With the VIX smashing last week to levels not seen since early 2007, the S&P rising to all time highs, and European core and peripheral bond yield this morning touching historic lows, it would appear that the "market" has priced in every possible negative outcome. Which, as Goldman showed over the weekend is clearly not the case at least as investors are concerned who continued to sell stocks across the board in May even as the market broke out to record levels making many wonder who is buying stocks (for more read here [27])? Expect more of the same, and with some luck we will get a single digit VIX in the coming days as newsflow slows down following payrolls week and ahead of the world cup start in Brazil.
Overnight, Asia-Pacific equities traded strongly (Hang Seng +0.73%, Nikkei 225 +0.31%) after better-than-expected Chinese trade balance and Japanese GDP. Ironically this was also the bad news: with imports tumbling concerns that the Chinese economy is slowing more than expected forced the PBOC to boost the Yuan daily reference rate to the highest in 2 months, sending CNY forwards surging the most since January 2012. Additionally, since the demand pull in Japan was far greater than expected, banks such as Goldman expect a vicious snapback and are now forecasting a -4% GDP in Q2.
European markets trade quiet this morning after the slew of risk events late last week (ECB, NFP) and Whit Monday holidays observed on the continent. Nonetheless, peripheral yields have continued to tighten with the Spanish 10yr yield dropping below the US 10yr for the first time since April 2010.
There is nothing on the US economic calendar today, with Bullard and Rosengren speaking, and the Fed concluding its ~$1 billion POMO in the 30 Year sector at 11am.
Bulletin Headline Summary
- Treasuries decline for seventh session out of the last eight, led by intermediates; no eco data on tap for today with 3Y/10Y/30Y auction cycle set to begin tomorrow.
- Yuan forwards jumped the most since January 2012 after China’s trade surplus almost doubled and the central bank boosted the currency’s daily reference rate to the highest in more than two months
- Japan’s GDP grew an annualized 6.7% in the first quarter, faster than a preliminary 5.9% and the median forecast of 5.6% by economists in a Bloomberg News survey. The nation’s current-account surplus narrowed in April from a year earlier, separate data showed
- Ukraine’s new leader, Petro Poroshenko, said the violence that’s rocked the former Soviet republic’s easternmost regions must end this week as peace talks began involving an envoy of Russian President Vladimir Putin
- Credit Suisse is considering selling additional stakes in an electronic interest-rates trading unit it set up last year, according to a person briefed on the plan
- U.S. Secretary of State John Kerry dismissed threats by some Taliban prisoners that they will return to the battlefield and kill Americans as “a lot of baloney.” The movements of the five former leaders of the Taliban government who were released to Qatar will be closely monitored, he said
- U.K. Prime Minister Cameron will get backing from his Swedish counterpart, Fredrik Reinfeldt, today as he urges Merkel to drop her support for Jean-Claude Juncker as the next head of the EC
- Sovereign yields mixed, with EU peripheral spreads tightening. Asian equities mostly higher; European equity markets and U.S. stock futures gain. WTI crude and gold higher, copper falls
US Economic Calnedar
- No major reports scheduled
- 9:10am: Fed’s Bullard speaks in Florida
- 1:30pm: Fed’s Rosengren speaks in Guatemala
- 11:00am: Fed to purchase $850m-$1.1b notes in 2036-2044 sector
ASIAN HEADLINES
Asia-Pacific equity markets traded positively (Nikkei 225 +0.31%, Hang Seng Index +0.73%) amid strong data and a read-across from the record close on Wall Street post-Nonfarm Payrolls on Friday. Chinese trade balance data surged beyond expectations (surplus of USD 35.92bln vs. Exp. 22.60bln (Prev. 18.46bln, Rev. 18.45bln)). Nonetheless, imports (-1.6% vs. Exp. 6.0%) slumped, prompting further concern on the state of domestic consumption in China. Japanese markets were buoyed by a strong upward revision to Q1 GDP to 6.7% from 5.9% as demand spiked ahead of the sales tax hike in April.
FIXED INCOME
Peripheral bond yield spreads continued to tighten in Europe this morning, with Spanish 10y yield dropping below the US equivalent for first time since April 2010, as the latest policy easing measures by the ECB encourage carry trades. In terms of UK related commentary, analysts at Morgan Stanley brought forward their BoE rate rise expectations to Q1 2015 vs. Prev. view of first rate increase in Q2 2015, expects BoE to raise 3 times in 2015 vs. Prev. view of just 2.
