July 4th may be a US national holiday, which means the S&P 500 won't hit a record high on good news and a recorder high on bad, but judging by global trading volumes - already abysmal heading into today - one may as well give the entire world a day off. However, for now, global equities have come off the impressive, and curiously schizophrenic US-data inspired gains of yesterday which sent the DJIA over 17,000 yet which has resulted in an almost unchanged 10Y Treasury print since before the NFP release. Once again bonds and stocks agree to disagree.
Asian markets are having a positive Friday helped by yesterday’s +0.55% gain in the S&P 500 and the first close above 17,000 in the Dow. However, as noted, it has been a beyond quiet session and more importantly, Treasuries continue to stabilise as if the NFP print never happened, and certainly disagree diametrically with the equities' take on the payroll number. The Nikkei (+0.6%) is pacing regional equity bourses, spurred by the +0.4% performance of dollar-yen (once again a USD story more than a JPY weakening story).
In Europe, while the periphery may pretend it is growing due to what is now a quarterly change in the actual definition of GDP, the core continues to deteriorate, only now it is not just France but Germany as well, whose latest factory orders print was a doozy, sliding -1.7% from 3.4% last month, far below the -1.1% expected. Domestic orders fell 2.5%mom after +1.1%, while foreign orders were down 1.2% mom after +5.0%. Orders from within the Euro area rose strongly for a second consecutive month (+5.7%mom after +8.9%). Orders from outside the Euro area declined 5.2%mom after +2.9%. Just how bad is the Chinese economy if it is starting to impact German exports now too?
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A combination of lower stocks and redemption/coupon flows provided a bid tone to German bunds, with the German 1-yr yield in negative territory for the first time since May 2013. Consequently Bunds are higher by 24 ticks on a break of the 61.8% at 146.72 (the contract high on Wed to post NFP low yesterday), and on Asian buying.
Despite the firmer USD, we’re not seeing broader weakness in EMFX. Indeed, some of the more vulnerable EM currencies such as IDR (+0.3%) and INR (+0.05%) are enjoying gains against the greenback, even with a number of Street forecasters bringing forward their Fed rate hike estimates late yesterday/overnight.
European shares little changed with the banks and utilities sectors underperforming and travel & leisure, media outperforming. The Italian and Spanish markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Irish 10yr bond yields fall; German yields decline.
Obviously, there is nothing on the US event docket.
Market Wrap
- S&P 500 futures down 0.1% to 1976.1
- Stoxx 600 down 0.1% to 348.7
- US 10Yr yield down 0bps to 2.64%
- German 10Yr yield down 2bps to 1.27%
- MSCI Asia Pacific up 0.4% to 147.6
- Gold spot up 0.2% to $1322.3/oz
EUROPE MARKETS
- 9 out of 19 Stoxx 600 sectors rise; travel & leisure, media outperform, banks, utilities underperform
- 50% of Stoxx 600 members gain, 47.3% decline
- Eurostoxx 50 -0.2%, FTSE 100 -0.1%, CAC 40 -0.1%, DAX -0%, IBEX -0.2%, FTSEMIB -0.5%, SMI -0%
ASIAN MARKETS
- Asian stocks rise with the ASX outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific up 0.4% to 147.6
- Nikkei 225 up 0.6%, Hang Seng up 0.1%, Kospi down 0.1%, Shanghai Composite down 0.2%, ASX up 0.6%, Sensex down 0.1%
- 8 out of 10 sectors rise with consumer, materials outperforming and energy, utilities underperforming
EUROPE NEWS
A combination of lower stocks and redemption/coupon flows provided a bid tone to German bunds, with the German 1-yr yield in negative territory for the first time since May 2013. Consequently Bunds are higher by 24 ticks on a break of the 61.8% at 146.72 (the contract high on Wed to post NFP low yesterday), and on Asian buying.
EQUITIES
After US-inspired gains yesterday European equities have come off their highs (EuroStoxx 50 -0.24%), weighed on by the financial sector. The sector underperformance is the result of Erste saying it expects a record loss of EUR 1.4-1.6bln this year on write-downs in Hungary and Romania and BNP, the worst performer in the CAC, who were the focus of a negative broker move at Macquarie.
