Single-Digit VIX Today?

She came, she spoke, and she sent stocks to a new all time high. That is perhaps the simplest summary of what Janet Yellen did yesterday when, as a result of her droning monotone, she managed to put the VIX literally to sleep, which closed at the lowest since 2007 and the resulting surge in the S&P was a fresh record high, because despite the "concerns" Fed member have about record high complacency, all they are doing is adding to it. And now that apparently the Fed has a market "valuation" department, and Yellen can issue fairness opinions on whether the S&P is overvalued, the only question is whether today, as a follow through to yesterday's "buy everything, preferably on leverage, sincerely - the Fed" ramp, the VIX will drop to single digits today.

The post-FOMC market reaction suggested that there was a good proportion who had expected the Fed to be more hawkish. This will likely encourage the search for yield and the low volatility environment to continue for a while yet. Going into the FOMC, UST yields were hovering around 2.63%, but they finished the day at 2.58% (almost 7bp lower on the day). The UST curve bull flattened, perhaps helped by a lowering of the Fed’s longer term rate projection to 3.75% from 4% previously. The CDX IG index was basically unchanged just before the FOMC statement but rallied tighter to close at - 3.5bp on the day - a pretty big move. The S&P500 (+0.77%) returned to record highs after notching its best gain in a month. EM bond markets which were still open during the time (mostly LATAM) saw yields tighten by around 2-3bp.

The market reaction in Asia is largely following the same theme with risk on led by EMFX, credit and Japanese equities. On the currency side, the US dollar has continued its slide today with IDR (+0.55%), INR (+0.75%) and MYR (+0.45%) being the main beneficiaries. Amongst equity indices, the key laggard today is the HSCEI (-0.2%) which is reacting to comments by Chinese Premier Li that China will avoid a hard landing and will therefore limit the scale of any economic stimulus. On a YTD basis, one of the key regional laggards, the Nikkei (+1.5% today) is within a couple of percentage points of being in positive territory for the year. It’s been a remarkable 10% rally from the May lows for the index, helped by headlines around pension fund reform and tax cuts.

Stocks traded higher since the get-go in Europe (Eurostoxx 50, +1.14%), with materials sector outperforming on the back of higher commodity prices, which itself were largely a product of a weaker USD. In terms of notable equity movers, EDF shares traded sharply lower in Europe, trading at its lowest level in 4-months, after the French energy minister Royal blocked a planned tariff hike in August. On the other hand, Rolls Royce shares surged 5% after the company announced GBP 1bln buyback. The Italian and Spanish markets are the best-performing larger bourses, Swiss the worst.

The euro is stronger against the dollar. French 10yr bond yields fall; German yields decline. Commodities gain, with nickel, natural gas underperforming and wheat outperforming. U.S. jobless claims, Philadelphia Fed index, leading index due later.

Market Wrap

S&P 500 futures up 0% to 1949.3
Stoxx 600 up 0.7% to 348.6
US 10Yr yield down 1bps to 2.57%
German 10Yr yield down 5bps to 1.33%
MSCI Asia Pacific up 1.3% to 145.5
Gold spot up 0.3% to $1281.5/oz

Bulletin headline summary from RanSquawk and Bloomberg

Treasury yields from 2Y to 10Y drop overnight, with 5Y leading, after Yellen repeated that the Fed is likely to make further QE reductions in “measured steps”
and that it expects interest rates to stay low after the buying ends.

Treasury five-year notes extended yesterday’s gain, the biggest in 11 weeks, and government bonds from Australia to Spain rose as investors gauged the Federal Reserve’s policy stance will keep global yields low

U.K. retail sales fell for the first time in four months in May as a World Cup boost failed to offset a slump in demand at food stores

Municipal bonds are on pace to outperform Treasuries in total return for an unprecedented 10th straight month and are also beating investment-grade company debt

U.S. prosecutors are broadening their investigation of the foreign-exchange industry as they question salespeople at the world’s biggest banks on their practices, according to two people with knowledge of the matter

The U.S. is distancing itself from Iraqi Prime Minister Nouri al-Maliki, pressing for political change that could help blunt a Sunni insurgency

Sovereign yields lower. EU peripheral spreads mixed with Greece 10Y ~6bps lower. Asian equities mixed; European equity markets, U.S. stock futures higher. WTI crude, copper, gold higher.

