If, in the New Normal, newsflow and facts mattered, facts such as the German Zew Investor Expectations index crashing from 43.2 to 33.1, smashing expectations of a 40.0 print to the downside and down to the lowest since January 2013 nearly half the 7 year half reported as recently as December confirming Germany can no longer be Europe's growth dynamo courtesy of a still nosebleed high EURUSD, or facts such as overnight Chinese data missed in every category with industrial output up 8.7% y/y in April vs an estimated 8.9%, retail sales up 11.9% below the estimated 12.2% rise and ; Jan.-April fixed-asset investment growing 17.3% vs est. 17.7%, then futures may just posted a downtick. However, since it is a Tuesday, with a ~$1 billion POMO, one can ignore the fundamentals and proceed straight to buying anything and everything with indiscriminate abandon. The only question is whether the NY Fed orders Citadel to slam the VIX under 11 to start off the morning S&P rampage which should push the broad market index above Goldman's 1900 price target for the end of the 2014.
Taking at look at some other headlines, Reuters is reporting that the ECB has made some small concessions to European banks to allow them to meet deadlines so that the central bank can complete its bank review by October. The concessions have reportedly resulted in a data reduction from around 300 spreadsheet cells per loan to a “significantly reduced amount” according to the article. Reuters is also reporting that although there are signs that the Japanese economy has weathered through the initial impact of the sales tax hike relatively well, weak exports could be the catalyst to spur the BoJ into further action in coming months. The article says at the moment, exports remain the biggest risk to the central bank’s outlook.
Turning to the day ahead, it’s likely that most of the attention will be centred on US April retail sales as well as their revisions. The Fed’s Lacker will be speaking today on the credit markets.
Bulletin Overnight Summary:
- Source comments pointing to Buba being more open to ECB easing in June weighed heavily on EUR and prompted further flattening of the Euribor curve, with stocks (Eurostoxx 50, +0.11%) also rallying on prospect of more policy easing
- Looking ahead for the session the US retail sales report, coupled with Fed’s Lacker, look to be the market moving events participants will get to digest
- Treasuries gain, led by 10Y-30Y sector, as German investor confidence fell for a fifth month in May, rebels in Ukraine seek to secede; retail sales due at 8:30am.
- China’s economic slowdown deepened with unexpected decelerations in industrial-output and investment growth and a decline in home sales, testing policy makers’ reluctance to step up monetary stimulus
- Chinese central bank told officials from 15 banks yesterday that they should approve and distribute qualified home mortgages in timely manner, according to a statement on its website
- ZEW’s index of investor and analyst expectations fell to 33.1 in May from 43.2, lowest level since Jan 2013; ZEW said there are signs Germany will not retain fast pace of growth
- The Bundesbank is willing to back an array of ECB stimulus measures, including negative deposit rate, cut in lending rate, some ABS purchases; remains resistant to large-scale purchases of public and private debt, WSJ reported, citing person familiar with the matter
- Russia called disputed referendums in eastern Ukraine a sign of “deep crisis” in its neighbor as rebels there sought to secede and gas export monopoly OAO Gazprom gave Kiev a deadline to pay or risk being cut off
- Facing a military assault by Ukrainian government troops, the self-styled Donetsk People’s Republic on the border with Russia declared itself a sovereign state yesterday
- Obama is missing something in this election season: a corporate bad boy to rail against and whip up the ire of Democratic voters, with oil companies, Wall Street executives and even PACs off-limits because of unique political dynamics in the 2014 midterms
- Sovereign yields mixed. Nikkei +1.95%, Shanghai -0.1%. European equity markets mixed, U.S. stock futures rise. WTI crude higher, gold and copper lower
US Economic Calendar
- 7:30am: NFIB Small Business Optimism, April, est. 94.5 (prior 93.4)
- 8:30am: Retail Sales, April, est. 0.4% (prior 1.1%, revision 1.2%)
- Retail Sales Ex Auto, April, est. 0.6% (prior 0.7%)
- Retail Sales Ex Auto and Gasoline, April, est. 0.5% (prior 1%)
- Retail Sales Control Group, April, est. 0.5% (prior 0.8%)
- 8:30am: Import Price Index, April, est. 0.3% (prior 0.6%) Import Price Index y/y, April, est. 0.3% (prior -0.6%)
- 10:00am: Business Inventories, March, est. 0.4% (prior 0.4%) Central Banks
- 10:30am: Fed’s Lacker speaks in Charlotte, N.C.
- 11:00am POMO: Fed to purchase $850m-$1.1b notes in 2036-2044 sector
EU & UK Headlines
Risk averse sentiment stemming from weaker than expected ZEW survey was short-lived, as source comments suggesting that Bundesbank is open to significant ECB stimulus in June if 2016 inflation forecasts are lowered saw stocks reverse initial weakness and Bunds consolidate in positive territory. At the same time, Euribor curve bull flattened as market participants bet on more stimulative measures by the ECB in June. Nevertheless, in spite of lower money market rates, EU inflation swap rates were again little reactive to the comments. The latest round of dovish comments, albeit from a source and not official, come just a day after ECB's Nowotny said that a rate cut alone is unlikely to meet ECB's inflation goals.
Equities
Buoyed expectation of more policy easing by the ECB in June, which now look to have the support from Buba, saw stocks recover initial ZEW inspired weakness. As a result, heading into the North American open, major European equity indices are seen broadly higher, apart from the Italian FTSE-MIB which is being weighed on by Telecom Italia (-4.3%) following earnings. At the same time, equities were supported by positive earnings by ThyssenKrupp (+6%) and Airbus’s (+5.6%).