EQUITIES
European equities trade quietly after the slew of activity late last week (ECB, NFP) and amid public holidays across Europe. Nonetheless, indices trade in minor positive territory after Wall Street’s record close on Friday and continue to be lifted by very strong peripheral banks, as analysts eye the ECB’s targeted LTRO details more favourably for small- to medium-sized banks. As such, Italian and Spanish banks are the strongest performers today, along with their domestic bond markets.
FX
EUR strengthened in opening trade following the respective inflows into European assets, with EUR/USD breaching its 200DMA to the upside at 1.3671, leading the USD index below its 200DMA at 80.34, however heading into the North American crossover prices have seen a retracement, with EUR/USD now broadly flat on the session. Meanwhile, commodity currencies have been supported by overnight Chinese data (trade balance surplus of USD 35.92bln vs. Exp. USD 22.60bln) and of note for AUD, analysts at MS have revised up their AUD/USD forecast from 0.8500 to parity by year-end citing foreign appetite for Australian bonds.
COMMODITIES
WTI and Brent crude futures trade positively ahead of this week’s OPEC meeting on Wednesday, where the cartel are expected to keep their output ceiling unchanged at 30mln bpd, but could adjust the internal production caps due to supply concerns in Libya, Iran’s recent glut of production and Iraq’s Kurdistan fields coming back online. Chinese trade data overnight showed China’s crude imports fell 9% from the prior month, but remained higher by 9% on the year.
Overnight, iron ore futures pulled back from their recent sharp losses having registered the seventh consecutive weekly decline on Friday as imports in China may slip on financing-demand concerns. Analysts state that Chinese iron ore imports may continue to slide on a monthly basis due to high inventory levels at Chinese ports. Finally, strike talks in South Africa will continue to be in focus with the South African Govt. due to meet AMCU today.
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DB's Jim Reid Concludes the overnight summary
Apart from Draghi's market friendly move, a decent US payroll number helped markets end the week on a firm note. Notably the VIX traded below 11 for first time since 2007 and to the lowest level since February that year. February was when we first started seeing the sub-prime fall-out hit the wider global financial market. Hard to image that this is nearly 7 and a half years ago. Time flies!!. Asian markets are seeing gains extended helped by market friendly
Chinese and Japanese data. Over the weekend Chinese exports beat expectations and this morning the Japanese economy was revised up to an annualized 6.7% in Q1 from the 5.9% preliminary reading (median economist forecast of 5.6%). The Hang Seng is up +0.7% and the Nikkei +0.34% as we type.
Following the roller coaster ride in fixed income markets last week there's perhaps a quiet sense of relief that things may start to slowdown a little ahead of the summer and perhaps a bit earlier than normal due to the World Cup. However most games occur after the European session closes and later in the
US session so anyone that uses the World Cup for inactivity might be being a little lazy although I suspect there may be a few late nights for some European fans. Before all this we do have a fairly light week as far as data flow is concerned as it is usually the case for a post-payrolls week. Other than retail sales on Thursday, PPI and the UofM confidence report on Friday there isn't really much going on for US data watchers.
European data flow should prove to be a little more interesting with French and Italian IP numbers out tomorrow and inflation readings across a number of Eurozone countries on Friday. Although following the ECB's package announcement last week, we do feel that most of the data flow will probably take a back seat for now as the market continues to digest the longer term consequences of the policy announcement and potentially what's next to come.
In Asia, the BOJ will conclude its policy meeting on Friday but the key economic releases will come from China when we receive its inflation and monetary aggregate numbers tomorrow. The usual monthly output of Industrial Production, Retail Sales, and Fixed Asset Investment reports will only be out on Friday. Chinese stock markets have been on a decent run up in the past few weeks on the back of persistent expectation of easing measures from authorities.
On that related note, DB's Linan Liu suggested that in its regular meeting on 30 May, the State Council decided to step up financial support to the real economy and specifically to expand the scope of targeted RRR cuts to selected financial institutions that have extended new loans above a certain threshold to the agriculture sectors, small and micro firms, etc in order to support domestic structural rebalancing. She expects the PBoC to announce the implementation details in the near future. This time, the targeted RRR cuts also aim at supporting lending to small and micro firms and other sectors that are important for China’s economic structural rebalancing. She believes this decision is consistent with PBoC’s forward guidance expressed in the Q1 monetary policy report that (a) it is prepared to relax monetary condition to support growth and (b) it remains committed to credit stimulus to ensure financing support to targeted sectors.