-turned on its Mexico tariff threats, but Morgan Stanley doesn't think this wil last. "Hope around upcoming events later this month (G-20, FOMC) may support markets in the very near term, but we think this peace is fragile as long as the 'three problems' remain," the bank's cross-asset strategists write. Those three issues facing markets? Trade tensions are up there, of course. Cyclical indicators pointing to economic weakness are the second. And the third, according to MS, is a perhaps misplaced confidence among investors that Fed easing will support markets despite "a poor track record" for gains when the Fed is easing in a context of weak economic data. As a reminder of the worrying signs in markets, you can see below how six euro zone bond yields fell to record lows on Friday. A gauge of long-run inflation expectations also fell to a record low, indicating investors see no end in sight to sluggish inflation. Here's our full story on the warning flags bond markets are waving: To navigate this environment MS strategists have added a couple of trades: a short USD-Indian Rupee position - as India is relatively little exposed to trade tensions, and should benefit from lower commodity prices - and long correlation in global equities as they see trade tensions and weakening economies driving stocks down in concert. (Helen Reid) ***** OPENING SNAPSHOT: TRADE RELIEF, CHINA DATA BOOST EUROPE (0726 GMT) Washington's decision to drop its threat to impose tariffs on Mexican imports, averting an escalation of the global trade tensions, and strong Chinese export data are helping European stocks extend last week's gains in early deals. The pan-European STOXX 600 is up 0.3%. There may also be some residual buying after weak U.S. nonfarm payrolls data on Friday spurred hopes of a U.S. interest rate cut. Liquidity is lower than usual with markets in Germany, Switzerland, Sweden, Norway, Denmark and Iceland shut for national holidays. Trade-sensitive stocks like miners, cars and chip makers are leading the gains, but dealmaking is driving most individual moves: Fiat Chrysler is up 2.9% and Renault is 2.1% higher after Reuters reported the two carmakers are looking for ways to resuscitate their collapsed merger plan and secure the approval of the French carmaker's alliance partner Nissan. BAE Systems, up 0.8%, is benefiting from hopes of further dealmaking in the aerospace and defense sector after United Technologies announced yesterday it has agreed to combine its aerospace business with U.S. contractor Raytheon, in what would be the sector's biggest ever merger. Some dealers caution though that the creation of a giant in aviation and defense procurement may not be an advantage to suppliers and competitors in the long run. Plumbing products distributor Ferguson is bottom of the FTSE 100, down 3.8% after its third-quarter revenue fell short of estimates due to slowing growth in the U.S.. Thomas Cook shares are surging, up 20% on news Hong Kong's Fosun Tourism is in talks to buy its tour operating business, the latest sign that the British group will be broken up after issuing three profit warnings in the past year. (Josephine Mason) ***** RISK-ON FOR EUROPE (0624 GMT) European stock futures have opened on a strong footing this morning after Washington's decision to drop its threat to impose tariffs on Mexican imports and strong Chinese export data have stirred investors' appetite for risk. The Eurostoxx futures are up 0.5% and at their highest since May 20. On the corporate news front, it's mainly dealmaking that's catching the headlines. Renault and Fiat remain in the spotlight after Reuters reported the carmakers are looking for ways to resuscitate their collapsed merger plan and secure the approval of the French carmaker's alliance partner Nissan. Keep an eye on aerospace and defense companies after news on Sunday that United Technologies agreed to combine its aerospace business with U.S. contractor Raytheon, in what would be the sector's biggest ever merger. A deal on that scale is likely to reshape the competitive landscape of the aviation and defense procurement sector. United Technologies provides primarily commercial plane makers with electronics, communications and other equipment, whereas Raytheon mainly supplies the U.S. government with military aircraft and missile equipment. In other dealmaking, Thomas Cook may get a boost from a report that Hong Kong's Fosun Tourism is in talks to buy its tour operating business as the British group faces breakup after issuing three profit warnings in the past year. Here's your snapshot: And some early headlines: United Technologies, Raytheon to create $120 bln aerospace and defense giant UK house prices show biggest annual rise since Jan 2017 -Halifax Fosun Tourism in talks to buy Thomas Cook's tour operating business-Sky News Gatemore Capital to disclose 10% stake in retailer Moss Bros -Sky News UBS switches stance with plan to offer $113 mln tax settlement in Italy Mediaset to put group under Dutch roof in pursuit of Europe plan Renault, Nissan spar over governance reforms as tie-up strains worsen-sources FCA-Renault revival may hinge on Nissan stake cut - sources Ferguson To Buy Back $500 Mln Shares, Sees 2019 Profit In Line With Analysts' Forecasts (Josephine Mason) ***** EUROPE SEEN EXTENDING GAINS (0540 GMT) European shares are expected to extend last week's gains this morning after Washington stepped back from its threat to hit Mexican goods with import tariffs, quelling worries among investors that another trade conflict in addition to U.S. President Trump's ongoing battle with China would damage global economic growth. Stocks are also likely to get a boost from surprisingly strong Chinese export data for May even amid the escalating trade war, although a sharp drop in imports may stir concerns about slowing domestic demand. There may also be some residual buying after weak U.S. nonfarm payrolls data on Friday spurred hopes of a U.S. interest rate cut. CMC Markets is calling the FTSE 100 to open 32 points higher at 7,332 and the CAC 40 up 20 points at 5,384. Liquidity will be lower than usual with trading in Germany, Switzerland, Sweden, Norway, Denmark and Iceland shut. (Josephine Mason) ***** (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)

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