The first news overnight came from the RBA which kept the target cash rate at 2.75% and following a warning that the AUD remains at a high levels (despite falling 10%), saw various AUD pairs slide. Which meant that all those correlation desks which had linked their rising ES signals to the AUDJPY and AUDUSD, would have to promptly recalibrate and find something else to "carry" them higher. That something was the Yen, as the USDJPY once again rose to just shy of the 100 resistance area, in the process pushing the Penikkeistock higher by 1.8% and above 14k, to 14,099 to be precise. Supposedly the Yen carry trade is back and all good again, or until such time as the 10 year hits 1% and the entire farce is repeated once more. However, at least Abenomics has bought itself a few weeks reprieve for the time being.
The Japanese euphoria, coupled with a plunge in repo and SHIBOR rates on ongoing PBOC jawboning, also pushed the Shanghai Composite above 2k and closing at session highs of 2,006, up 0.57% for the trading day. More importantly, as the WSJ revealed [21], "according to a previously undisclosed summary of a PBOC internal meeting on June 19, the central bank was especially concerned that in the first 10 days of June, Chinese banks increased lending by 1 trillion yuan ($163 billion)—an amount the central bank said "had never been seen in history." And about 70% of that amount consisted of short-term notes that mostly don't show up on banks' balance sheets—making it easier for the banks to get around regulatory lending restrictions-—rather than lending the money to promising companies or projects. The PBOC interpreted banks' actions to mean that "some banks thought the government would launch stimulus policies as the economy slows, and positioned themselves in advance," according to the summary. A number of banks including, Postal Savings Bank of China, China Citic Bank Co., China Minsheng Bank Corp. and Ping An Bank Co. were singled out for criticism."in
What this means is that as Zero Hedge predicted a week ago, China is now effectively looking at deleveraging amounting to roughly CNY 1 trillion. Any hopes that this will occur without glitches, and without more major shake outs in the market are woefully short sighted.
Turning to Europe, we have seen weakness in markets and peripheral spreads following the digestion of yesterday's news that Portufgal finmin Gaspar has resigned due to a backlash against "fauxterity." The completely unbelievable and totally made up continuation of Spanish good news continued as reported Jobless claims dropped by 127.2K in June more than the 100K drop expected. We can't wait to see how all this economic "recovery" materializes in a decline in Spanish NPLs which are all that matter for the insolvent and broken economy.
European PPI dropped 0.3% on expectations of a -0.2% print, confirming once more than if anything the ECB will have to take on a more dovish tone on Thursday. In the UK the CIPS June Construction Index printed at 51.0 below the estimated 51.2. German June vehicle sales dropped another 5%, indicating that the recession in the core is not getting better.
The most substantial European news came from Greece, again, whe EU officials said the country has 3 days to deliver on conditions attached to its international bailout offer or face the consequences. The EURUSD, which was trading over 1.3075 at the time the headline hit, did not like the update and dropped nearly 50 pips in the minutes following - just as the "fade Stolper trade" said it would.
But perhaps the most important, if largely meaningless, news of the day will come from Bill Dudley who for the second time in one week will speak later today to explain to the "confused" market how it misinterpreted the Fed's dovish stance. We also get US vehicle sales, factory orders and the IBD/TIPP economic optimism survey. Outside of that, there is relatively little else on today’s calendar to excite markets as we wait for the ECB meeting and US payrolls on Thursday and Friday respectively.
Keep an eye on events in Egypt where the pre-warned military coup is getting closer by the hour. Also, keep an eye on stocks which seem set to return to their old Tuesday ways on the new Tuesday.
DB's Jim Reid recaps the main news of the past 24 hours:
the peripheral countries actually outperformed the core in the PMIs yesterday in what was a reasonably encouraging set of PMI/ISM numbers out of Europe and the US. First Spain (50 vs 48.5 expected) and Italy (49.1 vs 47.8) beat expectations which will always be treated as a good sign by markets and even France saw a beat (48.4 vs 48.3). Then the slight beat on the US ISM (50.9 vs 50.5 expected) was perhaps perversely enhanced by the weakest employment sub component (48.7) since September 2009 (47.8). In the week of payrolls that's clearly sending out hopes of a softer report and hope of a tapering delay. As we've highlighted before, summer payroll numbers have on average been weaker than at other times of the year. Are we going the same way again in 2013?
