Late yesterday, after Nobel peace prize-winning president Obama revealed his latest military incursion, years of pent up can-kicking almost caught up with futures, which dared to tumble by a whopping 0.7%, a move which hit Europe far more than the US, and shortly after Europe's open, the Euro Stoxx 50 Index dropped 10% from its 2014 high, marking an official correction in Europe where the Dax continues to be the key risk indicator, and which dropped as low as 8,903 before recovering to a drop of only 0.9% while German Bunds continues to print record highs day after day on fears what the escalating Russian trade war will do to the German economy, and other such "costs."
US futures meanwhile have seen most of their losses recovered thanks to the usual relentless low volume USDJPY levitation which started just before Europe's open, which pushed ES down to just -0.2% after a nearly four times greater drop. Still, while futures may be surging, the 10 Year has not gotten the memo and remains stuck just above 2.36% or its lowest print since June 2013, a clear indication that at least the bond market has given up all hope of a so-called US recovery for the conceivable future. What is most important however, is that at this pace, the Friday confidence effect, i.e., a green close, may be recovered: let's all just wait and see what the NY Fed trading desk decides to do, and escalating world wars aside, let's just pretend that HY didn't just sugger the biggest weekly HY outflow in history didn't just take place.
Bulletin Headline Summary from RanSquawk and Bloomberg
- S&P futures languish close to 3-month lows, below 1900, as Obama’s airstrike authorization prompts a flight to quality across the globe, pushing US 10yr yields to 14-month lows
- EUR trades above pre-ECB levels as short-covering and strong French Industrial Production lifts the single currency
- Chinese equities are spared from broader Asia-Pacific weakness by a record high trade surplus, as export growth doubled expectations, lifting the Shanghai Composite by 0.3% while the Nikkei 225 fell 2.6%
- Treasuries rally overnight, led by long-end, as President Obama orders airstrikes in Iraq and Israeli/Palestinian ceasefire breaks down; 10Y yield (2.36%) drops to its lowest since June 19, 2013.
- U.S. 10Y yield and U.K. 10Y yield both fall to their lowest levels in a year on flight to quality flows
- President Obama authorized air strikes against Sunni militants in Iraq, potentially reengaging the U.S. military in a conflict that he pledged to leave behind when he first won office
- Crude oil prices rose as President Obama authorized airstrikes in parts of Iraq, OPEC’s second-largest producer, while Chevron Corp. said it was withdrawing some workers
- Israeli aircraft pounded the Gaza Strip today after militants fired rockets into the country’s south, shattering a cease-fire and reigniting the region’s monthlong conflict
- The worst Ebola outbreak on record is a public health emergency that threatens nations outside the four in West Africa where the virus is spreading, the World Health Organization said
- U.S. Secretary of State John Kerry met Afghanistan’s two presidential candidates in Kabul yesterday to lay out a road map to complete a vote audit and inaugurate a new leader by the end of the month
- Investors pulled a record $7.1 billion from high-yield bond funds in the week ended Aug. 6, accelerating a flight that started last month and bringing net outflows to $9.75 billion this year, according to data provider Lipper
- Sovereign yields lower, except Greece 10Y yield which is ~7bps higher. Euro Stoxx Banks little changed. Asian stocks mostly lower, with Chinese stocks higher. European equities drop, U.S. stock futures fall. WTI crude and gold higher, copper falls
US Event Calendar
- 8:30am: Non-farm Productivity, 2Q preliminary, est. 1.6% (prior -3.2%)
- Unit Labor Costs, 2Q preliminary, est. 1.1% (prior 5.7%)
- 10:00am: Wholesale Inventories m/m, June, est. 0.7% (prior 0.5%)
- Wholesale Trade Sales m/m, June, est. 0.7% (prior 0.7%) statement
Asia-Pacific equities fell sharply, with the Nikkei 225 (-3.0%) falling at the fastest rate since mid-February after the US President Obama authorized airstrikes in Iraq. Chinese equities (Shanghai Comp (+0.3%), Hang Seng -0.2%)) were somewhat spared from the broader losses as China’s trade balance surged to a record surplus of USD 47.3bln vs. Exp. USD 27.40bln (Prev. USD 31.56bln) after exports doubled expectations (14.5% vs. Exp. 7.0%).
T-notes continued yesterday’s rally in both the Asia-Pacific session and the European morning, as the safe haven bid for Bunds drove German 10yr yields to, again, all-time lows. Nonetheless, a short-covering rally in the EUR as well as equity futures pulled core fixed income markets off their best levels ahead of the US open. If T-notes close above 126.16+, that would mark the largest weekly rally of 2014.
European cash equity markets remain underwater as geopolitical tensions sour sentiment, with the telecoms sector the worst performer after Deutsche Telekom rejected Iliad’s bid for their T-Mobile US unit, citing short valuations. The Italian FTSE-MIB is the lone index in the green as short-covering and a strong turnaround in Banco Popolare Emilia Romagna shares after a short-selling ban on the stock lifted Milan equities.
JPY and CHF are the session's biggest gainers bolstered by flight to safety following the authorisation of air strikes in Iraq by US President Obama. Consequently, USD/JPY broke below its 50DMA as EUR/JPY fell to its lowest since November 2013 with EUR/CHF declining to its March 3rd levels. Elsewhere, AUD weakened following the RBA monetary policy statement, although largely overshadowed by the news of US intervention in Iraq. In the statement, the RBA trimmed its 2014 and 2015 GDP & inflation forecasts. Separately, the BoJ unanimously kept its monetary policy unchanged in an uneventful rate decision.
