Second Half Kicks Off With Futures At Record High On Lethargic Yen Carry Levitation

Tyler Durden's picture




 

BTFATH! That was the motto overnight, when despite a plethora of mixed final manufacturing data across the globe (weaker Japan, Europe; stronger China, UK) the USDJPY carry-trade has been a one-way street up and to the right, and saw its first overnight buying scramble in weeks (as opposed to the US daytime trading session, when the JPY is sold off to push carry-driven stocks higher). Low volumes have only facilitated the now usual buying at the all time highs: The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing - yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13.

As we start H2, Asian markets are trading with a stronger tone this morning. The official Chinese manufacturing PMI printed at 51.0, in line with consensus and at a six month high. The final HSBC Chinese manufacturing PMI came in at 50.7, slightly below the flash reading of 50.8, but this is also the highest print of the year. The PMIs for other Asian bellwethers including Indonesia and Taiwan were also up on a month-to-month basis. The Nikkei (+1.2%) is the clear outperformer today, on decent volumes and despite a drop in the Japanese Q2 tankan manufacturing index to 12 from 17 previously and 15 expected. This has boosted the USDJPY today. Outside of Japan, activity has been subdued with Hong Kong markets shut for July 1st holidays. The Indonesian rupiah is poised to record its strongest three-day rally in about fourth months – spurred by comments last week from the Bank of Indonesia that the country’s trade balance returned to surplus in May. The AUDUSD is also poised for a solid gain (+0.25%) after the RBA maintained its neutral tone in today’s policy meeting.

Stocks in Europe traded higher this morning, lead higher by basic materials sector after analysts at Bank of America raised Rio Tinto (+2.7%) to buy from neutral. At the same time, financials were supported by BNP Paribas (+4.1%), with FT Lex column noting that the USD 8.9bln settlement may prove a catalyst for recovery. This also saw other French based banks such as SocGen (+3.2%) and Credit Agricole (+1.9%) post decent gains.

In a nutshell: European shares rise, close to intraday highs, with the basic resources and telco sectors outperforming and retail, construction underperforming. Euro- Area  manufacturing slowed more than initially estimated in June, China manufacturing expansion quickens to fastest 2014 pace. The Italian and French markets are the best-performing larger bourses, Swedish the worst. The euro is little changed against the dollar. U.K. 10yr bond yields rise; Japanese yields decline.
Commodities little changed, with zinc, soybeans underperforming and silver outperforming.

Turning to the day ahead, the US manufacturing ISM is expected to show a small bump up to 55.9 (vs 55.4 in May) which would mark a six month high. Other highlights on the US data docket are May construction spending, and the IBD/TIPP economic optimism index and vehicle sales due later. Watch for GM to park ever more cars on vacant dealer lots as it hopes end buyers will quickly forget the recall scandal that has made its quality control process into the worst joke in US carmaking history.

Market Wrap

  • S&P 500 futures up 0.2% to 1957.1
  • Stoxx 600 up 0.5% to 343.4
  • US 10Yr yield up 2bps to 2.55%
  • German 10Yr yield up 2bps to 1.26%
  • MSCI Asia Pacific up 0.3% to 146.1
  • Gold spot down 0% to $1326.7/oz

EUROPE

  • 16 out of 19 Stoxx 600 sectors rise; basic resources, bank outperform, retail, personal & household underperform
  • 62.7% of Stoxx 600 members gain, 34.7% decline
  • Eurostoxx 50 +0.6%, FTSE 100 +0.5%, CAC 40 +0.7%, DAX +0.3%, IBEX +0.4%, FTSEMIB +0.8%, SMI +0.3%

ASIA

  • Asian stocks rise  with the Nikkei outperforming and the ASX underperforming.
  • MSCI Asia Pacific up 0.3% to 146.1
  • Nikkei 225 up 1.1%, Kospi down 0.2%, Shanghai Composite up 0.1%, ASX down 0.4%, Sensex up 0.4%
  • 9 out of 10 sectors rise with industrials, materials outperforming and financials, utilities underperforming

