The early session risk on trade, which materialized after the Pfizer confirmation it was seeking to buy AstraZeneca, and which sent the GBPUSD to its highest level since 2009, and also sent the EURUSD and EURJPY soaring in the process lifting US equity futures, has started to fizzle on the most recent news out of Ukraine, where the pro-Russian mayor of Ukraine's second largest city of Kharkiv was shot in the back in an apparent assassination attempt, which happened hours before the US is set to announce more sanctions against the Kremlin and its closest financial oligarchs. As a result, futures have pared gaisn modestly, especially since AstraZeneca made it clear with its initial reponse it has no interest in Pfizer's offer in its current format.
In Asia, Japanese equities are trading weaker (Nikkei -1.1%) as a follow on from the US tech selloff from Friday, and following a number of high profile earnings misses from corporates. Japanese electronics and hardware makers are leading the market’s declines. Elsewhere, the HSCEI is flat while the ASX200 is trading 0.3% higher off the back of M&A activity. In Asian EM credit, the rally in USD rates over the past week and general outperformance of credit has set the scene for a burst of new issuance activity this week across sovereigns and corporates.
In Europe, despite the growing tensions between Russia and Ukraine, Bunds traded lower, as the sentiment remained supported by M&A related activity. In terms of the latest development in Ukraine, heavily armed pro-Russian gunmen on Monday seized another town in east Ukraine, storming the town hall in Kostyantynivka.
Little EU related news flow this morning, but ECB's Knot (soft hawk, Dutch) said that he is not in favour of European quantitative easing (QE), and said evidence is needed on the effectiveness of QE. Also, Bundesbank said that the economic growth is to slow noticeably in Q2, but that fundamentals still show clear upward trend in Q2.
While the week ahead is very busy, today we see only US Pending home sales on the US docket as well as earnings by Corning.
Bulletin headline summary from Bloomberg and RanSquawk
- Treasuries decline, 10Y yields rise for first time in seven sessions as market prepares for Fed statement on Wednesday, nonfarm payrolls Friday.
- 10Y yields ended Friday at 2.662%, low close for the week amid Russia/Ukraine tensions; 30Y yield ended at low for the year
- The U.S. will impose new sanctions today on people and companies close to Putin, Obama said; may be followed by similar measures from the EU
- Gennady Kernes, the mayor of Ukraine’s second-largest city Kharkiv, was shot in the back and rushed to hospital for surgery, news service Interfax reported
- Stocks in Europe (Eurostoxx50 +0.75%) have shrugged off the negative sentiment that dominated overnight Asian session and instead took direction from M&A related news flow which buoyed stocks since the get-go.
- M&A chatter relating Pfizer/AstraZeneca saw GBP/USD advance to its highest level since November 2009, with EUR/USD also supported by a further reduction in Euro-area excess liquidity to multi-year lows and ECB's Knot advocating caution on QE.
- EU nations that want a financial-transaction tax remain deadlocked on what trades they should include, as the clock runs down before next month’s European Parliament elections
- A weak inflation reading on April 30 will probably see Draghi facing calls to act as soon as next week by imposing negative interest rates for the first time or pushing forward with plans for quantitative easing
Sovereign yields mostly higher. Asian stocks decline, Nikkei falls 1%. European equity markets; U.S. stock futures gain. WTI crude gains, copper and gold little changed
US Event Calendar
10:00am: Pending Home Sales m/m, March, est. 0.7% (prior -0.8%); Pending Home Sales y/y, March (prior -10.2%)
10:30am: Dallas Fed Manufacturing Activity, April, est. 6 (prior 4.9)
11:00am: Fed to purchase $1.75b-$2.25b in 2020-2021 sector
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Equity Headlines
Pfizer/AstraZeneca and Alstom related M&A news flow buoyed stocks in Europe this morning, with healthcare outperforming on the sector breakdown as a result. At the same time, Oil & Gas was the only sector to trade in the red, weighed on by BG Group after the CEO of the group resigned and the company also said that its full-year production target was expected at the lower end of its guidance.
FX
Initial weight on EUR/GBP relating to Pfizer/AstraZeneca flow which also saw GBP/USD to touch on its highest level since November 2009 related, was gradually pared after the latest ECB liquidity conditions report revealed further decrease in excess liquidity (fell to EUR 86.6bln vs. EUR 95.29bln on Friday). EUR was also supported by a weaker USD and also comments by ECB's Knot, who said that he is not in favour of European quantitative easing (QE), adding that evidence is needed on the effectiveness of QE.
Commodities
Concerns surrounding the stand-off between Russia and Ukraine, as well as the uncertainty surrounding the assessment of the damaged oil field in Libya supported both WTI and Brent this morning, with Brent prices briefly breaking above the psychological USD 110 mark. On the topic of Ukraine/Russia, US is expected to sanction both Russia individuals (exp.15 people) and entities today; US sanctions to include Putin 'cronies' according to sources.
In terms of precious metals news, gold jewellers in India are betting on an increase in demand as another gold buying festival kicks off this week. Jewellers raising their inventories in anticipation, according to Haresh Soni, the chairman of the All India Gems and Jewellery Trade Federation.
