"FOMC Drift" In Full Effect As Global Stocks Rise; S&P Futures Hit New Record; Oil Slides

Tyler Durden's picture

With last Friday's "tech wreck" now a distant memory, this morning the "FOMC Drift" described yesterday, which "guarantees" higher stock prices and a lower dollar heading into the Fed announcement is in full effect, with European and Asian stocks rising for a second day, led by rebounding tech shares, while S&P futures are modestly in the green and stocks on Wall Streets hit a record high overnight. And as the "FOMC Drift" also expected, the dollar has weakened for a third day with Treasuries rising, while oil fell after the latest IEA world forecast cut its global demand forecast while boosting output expectations.

The MSCI All-Country World index was up 0.1% and has remained stuck in a tight range this month. European shares headed for the highest in more than a week as companies including ASML and Hexagon (on M&A speculation) led the tech share revival in the region. The Stoxx Europe 600 Index gained 0.6%, building on a 0.6% increase the day before. Apart from technology sector, European equity markets supported by continued pick-up in industrial production which helps construction stocks.

The British pound, which rose Tuesday for the first time since the U.K. election, traded sideways as pressure mounted for Theresa May to abandon a so-called hard Brexit. Weaker than expected U.K. earnings data highlights squeeze on domestic consumers, long-end gilts lead curve flattening, GBP weaker in tandem. AUD/USD pushes higher through 100-DMA to outperform G-10, residual support still evident from CAD strength after recent hawkish BOC commentary.

Sovereign yields drifted sideways inside narrow ranges with the Loonie rising for a fifth day in otherwise muted FX markets. The Nikkei was modestly higher while Shanghai Composite declines after China data dump (China May retail sales 10.7% vs 10.7% est; fixed investment 8.6% vs 8.8% est, industrial output 6.5% vs 6.4% est) was seen as mixed, with overall resilience in retail sales and industrial output offset by capex weakness, but Chinese equity markets fell on concerns about a crackdown on the insurance industry after Anbang's chairman was "detained."

The Shanghai Composite Index tumbled 0.7 percent and the CSI 300 Index dropped 1.3 percent, its biggest loss this year. The Hang Seng Index erased losses to add 0.1 percent and the Kospi Index in South Korea fell 0.1 percent. Japan’s Topix Index closed down 0.1 percent, while Australia’s S&P/ASX 200 Index climbed 1.1 percent to its highest since May 16. Also in China, money-market rates eased as PBOC injects a net 20 BN yuan with reverse repos and the 7-day repurchase rate fell 32 basis points from Tuesday’s one-month high, overnight CNH Hibor drops to lowest since February.

Also in China, we got the latest credit creation data which showed a modest beat in New Loan activity offset by a miss in Total Social Financing, however it was the M2 which unexpectedly rose by just 9.6%, below the 10.4% est. and the lowest on record. In a statement on its website, the PBOC said that the slower M2 growth may become “new normal” amid leverage cut, adding that the PBOC was seeking to balance delveraging and stable liquidity.

S&P 500 futures were little changed. The gauge added 0.5 percent Tuesday and the Nasdaq 100 climbed 0.8 percent, rebounding from its worst two-day drop of the year.

The pound slipped less than 0.1 percent to $1.2743 after it strengthened 0.8 percent Tuesday. The Canadian dollar rose 0.2 percent, gaining for a fifth day. The euro was little changed at 1.1210. The Bloomberg Dollar Spot Index fell 0.1 percent. The yen was also 0.1 percent weaker at 110.19 per dollar

In commodities, oil prices fell more than 1 percent, on the backfoot again on worries about US oversupply. Brent crude oil was down 45 cents a barrel at $48.27 while U.S. crude was 50 cents lower at $45.96. U.S. inventories climbed by 2.75 million barrels last week, the American Petroleum Institute was said to report. The latest IEA report stated that global oil supply rose by 585k b/d in May to 96.69mm b/d as both OPEC and non-OPEC countries produced more. Meanwhile 2017 world demand was revised to 97.8m b/d from 97.9m b/d. Gold rose 0.1 percent to $1,268.30 an ounce.  Iron ore reverses early losses to climb 1.6%.

All eyes will now turn to the Federal Reserve. The widely expected quarter-point interest rate hike will take the Fed funds target rate above 1 percent for the first time since the immediate aftermath of the collapse of Lehman Brothers in 2008. The Fed is expected stick to previous guidance for another hike before year-end, while acknowledging that inflation is muted. The $4.5 trillion question will be what clues are given on the timetable and scale of eventual balance sheet reduction. Traders' focus will be on signals on the frequency of further hikes and how the Fed plans to unwind its huge Treasury bond stockpile over the years ahead.

