• Gold Standard I...
    07/24/2014 - 01:47
    There is confusion over what legal tender law does. It doesn't force merchants to accept dollars under threat of imprisonment. It attacks lender, by granting debtors a right to repay in dollars.

Risk Assets Stop For Breath Before Proceeding With Melt Up

Tyler Durden's picture




 

First it was Treasurys to fill the NFP gap, and then, a little after 4am, it was the USDJPY's turn which - despite all talk of an imminent upside breakout - promptly tumbled by nearly 30 pips well below 102, to 101.9 thus also returning to pre-NFP levels. Equity futures, however, have hardly retraced any of their Thursday gains and at last check were down a modest 0.1% or so: a situation which we expect will be promptly "fixed" once the BTFD dark pool algos appear, aided by the NY Fed/Citadel-controlled VIX "intervention" algo.

Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.4%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans.

European equities markets retreated today amid thin volumes and light newsflow, with the basic materials sector underperforming as softer metals and commodity prices weigh on miners. The CAC-40 underperforms as large-cap names Sanofi (SAN FP) and Total (FP FP) fall after warning on FX effects on their upcoming earnings and weak refining margins respectively. After topping 17,000 last week, focus shifts to US earnings, with Alcoa (AA) due after-market tomorrow, and Wells Fargo (WFC) rounding off the week on Friday.

The Q2 earnings calendar kicks off this week with Alcoa’s update on Tuesday. Wells Fargo will be the first of the major US banks to report (on Friday) but we’ll have to wait until next week for the bulk of the major banks to provide their earnings updates. In terms of what's in store this quarter, DB’s US equity strategist David Bianco expects a standard earnings season with typical results vs. expectations, but improved sales and EPS growth and a significant increase from 1Q EPS. David expects 2/3rd of the companies to beat with an average beat of 2-3%. He is also looking for sales growth to improve to ~5% y/y from the anaemic ~2.5% pace of the last 2 years on higher energy prices, improving capex and loan growth. Analysts polled by Reuters are calling for earnings growth for the second quarter of 6.2%, and a return to double digit growth in Q3 and Q4. The last time that S&P 500 earnings achieved double-digit percentage growth was the third quarter of 2011 (18%), according to Reuters. Of 133 earnings pre-announcements from S&P 500 components so far, 97 have been negative, 24 positive and 12 in line with existing forecasts, according to Thomson Reuters data. That puts the negative-to-positive ratio at 4-to-1 for the second quarter, the lowest since the fourth quarter of 2012. So as ever expectations have been pushed down in the weeks going into the reporting period.

In summary, European shares remain lower, close to intraday lows, with the basic resources and financial services sectors underperforming and utilities, telco outperforming. The Swiss and Spanish markets are the worst- performing larger bourses, the Swedish the best. The euro is little changed against the dollar. Commodities decline, with natural gas, silver underperforming.

Market Wrap

  • S&P 500 futures down 0.1% to 1975.5
  • Stoxx 600 down 0.3% to 347
  • US 10Yr yield little changed at 2.64%
  • German 10Yr yield little changed at 1.27%
  • MSCI Asia Pacific little changed at 147.6
  • Gold spot down 0.5% to $1314/oz

EUROPE MARKETS

  • 3 out of 19 Stoxx 600 sectors rise; utilities, telco outperform, basic resources, financial services underperform
  • 29.3% of Stoxx 600 members gain, 68.5% decline
  • Eurostoxx 50 -0.2%, FTSE 100 -0.2%, CAC 40 -0.3%, DAX -0.1%, IBEX -0.3%, FTSEMIB -0.1%, SMI -0.4%

ASIA MARKETS

  • Asian stocks little changed with the Sensex outperforming and the Nikkei underperforming.
  • MSCI Asia Pacific little changed at 147.6
    Nikkei 225 down 0.4%, Hang Seng down 0%, Kospi down 0.2%, Shanghai Composite little changed, ASX down 0.1%, Sensex up 0.5%
  • 4 out of 10 sectors rise with utilities, financials outperforming and energy, health care underperforming