Bulletin headline summary from Bloomberg and RanSquawk

  • Stocks traded higher in Europe (Eurostoxx 50, +0.52%), with volumes light given the usual summer trading conditions and basic materials outperforming after Rio Tinto was upgraded at Bank of America.
  • GBP/USD rose to its highest level since Oct’08, following the release of better than expected UK Manf PMI.
  • In terms of the upcoming releases, focus will be on the US ISM Manufacturing and API oil inventories data.
  • Treasuries decline within recent ranges to begin the second half of 2014; trading may be cautious before ECB, June payrolls and early close on Thursday. *10Y yields have fallen ~50bps since the start of the year, 5/30 curve flattening by around the same amount
  • China’s manufacturing expanded in June at the fastest pace this year, with the official PMI rising to 51 from 50.8 in May
  • U.K. manufacturing growth accelerated to the fastest pace in seven months as demand surged, adding to signs of a broadening recovery
  • Manufacturing in the euro area slowed more than initially estimated in June as a deepening of France’s downturn offset a rise in Spanish activity to a seven-year high
  • Australia’s central bank kept its benchmark rate at a record low as an elevated currency combines with government cutbacks and a slowdown in mining investment to  constrain growth
  • Ukrainian government forces resumed their campaign against pro-Russian rebels in the country’s violence-torn east after President Petro Poroshenko ended a cease-fire and vowed to retake territory from the separatists
  • Iraqi lawmakers failed to bridge differences on filling key posts, including appointing a prime minister; parliament adjourned until July 8, citing a lack of quorum and disagreements among leading political blocs
  • As Russia and Iran step in to bolster the government in Baghdad, Obama has no good options to help defeat the al-Qaeda splinter group that’s proclaimed an Islamic caliphate in Iraq and Syria
  • Obama said he’ll go it alone on changing U.S. immigration rules because House Republicans are “unwilling to stand up to the Tea Party to do what’s best for the country”
  • Sovereign yields mostly higher. EU peripheral spreads narrow. Asian stocks mostly higher, European stocks, U.S. stock futures rise. WTI crude higher, gold little changed, copper falls

US Event Calendar

  • 9:45am: Markit US Manufacturing PMI, June final, est. 57.5 (prior 57.5)
  • 10:00am: ISM Manufacturing, June., est. 55.9 (prior 55.4)
  • ISM Prices Paid, June, est. 60 (prior 60)
  • 10:00am: Construction Spending m/m, May, est. 0.5% (prior 0.2%)
  • 10:00am: IBD/TIPP Economic Optimism, July, est. 48.0 (prior 47.7)
  • Domestic Vehicle Sales, June., est. 13m (prior 13.11m)
  • Total Vehicle Sales, June., est. 16.38m (prior 16.70m)
  • 11:00am: POMO - Fed buys $2.50 - $3.25 billion in the 04/30/2020 - 06/30/2021
    range

ASIA

Asian equity markets traded mixed amid a slew of data releases including the quarterly BoJ Tankan survey which was impacted by tax hike and Chinese PMI releases, with Chinese official PMI at a 6-month high (as exp.) but HSBC PMI release was revised lower.

EUROPE

The release of somewhat mixed EU based final manufacturing PMI readings failed to weigh on sentiment, with Bunds and Gilts trading lower amid better bid stocks, as well as better than expected UK Manufacturing PMI which marked 16th month of expansion and highest reading since Nov 2013. The release resulted in further bear steepening of the Short-Sterling curve, while the Euribor curve was little reactive to an uptick in Euro-area excess liquidity, which rose to EUR 166.85bln vs. EUR 138.67bln.

EQUITIES

Stocks in Europe traded higher this morning, lead higher by basic materials sector after analysts at Bank of America raised Rio Tinto (+2.7%) to buy from neutral. At the same time, financials were supported by BNP Paribas (+4.1%), with FT Lex column noting that the USD 8.9bln settlement may prove a catalyst for recovery. This also saw other French based banks such as SocGen (+3.2%) and Credit Agricole (+1.9%) post decent gains.

FX

GBP outperformed EUR and USD this morning, with GBP/USD rising to its highest level since October 2008, following the release of better than expected UK Manufacturing PMI. Looking elsewhere, AUD/USD rose to its highest level since November, after the RBA signalled no changes to its monetary policy, which analysts note indicates that the RBA has a very high pain threshold.

COMMODITIES

Despite spiking overnight to its highest level since March after a high volume of trades went through as stops were broken above the USD 1330 level, spot gold gradually retraced the move and the price action was range-bound ever since. Also spot copper hit a 4-month high, with zinc hovering within reach of it highest in almost 3-years both supported by tight supply and after the Chinese data. Elsewhere, WTI and Brent Crude futures trade marginally higher, partly supported by the uncertainty surrounding Ukraine, where Ukrainian President Poroshenko said Ukraine is to end cease-fire in eastern regions and pledged to move against rebels.