“Markets will probably mostly just trade sideways today in front of the Fed’s rate decision and press conference tonight,” John Cairns, a Johannesburg-based currency strategist at Rand Merchant Bank, said in a client note. “The range of issues that the bank has to cover and the market’s sensitivities to even the slightest changes suggests some market volatility after the event.”

"With financial conditions remaining supportive ... and US financials breaking higher, the Fed may see little reason to moderate its rate hike projections when meeting today," strategists at Morgan Stanley said in a note to clients. The bank expects the dollar to gain 2 percent against major currencies over the next few weeks.

Meanwhile, rates continued to drift lower with the yield on 10-year Treasuries was down one basis point at 2.20% . The yield on U.K. gilts dropped four basis points to 1 percent after rising seven points on Tuesday. Europe's benchmark bond yield held near seven-week lows ahead of the Fed decision.

Bulletin Headline Summary From RanSquawk

  • EU bourses have traded higher throughout the morning, buoyed by the IT sector
  • Some moderate flow to report in a session looking ahead to the FOMC meeting this evening, with traders looking past the 25bp rate hike largely priced in
  • Looking ahead, highlights include US CPI, Retail Sales, DOE crude oil and the FOMC rate decision

Market Snapshot

  • S&P 500 futures up 0.06% to 2,441.50
  • STOXX Europe 600 up 0.6% to 391.00
  • MXAP up 0.08% to 155.12
  • MXAPJ up 0.4% to 505.58
  • Nikkei down 0.08% to 19,883.52
  • Topix down 0.1% to 1,591.77
  • Hang Seng Index up 0.09% to 25,875.90
  • Shanghai Composite down 0.7% to 3,130.67
  • Sensex up 0.2% to 31,177.15
  • Australia S&P/ASX 200 up 1.1% to 5,833.90
  • Kospi down 0.09% to 2,372.64
  • German 10Y yield fell 0.3 bps to 0.263%
  • Euro down 0.01% to 1.1210 per US$
  • Brent Futures down 1.2% to $48.15/bbl
  • Italian 10Y yield fell 3.9 bps to 1.69%
  • Spanish 10Y yield fell 2.0 bps to 1.416%
  • Brent Futures down 1.2% to $48.15/bbl
  • Gold spot up 0.04% to $1,267.07
  • U.S. Dollar Index up 0.01% to 96.99

Top Overnight News

  • Jeff Sessions calls the idea he colluded with Russia a ’detestable lie’
  • Mnuchin says ’optimistic’ tax reform will get done this year
  • China May retail sales 10.7% vs 10.7% est; industrial output 6.5% vs 6.4% est
  • PBOC operations show China is sticking to ’prudent and neutral’ policy: Financial News
  • Australia June Westpac consumer confidence 96.2 vs 98.0 prev; -1.8% m/m
  • API inventories according to people familiar w/data: Crude +2.8m; Cushing -0.8m; Gasoline +1.8m; Distillates -1.5m
  • The squeeze on U.K. households intensified in the three months through April as wage growth lagged further behind inflation.
  • European Central Bank Governing Council member Jens Weidmann highlighted the risks of continuing extraordinarily expansive monetary policy for too long.
  • Nasdaq Knocks Competitor’s Proposal To Change End-of-Day Trading
  • Boeing Pares 50 Defense Executives, Eliminating Management Layer
  • TPG’s Bonderman Quits Uber Board After Cracking a Sexist Joke
  • Biogen Says CFO Leaving to Join Another Biopharma Company
  • Deutsche Post, Ford to Build Electric Delivery Vehicles
  • Calpers Considers Pay Raises for Top Executives in Delicate Move

Asia stocks rose as the region was lifted by the momentum from the upbeat close on Wall St, where the tech sector rebounded from a 2-day sell-off, while S&P 500 and DJIA printed fresh record highs. ASX 200 (+0.9%) outperformed and rose above 5,800 led by advances in healthcare and tech, while gains in the Nikkei 225 (flat) were to a lesser extent as JPY remained steadfast. Shanghai Comp. (-0.8%) and Hang Seng (flat after paring early losses) were initially negative with participants tentative as they awaited the latest Chinese data updates, which upon release failed to spur demand despite Industrial Output beating expectations as Fixed Asset Investments slowed. Finally, 10yr JGBs were flat with the BoJ's present in the market under a somewhat lukewarm bond buying operation of JPY 750b1n, while the curve was mixed with underperformance in longer-dated bonds.

