Following the only major overnight econ event, which was the May German IFO Business Climate Index which dropped from 111.2 to 110.4 missing expectations of 110.9, the USDJPY has been on a soaring rampage higher hoping to push equities along with it (because now that gold manipulation is a proven fact, it is only a matter of time before the link between manipulating the USDJPY on thin volume with massive leverage and rigging the equity market is uncovered too), and at last check was just shy of 102.000. For now equity futures have failed to be dragged along although with the S&P all time high just around the horizon, the psychological level of 1900 staring the rigged market in the face, and the weekend just around the corner, it is virtually assured that the S&P will close at an all time high today - after all the people need to be confident when they go shopping at malls with money they don't have (but delighted by paper profits they haven't booked) so they boost the US non-GAAP GDP (at least before like Italy, the BEA too changes the definition of GDP to include cocaine and hookers). Finally, assuring a (record?) low-volume levitation today is the early closure of the bond pit ahead of Memorial Day holiday which also means only a skeleton crew of algos will be frontrunning each other to push the S&P over 1,900.
The only data on the US calendar today is April new home sales. If good it will be a confirmation of the recovery, if bad, it will merely prove that the harsh January winter weather lasted through April, or some other just as idiotic spin.
Bulletin headline summary
- Today's European session has been relatively quiet with the main focus being on the weak German IFO release which has led EUR/USD to print its lowest level since Feb.
- Peripheral paper outperforms the German benchmark following Greek and Spanish sovereign rating upgrades, with France and UK ratings expected after the European session.
- Looking ahead, today’s session is expected to remain quiet with new home sales being the only tier 1 release from the US.
Asian Headlines
The Nikkei 225 (+0.9%) extended on yesterday's gains to post a 1-month high underpinned by further JPY weakening and a second consecutive positive close on Wall Street (+0.24%). Elsewhere, Chinese stocks closed with minor gains with the Hang Seng (+0.1%) and the Shanghai Comp (+0.6%) shrugging off a telecoms sector downgrade at HSBC.
EU & UK Headlines
The main focus in today's muted European session has been upon the German IFO release (Business Climate 110.4 vs. Exp. 110.9) which saw all components come in marginally below expectations, which exacerbated the recent EUR weakness and helped Bunds recover off their lows. Elsewhere, in Europe S&P raised Spain to 'BBB' from 'BBB-'; outlook stable and Fitch upgraded Greece's ratings to 'B' from 'B-'; outlook stable, which consequently lifted peripheral paper and saw a tightening of the periphery against the German benchmark. In terms of ECB commentary, ECB's Hansson said no mechanical reaction to lower ECB staff forecast.
Prelim Barclays month end extensions show Pan-Euro Agg at +0.04y (Prev. +0.10y), Sterling-Agg at +0.06y (Prev. +0.02y)
US Headlines
Fed's Williams (non-voter, dove) said Fed policy tightening "still a good way off", normalizing will be gradual and Fed will be flexible. (BBG/RTRS)
Prelim Barclays month end extensions show US Treasury at +0.13y (Prev. +0.08y)
Equities
European indices have fluctuated between minor gains and losses (Euro Stoxx +0.2%), with no firm direction being provided by the subdued Asia-Pacific session despite the Nikkei 225 closing higher by 0.9%. The notable outperformer has been the FTSE MIB which has been lifted by Italian banks due to their holdings of Italian debt and cheap borrowing costs. The FTSE 100 (-0.2%) has underperformed throughout the session following individual equity news.
FX
The German IFO release saw EUR/USD break below its 200DMA for the first time since September 2013 with the pair trading at its lowest level since February 2014, which consequently lifted the USD-index to its highest level since April 7th after briefly breaching its 200DMA.
Commodities
Both WTI and Brent continue to remain range bound trading relatively flat heading into the North American open on muted news flow. Of note, In order to help shrink its growing glut of oil, the US may swap light crude to nearby counties without having to deal with new rules or findings. (BBG)
In metals markets, USD strength has seen gold ebb lower throughout European trade and away from the 50, 100 and 200DMAs. In terms of metals news, Citigroup and Nomura have said that they expect further easing of gold import rules into India. Citigroup have said that they expect an increase in gold imports to 800 tonnes in 2015 vs. 640 tonnes in 2014.
