After yesterday's last day selloff, the FOMC Drift is again missing again this morning, with S&P futures in the red following a drop in Asian shares and a bigger slump in Europe, where the Brexit chaos returned after May said she would not seek a long delay from the EU while a sharp drop in Bayer and BMW shares dragged Germany's DAX 1% lower. The dollar rose and ten-year Treasury yields slipped.





US equity futures erased an earlier gain, as nervous investors sold ahead of today's FOMC meeting, with the mood souring on Tuesday after reports of renewed tensions in U.S.-China trade talks also fraying nerves.

As a result, the longest winning streak in global shares since 2017 was set to end with a whimper as investors took profits on Wednesday before the U.S. Federal Reserve’s policy decision, ending 7 consecutive days of increases in the MSCI World.

Europe's STOXX 600 fell 0.3%, with indexes in Britain and France also slightly down as investors closed positions before the Fed’s decision, due at 2pm this afternoon.

Germany’s DAX led the retreat as BMW warned earnings would fall and chemical maker Bayer headed for the biggest drop in 16 years after the company lost the first phase of a U.S. jury trial over claims its Roundup weed killer causes cancer. The steep decline has a negative impact of almost 100 points on the DAX. Additionally, German automaker BMW stumbled 4.2%, after warning earnings will fall “well below” last year’s level. The news dragged down peers with Daimler down 2%, Continental -1.7%, and Volkswagen -2.1%.

Elsewhere, the largest Swiss bank UBS warned the first quarter "was one of the worst in history."

Earlier, Asian equity markets lacked firm direction following a lacklustre US session as global risk appetite was hampered by the looming FOMC meeting and ongoing US-China trade uncertainty. ASX 200 (-0.3%) and Nikkei 225 (+0.2%) traded mixed in which the former was pressured by weakness in financials and mining names, while Sony and Nintendo shares were among the biggest decliners in Japan following Google’s announcement of a cloud-based gaming service, although losses in the broader Tokyo market were later pared by a drop in the yen. Hang Seng (-0.2%) and Shanghai Comp. (U/C) conformed to the indecisive tone due to trade uncertainty following conflicting news flow in which US-China trade talks were said to be at the final stages with senior trade negotiators to meet from next week, although other reports noted expectations that China may walk back on some trade offers and that issues remained regarding data services and pharma.

Looking at today's main event, the U.S. central bank is expected to hold rates steady and cut the number of hikes projected for the rest of the year, signaling since early this year a “patient” approach to increasing borrowing costs, while also unveiling its plan to end the balance sheet rolloff.

“Some traders expect the Fed to be a little on the neutral side. The Fed will be optimistic - but not overly optimistic - to send a neutral but upbeat message to the market,” said David Madden, an analyst at CMC Markets in London.

Also in play were concerns on rising tension in the U.S. trade negotiations, which pushed MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.2 percent. Bulls retreated on Tuesday afternoon, after a Bloomberg report of U.S. concerns that China is pushing back against American demands in trade talks. Talks are set to resume next week - the first since President Donald Trump delayed a March 1 deadline to raise tariffs on Chinese imports - in an acceleration aimed at ending an eight-month trade war between the world’s two largest economies. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to travel to China next week for another round of talks with Chinese Vice Premier Liu He.

On the whole, though, many investors are holding on to hopes of a deal between Washington and Beijing, even as officials from the two sides remained locked in negotiations: “China is eager to come to an agreement so I’m not too worried,” said Wang Shenshen, strategist at Tokai Tokyo Research Center. “As long as they are holding meetings, many things will work out.”

Two-year Treasury yields remained below the top of the Fed’s policy target range amid expectations of a dovish tone from the central bank, while the dollar ticked higher after three days of losses. The pound fell as U.K. Prime Minister Theresa May was said to ask for only a short extension to the Brexit process, scuttling expectations that Brexit is all but over. The euro held steady after German producer inflation data missed estimates. European sovereign bonds were mixed.

Kazakhstan’s tenge fell half a percent against the dollar as Kassym-Jomart Tokayev, a career diplomat fluent in Russian, English and Chinese, was sworn in as president. Tokayev pledged to continue the policies of veteran leader Nursultan Nazarbayev, who unexpectedly resigned on Tuesday after three decades in power, and will serve out the presidential term ending in April 2020.