Top Asian News

  • Singapore Premier Lee’s Brother to Leave City Amid Family Feud
  • China’s Fosun Dangles Rival Bid for Biggest Emerald Miner
  • Former Noble CEO Alireza Sues Founder Elman for $58 Million
  • Time BOJ Talks Exit as Fiscal Risk Grows, Yoshikawa Says
  • China Big-Cap Stocks Sink Most This Year as Anbang Spurs Selling
  • IMF Lifts China Growth Estimate to 6.7% in Second Rise This Year
  • Inter Milan’s Chinese Owner in Talks to Expand Its Soccer Empire

European bourses have traded higher throughout the morning, buoyed by the IT sector, which has seen a recovery following the volume that was seen to the end of last week in the heavyweight US Tech names. Energy trades in the red amid last night's API build while the latest IEA report stated that global oil supply rose by 585k b/d in May to 96.69mm b/d as both OPEC and non-OPEC countries produced more. Fixed income markets have been rangebound as the week of central banks begins with the FOMC's anticipated "dovish hike" expected later. Deal related receiving has seen screens push by around 0.75bps in the 7-10yr, while the 2 — 10yr trades at 93.75bps, flatter from the open. Bund auction from the Buba was relatively well received with the line drawing a healthy 1.5 b/c (matching the previous)

Top European News

  • U.K. Squeeze Tightens as Wages Grow at Slowest Pace in Two Years
  • BNP Paribas, SocGen Selling $230 Million Stake in Euronext
  • Weidmann Stresses QE Risks as ECB Begins to Mull Stimulus ExitB
  • May Resumes Talks to Keep Power Amid Calls to Soften Brexit
  • Shell Sees Ability to Manage Risk Giving Edge in Offshore Wind
  • Germany Builds an Election Firewall to Fight Russian Hackers
  • Proposed New U.S. Sanctions On Russia to Tighten Debt Access
  • Hexagon ‘Regularly’ Looks at Opportunities to Boost Value

UK Election Latest: According to reports in the Telegraph, PM May is reportedly signalling that she is not willing to compromise over a hard Brexit and is determined to enter talks in Brussels next week with a threat that Britain is prepared to leave the EU without a future trading deal. However, the Times report that Chancellor Hammond is preparing to lead a battle within the government to soften Brexit by keeping Britain inside the EU customs union. Deal between DUP and Govt could be delayed until next week due to aftermath of Grenfell Tower and diary commitments of both leaders, according to BBC journalist. Delay to deal with DUP means likely postponement of Queens speech; and possibly Brexit talks.

In currencies, there has been some moderate flow to report in a session looking ahead to the FOMC meeting this evening, with traders looking past the 25bp rate hike largely priced in. We need to get a little colour on the rate path ahead, and just as importantly any fresh light on Fed intentions on balance sheet reduction which may alter the rate profile to some degree. EUR/USD and USD/JPY have been pretty balanced in the interim as a result, deviating less than 10-20 ticks from tight ranges seen over the week so far. More data for GBP traders to consider ahead of the BoE meeting tomorrow, and given expectations are that the MPC will maintain their easy stance for a little longer given last week's events, this morning's softer than expected wage growth numbers will add fresh concern over the inflation profile. The numbers were a little higher than expected Tuesday, but after today, the impact on household income is back in the frame. Cable tested towards 1.2800 ahead of the release as the market looked to extend the relief aspect from the perception that a softer Brexit is now more likely. Theresa May seems insistent on taking a 'hard' stance, which seems a little futile under the circumstances. The spot rate has dipped back into the lower half of the 1.2700's since, but there seems to be limited conviction inside the broader range, with outliers at 1.3000 higher up and 1.2500-1.2400 lower down.

In commodities, last night's API build reported went against the expectations in line with a series of recent draw downs, pulling WTI back under USD46.00 again and with Brent moving in tandem and still maintaining a USD2.00-2.50 premium to the former. We saw a 2.75m build vs the 4.6m draw previously, and but in relative terms the reaction has been modest, but with a view to looking for affirmation with the DoE report later today. Adding to support here, and to metals to a modest degree is the fresh weakness in the USD, and in turn, the prospect of a dovish hike this evening has lifted precious metals also as Gold is back around USD1270 or so despite the positive sentiment reflected on Wall Street last night. Silver remains below USD17.00 however. Copper remains just under USD2.60 this morning but is well off the recent lows to suggest a period of consolidation ahead. Aluminium also a touch lower today, but Nickel, Zinc and Lead all sporting modest gains on the day.

