It's only fitting that in a bizarro new normal, the news that passes for positive is either conflicting, reflexive or, well, simply bizarre. Last night was no exception as the "good" news came in the form of speculation that in order to promote its consumption tax hike, the Abe government would consider a corporate tax cut. How that helps the country with the 1 quadrillion yen in debt is not exactly clear, or how it makes consumer tax hikes any more palatable in a nation in which more people than anywhere in the world are retired and elderly, and thus removed from the corporate lifecycle, is just as nebulous. But the market liked it. Just as it liked the good ole' European cop out, of posting a surge in consumer confidence, or relying on reflexive indicators to represent an improvement in the economy, when in reality the only thing "improving" is the stock market. This happened when the German ZEW Economic Sentiment survey soared from 36.3 to 42.0 on expectations of a 39.9 print. So one must buy futures, or that's what the GETCO algo programming says.
So to summarize:
- German ZEW Survey (Economic Sentiment) (Aug) M/M 42.0 vs. Exp. 39.9 (Prev.36.3) - highest since March 2013.
- SP/GE 10y spread narrowed to tightest level since August 2011 at 270bps and IT/GE 10s narrowed to tightest level since July 2011 at 256bps.
- Japanese PM Abe called for a study on lowering the corporate tax rate as a confidence-boosting counterweight to a consumption tax hike.
Ridiculous news aside, far more importantly today we get the US retail sales which will help determine the Fed's September tapering agenda. In terms of market expectations, Bloomberg median estimates are for+0.3%mom on the headline which is not too far from the average monthly rate in Q2 and slightly lower than June’s 0.4%. Expectations are for slightly higher +0.4%mom gain for retail sales ex-auto and gas. In addition to today’s retail sales data from the US Census Bureau, retail bellwethers Macy’s and Walmart will be reporting their quarterly earnings and outlook commentaries tomorrow and Thursday respectively. This will add further clues about trends in consumer spending.
Overnight news bulletin via BBG:
- Treasuries fall for a second day as JPY declines, global stock markets rise amid report Japan’s Abe is considering a cut in corporate taxes.
- Germany’s ZEW index of investor and analyst expectations rose to 42 from 36.3 in July. Economists predicted 39.9, according to the median of 42 estimates in a Bloomberg News survey
- With data this week predicted to show the euro area is growing again after an unprecedented six quarters of crisis-driven contraction, economists say such stabilization will restore the region as a prop, if not a powerhouse, for international demand and financial markets
- China’s one-year interest-rate swap rose by the most in three weeks after the central bank cut the amount of cash it injected into the economy via reverse-repurchase operations
- German Social Democratic chancellor candidate Peer Steinbrueck said he’s going to have to clean up the mess created in Europe by Angela Merkel’s “one-sided” solution to almost four years of crisis in the euro region
- Bruno Iksil, the former JPM trader who became known as the London Whale because of his trading book’s size, has been cooperating with the FBI and the Manhattan U.S. Attorney’s Office for months in their probe of the bank’s biggest trading debacle ever, said three people with knowledge of the matter
- Sovereign yields higher; EU peripheral spreads narrow. Nikkei gains 2.6%, leading Asian stocks higher, as JPY falls toward 98 level. European stocks, U.S. equity index-futures gain. WTI crude, gold, copper eases
The full Market Re-Cap courtesy of RanSquawk
Stocks traded higher since the get go this morning, as market participants reacted positively to press reports overnight that Japanese PM Abe has called for a study on lowering the corporate tax, which in turn saw the Nikkei 225 index gain 2.57%. Consequent risk on sentiment weighed on Bunds, with the curve steepening ahead of this Wednesday’s 2023 Bund auction by Buba, roughly equivalent to 30k Sep-Bund contracts. The risk on sentiment was also supported by the release of yet another encouraging German macroeconomic data, with the ZEW survey (economic sentiment) coming in at its highest level since March 2013. Furthermore, ZEW noted that a rate hike is likely from the ECB in the next 6 months. Going forward, market participants will get to digest the release of the latest US Retail Sales, Import Price Index and the release of the weekly API report.