It was unclear whether Tokayev, the former prime minister, will run for a full term as president of the vast oil- and gas-rich country of 18 million people, adding to uncertainty for investors already facing a shift from long-term structural reforms towards populist policies.

In commodities, oil prices were firm, supported by supply cuts led by producer club OPEC as well as U.S. sanctions against Iran and Venezuela, though gains were limited by concerns over global economic growth. International Brent crude oil futures were at $67.65 a barrel by 0925 GMT, up 0.1 percent from their last close.

Looking at the day ahead, the FOMC rate decision is due, while scheduled earnings include Micron, General Mills.

Market Snapshot

S&P 500 futures up 0.1% to 2,839.75

STOXX Europe 600 down 0.5% to 383.01

MXAP down 0.1% to 160.28

MXAPJ down 0.2% to 529.52

Nikkei up 0.2% to 21,608.92

Topix up 0.3% to 1,614.39

Hang Seng Index down 0.5% to 29,320.97

Shanghai Composite down 0.01% to 3,090.64

Sensex up 0.2% to 38,427.54

Australia S&P/ASX 200 down 0.4% to 6,165.35

Kospi down 0.02% to 2,177.10

German 10Y yield fell 0.4 bps to 0.093%

Euro down 0.07% to $1.1344

Brent Futures up 0.4% to $67.85/bbl

Italian 10Y yield rose 3.9 bps to 2.14%

Spanish 10Y yield unchanged at 1.171%

Brent Futures up 0.4% to $67.85/bbl

Gold spot down 0.3% to $1,302.97

U.S. Dollar Index up 0.1% to 96.50

Top Overnight News

Brexit-backers in U.K. PM May’s cabinet have threatened to resign if an extension is so long the U.K. has to take part in European Parliament elections. The EU had indicated that a long delay is needed if May can’t get her deal through Parliament, and chief negotiator Michel Barnier hinted the bloc would like to see a second referendum

“Huge Tory revolt" is underway to stop U.K. Prime Minister Theresa May asking EU for Brexit delay of nine months or more, ITV Political Editor Robert Peston says on his Twitter feed. Theresa May has been "requested to address the 1922 committee of Conservative MPs at 5pm

U.S. negotiators are concerned China is pushing back against American demands in trade talks, according to people familiar with the negotiations, even as President Donald Trump sounded optimistic about reaching a deal

Most market watchers expect the more-aggressive projections in the Fed’s dot plot to come down this week, shifting the middle ground to just one hike this year and possibly another in 2020

Sydney’s apartment market is “quite soft” due to a sharp rise in supply that’s increased risks to financial stability, RBA’s Bullock said, urging banks to loosen up lending rules if they can

One of nine Bank of Japan board members said it was necessary for the central bank to avoid expectations of no policy change becoming excessively fixed in financial markets, according the meeting minutes

Oil’s rally stalled after some U.S. officials were said to fear a Chinese pushback in trade negotiations between the world’s two largest energy consumers

Former U.S. Vice President Joe Biden has begun telling some supporters that he’s making plans to jump into the 2020 Democratic race

Around 10,000 jobs in Frankfurt could be at risk from the potential merger between Deutsche Bank and Commerzbank; UBS Group’s Chief Executive Officer Sergio Ermotti gave a gloomy outlook to investors, saying conditions in the first three months have been among the toughest in years

Hedge funds focused on the $5.1 trillion-a-day foreign exchange market are trying to circumvent the dearth of volatility by going farther afield to find an edge

Asian equity markets lacked firm direction with the region cautious following a lacklustre lead from Wall St and as global risk appetite was hampered by the looming FOMC meeting and ongoing US-China trade uncertainty. ASX 200 (-0.3%) and Nikkei 225 (+0.2%) traded mixed in which the former was pressured by weakness in financials and mining names, while Sony and Nintendo shares were among the biggest decliners in Japan following Google’s announcement of a cloud-based gaming service, although losses in the broader Tokyo market were later pared by favourable currency moves. Hang Seng (-0.2%) and Shanghai Comp. (U/C) conformed to the indecisive tone due to trade uncertainty following conflicting news flow in which US-China trade talks were said to be at the final stages with senior trade negotiators to meet from next week, although other reports noted expectations that China may walk back on some trade offers and that issues remained regarding data services and pharma. Finally, 10yr JGBs were restrained as they reflected the flat picture in T-notes and uneventful BoJ Minutes release, although prices were then pressured as Tokyo trade began to improve and following a tepid BoJ Rinban operation of JPY 500bln concentrated in the belly.