Looking at the day ahead, the focus will be on the FOMC decision due later in the day but before that we will get the May CPI number (+2.0% YoY expected; 2.2% previous) and retail sales data (+0.0% mom expected; +0.4% previous). According to DB, the headline retail sales series should slow due to another disappointing month for unit motor vehicle sales; however, sales excluding automobiles should fare a bit better. With respect to the CPI, DB expects energy prices will drag on the headline, likely resulting in a flat month-over-month reading. However he notes that the core CPI series  will receive significant attention given that the last couple of prints have been surprisingly soft – particularly highlighting that the FOMC specifically mentioned the March core CPI decline in its May meeting statement. Thereafter all focus should shift to the FOMC meeting and press conference.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 7.1%
  • 8:30am: US CPI MoM, est. 0.0%, prior 0.2%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%
    • CPI YoY, est. 2.0%, prior 2.2%; CPI Ex Food and Energy YoY, est. 1.9%, prior 1.9%
    • CPI Core Index SA, est. 251.6, prior 251.2;
  • 8:30am: Real Avg Weekly Earnings YoY, prior 0.34%;  Real Avg Hourly Earning YoY, prior 0.4%
  • 8:30am: Retail Sales Advance MoM, est. 0.0%, prior 0.4%;  Retail Sales Ex Auto MoM, est. 0.1%, prior 0.3%
  • 10am: Business Inventories, est. -0.2%, prior 0.2%
  • 2pm: FOMC Rate Decision
  • 2:30pm: Federal Reserve Board Chairwoman Janet Yellen holds news conference

DB's Jim Reid concludes the overnight wrap

Overnight we've had the monthly key activity indicators for China released and they were broadly stable. Fixed asset investment (FAI) grew by 8.6% yoy ytd, slightly lower than 8.9% in April. Retail sales and industrial production both grew at the same pace as in April (10.7% and 6.5% respectively). Chinese stocks slipped, led by financial and developer shares, amid investor concern that regulators will place further curbs on insurers’ equity investments. The Shanghai Composite fell 0.6% as property and insurance sectors fell on fears of continued curbs for the former and tighter regulation for the sector. The Hang Seng is -0.3% with the Nikkei 0.1%. Asia is mostly waiting for the Fed.

Turning now to markets yesterday, global equities were broadly higher recovering some of Monday’s losses. Over in the US the S&P 500 and the NASDAQ both saw gains of +0.45% and +0.7% respectively with the S&P 500 and Dow back at record highs. The tech stocks are recovering a little after a difficult 48 hours. European equities saw a similar bounce with the STOXX 600 up by +0.6% while the DAX and FTSE MIB were up by +0.6% and +0.9% on the day. The odd one out in Europe was the FTSE 100 which dropped by -0.2% on the day, likely as sterling (+0.7%) gained for the first time since last week’s elections on slightly more stable politics and firmer data.

Staying in the UK, Gilts sold off yesterday across all maturities (2Y: +5bps; 10Y: +7bps) as UK inflation overshot in May. Data out yesterday saw consumer prices outpace expectations by growing at a four-year high of +2.9% YoY (vs. 2.7% expected; 2.7% previous). Retail prices were also up 3.7% YoY (vs. 3.5% expected; 3.5% previous) although wholesale price inflation remained more in line with expectations as PPI rose by +3.6% YoY (+3.6% previous).

Elsewhere in government bond markets, the US yield curve was broadly unchanged on the day (with only marginal flattening) ahead of the FOMC tomorrow whereas German Bunds saw yields rise across all maturities (2Y: +3bps; 10Y: +2bps). French OATs saw yields tick up from the 2Y point (+2bps) all the way to the 10Y (+1bp) but yields at the very long end fell (30Y -2bps). Italian BTPs saw yields fall across all maturities (2Y -2bps; 10Y -4bps) as the recent more positive political sentiment continues in the country.

Credit markets saw spreads broadly continue to tighten yesterday. In Europe iTraxx Main and Crossover saw spread tighten by -1bp and -3bps respectively, while in the US we saw CDX IG and HY tighten by -1bp and -3bps on the day. Turning to FX markets, we saw the US dollar and the Euro both hold fairly steady on the day. In the commodities space, we saw oil give up decent gains after a late day announcement of a surprise build up of US crude inventories. Metals on the other hand were broadly flat to lower.