US Event Calendar

8:30am: Initial Jobless Claims, June 14, est. 313k (prior 317k)
- Continuing Claims, June 7, est. 2.6m (prior 2.614m)
9:45am: Bloomberg Economic Expectations, June (prior 42.5)
- Bloomberg Consumer Comfort, June 15 (prior 35.5)
10:00am: Philadelphia Fed Business Outlook, June., est. 14 (prior 15.4)
10:00am: Leading Index, May, est. 0.6% (prior 0.4%) Supply
11:00am POMO: Fed to purchase $2.25b-$2.75b in 2021-2024 sector

EUROPE

All 19 Stoxx 600 sectors rise
84.2% of Stoxx 600 members gain, 14.7% decline
Eurostoxx 50 +1.1%, FTSE 100 +0.8%, CAC 40 +0.9%, DAX +0.8%, IBEX +0.9%, FTSEMIB +1%, SMI +0.3%

ASIA

Asian stocks rise with the Nikkei outperforming and the Shanghai Composite underperforming.
MSCI Asia Pacific up 1.3% to 145.5
Nikkei 225 up 1.6%, Hang Seng down 0.1%, Kospi up 0.1%, Shanghai Composite down 1.5%, ASX up 1.6%, Sensex down 0.2%
10 out of 10 sectors rise with materials, industrials outperforming and energy, tech underperforming

FIXED INCOME

Bund and Gilts traded higher, in tandem with stocks in Europe this morning as risk on sentiment dominated the price action in reaction to somewhat dovish FOMC decision yesterday where the Fed failed to deliver any hawkish surprises and lowered their long run view of the Fed Funds Rate. There was little in terms of tier 1 macroeconomic releases, but the ONS said that retail sales for the month of May were supported by sales of replica football shirts, while lower fuel prices driver overall prices lower.

EQUITIES

EUR/USD and GBP/USD traded higher in Europe this morning, with GBP/USD touching on its highest level since August 2009, inspired by USD weakness as the USD index moved lower the key 200DMA line which follows dovish FOMC decision yesterday. At the same time, AUD benefited from an uptick in commodity prices, with the pair advancing close to 2014 highs.

COMMODITIES

Gold and silver prices benefited from a weaker USD inspired by dovish FOMC yesterday, with silver prices approaching key USD 20 level, which is also the 100DMA line and is the highest level since mid-May.

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DB's Jim Reid concludes the overnight recap

With the Fed and Fed Chair delivering very little in terms of surprises, the post-FOMC market reaction suggested to us that there was a good proportion who had expected the Fed to be more hawkish. This will likely encourage the search for yield and the low volatility environment to continue for a while yet. Going into the FOMC, UST yields were hovering around 2.63%, but they finished the day at 2.58% (almost 7bp lower on the day). The UST curve bull flattened, perhaps helped by a lowering of the Fed’s longer term rate projection to 3.75% from 4% previously. The CDX IG index was basically unchanged just before the FOMC statement but rallied tighter to close at - 3.5bp on the day - a pretty big move. The S&P500 (+0.77%) returned to record highs after notching its best gain in a month. EM bond markets which were still open during the time (mostly LATAM) saw yields tighten by around 2-3bp.

Taking a look at other developments, ISIS militants and the Iraqi government battled for control of the Baiji refinery which is Iraq’s largest, sending crude up 0.7% yesterday and another 0.2% today. The WSJ said that the White House is signalling that it wants a change in government in Iraq without Maliki as its head, given the PM has been unable to reconcile differences with the Sunni minority. President Obama has also reportedly told Congressional leaders that he is considering military options to respond to the Iraq conflict and that he will not be seeking further congressional approval for those actions (BBG).

Elsewhere, the FT reports that US share buybacks and dividend payments reached a new record in Q1 2014, paying a total of $241bn to shareholders in the three months to March. This is $8bn more than the previous record set in Q3 2007 according to the FT who cite S&P Dow Jones data. In the first quarter, 290 companies in the S&P 500 reduced their share count year over year – up from 276 in the previous quarter, and share buybacks in the year to March 2014 are up 29% yoy. In another sign of the strength of funding markets, Cyprus returned to the international bond market just a little over a year since it announced a bail-in on bank deposits. Cyprus priced EUR750m of 5yr notes at a yield of 4.75%.

Looking at the day ahead, the focus turns to the data with UK retail sales this morning, followed by the Philly Fed and US jobless claims. The Philly Fed index is expected to slip to 14.0 (vs 15.4 in May). On the corporate side, Oracle reports earning today.