Top Asian News

China Developers Jump as Property Tax Law Omitted From 2019 Plan

Bank of Thailand Holds Interest Rate as Election Risks Mount

Singapore Gets First Guilty Plea in S$8b Penny Stock Rout

Major European indices are in the red [Euro Stoxx 50 -0.5%], with clear underperformance seen in the Dax (-1.0%). Underperformance in the Dax was seen at the open following Bayer (-12.5%) opening significantly lower following a US Jury ruling that the Co’s Roundup was a ‘substantial factor’ in causing a man’s cancer, for reference the Co. has around a 8.3% DAX weighting. Losses in the Dax were subsequently exacerbated by BMW (-4.8%) reporting that they see 2019 group profit before tax significantly lower than the prior years levels; other German names have been dragged down in sympathy. In terms of sectors the material sector continues to underperform, after opening lower than peers at the open, which has been attributed by some to a potential easing of supply constraints after Vale surpassed a milestone in their path to resume production at their Brucutu, Brazil mine. Other notable movers include UBS (-2.3%) are in the red, after the CEO stated that Q1 investment bank revenues are down by around a thirds Y/Y, adding that the CO’s global wealth management income remains under pressure. Elsewhere, Inmarsat (+16.6%) after reports that the Co. have received their 3rd takeover bid this year; which valued the Co. at GBP 2.5bln. Of note, Norsk Hydro (+1.0%) stated that it is too early to determine the exact operational and financial impact of the cyber attack they were subject to yesterday.

Top European News

Hermes Says China Demand Is Still Rising. Neckties, Not So Much.

Rolls-Royce Sees Record Year in China Even as Car Market Slumps

Moncler Underperforms After Eurazeo Sells Remaining Stake

Kingfisher CEO Laury to Step Down as DIY Retailer Struggles

In FX, the USD appears to have stabilised as the clocks tick down to the Fed, partly on technical grounds and short covering, but also due to the plight of others like the Pound that is underperforming on latest Brexit developments. The DXY is back within touching distance of the 96.500 level having stopped the rot just ahead of Fib support at 96.264, but it remains to be seen whether the index closes above another chart retracement level at 96.434, which did not hold yesterday, and this in turn depends on how dovish the FOMC proves to be via a combination of the revised growth and inflation forecasts, updated dot plots and especially QT guidance – for a full preview of the looming and pivotal event check out the Ransquawk Research Suite.

GBP - In contrast to the Buck’s resolve, Sterling seems resigned to heightened Brexit risk, and in particular the increased uncertainty that extending the A 50 deadline might bring, assuming the EU accepts the request of course. Latest reports suggest that PM May will ask for a short delay of up to June 30 after discussing the alternative of a longer postponement from March 29 with her Cabinet, but meeting staunch opposition to the latter from Tory Leave rebels. However, Brussels remains adamant that any request will only be considered, let alone granted, if accompanied by a rationale reason or firm plan of action, while stressing no going back to the table and renegotiating the WA. Moreover, a 3 month extension crosses the EU election deadline and event itself, as the deadline falls on April 12 for May 23. Cable has accordingly recoiled from another approach towards 1.3300, stopping just short of 1.3200, and Eur/Gbp is hovering near the top of a 0.8590-50 range.

G10 - Elsewhere, Usd/majors remain relatively rangebound and narrowly mixed, with the AUD, CHF and EUR marginally outperforming vs the JPY, CAD and NZD that are on a moderately softer footing vs the Dollar. Aud/Usd is holding close to 0.7100, and gleaning some support from the Kiwi on cross-positioning as Aud/Nzd climbs back above 1.0350 and Nzd/Usd is capped ahead of 0.6850 in advance of NZ Q4 GDP data that is likely to carry downside risks vs consensus. Usd/Jpy is pivoting 111.50 after more dovish leaning Japanese rhetoric from BoJ Governor Kuroda and the Government, while the Loonie has lost Tuesday’s bullish momentum and retreated further from 1.3250 to almost 1.3350 alongside crude prices. Turning to the single currency and Franc, trading parameters are still extremely tight around parity and 1.1350 respectively, with the Chf not just wary of the FOMC, but also the SNB on Thursday, while Eur/Usd does not seem likely to trigger decent option expiries at 1.1320-35 (1 bn) or 1.1390-1.1400 (2 bn) at this stage.

