Turbo Tuesday Pre-Ramp Missing As Earnings Season, Brazil-Germany Set To Kick Off

Poor algos: after they got no love on Monday from the overnight USDJPY selling team which took the all important pair back to the 200 DMA, today, inexplicably (it is a Tuesday after all, and if one can't frontrun a rigged market surging higher on Turbo Tuesday may as well throw in the towel on free money and learn about fundamental analysis) the same overnight USDJPY selling team has pushed the key carry pair to below the 200 DMA, and has dragged US equity futures lower with it for the second day in a row.

Unfortunately for the momentum ignition HFT crew, today there may be more issues than just igniting momentum at the right time, because as reported overnight by the NYT, Commerzbank has settled at least USD 500mln after breaking US sanctions, meaning the US dragnet of going after money launderers will continue, forcing even more countries (ahem Germany) to make strong anti Petrodollar statements (see France). This comes after BNP recently paid a USD 9bln fine for similar reasons and Morgan Stanley suggesting yesterday that European Banks facing more in legal costs, litigation and settlement costs than their US counterparts. Elsewhere Airline stocks show some notable weakness, after Air France-KLM, formerly the world’s largest airline by revenues, downgraded its forecast, dragging down the sector.

In summary, European shares fall, remaining close to intraday lows, with the travel & leisure and banks sectors underperforming and basic resources, utilities outperforming. U.K. manufacturing index unexpectedly fell, Italian banks’ bad loans rose in May. The Italian and Spanish markets are the worst-performing larger bourses, the Swiss the best. The euro is little changed against the dollar. Japanese 10yr bond yields fall; Portuguese yields increase. Commodities decline, with natural gas, Brent crude underperforming and zinc outperforming. U.S. consumer credit, JOLT job openings due later.

Additionally, geopolitical developments in the middle east continue deteriorating, and now one can add a resumption of the Israel Gaza conflict to the ongoing crusade by ISIS. At this point it is increasingly clear it is only a matter of time before a major land war breaks out between the various feuding factions.

The focus in Asia overnight is on tomorrow's Indonesian presidential election, with Indonesian equities (Jakarta Comp +0.9%), sovereign bonds and the Rupiah (+0.15%) trading firmer. Indonesian equities are extending yesterday’s 1.1% gain while the Rupiah is consolidating after yesterday’s 1.35% rise against the greenback - so it certainly appears that markets are increasingly positioning for a Jokowi win. The latest election poll from LSI suggests that Jokowi will likely prevail – he has extended his lead with 47.8% support versus his nearest rival and former army general Prabowo at 44.2%. 8% are undecided and there is a 2% margin of error according to the local poll. Other Asian markets are trading with a weaker tone again, paced by a 0.3% fall in the Nikkei. The May current account data for Japan showed an unexpectedly large surplus of JPY523bn (vs JPY417bn expected) with imports falling for the first time in 19 months as consumers cut back following the recent sales tax increase. S&P500 futures (-0.2%) are also struggling overnight.

Looking at the day ahead, perhaps the two highlights today are the US JOLTs report and the start of the US earnings season. On the JOLTs report, it’s been well publicised that this is a key labour market data point for the Fed so the trends in hiring, layoffs and quit rates will be closely watched. Later in the day, Alcoa unofficially kicks off the US Q2 earnings season for the S&P500 with its Q2 update due after the market close. In Europe, the focus will be on UK industrial production and German trade numbers. A number of central bank speakers are lined up today including the ECB’s Linde who is due to speak shortly after we go to print. The Richmond Fed’s Lacker speaks on the economic outlook at 1pm USET and the Minneapolis Fed’s Kocherlakota speaks on monetary policy shortly after Lacker.

Finally, since today the first world cup final takes precedence over pretty much everything, expect to be able to count the number of ES contracts traded during the day, on one hand.

Market Wrap

S&P 500 futures down 0.2% to 1966.8
Stoxx 600 down 0.7% to 342.5
US 10Yr yield down 2bps to 2.59%
German 10Yr yield down 2bps to 1.24%
MSCI Asia Pacific down 0.1% to 147.4
Gold spot down 0% to $1319.4/oz

EUROPE MARKETS

1 out of 19 Stoxx 600 sectors rise
14.7% of members gain, 82.7% decline
Eurostoxx 50 -0.6%, FTSE 100 -0.6%, CAC 40 -0.6%, DAX -0.6%, IBEX -1%, FTSEMIB -1.2%, SMI -0.3%

ASIA MARKETS

Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
MSCI Asia Pacific down 0.1% to 147.4
Nikkei 225 down 0.4%, Hang Seng up 0%, Kospi up 0.1%, Shanghai Composite up 0.2%, ASX down 0.1%, Sensex down 2%
2 out of 10 sectors rise with staples, health care outperforming and materials, consumer underperforming

Bulletin headline Summary

EU bank headaches arise again as Commerzbank are said to be subject to US fines due to sanctions evasion and Hungary’s banking laws prompt provision-taking
Bund futures trade just 10 ticks shy of contract highs as lower equities, poor UK macro data and dovish comments from ECB’s Linde and Noyer prompt upside
Attention turns to the beginning of earnings season, with Alcoa due after-market today (exp. EPS USD 0.12) and Fed’s Kocherlakota speaking on monetary policy at 1245CDT/1845BST

FIXED INCOME

Gilt futures lead upside in fixed income markets after UK Industrial Production fell at the fastest rate since August 2013, signalling the UK recovery is far from smooth sailing. This, twinned with dovish comments from ECB's Linde and Noyer (both talked up the prospect of asset purchases) led Bund futures just 10 ticks shy of Sep-14 contract highs at 147.25.

