Mega Merger Monday Bonanza Postponed Indefinitely As USDJPY Slides Under 200 DMA

It was supposed to be a blistering Mega Merger Monday following the news of both AT&T'a purchase of DirecTV and Pfizer's 15% boosted "final" offer for AstraZeneca. Instead it is shaping up to be not only a dud but maybe a drubbing, with AstraZeneca plunging after its board rejected the latest, greatest and last offer, European peripheral bond spreads resume blowing out again, whether on concerns about the massive Deutsche Bank capital raise or further fears that "radical parties [48]" are gaining strength in Greece ahead of local elections. But the worst news for BTFDers is that not only did the USDJPY break its long-term support line as we showed on Friday, but this morning it is taking even more technician scalps after it dropped below its 200 DMA (101.23) which means that a retest of double digit support is now just a matter of time, as is a retest of how strong Abe's diapers are now that the Nikkei has slid to just above 14,000, while China, following its own weak housing sales data, saw the Shanghai Composite briefly dip under 2000 before closing just above it. Overall, it is shaping up to be a less than stellar day with zero econ news (hence no bullish flashing red headlines of horrible data) for the algos who bought Friday's late afternoon VIX slam-driven risk blast off.

The mood is far different in India after Modi and his BJP party won the election by the biggest margin of any Indian party for 30 years. The NIFTY (+0.5%) and SENSEX (+0.6%) are poised to close at another record high as markets increasingly price in the prospect of a more market-friendly government having a sufficient powerbase to push through economic reforms. Reports suggest that Modi will likely choose Arun Jaitley (Bloomberg), a former trade minister and lawyer, to head the Finance portfolio of his government. The Rupee is poised to close stronger against the USD for the 15th time in 17 days and Indian credit is generally 1-2bp tighter today.

Outside of India, there are pockets of cautiouness in Asia overnight as spot iron ore prices in China hit 18 month lows and the latest Chinese property price data suggest that the real estate market is rapidly losing momentum. The data released over the weekend showed that property prices climbed in 44 of the 70 cities tracked by the government last month compared with 56 cities in March. That was the fewest cities with price gains since October 2012. Chinese equities are down today (Shanghai Comp -1.2%) lead by financials after the domestic regulator issued new rules to limit the growth of the country’s shadow banking system.

In summary, European shares fall, though are off intraday lows, with the health care and bank sectors underperforming and travel & leisure, media outperforming. The Italian and Spanish markets are the worst-performing larger bourses, Dutch the best. Euro stronger vs dollar. Portuguese 10yr bond yields rise; Italian yields increase. Commodities gain, with corn, wheat underperforming and nickel outperforming.

S&P 500 futures down 0.3% to 1868.5
Stoxx 600 down 0.6% to 337.1
US 10Yr yield down 1bps to 2.51%
German 10Yr yield up 1bps to 1.34%
MSCI Asia Pacific down 0.3% to 139.3
Gold spot up 0.5% to $1299.9/oz

Bulletin overnight summary

Weekend reports continue to highlight the preference for monetary easing by the ECB in the June 5th meeting, with focus on SME measures in the form of stimulus for business lending, and a possible 10bps refi rate cut
Looking ahead the session remains light for tier 1 data, however Fed’s Williams and Fisher, as well as ECB’s Coeure, are the next risk events to watch out for
Treasuries gain, 10Y yields holding at 2.50% level; eco calendar light this week, with NY Fed’s Dudley due to speak tomorrow, Kocherlakota and Fed minutes due Wednesday.
Global money managers raised cash holdings to a two-year high this month and say America is the worst place to invest, a Bank of America Corp. survey published last week shows
Bank of England Governor Mark Carney shifted closer to reining in surging U.K. home prices by branding them the No. 1 risk to the economy and listing potential policy responses
Putin ordered Russian troops near the Ukrainian border back to base, the Kremlin said, signaling a possible easing of tensions six days before Ukraine’s presidential election
Putin’s planned China visit this week is helping spark the longest rally in OAO Gazprom since 2006 as speculation mounts the Russian leader will return with a long-sought gas supply agreement
China’s new-home prices rose in April in the fewest cities in a year and a half as developers offered discounts and the economy slowed, prompting the easing of property curbs in some places
Bundesbank’s Weidmann said in Frankfurt speech that ECB targeting weaker euro could cause counter-reaction, euro- area countries should aim at improving competitiveness
Sovereign yields mixed. Nikkei -0.6%, Shanghai -1.05%. European equity markets decline, U.S. stock futures higher. WTI crude, copper, gold higher

US Event Calendar

No major economic data
12:10pm: Fed’s Williams and Fisher speak in Dallas
12:50pm: Former Fed Chair Bernanke speaks in Dallas
11:00am POMO: Fed to purchase $1.5b-$2b notes in 2020-2021 sector

Asian Headlines

A light start to the week for Asian markets, with little news-flow, however Chinese stocks underperformed (Shanghai Comp -1.0%) after fears of a slow down in the Chinese property market gathered pace as new home price growth slowed sharply from January.