Away from the inflation data out of the UK, we had a bit more data out of Europe to get through. We got the June ZEW survey in Germany which was a bit of a mixed bag – the current situation component clocked in above expectations at 88.0 (vs. 85.0 expected; 83.9 previous) while the expectations component deteriorated to 18.6 (vs. 21.7 expected; 20.6 previous). Over in the US we got the May NFIB small business optimism reading which held steady as expected at 104.5, while the May US PPI report saw wholesale prices unchanged on the month (+0.5% previous), although ex food and energy prices rose by more than expected (+0.3% mom vs. +0.1% expected).

Looking at the day ahead now, in Europe we are due to get the final May CPI numbers for Germany (with no revisions expected). We also get UK labour market data where the focus should be on the three month unemployment rate as of April (expected to hold steady at 4.6%) as well as weekly earnings numbers for April and jobless claims data for May. Following that we will also get the Eurozone industrial production readings for April which is expected to head back into positive territory (+0.5% mom vs. -0.1% previous).

Over in the US the focus will be on the FOMC decision due later in the day but before that we will get the May CPI number (+2.0% YoY expected; 2.2% previous) and retail sales data (+0.0% mom expected; +0.4% previous). Our Chief US Economist Joseph Lavorgna notes that the headline retail sales series should slow due to another disappointing month for unit motor vehicle sales; however, sales excluding automobiles should fare a bit better. With respect to the CPI, he expects energy prices will drag on the headline, likely resulting in a flat month-over-month reading. However he notes that the core CPI series  will receive significant attention given that the last couple of prints have been surprisingly soft – particularly highlighting that the FOMC specifically mentioned the March core CPI decline in its May meeting statement. Thereafter all focus should shift to the FOMC meeting and press conference.

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lester1's picture

Comstock Mining, ticker LODE is about to pop today as news of a joint venture to develop their mines near Lake Tahoe start to happen!

 

Easy $$$

mily's picture

What will DOE report today?

<-- large draw down

<-- large build

RockySpears's picture

" the dollar has weakened for a third day with Treasuries rising, while oil fell "

 

This is really good news for The rest of the World.  Yes?

 

RS

BritBob's picture

Falklands Oil - worth a punt?

 

Rockhopper Exploration has issued an update on planning for Phase 1 of the Sea Lion oil field development in the offshore North Falkland basin. Operator Premier's latest estimate of capex to first oil is US$1.5 billion, with life of field costs (capex, opex, and lease) of around US$35/bbl for Phase 1.

 Rockhopper CEO Sam Moody described this as “highly attractive” in the context of the current oil price. The estimated break-even price is US$45/bbl.
The partners have submitted an environmental impact statement and revised draft field development plan to the Falkland Islands government, and discussions are set to continue on a range of operational, fiscal, and regulatory matters.
They have also reached a settlement on an insurance claim relating to costs incurred on the Isobel Deep exploration well during the 2015/16 North Falkland basin exploration campaign. Value is US$90 million (after deductions) on a gross basis. (MercoPress 23.12.16)

What about the Argentinians?

Falklands – Territorial Waters: https://www.academia.edu/10574593/Falklands_Islands_Territorial_Waters

All hot air...

 

I am Jobe's picture

Netflix and Iphone works- American Sheeple. 

yogibear's picture

Yes, $1000 iPhones can be purchased in monthly payments. All about banksters control.

yogibear's picture

The dollar keeps declining, impoverishing the 80% is a good thing for the banksters. Means more control.

In the meantime use your printing presses to bid up assets for the rest.

wmbz's picture

Makes no difference what the un-fed does today or any day. Stawks go up because they are on auto buy all the time.

The Fed the CB's "mandate" is a simple one, always prop up the stawk market, by any means.

sinbad2's picture

Before this ends the US Government will own every share of every company in the USA.

Youri Carma's picture

"... , while acknowledging that inflation is muted." ???

Core Producer Prices Rise At Fastest Pace In 3 Years, Above Fed Mandate
http://www.zerohedge.com/news/2017-06-13/core-producer-prices-rise-faste...
 
For the first time in 3 years, Core Producer Prices have risen at a faster pace than The Fed's mandated 2% target. May PPI (ex food and energy) rose 2.1% year-over-year, the highest since May 2014, as goods prices tumbled (gasoline, motor vehicles, fresh fruit) while services costs (retailer and wholesaler prices, and residential lending) jumped.

Justin Case's picture

The Fed's mandated 2% target. May PPI (ex food and energy) rose 2.1% year-over-year,

Just blazing ahead! If only I could get that jump on the return on my money! Prob just an anomaly, nothing to get all excited about.

Atomizer's picture

FRN are equivalent to trading penny stocks. Back in Bush Jr era, we drove crude above $100/barrel and drove down USD FX to 71. More cat and mouse games from Federal Reserve.