Third Day In A Row Of Early Futures Weakness Set To Give Way To Low-Volume Levitation
Hopes that Kuroda would say something substantial, material and beneficial to the "three arrow" wealth effect (about Japan's sales tax) last night were promptly dashed when the BOJ head came, spoke, and went, with the USDJPY sliding to a new monthly low, which in turn saw the Nikkei tumble another nearly 500 points. China didn't help either, where the Shanghai Composite also closed below 2000 wiping out a few weeks of gains on artificial hopes that the PBOC would step in with a bailout package, as attention turned to the reported announcement that an update of local government debt could double the size of China's non-performing loans, and what's worse, that the PBOC was ok with that. Asian negativity was offset by the European open, where fundamentals are irrelevant (especially on the one year anniversary of Draghi FX Advisors LLC "whatever it takes to buy the EURUSD" speech) and renewed M&A sentiment buoyed algos to generate enough buying momentum to send more momentum algos buying and so on. As for the US, futures are indicating weakness for the third day in a row but hardly anyone is fooled following two consecutive days of green closes on melt ups "from the lows": expect another rerun of the now traditional Friday ramp, where a 150 DJIA loss was wiped out during the day for a pre-programmed just green closing print.
Headline bulletin summary via Bloomberg:
- Treasuries little changed as markets look to Wednesday’s FOMC statement for guidance on possible tapering, lower threshold for maintaining highly accommodative policy; July payrolls report due Friday.
- For roundup of views on Fed meeting, QE tapering, click here
- As Obama ponders a potential successor to Bernanke, his familiarity with Lawrence Summers may give his onetime adviser an edge over Fed Vice Chairman Janet Yellen, whom Obama has scarcely met, officials say
- BOE and ECB to release rate decisions Thursday; Coeure and Asmussen say that ECB should publish minutes
- BoJ’s Kuroda said achieving 2% inflation target will take a while and indicated little concern that a planned sales-tax rise would derail the economic recovery
- China will start a nationwide audit of government debt this week as the new Communist Party leadership investigates the threats to growth and the financial system from a record credit boom
- Investors are pumping money into junk bonds globally at the fastest pace ever while tempering their enthusiasm for higher-rated debt, demonstrating a preference for yield over stability
- EU bank-capital rules, already criticized by global regulators, face another international probe just months after they start to take effect next year
- Sovereign yields mixed. Asian stocks lower; Nikkei slides 3.3% as JPY gains though 98 level. European equities gain. U.S. stock index futures fall. WTI crude and gold lower, copper little changed
Full news run from RanSquawk:
- The risk on sentiment in Europe was supported by the latest M&A spree which is set to result in the creation of the world’s biggest advertising group, after boards of Publicis and Omnicom backed a USD 35bln tie-up.
- Barclays down over 2% as market participants reacted to reports over the weekend that that bank is eyeing a possible GBP 4bln share sale to meet new leverage rules.
- ECB's Coeure and Asmussen have said the ECB should look into publishing minutes
- China's top auditing body, the National Audit Office (NAO), announced Sunday that it will conduct a nationwide audit over government debt.
Stocks traded higher in Europe, buoyed by the latest M&A spree which is set to result in the creation of the world’s biggest advertising group, after boards of Publicis and Omnicom backed a USD 35bln tie-up. Also, Perrigo announced its intentions to buy Elan for USD 8.6bln. On the other hand, financials underperformed, with Barclays down over 2% as market participants reacted to reports over the weekend that that bank is eyeing a possible GBP 4bln share sale to meet new leverage rules, with the announcement set to be made on Tuesday when the bank reports its Q2.
In terms of EU related commentary, both the ECB's Coeure and Asmussen have said the ECB should look into publishing minutes, while German finance minister Schaeuble has ruled out another debt write-down for Greece. Going forward, market participants will get to digest the release of the latest Pending Home sales report from the US and the Treasury will release its latest quarterly borrowing estimates. Today also sees earnings report releases from Simon Property, Franklin Resources, Express Scripts, Anadarko Petroleum and General Growth.
The Chinese central government has decided to cap China's deficit-to-GDP ratio at 3%, aiming to avert a downgrade of China's credit rating by international ratings agencies. China's top auditing body, the National Audit Office (NAO), announced Sunday that it will conduct a nationwide audit over government debt.
BoJ's Kuroda said that he believed the economy would not suffer a significant setback should the tax be doubled to 10% as planned, in two stages beginning next April. A final decision on whether to go ahead with the first step, a hike from 5% to 8% must be made by October. Some advisers and members of the ruling party have urged to either to postpone the increase or to reduce its scale.
EU & UK Headlines
ECB's Coeure said interest rates must be kept low and that some countries face very tight credit conditions.
Elsewhere, both the ECB's Coeure and Asmussen have said the ECB should look into publishing minutes.
