Yesterday's market action was perfectly predictable, and as we forecast [32], it followed the move of the USDJPY almost to a tick, which with the help of a last minute VIX smash (just when will the CFTC finally look at the "banging the close" in the VIX by the NY Fed?) pushed the DJIA to a new record high, courtesy of the overnight USDJPY selling which in turn allowed all day buying of the key carry pair. Fast forward to today when once again we have a replica of the set up: a big overnight dump in USDJPY has sent the dollar-yen to just over 102.000. And since Nomura has a green light by the BOJ to lift every USDJPY offer south of 102.000 we expect the USDJPY to once again rebound and push what right now is a weak equity futures session (-8) well above current levels. Unless, of course, central banks finally are starting to shift their policy, realizing that they may have lost control to the upside since algos no longer care about warnings that "volatility is too low", knowing full well the same Fed will come and bail them out on even the tiniest downtick. Which begs the question: is a big Fed-mandated shakeout coming? Could the coming FOMC announcement be just the right time and place for the Fed to surprise the market out of its "complacency" and whip out an unexpected hawk out of its sleeve?
Around the world, overnight Chinese equities pulled back from yesterday’s inflation-inspired gains (Hang Seng -0.25%), with outperformance in the Nikkei 225 (+0.50%) after the MSCI decided not to reclassify Taiwan and South Korean equity markets as ‘developed’, which has allowed Japanese equities to continue their dominance of east Asian market share. Deutsche wonders if perhaps Chinese authorities have shifted from weakening the RMB as a form of stimulus to more targeted measures such as RRR cuts. This shift in policy bias likely stems from the fact that the objectives set out by the authorities in the beginning of the squeeze are gradually being achieved. Speculative flows are reducing and corporates are starting to hedge their risk more appropriately. The Nikkei is higher on the back of more headlines around corporate tax reforms and GPIF asset re-allocation.
In Europe, Deutsche Lufthansa was notable underperformer in Europe this morning, after the company cut forecast, in turn dragging the rest of the sector lower. Allied with this, Vallourec’s profit warning dampened sentiment, with losses observed across the continent. Absence of any positive catalysts meant that heading into the North American open, stocks are broadly lower, with the more defensive sectors such as healthcare outperforming.
Turning to the day ahead, there’s very little on the data docket outside of weekly US mortgage applications and the monthly budget statement. The US treasury’s 10 year auction will be closely watched today, following a fairly lacklustre 3 year auction yesterday and with 10 year yields at around 1 month highs.
Bulleting Headline Summary from RanSquawk and Bloomberg
- European equities retreat from recent highs, with a spate of profit warnings from Germany’s Deutsche Lufthansa and France’s Vallourec hitting sentiment
- EUR/GBP hits 18-month lows after the UK unemployment rate unexpectedly fell to Jan’09 lows
- Session ahead remains quiet, however the 10yr yield still lies close to 2.65% ahead of the 10yr Note auction today
- Fed officials, concerned that selling bonds from $4.3 trillion portfolio could crush U.S. recovery, are preparing to keep balance sheet close to record levels
- Bund yield erases ECB-led drop as UST correlation grows
- Obama’s ratings hit lowest point of his presidency in Bloomberg National Poll; just 44% of Americans say they have positive feelings about him
- Russia gave Ukraine extra 6 days to make payments for natural gas as countries resumed European Union-brokered talks in Brussels
ASIAN HEADLINES
Overnight, Chinese equities pulled back from yesterday’s inflation-inspired gains (Hang Seng -0.25%), with outperformance in the Nikkei 225 (+0.50%) after the MSCI decided not to reclassify Taiwan and South Korean equity markets as ‘developed’, which has allowed Japanese equities to continue their dominance of east Asian market share.
FIXED INCOME
There was little evidence of demand for core EU paper picking up, with Bunds yet again failing to benefit from lower stocks due to the 2016 Schatz auction by Buba today. Still, weaker stocks saw Bunds come off the worst levels of the session, with short-covering bring the German 10yr yield off the day’s highs. Nonetheless, they remain in negative territory, with peripheral bond yield spreads also marginally tighter.
Prices were also dragged lower by Gilts following the release of better than expected UK jobs report.
US HEADLINES
PIMCO’s Gross has raised his holdings of Treasuries and government related debt in May to half his flagship fund’s total. (BBG)
EQUITIES
Deutsche Lufthansa was notable underperformer in Europe this morning, after the company cut forecast, in turn dragging the rest of the sector lower. Allied with this, Vallourec’s profit warning dampened sentiment, with losses observed across the continent. Absence of any positive catalysts meant that heading into the North American open, stocks are broadly lower, with the more defensive sectors such as healthcare outperforming.
FX
GBP continued to outperform EUR this morning, amid monetary policy divergence and also the release of better than expected UK jobs report which showed that the unemployment rate has hit a new five-year low, but at the expense of shrinking real wages. Ongoing EUR weakness saw EUR/GBP fall to its lowest level since Dec-2012 and consequent JPY strength saw USD/JPY below the 100 and also its 50DMA lines.
Elsewhere, AUD and NZD benefited from expectations that the recently introduced monetary policies by the ECB will buoy demand for higher yielding currencies via carry trade. Antipodean FX now looks ahead to the RBNZ rate decision this evening, where the central bank are expected to hike rates by 25bps for the third consecutive meeting.
COMMODITIES
OPEC ministers unsurprisingly reached a consensus to keep the output ceiling unchanged at 30mln bpd, with energy market focus now shifting to the weekly DoE crude oil inventories in what looks to be a muted session ahead.
