S&P Futures, Global Stocks, Euro Dragged Lower By Deutsche, Geopolitics, French Election Worries

European shares and S&P futures are modestly lower this morning, dragged down by fresh geopolitical concerns out of North Korea which last night fired 4 ballistic missiles, by renewed political jitters out of France where Alain Juppe announced he would not run in the presidential election, from Deutsche Bank whose aggressive equity offering has weighed on local stocks, and from China’s announcement over the weekend in which it modestly cut its economic outlook. Risks were magnified following concerns of political stability in the US after President Trump’s accusation that his predecessor Barack Obama wiretapped him overshadowed a flurry of M&A activity in Europe.

As a result, caution has rippled through equity markets while metals slumped on Chinese growth prospects and the French presidential race continued to roil the euro.

The Stoxx Europe 600 index was down 0.4% dragged by miners and banks as Deutsche Bank announced it was reversing course with an overhaul to raise capital. Deutsche Bank shares slumped 6% after Germany’s biggest lender said it needs to issue more shares to raise 8 billion euros of capital. “The question is whether this will be the last capital hike or whether the bank will need more yet again in a few years,” said Stefan de Schutter, a trader at Frankfurt-based Alpha, referring to Deutsche. “Until now, none of the restructuring measures have borne fruit.”

Deutshce pressured European banking stocks and weighed on broader indices, offsetting a rise in shares of asset management firms after Aberdeen and Standard Life set the terms of their 11 billion pound tie-up. Both stocks rose more than 6 percent.

The FTSEuroFirst index of 300 leading shares and Germany’s DAX fell as much as 0.7 percent, both hit by the slide in Deutsche Bank. The European banking index was down 1 percent.

MSCI’s benchmark global stock index was flat on the day. U.S. stock futures pointed to a fall of around 0.5 percent at the open on Wall Street which would take some of the shine off last week’s rally to fresh record highs, particularly the Dow’s leap above 21,000 points. Japan’s Nikkei lost 0.5 percent, but that was the outlier in Asia. MSCI’s broadest dollar-denominated index of Asia-Pacific shares outside Japan rose 0.4 percent, recovering from Friday’s 1 percent fall, its biggest this year.

The euro erased earlier gains and German bonds rose after former prime minister Alain Juppe said he won’t step in to replace Francois Fillon on the Republican ticket in France’s frenetic presidential election. As a result, European markets unwound Friday’s Juppe-motivated risk-on, with Bund futures rallying, core curves bull flattening and peripherals dropping with French bonds. Local press reported over the weekend Juppe would decline to replace Fillon, prompting early risk-off moves; bund futures rose to session highs as Juppe confirmed he won’t run just after 10:30am CET.France-German 10y spread wider by around 5bps; credit spreads widen and European stocks slid. Elsewhere, the German 10Y yield declined -3bps at 0.33%; March bund futures were +40 ticks at 164.38; Italy +3bps at 2.12%, France +2bps at 0.96%, Spain +3bps at 1.70% in a parallel risk on/risk off move.

The bigger picture is that markets appear to be rolling over recent all time highs, as investors anticipate in a near-certain March U.S. rate rate next week. Chinese Premier Li Keqiang warned of larger challenges ahead during his work report to the annual National People’s Congress gathering in Beijing. In Europe, the agenda is being set by politics, according to Pictet Asset Management. “The ‘pothole’ is a political one with far right parties gaining ground in opinion polls ahead of both a Dutch and French ballots in spring,” Luca Paolini, chief strategist at Geneva-based Pictet, said in a research note. “We are scaling back exposure to European stocks, albeit retaining our overweight stance.”

Risk appetite also took a hit on rising geopolitical tensions in East Asia. North Korea fired four ballistic missiles early in the day, while a spat between China and South Korea over missile defense deepened. Trump’s accusation that his presidential predecessor Barack Obama wiretapped him during the late stages of the 2016 election campaign also cast a shadow over U.S. stocks. Some investors view Trump’s confrontational style as distracting the president from his economic agenda.

And then there is the Fed: investors opened the trading week almost certain that the Federal Reserve will raise U.S. interest rates next week. Fed Chair Janet Yellen on Friday all but confirmed market expectations, barring any sharp deterioration in economic conditions. U.S. money market futures are pricing in about a 90% chance the Fed will raise interest rates by 0.25 percentage point at its meeting on March 14-15, with another rate hike fully priced in by September. But much of the market’s move towards this level of certainty was made early last week, meaning it was already largely in the price of the dollar and U.S. bond yields.

Attention will now shift to the U.S. employment report for February on Friday, while investors are also awaiting more detail on Trump’s fiscal plans.

“The rally (on Wall Street) has been mainly driven by promises made by President Trump to lower taxes, increase spending on infrastructure and the military,” Rabobank analysts wrote in a note on Monday. “The importance of such pledges has increased as the Fed intends to raise rates further. What could possibly go wrong?”

Both the dollar and Treasury yields slipped on Monday, as investors took some profit from last week’s moves and squared positions ahead of the expected rate hike. The Bloomberg Dollar Spot Index added 0.1 percent, after slipping 0.7 percent on Friday to halt a five-day rally. The euro edged up to $1.0640 having dipped below $1.05 last week, and the dollar fell a third of one percent against the yen to 113.60 yen. China’s yuan was little moved, fetching 6.8920 yuan per dollar in offshore trade after China cut its growth target for this year to 6.5 percent, compared to its 2016 goal of 6.5-7 percent. Growth in 2016 was 6.7 percent.

In rates, the yield on the benchmark 10-year Treasury note declined one basis points to 2.47 percent. German bonds were Europe’s best performers, as 10-year yields dropped three basis points to 0.33 percent. French benchmarks declined, pushing the yield of debt due in a decade up two basis points to 0.96 percent.