German finance minister Schaeuble has ruled out another debt write-down for Greece. Schaeuble said Greece will receive aid beyond 2014 as needed if it fulfils conditions.
German parliament budget committee sources notes that German budget committee clears way for Greece loan tranche.
UK Net Consumer Credit (Jun) M/M 0.5bln vs. Exp. 0.7bln (Prev. 0.7bln, Rev. to 0.8bln), June SME lending growth strongest since series began in April 2011.
UK Mortgage Approvals (Jun) M/M 57.7K vs. Exp. 59.7K (Prev. 58.2K, Rev. 58.1K)
Barclays prelim month-end extensions for Pan Euro agg. at +0.11yrs
Barclays prelim month-end extensions for UK at +0.04yrs
The Bureau of Economic Analysis will begin counting spending on research, development and copyrights as investment and reflect pension deficits. This is estimated to add around 3 percentage points to the US gross domestic product.
The White House will not announce its nominee for the Fed chairmanship until the autumn, a senior official has said. This follows intense speculation over potential candidates in recent weeks. Barclays prelim month-end extensions for US Treasuries at +0.06yrs
Stocks traded higher in Europe, buoyed by the latest M&A spree which is set to result in the creation of the world’s biggest advertising group, after boards of Publicis and Omnicom backed a USD 35bln tie-up. Also, Perrigo announced its intentions to buy Elan for USD 8.6bln. On the other hand, financials underperformed, with Barclays down over 2% as market participants reacted to reports over the weekend that that bank is eyeing a possible GBP 4bln share sale to meet new leverage rules head of its Q2 release on Tuesday. Also, Commerzbank shares fell after German regulator BaFin noted that German banks with significant shipping loan portfolios may be forced to seek capital ahead of the stress test planned by the ECB.
EUR/USD and GBP/USD traded steady this morning, as market participants refrained from making a directional commitment ahead of the key risk events which includes the monthly jobs report from the BLS, ECB and the BoE policy meetings.
USD/JPY edged lower overnight amid fresh concerns over China's debt position after it was reported that China's top auditing body, the National Audit Office (NAO), announced Sunday that it will conduct a nationwide audit over government debt.
Speculators have added net long gold positions by 14,532 lots to 70,067, for a fourth consecutive weekly rise. Spec accounts have also raised their net longs in silver futures and options by 1,491 contracts to 6,321. Spec accounts have trimmed their net short position in copper by 2,700 lots to 12,974 lots.
Egyptian security forces and armed men in plain clothes killed scores of Muslim Brotherhood protesters on Saturday as the crackdown on the Islamist party and its supporters appeared to be gathering pace.
India finance minister says gold imports have risen in July.
China Jan-May steel industry profit rises 23.4% Y/Y, according to the NDRC.
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Finally, here is Jim Reid's full overnight recap
The Q2's US GDP release on Wednesday includes major revisions going back to 1929 that could alter investors and policy-makers perception of the Great Recession and of the recovery. It could eventually have implications for the Fed who incidentally meet on Tuesday/Wednesday. The consensus is firmly that the Fed will not be making any change in policy at this meeting nor will it be making any major changes in the post-meeting statement. There is no accompanying press conference from Bernanke this month. In Q2's GDP report, consensus expectations are for 1% real growth but we also like to look at the nominal GDP number. There's a good chance this will dip to having a 2-handle or possibly even a 1-handle. This comes after two quarters with a 3-handle - the weakest quarters since Q1 2010. As we've said before it takes a brave and confident Fed to start withdrawing stimulus with such low nominal activity and still high debts. However this is seemingly what they'll likely to do in September given all the discussions seen to date.
However remember Friday brings the next instalment in the monthly fun and games that is payrolls. Expectations are for +185k and a 0.1ppt dip in the unemployment rate to 7.5%. Any number above 150k probably keeps the September taper views in the ascendancy, and a number above 200k will certainly further increase the odds. If that wasn't enough Thursday brings the ISM and all the other global PMIs. We'll review the rest of the bumper week ahead at the end, one that includes an ECB and BoE meeting. The latter including some possible new policy guidance from new Governor Carney.
In addition to the upcoming FOMC, the Fed has been in the headlines of late over conflicting reports as to whether Summers or Yellen is most likely to be nominated as the next Fed Chairperson. In an interview with the NY Times published over the weekend, President Obama hinted that he wants someone who will “keep inflation in check” and “keep our Dollar sound” which were interpreted by some as suggesting a bias towards Summers. DB’s rate strategists think Summers is by no means a “hawk” but rather he is optimistic on growth. Indeed they note that any Summers’ critique of current policy settings should be understood in the context of being an eager candidate for the job. If Secretary Summers were actively seeking the post, then agreeing with current policy settings without critique would hardly constitute an effective strategy of differentiation from Governor Yellen or other candidates.