EQUITIES

Despite gapping slightly higher at the open European equities are on their worst levels of the session, led down by Financials (-0.66%). The notable mover, Commerzbank (-3%), was pressured after a NY Times article overnight reported that the bank has settled at least USD 500mln after breaking US sanctions. This comes after BNP recently paid a USD 9bln fine for similar reasons and Morgan Stanley suggesting yesterday that European Banks facing more in legal costs, litigation and settlement costs than their US counterparts. Elsewhere Airline stocks show some notable weakness, after Air France-KLM, formerly the world’s largest airline by revenues, downgraded its forecast, dragging down the sector.

GBP/USD slumped to the lowest level in a week and sub-1.71 after Industrial and Manufacturing Production fell below expectations, allowing EUR/GBP to top 0.7950 once more as the 1.36 handle in EUR/USD continues to draw attention (large option expiries of just under USD 1bln lie at the handle). NZD rallied to the highest level since Aug’11 after Fitch revised their outlook on the New Zealand ‘AA’ rating to positive from stable. Finally, the ZAR is pulling back some of the currency’s recent weakness as South Africa’s labour ministry has come closer to a resolution with unions to resume output at the country’s metal-working sites.

COMMODITIES

Gold trades range-bound, with little fundamental to offer the yellow metal direction. Copper is outperforming its peers, as supply concerns benefit prices, with Palladium also in positive territory on similar concerns, continuing to strike fresh 13-year highs. The increasingly stable situation in Iraq, coupled with the increasingly stable situation in Eastern Libya, applies downside momentum to the energy complex, with WTI crude futures at USD 103.38, down USD 0.15.

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DB's Jim Reid rounds up the overnight event summary

It’s fair to say that things are a little on the dull side at the moment as we await tomorrow's FOMC minutes. Indeed, we’ve now gone 55 trading days since the S&P500 last recorded a gain or loss of more than 1%. The fixed income market has been a tad more interesting given the recent grind upwards in yields at the front end of the UST curve. 2 yr yields are now 18bp higher than the May 20th lows, including a +6bp move since the June 18th FOMC. This has been met with a relatively firmer longer end of the UST curve, where 10yr yields are up only around 8bp since May 20th, and are broadly unchanged since the FOMC. There is plenty of debate about this flattening of the curve - perhaps the front end is acknowledging the better US payrolls and activity data, despite the dovish reassurances from the Fed. A bringing forward of Fed fund rate hike expectations from a number of US banks in recent days has helped to push shorter end rates upwards as well. Meanwhile the longer end is benefiting from positioning which leaves fewer investors willing to short the market and there are lingering concerns about secular stagnation, or as our rates strategist Dominic suggests, structurally low labour productivity.

By the closing bell, the US 2s/30s and 2s/30s curves had flattened by 3-4bp apiece while stocks finished weaker across Europe (Stoxx600 -0.91%) and the US (S&P500 -0.39%). The more growth-sensitive NASDAQ (-0.77%) underperformed in the US as did other cyclicals in general, with many pointing to the increased expectations of rate hikes as the main reason for the underperformance. Bank stocks on both sides of the Atlantic were amongst the laggards yesterday (Eur banks -0.99%, US banks -0.72%) and may have been weighed by a WSJ report over potential Basel Committee changes to the treatment of government bonds as automatically risk-free for bank capital charge purposes (see yesterday’s EMR for more detail).

Scanning some of the other headlines this morning, there’s an article in the FT suggesting that EU banks are on track to shed as much as €100bn in unwanted loan portfolios this year in response to regulatory pressures. Some €83bn of asset sales have been completed or are in the process halfway through the year, compared with €64bn for all of 2013, according to article, citing PwC. However, the accelerating sales remain a fraction of the total €2.4tn of non-core assets still on European banks’ books (FT). On the topic of banks, Bloomberg reports that the ECB will give banks six months to “fill in any holes” highlighted by the central bank’s Asset Quality Review in October, citing an unnamed Greek official. Away from Europe, Bloomberg is reporting that despite the M&A boom of 2014 and record low debt funding rates, corporates are preferring to use a disproportionately high amount of stock to finance takeovers. All-cash offers made up only about one-third of the takeovers announced in the second quarter, data compiled by Bloomberg show. A year earlier, all-cash bids accounted for two-thirds of deals, and in the five years through 2013 they averaged 50%. European buyers have made the biggest shift away from cash, the data show, with all-cash purchases falling to just 28% of the $88 billion of takeovers announced by public companies during the quarter, compared with 68% from 2008 to 2013 (Bloomberg).