EU & UK Headlines

This morning Germany's Bundesbank said economic growth to slow in Q2 after unusually mild winter boosted growth in Q1, while over the weekend Moody’s upgraded the Irish sovereign rating by two notches to Baa1 from Baa3; with outlook stable.

Reports over the weekend suggested that ECB’s Praet will recommend cutting the main refi rate to 0.15% from 0.25% at the June 5th ECB meeting. In other news, ECB is preparing to launch a EUR 200bln stimulus package next month according to reports. The measures are believed to include negative deposit rates and a plan to boost lending to small and medium-sized companies.

US Headlines

Fed’s Rosengren (dovish, non-voter) said the Fed is at the early stages of drawing conclusions about what is the best path forward for when the time comes to raise short-term interest rates.

Equities

Stocks are seen in negative territory (EuroStoxx -0.7%) after M&A newsflow and Italian ex-div.s weigh on European indices. The Italian FTSE-MIB is underperforming (-2.4%) where a number of blue-chip names are trading ex-div, while FTSE-100 (-0.4%) is being weighed on by AstraZeneca (-12.7%) after the board rejected a new offer from Pfizer. Some further downside pressure was seen after news flow regarding the ECB’s OMT program, with German campaigners asking the EU's top court to block the program, weighed on already depressed sentiment. AT&T has agreed to buy DirecTV for USD 48.5bln or USD 95 per share, split between USD 28.50 in cash and the equivalent of USD 66.50 in stock.

EUR/USD and GBP/USD traded steady this morning, though touted bargain hunting following last week selling, together with reports that AstraZeneca’s board has yet again rejected Pfizer’s takeover bid, meant that EUR outperformed its peers, albeit marginally. At the same time, the cautious sentiment which dominated the Asian session and was also evidenced in Europe this morning ensured that USD/JPY remained under pressure, falling to its lowest level since February after stops were triggered on the break of the 200DMA line at 101.23.

Commodities

Increased geopolitical premium supports WTI crude futures, with Brent also residing in positive territory, with an increase in violence in Libya also posing threats to supply. WTI futures broke above last weeks high at USD 102.65. While precious metals are higher as well, dragged upwards by spot gold (+ USD 6.56) on safe haven related flows, and after the yellow metal triggers stops through the 200DMA at USD 1298.65, to trade above the USD 1300.

Of note, Germany have warned that Russia would be subject to further sanctions if Ukraine’s Presidential poll on May 25th is disrupted. While in other news, Ukraine gunmen have seized a gas pipeline admin building in the East of the country but refuse to leave or conduct talks.

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We conclude with Jim Reid's overnight summary:

Turning to the overnight session, the limelight is on India after Modi and his BJP party won the election by the biggest margin of any Indian party for 30 years. The NIFTY (+0.5%) and SENSEX (+0.6%) are poised to close at another record high as markets increasingly price in the prospect of a more market-friendly government having a sufficient powerbase to push through economic reforms. Reports suggest that Modi will likely choose Arun Jaitley (Bloomberg), a former trade minister and lawyer, to head the Finance portfolio of his government. DB’s Chief India Economist, Taimur Baig, will be hosting a conference call tomorrow to discuss what this could mean for government policy and the near-term outlook for the Indian economy. Details are at the end of today’s EMR. The Rupee is poised to close stronger against the USD for the 15th time in 17 days and Indian credit is generally 1-2bp tighter today.

Reviewing some of the other newsflow, G4 central banks were a key discussion point from the weekend press. Expectations continue to build ahead of next month’s ECB meeting with the Sunday Times suggesting that the ECB is preparing to launch a EUR200bn stimulus package in June to “stave off a Japan-style deflationary spiral and weaken the EUR”. The measures are believed to include negative deposit rates and a plan to boost lending to small and medium-sized companies, similar to the UK’s Funding for Lending scheme. The article says that last week’s Q1 growth numbers have galvanised ECB officials into supporting intervention and there are also official concerns about the balance sheets of European banks ahead of this year’s asset quality reviews and stress tests. Meanwhile Reuters reported on Sunday night that ECB Executive Board Member Peter Praet will recommend that the ECB cut its main refinancing rate to 0.15% from 0.25% at its policy meeting on June 5, according to the German magazine Der Spiegel citing an unnamed source. Praet is also expected to recommend the introduction of a negative rate on bank deposits according to the article. Praet holds the economics portfolio on the ECB's executive board.