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Negative Asia-Pacific and European equity markets lifted T-notes back to flat ahead of the US crossover, after being weighed on upon resuming trade by last Thursday’s firm US jobs report
  • Spot gold continues to pull back from the highest level since mid-March (USD 1332.33 last week) as traders eye Goldman Sachs bringing forward their FFR hike expectations to Q3 2015 from Q1 2016
  • Today’s session quiet ahead of the beginning of earnings season with Alcoa (AA) after-market tomorrow, and Wells Fargo (WFC) on Friday
  • Treasuries steady, 10Y yield holds near 100-DMA, 2Y at highest since last year after last week’s stronger-than-forecast payrolls suggested Fed may increase interest rates sooner than previously expected.
  • Goldman now sees first rate hike in 3Q 2015 vs 1Q 2016; JPM also expects 3Q 2015 vs 4Q 2015
  • While ECB’s Draghi says a program to hand as much as EU1t to banks has built-in incentives to spur lending to the real economy, analysts from Barclays Plc to Commerzbank AG have doubts on how well it will work
  • Federal Reserve Chair Janet Yellen faces an economy that is starting to look more like Arthur Burns’s in the 1970s than Alan Greenspan’s in the 1990s
  • Germany’s Merkel said allegations that a member of its foreign-intelligence agency sold documents to the U.S. would be a clear contradiction of “trusting cooperation between agencies and partners”
  • The Ukrainian government accused pro-Russian rebels of setting mines on bridges and other infrastructure, as it sought the “liquidation” of insurgents’ bases and ruled out a unilateral cease-fire in the battle-torn east
  • Saudi Arabia is a target for both sides in Iraq’s deepening conflict, one reason it has ramped up security levels to confront a threat that’s more immediate than the Arab Spring revolts three years ago
  • The Obama administration will curb the number of unaccompanied, undocumented children crossing the U.S. border with Mexico, Homeland Security Secretary Jeh Johnson said
  • Sovereign yields mixed. EU bank stocks decline. Asian stocks mostly lower, European equities, U.S. stock futures fall. WTI crude, gold and copper fall

US Event Calendar

  • No economic reports
  • 11:00am POMO: Fed to purchase $2.5b-$3.25b in 2021-2024 sector

FIXED INCOME

EU fixed income markets trade quietly, amid thin volumes, with slight underperformance in Greece as markets eye a potential syndicated deal later this week. Bund futures opened slightly lower on the back of higher US yields overnight, however lower equities have kept Buns underpinned, with traders shrugging off comments from ECB’s Lautenschlager, who hinted that bond-buying is far from imminent, stating that asset purchases would only be an option if the ECB faces extraordinary risks.

EQUITIES

European equities markets retreated today amid thin volumes and light newsflow, with the basic materials sector underperforming as softer metals and commodity prices weigh on miners. The CAC-40 underperforms as large-cap names Sanofi (SAN FP) and Total (FP FP) fall after warning on FX effects on their upcoming earnings and weak refining margins respectively. After topping 17,000 last week, focus shifts to US earnings, with Alcoa (AA) due after-market tomorrow, and Wells Fargo (WFC) rounding off the week on Friday.

FX

EUR came under mild pressure alongside the European open as German industrial production was sharply lower than expected (-1.8% vs. Exp. 0.0%), however a slew of option expiries between 1.3600 and 1.3650 lifted EUR/USD back to flat well ahead of the US open. The JPY trades stronger, as leveraged names selling in EUR/JPY and a failure to hold 102.00 in USD/JPY lifted the currency.

COMMODITIES

Spot gold has continued to underperform today as markets continue to eye last week’s stronger US jobs data, with oil also trading softer after the force majeure in Libya’s Ras Lanuf and Es Sider refineries was fully lifted over the weekend. Platinum and Palladium prices are holding up relatively strongly, as mining output from South Africa is still yet to hit full capacity despite the strikes being resolved a few weeks ago.

DB's Jim Reid concludes the overnight statement

The week after payrolls is normally quiet for data and given that Friday was a US holiday and that we're now into the first full week of July and the start of holiday season, then there isn't a whole lot to get excited about for today or the week ahead. However you can be sure that as soon as we make such a comment then something will come from left field to focus our attention.

The main highlight of the week will likely be the release of the last set of FOMC minutes on Wednesday. DB's US economists think the overall minutes might be more hawkish than Yellen's recent pronouncements so it'll be interesting to see how the market reacts to such an outcome. The minutes will hopefully also shed light on the committee's discussions around labour market slack following the recent improvement in the unemployment rate. Hopefully they will also discuss whether the recent drift upwards in CPI and PCE inflation indicators were broadly accepted as statistical ‘noise’, as Yellen recently described it. Other Fed officials seemed divided on this topic, including the more hawkish Richmond Fed’s Jeff Lacker (alternate member of the FOMC) who said in late June that "I don't think the past few months are entirely noise".