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We conclude as usual with Jim Reid's overnight recap
Voting for the European Parliament began yesterday in Britain and the Netherlands and will continue across the EU’s 28 member states until the last Italian voters cast their ballots on Sunday evening before 10pm. The European Parliament forms one of the major institutions of the EU government and one of its main roles is to debate, amend and pass legislation proposed by the European Commission (the parliament itself has no power to make laws). In spite of this the parliament has exerted growing influence over EU legislation since the Lisbon Treaty became effective five years ago via amendments to commission directives. Given that the EU is involved in almost half of all European legislation the fact that up to 90% of what the EU does now requires the parliament’s assent means it shouldn't be discounted off-hand. Nevertheless whilst the parliament does have some ability to affect EU legislation the response to the Euro zone crisis has only gone to highlight the central role of national governments and the European Commission in EU governance and so the parliamentary election results have to be seen in this context. This context is important as the main “winners” from the election look set to be Europe’s anti-EU and protest parties. Whilst the latest opinion polls suggest the centre right (EPP) will extend its parliamentary lead in the election they also point to a significant increase in support for anti-EU/protest parties, with Open Europe in late April estimating such parties would win up to 31% of the vote (vs 25% in 2009) giving them 218 of 751 seats (up by 54). Some of the notable anti-EU/protest parties leading national polls are Syriza in Greece, the Front National in France, the Freedom Party in the Netherlands and UKIP in the UK.
What would such a result mean? Quite how much influence these parties would actually be able to exert within the (already-constrained) Parliament after the election, given their fractious nature and the lack of agreement between the different protest/anti-EU parties, is up for debate. Perhaps more important could be what these elections may mean for national elections over the next few years with some maybe interpreting a Syriza win in Greece for example as a sign that they might win the next Greek election (due in 2016). Such concerns are likely overdone in the near-term with the next key periphery election still likely over a year away (Spain’s next election must be held before December 20th 2015, although the ruling PP look set to win the largest portion Spain’s European election vote). Nevertheless politics are probably going to be Europe's biggest Achilles heel over the next few years so these elections offer an important window into the prevailing mood of the electorate.
Looking at the Dutch exit polls (which were released late last night), the result of the anti-EU parties has been mixed at best. In the Netherlands, Geert Wilders’s anti-EU Freedom Party finished in fourth place according to an exit poll for NOS television with 12.2% of the vote. The pro-EU D66 party came first with 15.6% of the vote, ahead of the Christian Democratic Alliance on 15.2%. Pre-election polls had suggested that the Freedom Party would finish at least second. The outcome, if confirmed when official results are published in two days’ time, means the Freedom Party will have three seats in the new European Parliament, two fewer than it won in the last elections five years ago according to Bloomberg. Official results are due in two days time. Across the English Channel, British exit polls for the European elections aren’t available but the European vote did coincide with local council elections. Early local council results show a significant swing towards the UKIP at the expense of the major parties.
While we’re talking about politics it will be interesting to see if there is any profit-taking or cautiousness in Russian assets today ahead of Sunday’s Ukrainian presidential elections. We’ve had a strong rally in the MICEX and Russian bonds over the last few weeks, with both almost back at pre-Crimea crisis levels. Our Chief Russian strategist Yaroslav Lissovolik highlights that if no candidate obtains a simple majority in the first round, there will be a second round run-off between the two leading candidates which is likely to take place in June. According to the schedule of Ukraine’s Central Electoral Committee, the official results should be published not later than 4 June. According to the most recent polls in Ukraine conducted by KISS from 29th April to 11th May), Petro Poroshenko remains the most popular candidate in the race (33.7% of total) followed by Yulia Tymoshenki. According to Yaroslav, Mr. Poroshenko advocates the restoration of the president-parliament political system; decentralization with more authority given to regions and pursuing EU integration.
