Stocks Maintain Zero Volume Hover Mode Ahead Of Bernanke Speech
Curious what has sent the EURUSD higher by over 60 pips in the past several hours: it was driven by the biggest economic datapoint so far in the session, the German ZEW Survey of Economic Sentiment, which missed expectations of an increase to 40 wildly, instead dropping to 36.3. While the kneejerk algo reaction was to push the EURUSD lower by 20 pips, it was the BIS FX traders that offset the drop and took what is the latest indicator of European core economic weakness as a signal to buy EURUSD to the highest in 4 days, and dragging European risk higher following Merkel comments she (Germany) was doing everything to stabilize the Euro.
But fear not US: with a Q2 GDP of under 1% now all but assured, and with all economic data reporting now a global bizarro day farce, you will have a chance to take the torch from Europe in the ugliest girl category, and push the S&P to a new record intraday high today following what should be assured epic misses in the Industrial Production print (exp. +0.3%), Cap Utilization and the NAHB housing market index which is set to tumble now that any retail demand for housing was promptly killed following the recent spike in rates.
In addition to a relatively lite economic docket, we get the all systematically important
hedge fund, Goldman Sachs, reporting which is expected to announce a 21%
q/q drop in revenues, led by lower gains in Investment Lending (i.e.
prop), offset by 12% drop in operating expenses.
Of course, nothing fundamental actually matters as markets continue to be on ultra low-volume, "drift higher" autopilot until tomorrow's Ben Bernanke semi-annual muppet show in Congress, when he is expected to refill the hopium trough once more and finally send the S&P above 1700 on central planning.
Market recap via RanSqauwk:
Positive production update by Rio Tinto which in turn boosted miners in Europe ensured that the heavy commodity weighed FTSE-100 index outperformed its peers. As such, the likes of Rio Tinto, Anglo American and ThyssenKrupp over in Europe traded with solid gains, however despite the global dominance, Glencore is seen little changed after the company said that it is to suspend iron ore mining in Australia citing poor outlook. Although stocks are trading off their worst levels, yet another release of less than impressive macroeconomic data from the Eurozone (ZEW survey) meant that stocks remained in the red. In terms of notable stock movers today, Commerzbank traded sharply higher after it was reported that Santander is said to be interested in acquiring a stake, while Telecom Italia shares were under pressure after it put its spin-off for its fixed-line network on hold following a dispute over tariffs with local regulator. Going forward, market participants will await the release of the latest CPI report, as well as earnings from Goldman Sachs, Coca-Cola and J&J.
SocGen summarizes the key macro highlights of the day
Financial markets traded in a confident mood yesterday with both stocks and bonds both still making the most of Fed chairman Bernanke's dovish remarks last week and taking weaker China GDP in their stride. The move lower in EU periphery yields and Portugal in particular was partially a correction of the spike in yields on Friday, but there is enough uncertainty on the radar to keep yields realigning towards post ECB meeting levels. The deadline for the Portuguese government to accept a “national salvation pact” has been set for 21 July while 30 July is the date of Silvio Berlusconi's fraud trial in Italy. Berlusconi's PdL party has threatened to pull out of the coalition in protest. Meanwhile in Spain, embattled PM Rajoy is reportedly fighting for his political life after being accused of accepting ‘slush funds'. Though Rajoy's position is fragile and he continues to reject calls for his resignation, the opposition Socialist party is not calling for early elections. This may explain why Spanish 2y debt has recently performed better out of the three countries, even as the IMF warned yesterday that risks to the to the economy from the financial sector remain high. The sale of Spanish T-bills today, but more so that of longer dated bonds on Thursday will be a test of confidence in the government.
A wealth of CPI data from the eurozone, the UK and the US are due today and apart from the UK, the stats should not have a major impact on markets or monetary policy perceptions. A rise to 3.0% is the consensus for UK CPI (SG forecast 2.9%) but only an increase above this threshold would force governor Carney to write a letter to Chancellor Osborne (but its immediate publication would now be delayed and instead fall alongside the August MPC minutes). The erosion of real UK yields has been an obvious drag on the performance of GBP lately and only when inflation pressures start subsiding can GBP be expected to stage a recovery. The performance vs the EUR has been puzzling but with EUR short positions having caught up with GBP over the past week, we think profit taking could happen soon. However, the risks for GBP/USD like EUR/USD are still skewed bearishly and tomorrow if Bernanke gives the view representative of the FOMC rather than his own, sellers of GBP/USD could come out to take advantage of a deceptive bounce on higher CPI.
Consensus expects US industrial output to be up 0.3% in June vs May and capacity use is seen staying below the 20y average of 79.0%.