* * *

DB's Jim Reid concludes the overnight news recap

The second half has now begun for markets and in our H1/Q2/ June performance review today we show that most assets have had a positive year so far. So much so that if the year eventually goes to penalties it will end up being a very poor second half showing in line with many of England's in recent years!! We briefly review the numbers at the end but all the data and charts are in the pdf of this document. Its pretty rare to have almost all main global assets in positive territory this far into a year. Central bank liquidity continues to drive markets in our opinion which has helped this synchronised uplift in valuations. However we can't help sensing that there's less joy over these returns than might be expected. Investors are worried about valuations in numerous assets and worried that the Fed might become more hawkish soon. There's little chance of the ECB following suit anytime soon though and European Government bonds have had a very good 2014 so far.

Over the last month we've again highlighted how many European Government bond markets have hit multi-century, all time yield lows. Well yesterday it was the turn of the Dutch 10 year yield to go through it’s all time low again. The Dutch series is where we have our longest history of any government bond market with data going back to 1517 spanning almost half a millennia. The graph is in the pdf today and further shows just how unique the current situation is. The level of uncertainty about how this all ends must by definition be very high given this.

So as we start H2, Asian markets are trading with a stronger tone this morning helped by a solid start to the global manufacturing PMIs. The official Chinese manufacturing PMI printed at 51.0, in line with consensus and at a six month high. The final HSBC Chinese manufacturing PMI came in at 50.7, slightly below the flash reading of 50.8, but this is also the highest print of the year. The PMIs for other Asian bellwethers including Indonesia and Taiwan were also up on a month-to-month basis. The Nikkei (+1.2%) is the clear outperformer today, on decent volumes and despite a drop in the Japanese Q2 tankan manufacturing index to 12 from 17 previously and 15 expected. The capex component of the Tankan survey was above expectations however (+7.4% vs 6.0%) expected, which is strongest rate of growth since 2007. This has helped USDJPY (+0.1%) today. Outside of Japan, activity has been subdued with Hong Kong markets shut for July 1st holidays. The Indonesian rupiah is poised to record its strongest three-day rally in about fourth months – spurred by comments last week from the Bank of Indonesia that the country’s trade balance returned to surplus in May. The AUDUSD is also poised for a solid gain (+0.25%) after the RBA maintained its neutral tone in today’s policy meeting.

The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing. Indeed, yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13. Adding to that, the S&P 500 closed virtually unchanged at -0.04%, and for the record the last time we saw a gain or loss of more than 1% in the index was April 16th. One theme to note though was the continued underperformance of European banks across the equity and credit spectrum. Yesterday’s underperformance was sparked by a 17% fall in the stock of Banco Espirito Santo which is Portugal’s largest bank. The price action was dictated by reports that regulators were concerned over corporate governance between the bank and other related companies and there were also reports that Luxembourg justice authorities had launched an investigation into one of the bank’s holding companies (Reuters). Portuguese securities regulator banned naked short selling on the bank’s stock for one day. The news weighed on Portuguese bond yields which added 8bp, and also on European banking stocks in general (-0.75% vs Stoxx 600 -0.09%). Peripheral bank credit traded about 3-5bp wider yesterday - and the European senior financials index (+2bp) underperformed Main (+1.375bp). The two credit indices were trading flat to each other in the middle of June but the recent underperformance of banks has pushed the basis back to nearly 6bp. We still think its likely that Fin Senior will trade through Main in H2 though.

Across the Atlantic, there was focus on the Chicago PMI and home sales data, following which treasury yields spiked up briefly before retracing the move to be largely unchanged on the day. The US Chicago PMI was slightly below expectations 62.6 (vs 63.0 expected) and also below last month’s 65.5. Still, our economists note that the PMI was consistent with a large snapback in growth in Q2, and they noted the three-month to June average was 63.7 which is the highest since the three months to April 2011. The other regional activity indicator, the Dallas Fed manufacturing outlook rose to 11.4 (vs 8.5 expected and 8.0 prior). Pending home sales rose 6.1% MoM (1.5% expected) which benefited US homebuilders on the equity side (+1.5% yesterday). In terms of Fed speak, the SF Fed’s Williams commented that a first rate hike in 2H15 will be appropriate, but he also reiterated that it may be optimal for the Fed to let inflation run above target in order to balance the Fed’s dual mandate.