The Q2 earnings calendar kicks off this week with Alcoa’s update on Tuesday. Wells Fargo will be the first of the major US banks to report (on Friday) but we’ll have to wait until next week for the bulk of the major banks to provide their earnings updates. In terms of what's in store this quarter, DB’s US equity strategist David Bianco expects a standard earnings season with typical results vs. expectations, but improved sales and EPS growth and a significant increase from 1Q EPS. David expects 2/3rd of the companies to beat with an average beat of 2-3%. He is also looking for sales growth to improve to ~5% y/y from the anaemic ~2.5% pace of the last 2 years on higher energy prices, improving capex and loan growth. Analysts polled by Reuters are calling for earnings growth for the second quarter of 6.2%, and a return to double digit growth in Q3 and Q4. The last time that S&P 500 earnings achieved double-digit percentage growth was the third quarter of 2011 (18%), according to Reuters. Of 133 earnings pre-announcements from S&P 500 components so far, 97 have been negative, 24 positive and 12 in line with existing forecasts, according to Thomson Reuters data. That puts the negative-to-positive ratio at 4-to-1 for the second quarter, the lowest since the fourth quarter of 2012. So as ever expectations have been pushed down in the weeks going into the reporting period.

We’ll preview the rest of the week ahead below but first we’ll take a look at overnight markets. Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.25%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans. 10yr UST yields have reopened higher (+2bp at 2.656%) after the extended weekend.

Aside from the FOMC minutes, there are a couple of other highlights on the US calendar. The latest JOLTs jobs number will be released tomorrow and it will be worth watching the trend in the quit rate, one of the key labour market indicators which Yellen focuses on. The May consumer credit report will also be published tomorrow. Five regional Fed presidents will be speaking this week, namely Lacker and Kocherlakota (Tuesday), George (Thursday), followed by Lockhart and Evans (Friday). Elsewhere initial jobless claims are out on Thursday as usual.

In a quiet week for Europe, the Bank of England’s MPC meeting (Thursday) is perhaps the key event to watch. Many expect this month’s meeting to be a non-event with no detailed post-meeting statement ahead of the Bank’s august inflation report which is expected to be a better vehicle to flag any changes to policy. Though the activity data have been upbeat and Carney’s Mansion House speech have given food for thought, even the more hawkish members on the MPC such as Martin Weale have warned of persistently low wage inflation. As well as the MPC, the BoE’s top banking supervisor Andrew Bailey will be speaking on Thursday. In terms of data, German IP (today), German trade, UK industrial production, French trade (tomorrow) and UK trade (Thursday) are the key ones to watch.

In the emerging markets, a couple of highly anticipated events come to a head this week. The first of these is the Indonesian presidential election on Wednesday. The latest opinion polls suggest that the race between the reformist Jokowi and former army general Subianto is too close to call. The latest Roy Morgan poll puts the vote at 52% vs 48% in favour of Jokowi. In India Modi’s government releases its highly anticipated maiden budget on Thursday which will aim to address the fiscal deficit while balancing inflation risks. There have been numerous reports over the last 48 hours suggesting that Modi will be targeting record levels of asset sales and privatisations of listed public sector companies as a means of shoring up the national budget. Also on Modi’s horizon are reforms to sales taxes and fuel subsidies. Elsewhere on the EM radar, Mexico reports June inflation on Wednesday and Mexico’s central bank announces its latest rate decision on Friday (Bloomberg consensus is for no change). This will also be a key week for China where the latest PPI and CPI numbers are released on Wednesday, followed by the June trade report on Thursday and the latest money supply/bank lending numbers towards the end of the week.

Though it was a quiet weekend for news flow, a couple of news items caught our eye. As we mentioned above, at her most recent news conference the Fed chair described inflation readings as being "a bit on the high side" lately but warned "the data that we're seeing is noisy". The WSJ provides more colour on where this noise may be coming from, and they pointed to certain segments of the fresh food sector including ground beef which rose 10.4% from a year earlier in May while pork chop prices climbed 12.7%. The price of fresh fruit rose 7.3% and oranges 17.1%. The article notes that drought in Oklahoma and Texas is driving up cattle prices. A disease known as porcine epidemic virus has contributed to higher hog prices. A disease known as citrus greening is killing Florida's orange and grapefruit trees, driving up citrus prices. Most of the shrimp eaten in the U.S. comes from Southeast Asia, where a bacterial infection has devastated stocks. Finally, coffee prices have risen this year due to a drought in Brazil. The article highlights that in contrast, price increases for non-perishable food items and restaurant food have been largely benign, suggesting that recent food inflation is arising from special factors constraining selected fresh food supplies, as opposed to broad increases in demand. This may be giving the Fed additional comfort when it comes to inflation.