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Finally, DB's Jim Reid recaps the past 24 hours and what to look forward to:
Markets continued their streak of gains, as a tightening of US rates helped underpin gains in credit and equities yesterday. There was also a positive earnings report from Citigroup, some relatively positive news in European politics and hopes of policy easing in China which helped boost risk sentiment. But it was the US data that set the tone yesterday, particularly the disappointing retail sales report which eased fears of near term Fed tapering. Starting with Citigroup, the bank reported better than expected Q2 earnings which helped US banking stocks post a 0.78% gain, outpacing the broader S&P500 index (+0.14%). Citigroup’s Q2 EPS was $1.34 ($1.25 ex CVA/DVA) which was solidly ahead of consensus estimates calling for $1.18. The revenue line also managed to squeeze in ahead of estimates at $20.0bn vs consensus of $19.8bn. Our US banking analyst noted a number of positives in the result including strong revenue trends from core businesses including a 68%yoy increase in equities, a well-contained cost base and a reduction in non-core legacy assets. On a less positive note, a core theme that has emerged in the US bank results to date is the pressure on net interest margins and this was also evident in Citi’s results where NIM declined by 3bp. On the balance sheet side, Citi reported that its leverage ratio averaged 4.9% for the quarter and at the end of June had exceeded the 5% minimum recently proposed by US regulators. Markets appeared to like the result with Citi’s share price 2% higher and its 5yr CDS quoted 6.5bp tighter on the day.
Back to the broader markets, the release of the US data yesterday saw 5yr and 10yr UST yields rally 8-10bp. Both closed around 5bp lower on the day. Similarly, the dollar index was headed for an intra-day high of +0.6% before it reversed course sharply post-data to close virtually unchanged on the day. In terms of the data itself, June retail sales rose a weaker-than-expected +0.4% (vs 0.8% expected) in the headline following a downward revision to May (- 0.1% to 0.5%) and a modest increase for April (+0.1% to 0.2%). DB’s US economists highlight that outside of motor vehicle sales, which rose 1.8% in the month, the retail results were even softer (unch. vs. +0.5% expected).
Overshadowed by the poor retail data, the NY Empire survey posted strong July result (9.5 vs 5.0 expected). The July NY Empire reading is a 6-month high and comes after last month’s strong print (7.84 vs 0 expected). Nevertheless, the disappointing retail sales data was enough to prompt our US economists to revise down our Q2 GDP estimate by one full percentage point to 1.3%, joining a number of other investment banks in taking down GDP forecasts over the last 24 hours. However DB caution against reading too much into the Q2 number given the upcoming benchmark revisions that the Bureau of Economic Analysis will make.
The weaker US dataflow and resulting GDP downgrades eased some fears of a near term Fed tapering (we’ll find out more this topic on Wednesday/Thursday
when Bernanke speaks). It also helped the S&P500 post its eighth consecutive gain which is its longest winning streak since January 2013. Both the S&P500 and Dow closed at fresh all-time highs. Indeed, US equities have had a very robust start to the month of July. As it stands, the S&P500 has experienced only one negative day out of 10 this month, and the one negative day that we did see resulted in a minor loss of -0.05%. The combination of better equity market sentiment and lower US rates helped major credit indices including the European iTraxx (-3bp), Crossover (-14bp) and US IG (-1bp) grind lower as they move steadily towards series tights.
In European rates, yesterday saw spread compression between core and periphery as markets as political concerns in Portugal and Spain lessened. Portugal’s 10yr yield rallied -20bp to 7.01% with the Portuguese government hoping to put in place a cross party pact to support the existing troika programme until its completion next year and Spanish PM Rajoy pledging to complete his term despite ongoing corruption allegations. Elsewhere in Europe, Fitch downgraded the EFSF to AA+ from AAA. The move came after European markets had shut but probably doesn’t come as a major surprise given Fitch’s downgrade of France late last week. Furthermore, Fitch’s rating action on the EFSF merely brings its rating to the same level as Moodys and S&P at Aa1 and AA+ respectively.
Taking a look at overnight markets, Asian equities are mixed this morning despite early gains and a positive finish to the US session. Chinese equities are leading the region’s losses (Shanghai Comp -0.7%) on reports that the Chinese government will introduce further curbs designed to limit house price rises such as property taxes. This is putting pressure on Chinese property developers whose stocks are down 1.1% this morning. On the policy side, domestic newswires are reporting that China’s State Council may release economic plans for the second half of the year tomorrow (21st Century Business Herald). India’s NIFTY index is underperforming (-1.7%) after the RBI announced measures to curb the INR’s decline including raising two key money market rates. The INR has recovered 1% versus the USD this morning.
Bucking the regional trend, Japanese equities are seeing solid gains (Nikkei +0.6%) after reopening following Monday’s public holiday. USDJPY’s rally to 99.8 over the past two days is also helping sentiment there.
Turning to the day ahead, the German ZEW survey, UK CPI and Italian trade data for the month of May are the major economic reports in Europe today. In the US, June CPI and industrial production will be the main focus. On the former, DB is anticipating a +0.3% increase in the headline and +0.2% increase in the core, but a +0.3% rise in the core is possible if there is some retracement of medical care prices which have shown record weakness over the past couple of months. The NAHB housing index is also scheduled today. In terms of earnings, Yahoo and Goldman Sachs are amongst the latest companies to report.
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