Perhaps one of the key themes of 1H14 was the surging M&A activity globally. With 1H14 books closed, the final M&A tally was $2.2trillion according to Bloomberg which is a YoY increase of 77%. By region, leading the way was the resurgence of corporate activity in Europe (+109% YoY), though this was coming off a low base, followed closely by North America (+79%). In terms of industry the biggest pickup in activity came in pharma (+677%) and healthcare (+140%). One reason for the surge in M&A has been the accommodative capital markets. We saw an example of that yesterday with a jumbo bond deal from Oracle who priced $10bn in bonds (the second largest USD offering in the year-to-date according to Bloomberg) to fund the purchase of Micros Systems. The deal was sufficiently large to drag other TMT bonds several basis points wider on the day.

Looking at some of the geopolitical headlines, Ukrainian President Poroshenko said late on Tuesday that we would end the cease-fire with pro-Russian rebels and vowed to intensify military operations in the country’s east. However the president also made some concessions including guaranteeing Russian-language rights and more regional autonomy. Russia also offered some concessions yesterday including allowing Ukrainian and international observers in its own border posts along the border with Ukraine. In Iraq, semi autonomous Kurds plan a referendum for independence according to a regional government spokeperson (Reuters). The Kurds plan to keep  control of the Kirkuk oil fields.

There are some mixed headlines elsewhere in China. Firstly China's banking regulator announced a small change in the way that Loan-to-deposit ratios are calculated which our banking analysts think will reduce the system regulatory LDR ratio by 410bp based on end 2013 data. Our analysts think that this will pave the way for more relaxation of Chinese bank liquidity requirements. Secondly, the latest Macau gaming numbers were reported which showed June casino revenues fell 3.7% YoY in June. This is the first drop since 2009, but some are attributing this to the effects of the World Cup.

Turning to the day ahead, the rest of the global manufacturing PMIs/ISMs will be released starting with the final PMIs for Europe. The US manufacturing ISM is expected to show a small bump up to 55.9 (vs 55.4 in May) which would mark a six month high. DB is expecting a print of 55.0. Other highlights on the US data docket are May construction spending and the IBD/TIPP economic optimism index.

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Tue, 07/01/2014 - 07:29 | 4913210 Headbanger
Headbanger's picture

It will be interesting to see how today's POMO stacks up against the PMI, ISM and auto sales numbers

Any bets on Q2 GDP revisions going to near 0% after these numbers??

Tue, 07/01/2014 - 07:30 | 4913213 DavidC
DavidC's picture

Big POMO today ($2.50 - $3.25 billion) then NOTHING until next Monday! That could get interesting.

http://www.newyorkfed.org/markets/tot_operation_schedule.html

And $19 billion in July.

DavidC

Tue, 07/01/2014 - 07:38 | 4913228 fonzannoon
fonzannoon's picture

The market no longer needs POMO. Seriously, it just does not. However they have this rigged, they have it just the way they want it. Low yields, high market. Embrace it. Honesly as an American I think that it's important we close the market Thursday at SPY 2000 so my I can have my beer and burgers on Friday and rejoice about it.

Tue, 07/01/2014 - 07:42 | 4913236 max2205
max2205's picture

POMO WORKING EARLY ON NFLX...headed to 500.....

GS upgrade so could this top out Q3?

Tue, 07/01/2014 - 07:45 | 4913239 DavidC
DavidC's picture

fonz,
I partially agree in that there are various shenanigans going on to keep this going as long as possible (Belgium massively buying Treasuries! Uh?! The US not yet including prostitution and drugs in the GDP calculation like the UK and Italy are now doing), but it does, at least, remove one of the pins. I've watched the ramp in stocks every day there's a reasonable POMO.

Let's see what happens over the next week.

DavidC

Tue, 07/01/2014 - 07:51 | 4913244 fonzannoon
fonzannoon's picture

All the best to you David. By the way I think the lock of the day is the U.S coach gets a call from the BernakYellen and is told to make sure they lose to Belgium otherwise there is a massive treasury dump tomorrow am.

2-0 Belgium today.

 

check this out btw

http://www.theguardian.com/world/2014/jul/01/nicolas-sarkozy-detained-qu...