Shifting from EMEA politics to Asian politics, there has been relatively muted reaction from markets to the Thai military coup, although one could argue that markets were already underinvested in Thai assets given the six month political stalemate. The coup is also providing hope to investors that we will see a faster end to the political deadlock. According to the FT, leading politicians have been jailed, the Constitution and the government have been suspended, and all radio and TV broadcasting has been suspended. The Thai Baht is trading 0.2% stronger against the USD today, recouping most of its 0.3% losses when the headlines first broke yesterday. The SE Thai equity index is down 1.5% overnight while Thai 5yr CDS is about 3bp wider today at around 130bp. During the last Thai military coup of 19th September 2006, the Thai Baht lost 1.3% on the day while the stock market dropped 2.3%, so the reaction this time around certainly has been mild in comparison. Outside of Thailand, Asian markets are generally trading in the green led by the Nikkei (+1%) while in China a number of property stocks are seeing 2-3% gains on market chatter that the government will be easing home purchasing restrictions to support the cooling property market.
Elsewhere in the Asian political sphere, DB’s GEM equity strategist JP Smith warns that while the Indian election win gave the BJP a clear mandate for economic reforms, there are some formidable constraints to the government’s agenda. The new administration faces a series of economic issues which are likely to require immediate action and which may swiftly deflect investors’ attention away from the potential gains from structural reforms. The most pressing is likely to be to negotiate the balance between pro-growth measures and fiscal tightening given that the underlying fiscal situation appears to be much worse than the headline figures suggest. There is also a strong possibility that the RBI may have to raise interest rates given recent poor inflation data. If there is a swift deterioration in public support for Prime Minister Modi (like French President Francois Hollande after the 2012 election), the administration might be tempted to push a more conservative program in front of the series of upcoming state elections and most importantly the 2016 election for the upper house, which is currently dominated by the BJP’s political opponents. The Indian market has risen in anticipation of a decisive BJP victory while taper concerns have evaporated against a backdrop of falling UST yields. The recent election may well mark the start of a paradigm shift, but it is too early to tell and in the meantime, the market is expensive relative to its history relative to GEM, despite the fact that GDP growth rates are unlikely to return to 2005-07 and 2010 levels for some time, if at all.
As we go to print this morning, Spain has been upgraded to BBB from BBB- by S&P. S&P said that it has revised up its 2014-2016 real GDP growth projections for Spain to 1.6% from 1.2% reflecting the effects of labour and other structural reforms. This will come as some relief to markets who in 2012 were fearing that Spain could be downgraded to sub-investment grade. Greece has also been upgraded to B from B- by Fitch overnight.
Yesterday saw the theme of low volatility and a slow grind higher in equities continue, buoyed by better than expected PMIs in China and the US, which offset mixed PMI data in Europe and weaker than expected US home sales data. There was a brief dip in risk after the release of US existing home sales data which printed at +1.3% MoM (or 4.65m), a little lower than the +2.2% (or 4.69M) run rate expected. The dip lasted just a few minutes though, and soon the S&P500 (+0.24%) resumed its march higher, spending 80% of the day within a small 4 point trading range. US 10yr yields hit a low of around 2.535% shortly after the home sales data, but ticked upwards to 2.55% towards the US close (+2bp on the day). In terms of other data, US initial jobless claims for the week of May 17 rose +28k to 326k (310k expected) after the prior week was revised up +1k to 298k. Despite this rise the four-week moving average fell 1k to 323k. DB’s Joe Lavorgna expects a 200k gain on May payrolls when the data is reported on June 6. EM saw some solid gains bringing the YTD gains in the MSCI EM index to 3.84% and gains from the February lows of 14%.
Looking at the day ahead, there’s more US housing data on the way with April new home sales. Consensus is calling for a rebound (+10.7% MoM) following the falls in four of the last five months. In Europe, Germany publishes its final estimate of Q1 GDP, the latest German IFO survey is released and Italy prints retail sales for March. Sovereign rating updates for France (Moodys), Spain (S&P), and Turkey (S&P) are due this morning. As discussed earlier there are plenty of political themes to watch ahead over the weekend including Ukraine presidential elections and the rest of the European parliamentary elections. The US session might be quieter than usual ahead of the Memorial Day long weekend. Here in the UK we're also off on Monday.