They expect Secretary Summers, were he to accede to the Fed post, to be biased to holding monetary policy quite loose in the absence of, or in support of, more expansive fiscal policy given that he is a Keynesian. According to Bloomberg who quote an administration official, Obama is not expected to nominate a successor to the current Chairman until at least September which means we’re left with another couple of months of conjecture over the future leadership of the Fed.
Turning to overnight markets, Asian equity markets are lower across the board led by weaknesses in Japan and China. The Shanghai Composite (-1.5%) is lower for its fourth consecutive day on the back of a slower Industrial Profit growth report over the weekend and news that the National Audit Office will carry out an examination of total government debt, acting on the orders of the State Council. The last full audit of local government debt in China was published in 2011 and found debts totalling CNY10.7trillion (US$1.75trillion) for the end of 2010. A separate audit of a subset of 36 local governments found they had outstanding debt totalling CNY3.85trillion in 2012, up 12.9% from 2010 (Wall Street Journal).
In Japan the Nikkei is down by more than 2% overnight, weighed by the continued strengthening in JPY. The Yen is up 0.4% against the Dollar overnight after having rallied nearly 2.5% against the Greenback since last Thursday. Elsewhere in Japan, weekend Reuters news said that Japan's most significant fiscal reform in years - a planned increase in the country's sales tax - could be delayed or watered down over concerns that it would be a setback to the economic recovery. Prime Minister Shinzo Abe will decide whether to go ahead with the planned sales tax hike before an extraordinary Diet session convenes in the fall after the release of key economic data in early September, Chief Cabinet Secretary Yoshihide Suga said Sunday. If given the go ahead, the plan is for the sales tax to be implemented in stages starting in April next year.
As mentioned at the start we have a big week of data and policy meetings ahead of us. Starting with the central banks, the ECB meets on Thursday and will be followed by Draghi’s press conference as usual. Our European economists note that those Council members against cutting rates in July may feel vindicated by the rising PMIs. Those in favour of cutting rates may be concerned that credit continues to contract and the money market curve has retraced much of the post-guidance announcement flattening. A Bloomberg poll shows that no economists are expecting a change in refi/deposit rates on Thursday. For the record, DB is also not expecting a change in guidance or non-standard policies (LTROs, collateral, OMT, etc). In the UK, the Bank of England minutes from Carney’s first policy meeting in July revealed that some MPC members had thought “there was merit in pursuing a mixed strategy with regards to the different policy instruments at the committee’s disposal”. The general expectation is that Carney will propose some form of “forward guidance” at Thursday’s meeting, similar to the policy he initiated at the Bank of Canada. This comes after the MPC surprised last month with the statement that "the implied rise in the expected future path of the Bank Rate was not warranted by the recent developments in the domestic economy" which came several days into Mr Caney’s tenure and could’ve been seen as an early step towards formal forward guidance.
Moving on to the data calendar, the show kicks off on Tuesday with the US consumer confidence survey and the euroarea’s consumer sentiment index. Midweek, the focus will be on what is expected to be extensive US GDP revisions. Wednesday’s ADP employment report may offer some early indication of what to expect from Friday’s payrolls. We also get the Chicago PMI and Euroarea unemployment data on the same day. This brings us to PMI/ISM Thursday where we’ll get the US manufacturing ISM and final PMIs across the globe. China will unveil its official manufacturing PMI on Thursday as well and markets will be looking at whether the disappointment from the flash HSBC reading is repeated in the official survey. Friday will then be all about US payrolls.
On the earnings front, we have nearly 300 companies reporting from both sides of the Atlantic. In the US, we can look forward to 136 S&P 500 constituents (which represents about 25% of the Index's market cap) and will include industry stalwarts such as Berkshire Hathaway, Exxon Mobil, Chevron and P&G. In Europe, we have about 20% of the Stoxx600 market cap reporting (150 firms) with the highlights being the European banks’ results. Speaking of earnings we update our usual US and European earnings tracker below. The trend remains largely the same for US corporates where of the 240 firms that have reported so far the EPS beat:miss ratio is standing strong at 72%:26% (2% in-line) but revenue performance is less impressive at 58%:43%. The revenue beats/miss would be slightly lower at 55%:45% if we exclude Financials. In Europe, EPS performance is relatively disappointing at 48%:51% (1% in-line) although top line is faring better at a beat:miss of 58%:42%.
On the political front, the US Congress goes into summer recess beginning this weekend so there’s a possibility that both sides will be ramping up the rhetoric over the debt ceiling ahead of holidays. Elsewhere, President Obama travels to Tennessee on Tuesday where he will speak on the economy and jobs. On Wednesday, the U.S. Treasury’s will release its refunding statement outlining its funding needs for the next two quarters which may shed more light on the upcoming debt ceiling issue. Spanish PM Rajoy will reportedly appear before parliament on Thursday to face questions over corruption allegations linked to his political party. The final hearing on Berlusconi’s tax fraud appeal is scheduled to begin on Tuesday.
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