Tue, 07/01/2014 - 08:31 | 4913324 NoDebt
NoDebt's picture

I'm sitting around today, while doing quarterly billing and reconciliation, to think up reasons why there can't be a large-scale sell-off in equities.  Here's my best one so far (last night, 2 beers in, my best deep-though time):

Stocks are held in quantity by so few hands that nobody will sell- just buy and hold forever, accumulating the last scraps held by non-players.  If none of those parties ever sells, there can't be a sell-off of any size.  And each of those parties KNOWS that selling in quantity would start a stampede, so they'll never do it.  Explains the low volume, low volatility, slow levitation world we're in.

Tue, 07/01/2014 - 08:41 | 4913346 fonzannoon
fonzannoon's picture

that was the ekm theory. he always used to say it would end in the big crash. when i pushed him on it he would concede that the flip side is the dow could go to 30k first.

AUM wise this is the best start i have had to a year since i can remember. retail is really chucking money at this thing and if that is a true trend we could have a ways to go before any real bag holder situation. if you rig it they will come.

Tue, 07/01/2014 - 08:21 | 4913301 DavidC
DavidC's picture

Why did I get a down vote there?

DavidC

Tue, 07/01/2014 - 08:24 | 4913311 NoDebt
NoDebt's picture

Musta been Kevin Henry hearing you speak ill of POMO.

Tue, 07/01/2014 - 08:30 | 4913321 Headbanger
Headbanger's picture

Nahh.. It's the Women's Mafia who would be out of business if prostitution were legalized to be included in GDP.

Tue, 07/01/2014 - 08:31 | 4913325 fonzannoon
fonzannoon's picture

my junker must have dinged you by accident. 

Tue, 07/01/2014 - 07:30 | 4913214 B2u
B2u's picture

No risk in the markets.  BTFATH....buy and buy more....

Tue, 07/01/2014 - 07:30 | 4913215 ziggy59
ziggy59's picture

If its Tuesday, it must be BS

Tue, 07/01/2014 - 07:34 | 4913220 firstdivision
firstdivision's picture

Have no fear, Yellen be jellen.

Tue, 07/01/2014 - 07:37 | 4913225 AdvancingTime
AdvancingTime's picture

That is what I'm afraid of. Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.

With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed know we are already there. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...

Tue, 07/01/2014 - 09:10 | 4913385 firstdivision
firstdivision's picture

Wanna know what the exit strategy is?  Let's just say it involves suitcases with a barbaric relic, and private jets on standby.

Tue, 07/01/2014 - 07:35 | 4913221 AdvancingTime
AdvancingTime's picture

What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises.

Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part. More about this subject in the article below.

http://brucewilds.blogspot.com/2014/06/stock-markets-and-girls-gone-wild...

Tue, 07/01/2014 - 07:44 | 4913238 max2205
max2205's picture

Long hookers and blow....

Tue, 07/01/2014 - 07:36 | 4913224 toe
toe's picture

I cant remember last time we had a down day during a holiday week. Always low volume levitation. 

Tue, 07/01/2014 - 07:48 | 4913241 The_Ungrateful_Yid
The_Ungrateful_Yid's picture

Living in a depression is getting quite to be a motherfucker.

Tue, 07/01/2014 - 07:49 | 4913246 Yen Cross
Yen Cross's picture

     The German macro numbers continue to deteriorate. The GBP is a fucking joke and is going to get smacked down hard on any type of market selloff. Manufacturing is only 25% of their economy.

Tue, 07/01/2014 - 08:08 | 4913277 The worst trader
The worst trader's picture

Looks like the PREZ was rite ,just buy stocks and all will be furrrrrrrrrrfect!. BTFATH!~ and don't be late!

Tue, 07/01/2014 - 08:38 | 4913335 GFORCE
GFORCE's picture

The market was at the low of the day yesterday near the close. Great opportunity to buy ahead of standard POMO tuesday.

As a side note, Silver, crude and Gbp COT are at extremes. Expect a pullback soon. This week or next.

Tue, 07/01/2014 - 09:34 | 4913457 TheRideNeverEnds
TheRideNeverEnds's picture

Just buy everything, the chance of asset prices declining with all the money printing is basically zero.  S&P 2000 by the end of this year is a given.

Tue, 07/01/2014 - 09:41 | 4913477 timmeh
timmeh's picture

time for a little short

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