After months of ignoring events in Ukraine, HFT algos suddenly, if one for the time being, have re-discovered just where the former USSR country is on the map, and together with the latest economic disappointment out of China in the form of its official manufacturing PMI which missed expectations for the sixth month in a row, futures are oddly non-green at this moment now that talk of a Ukraine civil war is the new black (after two months of ignoring the elephant in the room... or rather bear in the room). Lighter volumes, courtesy of holidays in Japan and UK, have not helped the market breadth and stocks in Europe are broadly lower with the DAX (-1.33%) and CAC (-1.19%) weighed upon by risk off sentiment and market positioning for the eagerly anticipated ECB policy meeting especially after the EU cuts its Euro-Area 2014 inflation forecast from 1.0% to 0.8%. But what's bad for stocks continues to be good for equities, and moments ago the 10Y dropped to a paltry 2.57%, the lowest since February... and continuing to maul treasury shorts left and right.
Market focus is squarely pointed ahead to the key risk events of the week, including the BoE and ECB rate decisions with various PMIs scattered through the week.
Bulletin overnight highlights from Bloomberg and SocGen
- With Ukraine on an offensive to uproot insurgents from its eastern industrial region, dozens were killed in Odessa on May 2 after Russia sympathizers seeking to escape clashes took refuge in a building later engulfed by fire
- Ukraine’s presidential election, planned for May 25, is driving another rift between Russia, the EU and the U.S. as Putin’s government questions the legitimacy of the vote
- Nikkei closed; 10y bunds down 2bps at 1.449%
- Treasuries post slight gains as long bond leads an extension of Friday’s reversal amid escalating violence in Ukraine; markets waiting Yellen remarks Wednesday, start of quarterly refunding auctions tomorrow.
- China’s manufacturing contracted for a fourth month in April, according to HSBC/Markit purchasing manager’s index
- Australia March building approvals decline 3.5% mom (vs cons +1.5% mom)
- Portugal decides on ‘clean exit’ from bailout, without precautionary credit line; PM Passos Coelho says decision backed by European partners; nation has reserves for one year which provides protection against any external volatility
- Indonesia’s economy expands 5.21% yoy in Q1 2014 falling short of consensus expectations of 5.60%
- The European Commission trimmed its economic growth forecast for the euro area and predicted low inflation to remain a threat to expansion for at least the next two years
- Draghi has designed two-step ECB monetary strategy, El Pais reported, citing unidentified people in Frankfurt; may cut rates to 0.15%, go to a negative deposit rate; if prices do not pick up, ECB will study QE program as a second step
- Gary Becker, the University of Chicago economist who won a Nobel Prize for applying economic methods to shed light on sociological topics such as crime, education and marriage, has died. He was 83.
- Sovereign yields mostly lower. Asian stocks little changed. European equity markets fall (U.K. closed for holiday), U.S. stock futures decline. WTI crude,
- gold and copper gain
US Event Calendar
- 9:45am: Markit US Services PMI, April final, est. 54.5 (prior 54.2)
- Markit US Composite PMI, April final (prior 54.9)
- 10:00am: ISM Non-Manufacturing, April., est. 54 (prior 53.1)
- 11:00am POMO: Fed to purchase $2.25b-$2.75b in 2021-2024 sector 11:00am: U.S. announces plans for 4W bill auction
EU & UK Headlines
Cautious sentiment over the weekend, on the back of Ukraine escalation, ECB sources and the UK market closure today coupled with the EU cutting Euro-Area 2014 inflation forecast to 0.8% from 1.0% has weighed heavily on European stocks. and benefited safe have assets across the board.
In spite of the cautious sentiment, Bunds are little changed, with short end peripheral bond yield spreads tighter after El Pais reported over the weekend citing sources that the ECB may act in June if inflation does not pick up and EUR stays strong. The sources added the ECB may cut interest rates to 0.15%, put deposit rate in negative territory and if prices do not pick up, the ECB would study asset purchases as a second step although only after the AQR in autumn.
US Headlines
Fed’s Fisher (voter, hawk) said the Fed will likely bring their bond-buying program to an end in October and only after that will they consider raising rates.
Equities
With little in the way of earnings, and relatively light news flow given the UK closure, The DAX (-1.33 %) and CAC (-1.19%) are weighed upon by several Co.'s going ex-div. and general cautions sentiment based on Ukraine. With M&A news marginal today, notable stories concern Siemens, with some members on the Co.'s supervisory board opposing their Alstom bid and AstraZeneca, with Pfizer said it would lobby Astra shareholders to force the Co. into talks by warning it would not increase its GBP 50/shr offer.
FX
Weekend press reports which indicated that the ECB may act in June if inflation does not pick up and EUR stays strong failed to weigh on EUR, which instead benefited from fears of more sanctions on Russia companies. This, combined with light volumes amid the market holiday in the UK meant that heading into the North American cross over, both EUR/USD and GBP/USD are seen little changed. At the same time, flight to quality trades weighed on USD/JPY, which trades close to mid-April levels.
Commodities
Brent and WTI futures have both been in positive territory today as tensions in Ukraine continue to flare and conflict in South Sudan disrupts oil production. Libyan production also seeing disruptions as further protests on a connecting pipeline halts the El Sharara oil field despite protests in the area ceasing. A light week ahead in terms of US data with only ISM Non-Manufacturing Composite due out today at 1500BST.
Over the weekend it was reported that Ukraine government troops renew offensive in Slovyansk, Eastern Ukraine, with Ukraine troops in heavy fighting in Slovyansk. Over the weekend Ukrainian Police said that 31 people had been killed in a violent confrontation between pro-Russian and pro-Kiev protesters as a trade union building was set ablaze.