Overnight news began in China where the CPI came in 2.7% versus consensus of 2.5% although PPI continues to decline at a faster pace than expected (-2.7% v -2.6%). While nobody believes the actual print, that the PBOC is telegraphing an inflationary "leak" shows its willingness to continue with pro-tightening measures which is why despite an Alcoa "beat", the SHCOMP was up only 0.37%. Elsewhere in China, Bloomberg news quoting Xinhua said that some district governments of Ordos of Inner Mongolia is struggling with finances and had to borrow money from companies to pay salaries of municipal employees. Ordos is the infamous "ghost town" spurred by the mining boom in Inner Mongolia. The Bloomberg article noted that Ordos local government entities have CNY240bn of debt versus CNY37.5 billion of revenue last year.
And while the Alcoa "beat", helped handily by a hilariously "tapered" consensus into reporting day, did little for China it was the catalyst that pushed global stocks higher worldwide.
Yes, the same Alcoa that ended its afterhours trading session lower. In fact, the AA news was extrapolated as extremely beneficial for the beaten down materials sector with Rio Tino and BHP Billiton both up 2.5%, while the resource heave FTSE-100 outperformed in Europe. This was despite a miss in both UK Industrial (0.0%, Exp. 0.2%), and Manufacturing production (-0.8%, Exp. 0.4%) and yet another downward revision to the Greek economy by the Greek IOBE think tank which now sees contraction of 4.8-5.0% compared to -4.6% previously.
The ongoing Spanish graft scandal continues, with El Mundo reporting overnight that Prime Minister Mariano Rajoy received illegal bonus payments from his People’s Party in 1997, 1998 and 1999 while he was a minister during govt led by Jose Maria Aznar, El Mundo reports, citing documents from former party treasurer Luis Barcenas. A press official at Rajoy’s office was unavailable for
comment when contacted by Bloomberg News today. The People’s Party said in an e-mailed statment it isn’t aware of documents cited in press report and doesn’t acknowledge them as being part of its accounting procedures. Not that anyone would expect them to admit guilt that is.
However, since news doesn't matter, the question is which will be the carry currency of choice today to push US equities higher since there will be no good or bad data releases, both of which are good for stocks of course, and with both the EURUSD, USDJPY and AUDUSD sputtering it is not quite clear as of right now just which FX pair will push equities higher.
In the absence of first tier data US NFIB small business confidence (Est. 94.6) and JOLT openings (Est. 3790k) will be the main ones to watch. There is a 3 Year Treasury note auction scheduled for today and the usual POMO concluding at 11 am, which will be for $2.75-$3.50 billion in the 10 year range: watch out for that special repo rate in the 10 Y. We also have a muted day for company earnings with JPMorgan’s Q2 on Friday being the next highlight to come.
Bulletin summary of the key headline news via Bloomberg:
- Treasuries resume decline that has pushed yields to highest since August 2011; week’s auctions begin with $32b 3Y notes, yield 0.73% in WI trading; stopout yield at that level would be highest in two years.
- China’s inflation stayed subdued in June while a decline in factory-gate prices extended its longest streak in a decade, underscoring weaker demand in an economy that probably decelerated for second quarter
- GBP slides vs USD as U.K. manufacturing fell 0.8% in May, more than forecast, amid a drop in the output of pharmaceuticals and metals
- European governments agreed to release EU3b of aid for Greece, seeking to buy enough financial calm to prevent another debt-crisis showdown until after Germany’s elections in September
- China’s central bank is tightening rules on interbank bond market trading by ordering all transactions to be conducted through the National Interbank Funding Center as it seeks to boost transparency
- Alcoa Inc. reported earnings that beat analysts’ estimates following a better-than-expected performance at its unit that supplies components to aerospace and power companies
- Egypt’s interim leader pushed ahead with a timeline for new elections as the fatal shooting of more than 50 Islamists by the army threatened to split the opposition coalition that led calls for Mohamed Mursi’s ouster
- Sovereign yields mostly lower. Nikkei surges 2.6%, Shanghai +0.4%. European stocks, U.S. index futures higher. WTI crude and copper lower, gold gains
Quick update of where markets stand:
- Spanish 10Y yield up 2bps to 4.69%
- Italian 10Y yield down 3bps to 4.35%
- U.K. 10Y yield down 1bp to 2.47%
- German 10Y yield down 1bp to 1.69%
- Bund future up 0.07% to 142.04
- BTP future up 0.18% to 111.19
- EUR/USD up 0.03% to $1.2874
- Dollar Index up 0.09% to 84.27
- Sterling spot down 0.47% to $1.4881
- 1Y euro cross currency basis swap steady at -18bps
- Stoxx 600 up 0.76% to 294.59
Socgen's FX team summarizes the key macro outlook:
Yesterday was another good example of how FX markets are currently the slave of the bond market. Equities had a good session as core yields fell back and the EU periphery also turned in a decent performance with Portugal and Greece taking full advantage of the Eurogroup discussions, with small relief observed again following the decision to release part of the latest payment to Greece. Bringing forward a EUR2.5bn payment to July, the rest in October dependent on delivery of economic reform, will help to tide over the repayment of two bonds that mature on 20 August.