Asian Headlines
Japanese PM Abe called for a study on lowering the corporate tax as a confidence-boosting counterweight to a consumption tax hike.
BoJ Minutes from the July 10th-11th meeting says members expect Japan economy to recover moderately.
According to the minutes, members said CPI is likely to turn positive, whilst a few members said that the CPI rise might come to a pause after summer.
EU & UK Headlines
German ZEW Survey (Economic Sentiment) (Aug) M/M 42.0 vs. Exp. 39.9 (Prev.36.3) - highest since March 2013.
German ZEW Survey (Current Situation) (Aug) M/M 18.3 vs. Exp. 12.0 (Prev.10.6)
- First signs of end of recession in important Euro Zone countries may have contributed to indicators rise.
- Economic optimism is supported by German domestic demand.
- 83% of respondents expect no change in short-term interest rates in next 6 months.
Germany trims planned 2014 bond sales according to a budget draft. Says Germany plans to sell EUR 216.5bln of bonds in 2014 compared EUR 240bln this year which includes EUR 107.6bln with maturity of at least four years compared with EUR 114.5bln this year. Sales of debt with a maturity less than four years including bills will be cut to EUR 108.9bln from EUR 125.6bln.
UK CPI (Jul) Y/Y 2.8% vs. Exp. 2.8% (Prev. 2.9%)
UK CPI Core (Jul) Y/Y 2.0% vs. Exp. 2.2% (Prev. 2.3%)
UK PPI Input NSA (Jul) Y/Y 5.0% vs. Exp. 5.5% (Prev. 4.2%, Rev. to 4.0%)
UK RPI (Jul) Y/Y 3.1% vs. 3.2% (Prev. 3.3%)
UK PPI Output NSA (Jul) Y/Y 2.1% vs. Exp. 2.1% (Prev. 2.0%)
UK ONS House Price (Apr) Y/Y 3.1% vs. Exp. 3.5% (Prev. 2.9%) - biggest rise since December 2012, London house prices +8.1% Y/Y.
SP/GE 10y spread narrowed to tightest level since August 2011 at 270bps and IT/GE 10s narrowed to tightest level since July 2011 at 256bps.
Of note, Spanish newspaper Expansion reported this morning citing Spanish Treasury chief that monthly volume of debt sold will fall 30% from September.
US Headlines
Norwegian wealth fund's largest bond holding was in US Treasuries.
Equities
Stocks traded higher since the get go this morning, as market participants reacted positively to press reports overnight that Japanese PM Abe has called for a study on lowering the corporate tax, which in turn saw the Nikkei 225 index gain 2.57%. On the sector break down, basic materials and utilities outperformed, while in spite of credit spreads tightening, financials were seen as the worst performing sector this morning.
FX
USD/JPY trended higher overnight in Asia, primarily underpinned by reports that Japanese PM Abe has called for a study on lowering the corporate tax. The price action was also evident in Europe this morning, that’s in spite of the fact that the release of much better than expected ZEW survey prompted broad based EUR strength, which in turn saw the USD index move back to unchanged.
Commodities
Press reports indicated that China is considering opening up its crude import market to more refineries outside its dominant state giants, with quotas of at least 10 million tonnes being discussed for new entrants in 2014.
Libya's deputy oil minister says workers and local authorities at Es Sider crude oil terminal have reached an agreement to end the strike. The official expects Es Sider crude oil terminal to resume exports around August 15th or 16th and added that the ports of Ras Lanuf, Zueitina, Marsa Al Hariga are still closed.
UBS sees silver price relative to gold rising in next few years.
India raised excise duty on refined silver bars to 8% from 4%, refined gold bars to 9% from 7% and silver to 10% from 6%.