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DB's Jim Reid concludes the overnight recap
It’s been a quiet weekend for news, with most of the headlines centred on the potential for further sanctions against Russia. A joint statement from G7 nations over the weekend said that they would "move swiftly to impose additional sanctions on Russia" because the latter has not taken concrete steps to comply with the Geneva accord. The exact nature of the sanctions is unclear at this stage, but newswires are reporting that they are targeted at "individuals or companies with influence on the Russian economy, such as energy and banking”, effectively adding to a list of those previously sanctioned (Reuters). Some 15 people may be added to the existing list. However, Bloomberg is reporting that Russian oil and energy companies such as Rosneft and Gazprom could be affected by the new round of sanctions. The White House deputy national security adviser said that they are also looking at steps to curb hightechnology exports to Russia’s defense industry.
The announcement of new sanctions follows the capture of European observers in eastern Ukraine on Friday night, by pro-Russian separatists. The separatists announced late on Sunday that they had released one European OSCE observer from Sweden, but had no plans to release another seven observers currently being held. The Swedish observer was released on medical grounds. All this comes after what was a week to forget for investors in Russian assets where 10yr yields jumped 40bp (or 66bp in local currency), the stock market shed 6%, and the Ruble lost 1% despite a 50bp rate hike. There was also an S&P rating downgrade of the Russian sovereign on Friday.
In other weekend news, the ECB’s Klass Knot and head of the Dutch central bank said in an interview with NRC Handelsblad that he’s not yet convinced of the effectiveness of QE. Knot added that the current economic recovery can bring the inflation rate back close to targeted 2%. However if inflation rate falls any further, the ECB could introduce negative deposit rates.
Taking a quick look at how markets are trading to start the week, Japanese equities are trading weaker (Nikkei -1.1%) as a follow on from the US tech selloff from Friday, and following a number of high profile earnings misses from corporates. Japanese electronics and hardware makers are leading the market’s declines. Elsewhere, the HSCEI is flat while the ASX200 is trading 0.3% higher off the back of M&A activity. In Asian EM credit, the rally in USD rates over the past week and general outperformance of credit has set the scene for a burst of new issuance activity this week across sovereigns and corporates.
Previewing the week ahead in more detail, the focus today will be on earnings in Europe with a number of notable companies reporting such as Holcim, Bayer, Deutsche Boerse and Bankia. US pending home sales and Italian consumer confidence are the major data releases today. Senior EU diplomats plan to meet in Brussels to discuss Russia sanctions and Moscow will be hosting multi-party talks to discuss European gas supply concerns. Tomorrow, US Case-Shiller home prices for February will be released and the US conference board reports its April consumer confidence reading. The UK prints its Q1 GDP with the market’s growth expectations ranging from 0.7% to 1.0%. France’s parliament will consider and vote on President Hollande’s Stability Program which lays out fiscal policy over 2014 to 2017. Our European economists note that the Stability Program technically complies with the 3% deficit target for 2015, albeit on optimistic assumptions, but the tension with the parliamentary majority is unusually high by French standards. Tuesday will be an important day for tech earnings with Twitter and eBay reporting.
Wednesday will be a big day on the macro calendar. The FOMC winds up its two-day meeting and will likely continue with its gradual QE taper - but there will be more interest in whether we see a change in the tone of the policy statement after the hawkish surprise from the March meeting. We note that the S&P500 and 10yr UST yields are both broadly unchanged since the March 19th FOMC. It will also be interesting to see the Fed’s take on the recent positive US economic data surprises. The Fed is not the only G3 central bank meeting on Wednesday with the BoJ finishing its second April meeting on the same day. Though the market expects the central bank to stay put for the time being in terms of policy as the effects of recent sales hikes wash through the economy, there will be some focus on its updated semi-annual outlook including GDP and inflation forecasts from 2014 to 2016. Wednesday’s data docket is pretty full. The US will print its advanced Q1 GDP – consensus is for growth of 1.2% on an annualised q/q basis in what was a weather-affected quarter. The ADP employment report will give us a preview of what to expect for Friday’s payrolls. The Chicago PMI for April will be released, as will German and Italian unemployment data. Amid all the recent talk about the possibility of ECB easing, Wednesday’s Euroarea CPI report for April takes on additional significance. Consensus expects headline CPI of 0.5%, the lowest in four years. The US treasury will announce its quarterly refunding plans.
With the Q1 GDP data out of the way on Wednesday, the focus shifts to the more forward-looking manufacturing activity data for April on Thursday. The US ISM manufacturing index will be released but our economists warn that there are two technical factors that are impacting the ISM headline which are simply delayed reactions to recent weather events—this is occurring in the employment and supplier delivery subcomponents. As such, they think the growth rebound is more pronounced than the ISM headline implies. China also releases its official manufacturing PMI. The latest US consumer spending report will be published together with the PCE deflators. Janet Yellen speaks at a Community Bankers of America meeting at 08:30 in Washington. Chancellor Merkel begins a two-day trip to Washington. Oil giants, Exxon Mobil and ConocoPhillips report earnings the same day.
The busy week will be capped off by Friday’s US payrolls. The unemployment rate is expected to drop by 0.1ppt to 6.6% and average hourly earnings and weekly hours are expected to be unchanged at 2.1% y/y and 34.5hrs respectively. Friday also sees the release of March US factory orders. Berkshire Hathaway may report earnings on Friday ahead of its annual meeting in Omaha.