One must assume that the pullback in UST yields (reversed overnight) is the response after a exaggerated post payrolls reaction on Friday (and concession in prices ahead of UST supply this week). It does not echo the price action of the payrolls report one month ago when yields kept on rising for three days before reversing and higher beta currencies like SEK and NOK kept falling. It is representative of the market taking two steps forward and one step back, but the trend for yields is upward. As we wait for the next Fed speaker or US data set - the FOMC minutes of the June 18/19 meeting are due tomorrow and 17 July is when chairman Bernanke next testifies on the economy to Congress- the challenge for UST 10y yields is to consolidate around 2.60%.
With regard to the eurozone, the reports yesterday of a disappointing 1.0% drop in German industrial output and a 2.4% drop in German exports vindicated the dovish message by the ECB last week. Though a bounce in Q2 GDP is expected, the data underlines that the recovery is far from smooth and any pick-up in growth is more likely to be gradual than a sudden spurt. Early indications are that momentum going into Q3 will be weak which makes ECB policy making interesting into the German general election in September. ECB president Draghi reiterated yesterday that exit remains distant and policy will remain accommodative for a prolonged period. News sources reported that Mr Draghi and ECB chief economist Praet had made the case last week for a 25bp rate cut, but this was blocked by seven council members. One of them, Mr Asmussen, is scheduled to speak today. We also get UK industrial output and foreign trade and US small business optimism.
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DB's Jim Reid concludes the overnight recap:
Markets certainly traded on a more positive tone yesterday as a retracement of Friday’s US rates sell-off help set the direction for both equities and credit. In reality there was also some good news from Europe as officials agreed to release Greece’s bailout funds while Draghi continued his dovish policy stance. We’ll recap these events below but Alcoa’s ahead of consensus result after market seems to be adding further optimism to the Asian session overnight.
Indeed Alcoa kicked off the Q2 US earnings season with both a bottom and top line beat although expectations were somewhat tapered into this. Adjusted EPS for the company came in at 7cps versus analyst expectations of c.6cps. Revenue for the quarter was $5.85bn versus consensus of $5.79bn. Our Alcoa’s equity analyst noted that the results were underpinned by lower cost (productivity gains and favourable FX) and higher contribution from Engineered Products segment on better aerospace demand. For credit investors, a positive free cash flow on lower capex and some debt repayment were encouraging. Outlook wise the company reaffirmed its 7% global aluminum demand growth for 2013. AA’s 5yr CDS finished 10bps tighter on the day although its share price was broadly unchanged in extended hours trading.
Back to broader markets, major Asian bourses are higher across the board led by gains in the ASX 200 (+1.4%), Nikkei (+1.7%), and the Hang Seng (+0.3%). Chinese equities are +0.1% on the day as the market continues to digest the inflation data overnight.
Back to markets and as mentioned at the start, the 10yr Treasury yield managed to unwind half of Friday’s post-payroll spike yesterday in what was a quiet day for US dataflow. Indeed after a +24bp move higher on Friday following the above-consensus payrolls print, the 10yr rallied c.10bp to close at 2.64%. Risk assets were better bid helped by comments from the ECB President who reiterated the ECB's forward commitment to low rates and a distant exit to accommodative policy. On a related note, there was also a report on newswires suggesting that ECB chief economist Peter Praet had proposed to cut the benchmark interest rate by 25bp at last week’s Governing Council meeting (MNI News). The article hinted that Draghi had supported this move which also added to sentiment yesterday. European equities outperformed with the CAC, DAX and IBEX up +1.86%, +2.08%, +1.90%, respectively as the weaker-than-expected German trade and IP data were largely shrugged off. Across the pond, the S&P 500 (+0.53%) moved to within 2% of its all time high of 1669 reached on the day just before Bernanke’s JEC testimony while July has started well for the index after having rallied four out of the last five sessions.
In the European rates market, Portuguese 10yr bonds rallied 20bp to close below 7% for the first time in almost a week. This followed the weekend’s news that PM Coelho had managed to salvage the coalition, but as DB’s Gilles Moec highlights, it came at a high political price. Indeed, CDS-PP leader Paulo Portas accepted to rescind his resignation from government to become officially vice- Prime Minister (a function last used 30 years ago) and more crucially will be overseeing economics and government reform as well as the relationship with the troika. Gilles believes that while the market may welcome this as a first step to lesser political uncertainty, it does create problems both externally (the government’s relationship with the Troika) and internally (coordination with the “harder line” Finance Minister). Gilles continues to think that the Europeans need to find a solution to fund Portugal after 2013 to allow it to continue the adjustment away from immediate market pressure.
Given the post-payrolls lull this week was always going to be quiet for data watchers and today will be no different. In the absence of first tier data, UK IP, US small business confidence and JOLT openings will be the main ones to watch. There is a 3yr Treasury note auction scheduled for today. We also have a muted day for company earnings with JPMorgan’s Q2 on Friday being the next highlight to come.