FX
The release of weaker than expected ZEW survey, together with source comments suggesting that Bundesbank may be open to more aggressive ECB measures to meet inflation goals saw EUR come under broad based selling pressure, with EUR/USD falling below the 100DMA line as a result. Consequent USD strength also weighed on GBP/USD, which trended lower this morning as market participants booked profits ahead of the tomorrow's eagerly awaited Quarterly Inflation Report by the BoE.
Commodities
Despite weaker Chinese IP (8.7% vs. Exp. 8.9%) and retail sales (11.9% vs. Exp. 12.2%) , which combined with further alleviation of tensions in Ukraine initially weighed on the energy and metals complexes. However as the session progressed, WTI and Brent crude futures edged back into positive territory, supported by the prospect of further Cushing drawdowns due tomorrow and delays in Libyan supply coming online support price action.
Jim Reid concludes the overnight recap:
There was remarkably little volatility to yesterday’s performance with the S&P500 essentially straight-lining all the way to an 18 point gain. Cyclical stocks led the way with a notable rebound in tech and internet retailing stocks, small caps and momentum stocks, all of which helped to ease the pain from these sectors’ underperformance of recent months. The M&A story continues to play out on both sides of the Atlantic. After the US closing bell, Pfizer was reported to be planning to raise its bid for cross-Atlantic rival AstraZeneca PLC and AT&T was said to be in negotiations to acquire DirecTV (Source : Bloomberg). Both stories buoyed S&P500 futures in afterhours trading.
As an indication of how buoyant M&A volumes are, total pending/completed/announced M&A transactions are up 79% YoY in value terms in the year-to-date on a global basis. Looking at geographical performance, Europe has been leading the way with a +96% yoy spike in volumes, followed by an 88% increase in LATAM, and an 83% jump in the US.
Asia Pacific M&A volumes are lagging in comparison at +66% yoy (Bloomberg). If we look at quarterly performance, 2014 Q2 M&A volumes have already equaled the volumes from all of Q1 and we are on track this quarter to challenge the highs seen in the heady days of late 2006 and 2007. With the broad risk on sentiment yesterday, rates predictably underperformed especially gilts which added 5bp in yield terms in the 10yr bond. There was much talk about the BoE’s upcoming quarterly inflation report (to be released tomorrow) where many are expecting the central bank to indicate that rate hikes are closer on the horizon than previously thought. Indeed, there was market chatter that a rate hike could come as early as before Christmas this year, or latest by Q1 2015 ahead of the general elections. GBPEUR (+0.12%) rose to its highest level in 17 months and the 2yr bond yield rose to its highest level since mid 2011.
Emerging markets shrugged off concerns around Ukraine and the backdrop of rising global rates yesterday to post strong gains in equities. The MSCI EM equity index posted a 0.88% gain, bringing the month-date gains to just over 2%, compared to a 1% gain in the S&P500 in the same time period. Overall the tone yesterday in EMFX and EM credit was of consolidation and profit-taking, which is not entirely unexpected following a strong run over the last two months. Many noted the strange silence from President Putin on the weekend referendums in eastern Ukraine. Our Russian strategist thinks that Russia will not recognise the results of the referendum right away, but will use it as a tool to press the case for greater federalisation.
While we're on the subject of EM, DB's latest GEM equity strategy monthly was out overnight. JP Smith thinks the slowdown in the growth rate of the Chinese economy is becoming more obvious in the increasing operational and financial pressures through the material/industrial and property sectors. He also thinks the precarious state of local government finances is likely to negate any Beijing-led fiscal stimulus, so the emphasis may then shift to monetary stimulus measures, such as a reduction in reserve requirement ratios. JP is sceptical that this will make a great deal of difference either to the economy or the stock market. Meanwhile he thinks the disconnection between Beijing’s narrative of structural reforms and their translation into reality will become even wider. All in all, underweight China remains his highest conviction position within GEM and the major reason he continues to be bearish about the outlook for GEM in absolute and relative terms.
Looking at overnight markets, equities are edging higher ahead of Chinese retail trade and industrial production data which is due to be released as we go to print. Gains in stocks are being led by the Nikkei thanks to some solid earnings announcements from the likes of Nissan (+4.5%) and a rising dollar-yen. In India, the Rupee forwards are largely unchanged this morning following yesterday’s strong gains which were inspired by exit polls that indicated that the opposition BJP party may gain a parliamentary majority. There is some caution though, as exit polls have overestimated the BJP’s strength in the last two national elections. The Nifty is up 1.2% this morning. Gold is slightly lower after a 0.53% gain yesterday on expectations that the BJP may ease import restrictions, amongst other economic reforms being considered by the party. The AUD is hovering around one month highs before the Australian Government releases their budget later today. The expectation is that the budget will trim spending while increasing taxes – though DB’s economists highlight that it is not likely to have a material impact on the path of rates.
Taking at look at some other headlines, Reuters is reporting that the ECB has made some small concessions to European banks to allow them to meet deadlines so that the central bank can complete its bank review by October. The concessions have reportedly resulted in a data reduction from around 300 spreadsheet cells per loan to a “significantly reduced amount” according to the article. Reuters is also reporting that although there are signs that the Japanese economy has weathered through the initial impact of the sales tax hike relatively well, weak exports could be the catalyst to spur the BoJ into further action in coming months. The article says at the moment, exports remain the biggest risk to the central bank’s outlook.
Turning to the day ahead, it’s likely that most of the attention will be centred on US April retail sales. DB’s Joe Lavorgna thinks that it could be weighed down by moderately slower motor vehicle sales in April (16.0M) compared to March’s cyclical high (16.4M). As usual, pay attention to revisions to retail sales, as they can be substantial. The German ZEW survey and NFIB small business optimism survey are other highlights on the data docket. The Fed’s Lacker will be speaking today on the credit markets.