We could focus on whatever events took place in the overnight session or the seasonally-adjusted economic data avalanche that will dominate US newsflow over the next two days (ADP, ISM New York, Factory Orders, Services ISM, Yellen Speaking, and of course Nonfarm payrolls tomorrow), or we could ignore all of that as it is absolutely meaningless and all very much bullish, and use a phrase from Standard Chartered which said that "the dollars Yellen is removing could be compensated for by cheap euros from the ECB; result may be enough cash sloshing around to underpin this year’s run-up in risk assets even if the Fed begins mulling higher interest rates too." In other words, the bubble will go on, as the Fed passes the baton to the ECB, if not so much the BOJ which is drowning in its own imported inflation. Case in point: two of the three HY deals priced yesterday were PIK, and the $1 billion in proceeds was quickly used to pay back equity sponsors. The credit bubble has never been bigger.
For those who care, here is the market snapshot: European shares rise, close to intraday highs, with the autos and retail sectors outperforming and telcos, chemicals underperforming. The Italian and Swedish markets are the best-performing larger bourses, French the worst. The euro is weaker against the dollar. Spanish 10yr bond yields rise; Irish yields increase. Commodities decline, with Brent crude, corn underperforming and soybeans outperforming.
Taking a look at Asia today, markets are having a relatively buoyant 2nd day of Q3 helped by the record closes on Wall Street. Gains are being led by the Hang Seng (+0.95%) which is playing catch up after being closed for holidays yesterday, while gains are also being posted on the ASX200 (+1.1%) and the Nikkei (+0.3%). The AUD (-0.5%) has lost some ground against the greenback today following disappointing May trade data, though it’s still near eight-month highs. In Japan, the BoJ’s tankan inflation survey suggested that firms expect consumer price inflation of 1.5% in the year ahead, unchanged from last quarter’s survey. Inflation projections 3yrs and 5yrs from now are only 1.6% and 1.7% respectively, which is down to unchanged versus the last quarterly survey and still short of the BoJ’s goal.
As DB's Jim Reid notes, in an otherwise quiet week for Fed policymakers, Yellen’s lecture at the IMF today (11am) will take much of the limelight. The exact topic of her speech is not yet known though as it is simply being billed as a Central Bank lecture, followed by a Q&A conversation with IMF Managing Director Christine Lagarde. If Yellen does discuss current monetary policy, we can probably expect more of the same overall tone that we saw from her post-FOMC press conference. Recall also that at that press conference, Yellen mentioned that “high yield bonds have certainly caught our attention”, so it will be interesting to see whether she elaborates on this topic given the IMF appears to have become more vocal about the issue of financial stability lately. DB’s Joe Lavorgna notes that Yellen will not have the employment data at the time of her talk. Traditionally, the Fed Chair does not get these figures until the early evening of the night before their release.
Turning to the day ahead, on the US docket we have US ISM New York, factory orders, mortgage applications, ADP employment change.
Bulletin headline summary from Bloomberg and RanSquawk
- Treasuries 7Y and longer gain, curve spreads flatten, as markets await ECB/Draghi and nonfarm payrolls tomorrow; Yellen due to speak at IMF 11am ET.
- Stocks in Europe traded broadly higher (Eurostoxx 50, +0.08%), benefiting from yet another record high close over on Wall Street yesterday, which saw the DJIA come within 2 points of 17,000.