In terms of geopolitical headlines, Iran announced on Saturday that a pilot serving in Iran’s elite Revolutionary Guards air force was killed in Iraq in a further sign that the conflict in Iraq is widening. The official IRNA news agency reported that the pilot was killed while "defending" the holy shrines of Shia Muslims in Samarra, north of Baghdad, according to the FT. In Ukraine, it will be interesting to see whether there is a response from Russia or pro-Russian rebels, after the Ukrainian government announced that it had retaken rebel strong holds of Slovyansk and Kramatorsk.

Of relevance to the banking sector, the WSJ reports that the Basel Committee on Banking Supervision is considering new global regulations that would reduce banks' latitude to measure the riskiness of their own assets for the purposes of regulatory capital calculations. The potential move includes changes to the risk treatment of government bonds and the ability of banks to measure the risk of their own assets. The committee is more likely to propose risk-weighting "floors," which would set minimum risk weights for certain classes of assets.

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Mon, 07/07/2014 - 07:13 | 4931073 junction
junction's picture

Now I'm worried.

Mon, 07/07/2014 - 07:34 | 4931097 Tao 4 the Show
Tao 4 the Show's picture

If you want your asset...

You can have your asset handed to you.

Mon, 07/07/2014 - 07:35 | 4931099 GetZeeGold
GetZeeGold's picture

 

 

Not to worry.....soon we'll have ghost trains.

China Railway Corp will buy around 300 sets of high speed trains

Mon, 07/07/2014 - 09:34 | 4931320 disabledvet
disabledvet's picture

"Bullet trains in China." They have the money. That's at least a trillion US for a down payment. Lot less than trying to build out an interstate highway system. Not a very good inflation hedge though.

Mon, 07/07/2014 - 08:19 | 4931171 Lewshine
Lewshine's picture

The in-depth info on commodities makes me want to buy some leap calls on cattle and hogs - BUT, only if we had a real market. You see what happen to those going long oil because of the obvious tensions in the ME. The Fed just adds that little catagory to the sell side, and oil hasn't had an up day in two weeks.

Mon, 07/07/2014 - 07:15 | 4931078 DavidC
DavidC's picture

I know it's mentioned in the text above, but a biggish POMO today.

DavidC

Mon, 07/07/2014 - 07:37 | 4931100 Kreditanstalt
Kreditanstalt's picture

"China Railway Corp" is a government outfit, so this is not real "investment".  Probably more Keynesian "insfrastructure stimulus" misallocating of capital...

Can anyone spell F-U-T-U-R-E  I-N-F-L-A-T-I-O-N?

Mon, 07/07/2014 - 07:43 | 4931113 BeetleBailey
BeetleBailey's picture

This shit-show is getting more boring than the fucking World Cup...

speaking of that snoozer....the Tee Vee peeps need to keep babe spotting during the fucking No-Doz-esqe "play"

Mon, 07/07/2014 - 08:10 | 4931148 orangegeek
orangegeek's picture

Where's that piece on the Austrian bank's 40% rise in bad debt???

 

Could you play that one again Tyler?

 

Helps me position my bullish trades.

Mon, 07/07/2014 - 08:11 | 4931149 buzzsaw99
buzzsaw99's picture

...and Total (FP FP) fall after warning on FX effects on their upcoming earnings and weak refining margins respectively.

 

yeah, lulz, and the fact they challenged the maggot's usd hegemony in the press.

Mon, 07/07/2014 - 08:23 | 4931177 Keltner Channel Surf
Keltner Channel Surf's picture

Given the supersized $3B POMO today, standard algo playbook would be an opening dip til ~10:17 before smartly snapping back.  If true to form, will be interesting to see whether we get a gentle rollover post 11:15 to flush out some of the usual vacation vapor-ramping, or if the big guns are in the mood to tickle shorts further before the big earnings reports ...

Mon, 07/07/2014 - 09:50 | 4931356 disabledvet
disabledvet's picture

US energy boom roars ahead as pipelines now the next project to be started up. Hard to see this as Arthur Burns as there is still massive quantities of land for sale and just lying around fallow.

Hundreds of thousands of acres of this land hasn't been productive in over twenty years.

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