The US commodities watchdog has subpoenaed companies including Goldman Sachs, JPMorgan Chase and Glencore as it ramps up its probe into the metals warehousing industry. The subpoenas come amid a barrage of criticism in the US of banks’ activities in commodity markets.
* * *
DB's Jim Reid recaps the balance of overnight news
Today US retail sales starts us on the next set of data points which will help determine the Fed's September tapering agenda. In terms of market expectations, Bloomberg median estimates are for+0.3%mom on the headline which is not too far from the average monthly rate in Q2 and slightly lower than June’s 0.4%. Expectations are for slightly higher +0.4%mom gain for retail sales ex-auto and gas. In addition to today’s retail sales data from the US Census Bureau, retail bellwethers Macy’s and Walmart will be reporting their quarterly earnings and outlook commentaries tomorrow and Thursday respectively. This will add further clues about trends in consumer spending.
Looking at overnight markets, Asian equities are trading with a strong tone led by the Nikkei (+1.6%). In Japan, PM Abe is reportedly considering a corporate tax rate cut as a counterweight to an increase in sales taxes, the Nikkei newspaper said, citing government sources. On the data front, Japanese machine orders for June have come in better than expected (+4.9%yoy vs +2.6% forecast) which have also buoyed Japanese equities and dollar yen (+0.4%) this morning. The latest BoJ minutes revealed little new information, but some have argued that the minutes are on the dovish side given commentary around the uncertainty in global economies and expectations that CPI rises would pause after the summer.
Elsewhere in Asia, there is a continuation of the constructive price action that we saw in the region yesterday fuelled by further signs of policy easing in China. The Hang Seng (+0.73%) and ASX200 (+75%) indices are both trading moderately firmer. There are reports that the Chinese city of Wenzhou has relaxed restrictions on property purchases to allow some people to buy second homes, the first in the country to ease controls, though analysts say other mainland cities are not expected to follow suit (SCMP). There are also reports that China’s cabinet has unveiled plans to set up more private banks to boost financial support for smaller firms who have been unable to access traditional forms of credit. The Australian dollar is 0.2% lower against the USD (91.3X) and the S&P500 futures is trading a touch firmer (+0.1%) at 1689.
Returning to yesterday, in what was a very rangebound day perhaps the most interesting news came from Apple. The company’s stock gained more than 2.8% after it was reported that the company is preparing the latest version of the iPhone for release this autumn, together with a newer, thinner iPad. The news helped drag the S&P500 (-0.12%) back up from the early lows. Coincidentally, Apple’s competitor, Blackberry gained 10.5% yesterday after saying that it was reviewing ways to enhance Blackberry’s competitiveness including potentially through a sale of the company. Foreign hardware makers such as Lenovo have been cited as potentially interested bidders (Bloomberg).
Away from equities, we noted that companies have raised more than $295 billion in the U.S. loan market this year, on pace to top the record $387 billion in all of 2007, according to Bloomberg, who cite S&P LCD data. At the same time, the number of cross border deals (non-US borrowers) has surpassed $45bn which is ahead of the $41bn record set in 2012. And despite the taper fears over the past several months, there have been a number of articles suggesting a return of capital to the investment grade and high yield bond funds, while strong inflows continue into the US leverage loans sector ($2bn last week according to Bloomberg).
In emerging market credit, there was some disappointment over the Mexican President’s plan to open up the country’s energy sector to foreign investors for the first time in 75 years. Mexico’s 10yr bonds sold off 4bp to 5.88% yesterday after the government said that the plan would limit foreign companies to profit-sharing contracts that provide less control over oil production. Turning to the day ahead, the focus in the European time zone will be on Eurozone industrial production data, German/Spanish inflation and the ZEW survey. In the UK, the latest CPI report is due. Across the Atlantic, retail sales and business inventories data are the highlights. The Atlanta Fed’s Lockhart will be speaking today on the economic outlook towards the latter half of the US trading session – Lockhart said last week that Fed tapering could come as early as September so this will be an interesting accompaniment to the retail sales release.