- GBP/USD rose to its highest level since October 2008 following better than expected UK Construction PMI and Nationwide housing survey
- The dollars Yellen is removing could be compensated for by cheap euros from the ECB; result may be enough cash sloshing around to underpin this year’s run-up in risk assets even if the Fed begins mulling higher interest rates too, according to Standard Chartered Plc in Dubai
- Foreign ministers from Ukraine, Russia, Germany and France meet in Berlin this afternoon for talks intended to “try and reduce the tensions,” according to a Russian Foreign Ministry spokeswoman, as Ukraine ended a cease-fire and vowed to retake territory from separatists in the violence-torn east
- A second batch of used Russian Sukhoi combat jets arrived in Baghdad to help Iraqi forces fight an al-Qaeda breakaway group threatening to fracture the country
- The State Department has told lawmakers informally that Obama wants to sell Iraq more than 4,000 additional Hellfire missiles for the government’s fight against Islamic insurgents, according to people familiar with the plan
- Belgium overcame a World Cup-record 16 saves by goalie Tim Howard and defeated the U.S. 2-1 in extra time to set up a quarterfinal soccer match against Argentina, which won 1-0 against Switzerland
- Stock investors have found a new hero in Japan’s JPY128.6t ($1.3t) retirement fund, SocGen said; the Topix rebounded 5% in 2Q as the GPIF moved closer to an asset overhaul that’s expected to pour JPY3.6t into Japan’s equities
- Jamie Dimon said he’ll start treatment for throat cancer, raising new questions about succession plans at the biggest U.S. bank
- Sovereign yields mixed. EU peripheral spreads widen. Asian and European stocks, U.S. stock futures gain. WTI crude falls, gold and copper little changed
US Event Calendar
- 7:00am: MBA Mortgage Applications, June 27 (prior -1.0%)
- 7:30am: Challenger Job Cuts y/y, June (prior 45.5%)
- 7:30am: RBC Consumer Outlook Index, July (prior 51)
- 8:15am: ADP Employment Change, June., est. 205k (prior 179k)
- 9:45am: ISM New York, June (prior 55.3)
- 10:00am: Factory Orders, May, est. -0.3% (prior 0.7%) Central Banks
- 11:00am: Fed’s Yellen speaks in Washington
- 2:00pm: Fed board discusses semiannual monetary policy report to Congress, board oversight and assessment of reserve bank
- 8:00pm: Reserve Bank of Australia’s Stevens speaks in Hobart
- No POMO today or the rest of this week
Market Wrap
- S&P 500 futures up 0% to 1966.7
- Stoxx 600 up 0.4% to 346.2
- US 10Yr yield down 1bps to 2.55%
- German 10Yr yield down 0bps to 1.24%
- MSCI Asia Pacific up 1% to 147.7
- Gold spot up 0.1% to $1327.1/oz
- 16 out of 19 Stoxx 600 sectors rise; 67% of Stoxx 600 members gain, 31.2% decline
- Eurostoxx 50 +0.1%, FTSE 100 +0.3%, CAC 40 -0%, DAX +0.2%, IBEX +0.1%, FTSEMIB +0.8%, SMI +0.3%
- Asian stocks rise with the Hang Seng outperforming and the Nikkei underperforming.
- MSCI Asia Pacific up 1% to 147.7
EUROPE NEWS
There was little in terms of tier-1 macroeconomic releases in Europe this morning, but another round of better than expected macroeconomic data out of the UK (UK Construction PMI and Nationwide) resulted in further steepening of the Short-Sterling curve, while the Euribor curve was little changed.
Absorption of supply out of Germany (2019 auction), together with cash payment related flow (where as an estimated EUR 13bln of gross supply is outweighed by EUR 11.4bln of coupons and EUR 25bln of redemptions for Bunds) meant that in spite of stocks trading broadly higher, Bunds also remained bid.
EQUITIES
The positive sentiment stemming from yet another record high close over on Wall Street yesterday, which saw the DJIA come within 2 points of 17,000 yesterday, filtered over into the European session, with stocks in Europe (Eurostoxx 50, +0.08%) seen broadly higher this morning. However telecommunications sector underperformed since the get-go, with Orange shares down over 3% after the company scrapped plans for a potential M&A in France.
FX
GBP/USD touched on its highest level since October 2008 following the release of better than expected UK Construction PMI, which rose to its highest level since February. The pair was also supported by the latest UK Nationwide house price survey which showed that annual rise in house prices jumped from 11.1% to 11.8% in June and London seeing the sharpest rise, with prices up almost 26% in the three months to the end of June compared with the same period last year. Elsewhere, AUD/USD reversed much of yesterday’s RBA inspired gains, as Australia’s trade deficit ballooned to AUD 1.9bln, with exports falling 5%, led by a collapse in metal ore and mineral sales (-9%).
COMMODITIES
In terms of precious metals, spot gold traded sideways overnight and in Europe this morning, off its 3-month highs printed yesterday, even though SPDR gold holdings showed its biggest two day gain since 2011. Looking elsewhere, WTI and Brent crude futures traded lower, failing to benefit from a drawdown in API crude oil inventories and instead coming off on absence of geopolitical related news flow, as well as reports of the Libyan Es Sider port re-opening.