WTI and Brent crude futures have been supported throughout the European morning by the developments in Iraq, as Obama places airstrikes as a weapon on the table against ISIS. Due to the developing situation in the area, a number of oil producing firms including Afren, Chevron and ExxonMobil have evacuated fields and rigs to protect staff – more than likely reducing, if not halting, output. Gold trades above yesterday’s highs, as the falling USD and risk-aversion spurs flows into precious metals. Overnight, the Gold/Silver ratio hit its highest level since the 10th of June.
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We conclude as usual with DB's Jim Reid providing his nuggets of overnight wisdom
Fast forward to the current day and its becoming clearer that the downing of the Malaysian Airliner last month was a landmark moment of sorts with consequences for the world and with it global financial markets. At the moment the impact is being felt through lower yields, a weaker bias to risk, very poor liquidity, and some worryingly real-time data releases in Europe. The fear is that the last of these will continue to be soft as the trade war slowly escalates as over the last 24 hours Russia has retaliated to Western sanctions by banning the imports of various food/agriculture products with the threat of sanctions in the aerospace (production and actual bans on using airspace), auto and shipbuilding sectors.
If that's not enough to contend with geopolitics wise, overnight President Obama has authorized targeted air strikes in Northern Iraq to stop the "genocide" of 40,000 refugees under the threat from Islamic jihadists. The President said there are no plans to send ground troops to Iraq. In terms of market reaction it has been a fairly classic risk-off session in Asia overnight with equities and credit products weaker whilst safe-haven benchmarks such as UST and Gold are all stronger on the day. Brent is also up nearly 1% overnight to US$106.5/bbl. The UST is down nearly 9bps overnight to 2.38%, the lowest since June 2013. Gold is up for the fourth consecutive session at US$1317/oz. Elsewhere the Topix (-2.3%) is seeing its biggest fall since May whilst the KOSPI, and the ASX 200 are also down -1.1% and -1.4%, respectively. Interestingly Chinese equity markets are holding up fairly well with the Shanghai Comp and CSI 300 at around two-tenths of a point higher on the day. The trade surplus surged to a record this morning and markets are hoping this shows enough export strength for the Government to hit its growth target.
Away from Iraq, the Ukraine crisis also received some airtime at the ECB meeting yesterday. In its prepared statement, the ECB noted that the Ukraine crisis presents a ‘heightened’ geopolitical risk which is adding to the slower momentum currently observable. However DB's Gilles Moec and Mark Wall noted that the Ukraine situation is perhaps too fluid at this stage for an outlook change. So for the time being, the ECB considers that the depreciation of the EUR together with tentative signs of normalization in bank lending at least offsets geopolitical threats. Fundamentally what was notable was how Draghi elaborated on the lasting divergence between the ECB and the Fed/BoE and repeated several times that the ‘fundamentals’ are now better aligned for more EUR weakness. Overall ECB looks comfortable with its current policy stance even if Draghi was seen more forceful than before on ABS purchases. This strengthens our house view that the ECB will effectively launch such a policy early next year. There is no hurry to do more but will this change if geopolitics worsen materially from here?
Safe haven flows are driving the price action in core government markets for now. The 2yr Bund yields dipped briefly into negative territory at one point (- 0.004%) yesterday before closing largely flat at 0.006% on the day. Towards the belly we also saw 10yr Bunds and OATs close 3-4bp lower at 1.06% and 1.49%, respectively. Away from the core it was a bad day for peripheral bonds with Italian and Spanish 10yr yields up 6bp and 4bp respectively.
What is clearly not getting much love these days is US HY and again the latest flow numbers are fairly bad. The latest data has shown that these negative flows have now spread to European HY. Indeed the latest weekly flow data from EPFR (out late last night) has indicated that US HY funds suffered -$8.2bn of outflows in the week to 6 August. This represents 2.75% of AUM and is biggest weekly outflow in absolute terms and the third biggest in terms of % of AUM since the series started in 2003. This is the fifth consecutive week of outflow with the YTD cumulative flows now in negative territory (-3.2% of AUM). US markets ETF outflows in the last 24 hours have been mixed. The US iShares iBoxx HY recorded an inflow of US74m yesterday whilst the SPDR Barclays HY Bond ETF saw US$10.1m in outflows.
On this other side of the pond, Western European HY funds saw an outflow of US$934m in the latest week ending 6 August (representing 2.24% of AUM). This also marks the biggest weekly outflow for the asset class in absolute terms since data started in November 2004. That said in % of AUM terms the 2.24% in the latest week ranks the 33rd worst week (out of 508 weeks of observation) and not as bad as the 6.8% of AUM in outflows seen in March 2007. We now have two consecutive weeks of outflows for European HY. Its maybe too early to call it a trend but worth noting that YTD flows are still positive at around 18.4% of AUM. We’ve included updated US and European HY fund flow charts in the PDF for those interested.
Looking at the day ahead, US wholesale inventories (June) and non-farm productivity for Q2 are the notable releases In Europe we will get the current account balance in Germany and budget and IP data in France. A fairly quiet day as far as data is concerned but all eyes will be on how risk markets perform given the recent geopolitical developments overnight.