Across the Atlantic, there continues to be a lot of discussion around the Fed’s policy exit plan over the next couple of years. Newswires are reporting that former Fed Chair Ben Bernanke has been speaking at various private functions suggesting that he does not expect the Fed Funds rate to rise back to its long term average of 4% in his lifetime (Reuters). Seperately, the WSJ’s Hilsenrath outlines an interview with the Boston Fed’s Rosengren who says that Fed officials remain in deep discussions about how to raise short term interest rates. In a detailed interview, Rosengren discusses the operational role that interest on reserves and an overnight reverse repo facility will play in the policy normalisation process. Rosengren said that the Fed was in the early stages of mapping out the Fed’s rate normalisation strategy and this was still far from being finalised. This comes after the St Louis Fed’s Bullard said to reporters on Friday that he expects the first rate hike in Q1 2015, or approximately six months after the end of QE.

In the UK, BoE Governor Mr Carney was quoted in an interview published on Sunday, warning that the UK’s housing market represents the “biggest risk” to the economic recovery. Carney expressed concern that the UK is facing another “big debt overhang” that could slow the economy in the medium term. However, Carney said that there was little they could do about the "deep, deep structural problems" in the housing market, with demand for homes outstripping supply (Guardian).

Away from the G4, the flare up in China-Vietnam relations is attracting more attention following deadly protests in Ho Chi Minh city over the last week or so that have left dozens of Chinese and Taiwanese owned factories damaged. There are unconfirmed reports that China’s PLA has sent troops to the border near Vietnam and that the Chinese government has asked forces in border provinces to increase their state of alertness. Over the weekend, China dispatched five ships to Vietnam to evacuate its citizens (more than 3000 Chinese nationals have been evacuated as of Saturday) and China’s PLA Navy has sent two vessels to protect disputed oil rigs in the South China Sea (South China Morning Post). Although this is not something likely to affect global sentiment at the moment, this has the potential to escalate in a highly politically sensitive area of the global map. Time Magazine noted last week that previous conflicts between the two countries have resulted in large costs for both countries. On a separate but not unrelated issue, a Kyodo news survey showed that 48% of Japanese respondents oppose allowing Japan to exercise the right to collective self defence versus 39% who expressed support. The poll also found that a majority of respondents oppose PM Abe’s plan to make it possible to exercise self defence rights by reinterpreting the country’s pacifist constitution.

Turning to the week ahead, following the rates rally of late, bond markets will be watching a number of Fed-related events this week. Ben Bernanke gives a public interview in Dallas today where we might hear more about the topical subject of the Fed’s terminal rate. San Francisco Fed president John Williams and Dallas Fed president Richard Fisher also speak today. The following day, the NY Fed’s Bill Dudley speaks where he may shed more light on the Fed’s discussions around its policy exit strategy. Wednesday’s FOMC minutes may also shed light on this topic. Recall that the Fed had recently gathered to discuss “Medium Term Monetary Policy Issues” ahead of the April FOMC. The details of the separate meeting were not outlined in detail but some have interpreted this meeting as a discussion of the Fed’s tightening toolkit including IOER and reverse repo tools. Also on Wednesday, US Senate leaders are set to vote on the nomination of Stanley Fischer to be the Fed Vice-chair.

Outside of the Fed, there are plenty of other political and economic events on the horizon. On Tuesday, Vladimir Putin travels to China where he will seek to close a deal for Russia to supply gas to China, as part of attempts to diversify its dependence on European gas customers.

On Wednesday, the BoE releases its latest MPC minutes which may shed some light on internal discussions over the central bank’s inflation, spare capacity and growth outlooks. On the same day, Japan announces its trade data for April and the BoJ concludes its latest policy meeting where expectations are for policy to be unchanged. Yellen speaks at a commencement ceremony at New York University on Wednesday, but it’s unclear if her speech will touch on the economy.

The start of European parliamentary elections are the key event on Thursday, beginning with polls in the UK and Netherlands, before the rest of the Bloc votes over the weekend. Datawise, the focus will be on the global PMIs, existing home sales, jobless claims and the second estimate of UK’s GDP. The European PMIs will be watched closely to see if there are signs of a rebound following Q1’s weak GDP data. There will be central bank policy meetings in South Africa and Turkey (DB’s EM strategists expect both to keep policy unchanged). Brazil will also give an update on unemployment on Thursday.

On the last trading day of the week, new home sales and the German IFO survey headline the data docket. It may be a more quiet US session than normal ahead of the Memorial Day public holiday long weekend. Also on Friday, the rating agencies will also announce the outcome of sovereign rating updates for France, Spain and Turkey.