API Crude Oil Inventories (June 27) W/W -876k vs. Prev. 4000k
API Cushing Crude Oil Inventories (June 27) W/W -1300k vs. Prev. 424k
API Gasoline Inventories (June 27) W/W -407k vs. Prev. 2200k
API Distillate Inventories (June 27) W/W 4400K vs. Prev. -253k
We conclude with the overnight musings of DB's Jim Reid
Following on from H1's near universal asset price climb, the S&P 500 (+0.67%) hit fresh highs again yesterday. In spite of this fresh high and H1's near universal rally I would have to say that this is a fairly miserable synchronised bull market. There's not a lot of happiness and a lot of nervousness with markets at the moment. It’s tough to say whether this is mainly because bond yields have surprised the vast majority, or because the economic recovery still generally disappoints, or because trading liquidity is very low, or that regulation hurting certain markets, or fears that the Fed is soon to become more hawkish, or that liquidity not fundamentals are the main drivers of markets, valuations are becoming more stretched in many markets, or finally simply that there is little in the way of volatility. In truth all of these factors are preventing the champagne corks from popping at the moment. Maybe it’s better for markets to feel like this rather than be euphoric and complacent but it’s fair to say that we continue to live in fairly unique financial markets with a lot of uncertainty.
Tuesday’s US data docket was probably supportive of the theme that the economic recovery is a slow and steady one. Case in point was the US ISM which was basically unchanged at 55.3 for the month of June (vs 55.4 prior month). This was one of the higher readings of the last few years, but was below expectations of 55.9. The prices paid subcomponent printed at 58.0 which is broadly in the same range as it has been over the last six months. Consistent with the neither-hawkish-or-dovish feel of the ISM, construction spending growth of +0.1% was below expectations of +0.5% but this was offset by large upward revisions to April’s data. One of the stronger data points came from US vehicle sales for June which beat consensus across GM, Ford, Chrysler and Nissan. The total rate of sales increased to 16.98m (vs 16.70m previous and 16.38m expected) and this marked a post financial crisis high, despite a lower number of selling days this June compared to a year earlier. This prompted a sharp rally in GM stock yesterday (+3.35%). 10yr UST yields closed about 3.5bp higher at 2.565%, though most of that move occurred before the data flow.
In an otherwise quiet week for Fed policymakers, Yellen’s lecture at the IMF today (4pm London) will take much of the limelight. The exact topic of her speech is not yet known though as it is simply being billed as a Central Bank lecture, followed by a Q&A conversation with IMF Managing Director Christine Lagarde. If Yellen does discuss current monetary policy, we can probably expect more of the same overall tone that we saw from her post-FOMC press conference. Recall also that at that press conference, Yellen mentioned that “high yield bonds have certainly caught our attention”, so it will be interesting to see whether she elaborates on this topic given the IMF appears to have become more vocal about the issue of financial stability lately. DB’s Joe Lavorgna notes that Yellen will not have the employment data at the time of her talk. Traditionally, the Fed Chair does not get these figures until the early evening of the night before their release.
Taking a look at Asia today, markets are having a relatively buoyant 2nd day of Q3 helped by the record closes on Wall Street. Gains are being led by the Hang Seng (+0.95%) which is playing catch up after being closed for holidays yesterday, while gains are also being posted on the ASX200 (+1.1%) and the Nikkei (+0.5%). The AUD (-0.5%) has lost some ground against the greenback today following disappointing May trade data, though it’s still near eight-month highs. In Japan, the BoJ’s tankan inflation survey suggested that firms expect consumer price inflation of 1.5% in the year ahead, unchanged from last quarter’s survey. Inflation projections 3yrs and 5yrs from now are only 1.6% and 1.7% respectively, which is down to unchanged versus the last quarterly survey and still short of the BoJ’s goal.
Looking at other headlines, the FT reports that the ECB has yet to make any firm decisions or progress on how it intends to revive the loan-backed ABS market since last month’s ECB meeting where Draghi pledge to “intensify preparatory work” on a QE-like programme. Reportedly, one of the issues faced is the small size of the market with just EUR13.6bn of European securities issued in Q1 of 2014 and EUR181bn between 2012 and 2013. This is not surprising given the low amount of underlying SME loan origination volumes amongst European banks during this time. European banks themselves actually had a strong session yesterday led by Banco Espirito Santo (+13.8%) which recouped most of its losses from Monday after concerns over corporate governance issues arose. BNP (+3.6%) also rallied after the bank affirmed its long term dividend plans and said that it doesn’t plan to raise capital following the fine from the US authorities. European banks (+1.88%) were one of the key outperformers on the Stoxx 600 (+0.89%). It was also a strong performance in terms of European bank credit where both the senior and subordinated financials indices rallied sharply yesterday (-5bp and -8bp respectively).
Turning to the day ahead, the focus will again be on the US data with ADP employment (205k consensus) allowing markets to fine tune their estimates ahead of tomorrow's payrolls. Aside from that there is the Challenger US job cuts release and factory orders. Yellen’s IMF lecture is scheduled for 11am Washington time (4pm London). In the UK, the June construction PMI will be released as well as Nationwide house prices. In EM, Brazil will report industrial production.