FX
In FX, EUR/USD has broken yesterday’s lows as banks continue to expect more from the ECB later in the year and cautious sentiment enters the market. EUR/GBP is at its lowest levels since mid-2012 and nearing an option barrier at 0.7900 and USD/CHF is testing its 200DMA to the upside at 0.8949.
COMMODITIES
WTI and Brent have traded sideways, with little change as light news flow and thin volumes offer little defined price action. Notably BoAML say that oil prices could rise by USD 40-50 if the 2.6 mn b/d of oil production in Southern Iraq is lost, although the risk is low, Brent prices averaging USD 106 in 2014 and USD 103 in 2015, though upside risk to these exist given the recent escalation of conflict and production losses in Northern Iraq. Elsewhere, spot gold traded range bound overnight after rebounding from yesterday’s US-data and stronger USD inspired losses, however broke out of its tight range in early European trade.
The overnight summary concludes with comment by DB's Jim Reid
The US economic bulls certainly snatched the yellow jersey yesterday after payrolls gave them the perfect riposte to all the recent doubts over growth. However until we get past the weather related snapback it’s going to hard for them to conclusively win the argument. It was interesting that after an initial sell-off (6bps), US 10 yrs only rose 1.2bp on the day and settled at 2.638% at the early closing bell. The initial move may have been more related to the headline print (+288k vs 215k expected) and change in unemployment (6.1% vs 6.3% in May) but the move back down in yield might have been a result of some of the detail in the report. To be clear, it was a strong payrolls report, but some noted that wage inflation indicators remained benign with average hourly earnings at +2.0% YoY, roughly where it’s been bouncing around for the last 18 months and broadly in line with CPI. Others highlighted that the number of people working part time because they can’t find full time work rose; also many of the gains were in relatively low paying sectors and that the overall participation rate (62.8%) is stuck at 35 year lows.
More broadly, DB’s rates strategist Dominic Konstam raises two points which might explain yesterday’s rally in rates following the initial selloff. Firstly, Dominic thinks positioning leaves few investors ready or willing to short the market. Secondly, Dominic thinks the bigger picture issue is that the focus should and is turning away from the cyclical story of US recovery to the structural story. He thinks the Yellen-led Fed isn’t too far away from focusing more and more on the structural limits to growth, namely productivity which continues to be disappointing. The problem for wages -- and why they are low is that people are paid their productivity. Dominic believes that the ongoing productivity funk is the reason why real rates can't rise above say 1% and why neutral real funds might be close to 50 bps.
Away from payrolls, the other major focus yesterday was the ECB. The complexity of last month’s package left many scratching their heads and there was a lingering fear that the TLTRO would indeed be so “targeted” that it may constrain the ability of banks to use it to the full extent. However the new details that emerged yesterday seemed to be fairly accommodative and were supportive of the carry trade that Draghi verbally tries to talk down. According to DB’s European economists Gilles Moec & Mark Wall, the technical documentation makes it clear there won’t be any constraint that would hinder how banks would be able to recycle the proceeds of the TLTRO. The spread compression seen in periphery European bonds yesterday seems to support that view. Beyond the TLTRO technicalities, Draghi announced that the ECB would reduce the frequency of its meetings to one every 6 weeks from January 2015 onward (together with the reserve maintenance period). Draghi also announced that the ECB would publish “accounts” of the meetings from January 2015 onwards as well.
Asian markets are having a positive Friday helped by yesterday’s +0.55% gain in the S&P 500 and the first close above 17,000 in the Dow. It’s generally a quiet session though and interestingly Treasuries continue to stabilise. The Nikkei (+0.5%) is again pacing regional equity bourses, spurred by the +0.4% performance of dollar-yen (once again a USD story more than a JPY weakening story). Despite the firmer USD, we’re not seeing broader weakness in EMFX. Indeed, some of the more vulnerable EM currencies such as IDR (+0.3%) and INR (+0.05%) are enjoying gains against the greenback, even with a number of Street forecasters bringing forward their Fed rate hike estimates late yesterday/overnight. With less than a week until Indonesia’s elections, Bloomberg is reporting that Joko Widido is now trailing Subianto in some polls. This is something to watch for in the coming days in one of Asia’s higher beta EMs.
Following the events of yesterday and today's US holidays, it’s much a quieter day ahead. German factory orders is the only data release of note. Sovereign credit rating updates are scheduled for the Netherlands and Hungary.