In commodities, Brent (-1.0%) and WTI (-0.5%) prices have slipped, and eliminated the support to prices garnered from yesterdays surprise API draw of -2.1mln vs. Exp. +0.3mln. Separately, UBS highlights that the slowing US’s slowing supply, which they note was highlighted in the EIA’s monthly report, suggests that oil markets are continuing to tighten. Looking ahead we have the EIA Weekly Crude report, where expectations are for a crude stocks draw of 0.775mln; at 14:30GMT. Gold (-0.3%) is trading towards the bottom of the days range, weighed on by a stronger dollar and ahead of FOMC rate decision later in the session. Elsewhere, copper has traded uneventfully this morning and Glencore are reportedly in talks with Aeris to offload their CSA copper mine for USD 575mln.

US Event Calendar

7am: MBA Mortgage Applications, prior 2.3%

2pm: FOMC Rate Decision

DB's Jim Reid concludes the overnight wrap

The countdown has now ticked down to under a month until we move into our new house after two years of anticipation and stress. Last night was the time for the final decision on paint for the kitchen with my wife giving me chapter and verse on the merits of a gloss or matt finish. Apparently one is more hard wearing which is preferable in the kitchen and I think I also heard that one can be a bit harsh in a kitchen for dark colours. To be honest it was all quite complicated and “glossed” over me. So I’m not 100% sure what we agreed on. Suffice to say that if I was in charge the kitchen would actually now be a golf simulator so it’s probably good that I’m not.

Elsewhere although the countdown to Brexit is technically now down to 9 days - without an extension - yesterday’s break in big Brexit news meant we’ve had a chance to revisit the real world in the last 24 hours and it’s looking a bit rosier than the inner walls of the House of Commons at the moment. However some concerns about the progress of US/China trade talks took the shine off the second half of the US session and this has spread into Asia a little too. Before this European equities closed at the highest point since the end of September and the S&P traded above 2850 intra-day for the first time since early October. US markets did fall -0.7% from the peaks though to eventually close just about flat (-0.01%) but still around its 5-month high, while the NASDAQ gained +0.12% to reach a fresh high since October 9. As mentioned the relatively sharp reversal around lunchtime in New York came as Bloomberg reported that US trade officials are becoming concerned over the apparent strong degree of pushback from China on issues related to intellectual property. According to the reports, Chinese officials believe that they have already made concessions by opening up some industries and moderating their joint venture requirements, and they want reciprocal commitments from the US in the form of eliminated tariffs. Other sources subsequently downplayed the stories, including President Trump who said that “talks with China are going very well.” USTR Lighthizer and Treasury Secretary Mnuchin are set to travel to China next week to continue talks.

In Asia, the Hang Seng (-0.52%), Shanghai Comp (-1.03%) and Kospi (-0.97%) are all down while the Nikkei (+0.04%) is trading flattish. In other news, Samsung Electronics said in a statement that 2019 is likely to be a difficult year for its components business due to increasing uncertainty in business environment, a slowdown in the smartphone market and reduced investment by data centers. The stock is down c. -1% this morning. Elsewhere, futures on the S&P 500 are also down -0.11% and all G-10 currencies are trading weaker (-0.1% to -0.3%) this morning.

Before all this and as discussed at the top, the STOXX 600 (+0.57%) closed at its highest level since September 27th and while that was slightly off the intra-day highs, it is back within 4.60% of the local highs from January 2018 albeit -7.19% below the all-time highs seen in April 2015. At the same time the VIX touched its lowest intraday level since last October and the V2X slid to touch its lowest level since last August. The MOVE index is hovering around the YTD (and close to all time) lows and CVIX is at the lowest in 4.5 years. So all seems fine in the world....... for now.

Will the calmness continue going into and out of the Fed meeting tonight? On Powell’s first seven FOMC meetings, the S&P 500 ended up lower on the day of the policy announcement. However, this trend reversed in January when the S&P 500 rallied +1.55% on the dovish pivot. If Fed chairs kept score, Powell would still trail his predecessors, since the S&P 500 has fallen on average -0.25% on FOMC meeting days under his leadership. The averages for Yellen (+0.17%), Bernanke (+0.55%), and Greenspan (+0.18%) all make for happier reading. A reminder that our economists ( link ) expect few surprises in the statement or Powell’s rhetoric. They anticipate the median rate expectation for 2019 will fall to one hike, and will be monitoring for any signals about balance sheet policy or what conditions are needed to allow for another hike.