The bulls would hope that this recently narrowing gap between the technicals and the fundamentals will continue to be eroded by a continuation in growth improvements. However the test will be how economies react to the shock of recently rising yields, and to events in China and the rest of EM over the past few weeks. This might show up in the flash PMI numbers in 3 weeks so we shouldn't get complacent over yesterday's improvements. Nevertheless, markets have been becalmed for now with US yields stabilising. Indeed, 10yr UST yields have range traded on either side of the 2.5% mark for more than a week and yesterday saw a continuation of this pattern. 10 yr yields traded up to a session high of 2.55%, before the ISM print, and maybe the softer employment component, saw it come back in to close virtually unchanged at 2.47%. Elsewhere Italian and Spanish 10yr bond yields closed 13bp and 16bp lower respectively on the back of the data. The sentiment also filtered through to EM rates where Mexican and Brazilian 10yr yields firmed by 14bp and 8bp. In equities, the S&P 500 (+0.54%) recorded a solid overall gain but closed well off the day’s highs of +1.3%. Resources stocks (+1.11%) outperformed the broader S&P 500, making up for some of its YTD underperformance which has seen S&P 500 metals and mining stocks lag the broader index by 33% (YTD -20% vs S&P500 +13%). Yesterday’s laggards were the defensive telco (-0.12%) and utilities (-1.22%) sectors.
Overnight markets are more mixed despite the positive lead from Wall Street. The Nikkei continues its outperformance (+1.1% as we type) and has managed to trade above 14,000 for the first time since May 30. Dollar-yen is hovering around 99.7, and 10yr JGB yields are unchanged at 0.89% having barely moved in the last month. Elsewhere in Asia, the Hang Seng (-0.4%) is trading lower in its first session since last Friday and is probably reacting to the release of Chinese PMIs yesterday. S&P futures (+0.2%) are a touch higher at 1609. In Asian credit, markets continue to grind tighter (Asia IG index -4bp). The Australian dollar is 0.7% weaker at 0.917 after the RBA left rates unchanged at today’s meeting.
Staying in Asia, there was an interesting WSJ article overnight which describes the events leading up to the spike in Chinese interbank rates in late June. According to a previously undisclosed summary of a PBOC internal meeting on June 19, the PBoC was concerned that in the first 10 days of June, Chinese banks increased lending by RMB1 trillion (or $163 billion)—an amount the central bank said "had never been seen in history." And about 70% of that amount consisted of short-term notes that mostly don't show up on banks' balance sheets—making it easier for the banks to get around regulatory lending restrictions. According to the article, the PBoC responded by reinforcing its message that it wouldn't be easing monetary policy despite slower growth, which ultimately resulted in the rate spikes that we saw towards June end.
In terms of the day ahead, the US data calendar remains busy with US vehicle sales, factory orders and the IBD/TIPP economic optimism survey. The NY Fed’s Bill Dudley will speak today on the topic of economic conditions. Outside of that, there is relatively little else on today’s calendar to excite markets as we wait for the ECB meeting and US payrolls on Thursday and Friday respectively.
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SocGen summarizes the key macro highlights for today:
The second half of the year got off to a quiet start yesterday with the (partial) reversal of quarter and half-year end flows of last week credited for the minor setback for the USD. The same applies to core bonds where yields ticked up supported by higher stocks and the stronger manufacturing ISM (though the employment component fell to below 50, the first sub-50 print and lowest since September 2009). Last Friday's weekly close in US 10y swaps (2.6970%) was no mean achievement in technical terms and has upped the ante for a stretch towards 3.00%, of course contingent on macro data and the S&P overcoming resistance around 1,635. We know from last month that the Fed's bias towards tapering is data dependent, but what the bond and FX markets now must decide for themselves with Friday's payrolls in their sights is the pace of advance. The fact that USD long positions have been pared back over the last two weeks in theory creates more room for investors to add longs, but will FOMC voter Dudley (who is speaking today) try to defuse hawkish tensions for a second time in a week?
Another observation we are making is the rally in JPY crosses which does not dovetail with the ongoing. Japanese bond repatriation flows from overseas which have now occurred for six straight weeks. The push higher in JPY crosses yesterday despite a calm UST market suggests the selling in overseas bonds may be relenting, a notion that is validated by the wild turn in EU periphery yields (lower) last week, unless domestic Euro investors are putting their faith in a dovish ECB. In spite of stronger manufacturing PMI data from Spain (50.0) and Italy (49.1), the furious rally continued yesterday with 10y Bono and BTP yields continuing to fall. Portfolio flows will determine whether grounds for optimism are justified that JPY crosses can in the short-term return to the May highs. This would fly in the face of stronger Japanese economic data (Tankan, industrial output) and if further gains crystallise, then manufacturers' expectations for USD/JPY of 91.20 in FY 2013 is going to be simply too low. This also implies that company profits are likely to run ahead of expectations based on a depressed JPY, which in turn keeps the Nikkei attractive at a P/E of 17.52 on estimated 2013 profits.
Second-tier data are scheduled today and include Spanish unemployment, UK construction PMI and US factory orders. Austria and the UK DMO will tap the market for 10y funds.