Gold outperformed its peers this morning, as expectations of a resurgence in physical demand in Singapore, together with somewhat cautious sentiment continued to support prices. Also of note, volumes for the benchmark spot contract in China rose to a two-week high, further supporting growing view prices trying to establish a base.
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We conclude with the overnight recap by DB's Jim Reid
Perhaps it’s the usual post-payrolls lull, but already the anticipation appears to be building towards the next FOMC even though it’s still more than a week away (June 18th). To be fair the June FOMC will be a fairly interesting one for a number of reasons so there are good reasons to speculate on the outcome. Firstly we get to hear from Yellen again in her second post-FOMC press conference as Fed Chair. Her first press conference in March certainly caused a stir in markets whether intentional or not, and since that time US yields have taken a round trip to a low of 2.44% in late May, followed by a 20bp upwards retracement to our current levels of around 2.64%. Next week’s FOMC will also include new economic projections, as well as an update to the Fed officials’ “dot plot” Fed Funds forecasts. So there’s plenty to look forward to at this meeting.
There also seems to be a growing chorus of market participants who think that we’re starting to see a gradual shift in the Fed’s tone given the recent run of stronger US economic data. Perhaps these views may be reflected in the updated Fed Funds dot plot, but there’s also a growing number who say that the Fed is “behind the curve” in terms of shifting its policy. The WSJ and Harvard University’s Martin Feldstein argues that inflation is a more serious threat than the Fed recognises. Feldstein argued in a WSJ opinion piece on Monday that the Fed’s preferred measure of inflation, CPI excluding food and energy, rose 1.4% yoy in May but has increased since February at a 2.1% seasonally adjusted rate. Producer prices for the same goods and services has been rising over the same time period by 3.6%. From a labour market perspective, Feldstein argues that wage pressures are more closely linked with short term unemployment than long term unemployment, and given that the unemployment rate for those out of work for less than six months was only 4.1% in May, wages may soon begin to rise more rapidly. These views continue to be challenged by those who argue that we’re in a lower for longer “new neutral” environment. The conclusion to this debate could be one of the most important themes of H2 2014.
Speaking of US data, yesterday’s releases provided more fuel for the bond bears and perhaps explained some of the 4bp cheapening in US 10yr bonds. The NFIB small business optimism index printed at 96.6 which was about 0.8pts higher than the consensus estimate and a 1.4pt improvement over the April number. The May reading was also the highest print since September 2007. However in its commentary, the NFIB was more downbeat saying that the index remains “below average” and “far from what is considered to be an expansion level”. The four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components (sales expectations and business conditions) according to the NFIB.
Also marking a post-financial crisis high was the BLS JOLTS job openings report which showed that the number of job openings (4.455m vs 4.050m) was at its highest level since September 2007. The April number was significantly higher than the March outturn of 4.017m. In addition, the ratio of unemployed compared to job openings fell to 2.19 in April, compared to the 2.51 in March and the lowest reading since June 2008. One of the key metrics watched by Yellen, the quit rate, also seemed to improve but showed a more mixed picture. Quits rose slightly in April by 12k to 2.47m but the quits rate remained at 1.88% which is less than the pre-recession average. In terms of inventories, a larger than expected wholesale inventory build (+1.1% vs +0.6% expected) was recorded in April which led some Street economists to raise their Q2 GDP estimates.
The Asian session has been relatively lacklustre with the most notable move being a further 0.10% drop in EURUSD to 1.353. CNH and CNY are trading a little weaker against the greenback today (-0.1% apiece) with the PBOC setting a weaker reference rate for the first time in 4 days. This follows three days of sharp gains. Perhaps Chinese authorities have shifted from weakening the RMB as a form of stimulus to more targeted measures such as RRR cuts. Our EM strategists think that FX policy seems to be transitioning to a more neutral stance after four months of turmoil in the RMB complex. This shift in policy bias likely stems from the fact that the objectives set out by the authorities in the beginning of the squeeze are gradually being achieved. Speculative flows are reducing and corporates are starting to hedge their risk more appropriately. Elsewhere in the region, Asia Pacific government bonds are trading lower in price and Asian equities are trading around a quarter to half a percent lower which largely follows the price action that we saw in the US and Europe yesterday. The Nikkei (+0.3%) is the main exception on the back of more headlines around corporate tax reforms and GPIF asset re-allocation.
Yesterday was the first negative post-ECB trading session. However the S&P500 closed only 0.02% lower and if we look at the sectoral composition it was actually the higher beta stocks such as tech (+0.18%), consumer goods (+0.08%) and basic materials (+0.06%) which outperformed while the defensives such as telcos (-0.14%) and utilities (-0.31%) dragged the overall index lower. The consolidation was more obvious in European rates where Spanish and Italian bond yields added 7bp and 10bp respectively, partially unwinding some of the rally since the ECB’s latest policy announcements, while Bunds added 2bp. The stronger US data flow helped the US dollar index add 0.19% and notch up a four month high. EURUSD continued to trade lower post-ECB, now firmly below its 200D moving average as the impact of the ECB’s negative deposit rates take effect. Higher UST yields weighed on EM with Russia, South Africa and Turkey 5yr CDS widening by around 5-10bp.
Turning to the day ahead, there’s very little on the data docket outside of weekly US mortgage applications and the monthly budget statement. The US treasury’s 10 year auction will be closely watched today, following a fairly lacklustre 3 year auction yesterday and with 10 year yields at around 1 month highs.