Overnight Sentiment: Bad News Is Good On More Hope And Prayer
It is just getting stupid. Europe officially enters recession, Japan GDP declines nominally, China admits to food inflation which locks the PBOC out of easing for months, UK inflation is again rising faster than expected which will soon force the BOE to reevaluate its latest easing episode, Brent is once again rising on supply fears and middle east war fears to a 3 month high, corporate revenues have never been worse in this recession cycle and what happens? Futures spike following a very visible invisible finger pushing ES higher by 0.5% at 9 pm Eastern and setting the scene for trading throughout the night. And since the market has reverted back to full retard mode full of hope of an absolution from the Fed, this time at the August 31 Jackson Hole meeting, which will be very disappointing as Ben will say absolutely nothing yet again, why not take the S&P to new 2012 highs? After all well over 100% of QE3 is now priced in. Finally, expect the ES to surge by 10 points should advance retail sales miss wildly the consensus of a +0.3% print. After all, inverted is the NKI.
Asian equity markets rose overnight, helped by Bank of Japan minutes showing that policymakers may adopt options to boost growth. The Nikkei picked up by 0.5%, a bit more than the 0.3% posted by the Shanghai composite. The Hang Seng index and the Kospi climbed even higher, rising by 1.05% and 1.27%, respectively. The Kospi has now reached the highest level since May 8, and the exchange will be closed tomorrow (15th August) for holiday. The MSCI Emerging Markets Index advanced 0.7%, reaching a three-month high.
In Europe, stock prices have been rising on the back of better-than-expected GDP reports. With German growth slowing less than forecast, European stocks built on the positive mood in Asia. Most European indices are up by about half of a percentage point. Meanwhile in the US, the S&P500 futures are up by 0.2%.
In bondland, Treasuries are largely unchanged with 10-year yields modestly up to 1.67%. In Europe, bond yields have responded to the better-than-expected GDP data. In Spain, 10-year yields are down to 6.72%, while in Italy 10-year yields have receded to 5.83%. Conversely, German bund yields have risen to 1.42%.
The dollar is trading marginally lower against a basket of major currencies, with the DXY index down only 0.1%. The euro is climbing for a second day, reflecting better news on German growth. On the commodities side, oil prices rose on speculation that inventories declined for a third week in the US. Brent prices climbed to more than $115 yesterday (13th August) after a US Navy ship collided with an oil tanker in the Persian Gulf. WTI is up by 0.2% to $91.2 a barrel while Brent prices are rising by 0.3%, to $113.9 a barrel.
Euro area GDP reports out today confirmed that the region is mired in recession. The economy shrank by 0.2% during the second quarter, after stagnating in 1Q. German and French GDP, however, surprised on the upside. In Germany the economy picked up by 0.3%, while in France GDP stagnated for a third straight quarter. Meanwhile in Spain the economy shrank by 0.4%, and in Portugal GDP shrank by 1.2%. All in all, our European team expects euro area GDP to contract by 0.7% both this year and next.
Also out this morning, the ZEW survey of investor confidence dropped further in August. Both the current situation assessment and investors' expectations fell. In the UK, CPI inflation rose from 2.4% to 2.6% in July, notably above market expectations. A changed seasonality of summer sales and higher air fares pushed inflation upwards last month.