As for other markets yesterday, interest rates were mostly higher, as treasury and bund yields rose +1.3bps and +1.4bps, respectively. Bund yields touched their highest level (0.12%) since the ECB meeting earlier this month, but subsequently retraced a bit alongside the move in equities to close around 0.09%. The initial catalyst for the earlier move higher was apparently the pricing of €1.55bn of 100-year bonds by the German state of North Rhine-Westphalia. The MNI story below may have also played a part.

Moving on. It might have been quiet but we weren’t going to get away without a Brexit update despite it waiting until the eighth paragraph today. The newsflow yesterday confirmed that we won’t get a vote on May’s deal in Parliament this week and that talks with DUP are still ongoing. A Bloomberg story suggested that an EU extension would be finalized in the days before March 29th with another Parliament vote on MV3 possible next week. A headline on Reuters also suggested that May will write to EU leaders requesting a short and long Brexit delay – the latter likely to be used as pressure tactics towards the hard Brexiteers to vote through MV3. However there was some talk that the hard liners in the Tory party as so angry that they might not support the party in a confidence vote. So the stakes are getting higher.

A Bloomberg story later suggested that the EU is likely to tell Mrs May that she must decide by mid-April whether to extend Brexit until 2020 or risk leaving in three months without a deal, a senior EU official said. I suppose this gives cover for MV3 and then indicative votes if then needed before that. It also ties into the date (April 12th) where the U.K. needs to decide whether it is going to participate in the Euro Parliamentary elections. If all this fails then we may start the process again with an extended membership into at least 2020 and with risks high of a new PM or a general election. As we get closer to tomorrow’s EU meeting, attention will shift away from the UK side, and investors will increasingly focus on the rhetoric coming out of the EU. There are signs of some disagreement on their side about what conditions they’d want to attach to an extension, with German Europe Minister Roth saying he needs “clear and precise proposals” from the UK explaining “why such an extension is necessary.” The French Europe Minister said a no-deal outcome “can very well happen.”

Sterling reflected the directionless newsflow, having a fairly calm day by comparison to recent sessions, trading in a 0.53% range before finishing little changed at $1.3258. That’s the 8th tightest range of the year. Despite all the Brexit noise, three-month implied volatility for the pound versus the dollar slid to 9.5, its lowest level since last October. Even sterling cannot seem to escape the universal drop in implied volatility this month.

In other news, the gains for European equities certainly weren’t damaged by yesterday’s MNI story suggesting that the ECB might have to buy stocks in any new rounds of QE in the future. We should note that MNI sources do require a bit of a pinch of salt and the details of the story were a lot more hypothetical than the headline itself. In any case our economists in Europe have written about the possibility of the ECB buying equities in 2016. They found that the size of Euro Area ETFs linked to broad market indices was relatively small to make much of a big difference to the size of QE purchases, assuming the ECB followed a similar model to that of the BoJ. See their report here .

As for the data out in the US yesterday, despite being broadly softer, it didn’t move the dial particularly. Factory orders for January printed at +0.1% mom (vs. +0.3% expected) while there were downward revisions for durable goods orders (+0.3% mom vs. +0.4% flash and ex transport -0.2% mom from -0.1% flash) however core capex orders were left unchanged at +0.8% mom.

In the UK the mystery of extremely strong labour market data and weaker demand deepened after yesterday’s January and February employment data. The unemployment rate ticked down one-tenth unexpectedly to 3.9% while average weekly earnings beat at +3.4% 3m/yoy (vs. +3.2% expected). Employment change was also a robust 222k 3m/3m (vs. 120k expected). So another inflationary mix of data for the BoE to consider. Meanwhile the only other data worth flagging yesterday was the March ZEW survey in Germany which looked better at the expectations level (-3.6 vs. -11.0 expected; -13.4 previously) than it did at the current situations level (11.1 vs. 13.0 expected; 15.0 previously).

Finally to the rest of the day ahead, where the data this morning includes the February PPI reading in Germany and February CPI/PPI/RPI readings in the UK. The March CBI survey is also due out in the UK before all eyes turn to the aforementioned Fed meeting this evening. Also worth flagging is the German Cabinet deciding upon the 2020 budget and medium term financial plan tomorrow which is worth keeping an eye on.