Futures Flat Following Turbulent Asian Session, FOMC Minutes Loom

While the situation between Israel and Gaza continues to escalate, pulling the markets' attention away from the recent developments in Iraq (as for the Ukraine civil war, forget it), the big news overnight came out of Chine which reported another contraction in consumer prices, which both declined to 2.3% and missed expectations of a 2.4% print (down from 2.5%). Producer Prices had another negative print, the 28th in a row, and have remained negative since 2012. This led to the Hang Seng Index falling at the fastest rate since late June to erase all YTD gains. However, as has now become the norm, macro news hardly impacted US equity futures, which are driven exclusively by the Yen carry trade, which unlike yesterday's pounding, has traded rangebound between 101.6-101.7 keeping US equity futures just barely in the green. We expect the momentum ignition algo to kick in at some point, for absolute no fundamental reason beside the NY Fed trading desk issuing a green light, sending the USDJPY surging, taking the Spoos with them, and helping stocks forget all about the weak Asian session.

The tone from Tuesday has carried through to overnight markets with losses across all the major equity bourses including Japan (Nikkei -0.1%), Hong Kong and Korea. In the Asian EM space, all eyes are on Indonesia’s presidential elections. Voting ends at around the time that we go to print and ‘quick count results’ will begin to emerge during the London morning today. However the official results won’t be announced until around July 21st or 22nd, or possibly late August if there are legal challenges (Bloomberg). Local Indonesian financial markets are shut today for the elections, however offshore USD Indonesian bonds are trading stronger yet again in anticipation of a Jokowi-win.

European market sentiment is negative amid very thin volumes after the poor performance by Asian stocks filtered through to local indices. European shares remain mixed with the financial services and autos sectors underperforming and chemicals, tech outperforming. The U.K. and Swiss markets are the worst-performing larger bourses, the Italian the best. The euro is little changed against the dollar. Portuguese 10yr bond yields rise; Irish yields increase. Commodities decline, with soybeans, corn underperforming and zinc outperforming. U.S. mortgage applications due later.

The main event on today's US calendar is the release of the Fed minutes. As DB notes, there seems to be a fair amount of anxiousness ahead of the FOMC minutes release. DB expects the minutes to reveal a more hawkish side to the FOMC than has been presented from Yellen’s recent public commentary. Judging by the trading patterns on previous FOMC minutes days, the minutes have been a bridge between the Fed leadership and perhaps a less dovish overall Committee. Indeed FX strategist Alan Ruskin notes that 10y yields have gone up on ten consecutive FOMC minutes release days. The USD Trade-weighted index versus major currencies, has been up on 11 of the last 13 FOMC minutes release days, suggesting the bearish bias in US longer-dated yields has largely translated to a stronger USD. On the day of the last 8 FOMC minutes releases, the EUR has been weaker 6 times. Speaking of Yellen, it was announced that the Fed chair will be taking part in the semi-annual Humphrey Hawkins testimony before the US senate next week (July 15th). Given her recent public comments, it’s difficult to envisage any major departure from her dovish stance.

MARKET WRAP

S&P 500 futures little changed at 1961.1
Stoxx 600 down 0.2% to 339.4
US 10Yr yield up 2bps to 2.57%
German 10Yr yield little changed at 1.22%
MSCI Asia Pacific down 0.7% to 146.6
Gold spot up 0.3% to $1323.8/oz

Bulletin Headlin Summary from Bloomberg and RanSquawk

The Hang Seng Index fell at the fastest rate since late June to erase all YTD gains after Chinese inflation data slumped below expectations, marking the 28th consecutive negative PPI.
European markets trade under pressure, with the FTSE 100 underperforming its peers on a BP downgrade at Barclays.
Markets now look ahead to the FOMC minutes, expected at 1900BST/1300CDT, with ECB president Draghi expected to speak 30 minutes later.
Treasuries decline before Fed releases minutes of last month’s meeting, U.S. sells $21b 10Y in reopening; yield 2.575% in WI trading vs 2.648% in June.
3Y notes sold yesterday awarded at 0.992%, highest since May 2011 and 0.6bp lower than WI yield at 1pm according to Stone & McCarthy
Citigroup may reach an agreement with federal prosecutors as early as next week to resolve a probe into MBS sales before the 2008 crisis, a person familiar with the negotiations said
Bonds of Banco Espirito Santo SA plunged to record lows after a parent company delayed payments on some short-term debt; Portugal’s 10Y yield rose the most in a year
German authorities are investigating a second case involving allegations of espionage for the U.S., Sueddeutsche Zeitung newspaper reports
French and German companies are leading among countries outside of greater China in the usage of the yuan, according to a report by HSBC
China’s factory-gate prices fell in June at the slowest pace in more than two years, adding to signs of stabilization in the world’s second-largest economy
The thousands of children crossing the southern U.S. border are putting immigration back on the political agenda, with Obama facing the prospect of mass deportations at a time when administration was easing away from such actions
Israeli officials said the aim of their operation in the Gaza Strip is to cripple the military capability of Hamas, as rockets fired by the Islamist movement and other Palestinian militant groups reached the skies over Tel Aviv and Jerusalem
Sovereign yields mostly higher. Euro Stoxx Banks index little changed, holding near falls lowest since February. Asian stocks decline. European equities, U.S. stock futures mostly lower. WTI crude little changed, gold and copper higher

US Event Calendar

7:00am: MBA Mortgage Applications, July 4 (prior -0.2%) Central Banks
2:00pm: Fed releases minutes from June 17-18 FOMC meeting
2:30pm: ECB’s Draghi speaks in London Supply
1:00pm: U.S. to sell $21b 10Y notes in reopening

EUROPE MARKETS

3 out of 19 Stoxx 600 sectors rise; chemicals, tech outperform, financial services, autos underperform
31.7% of Stoxx 600 members gain, 66.5% decline
Eurostoxx 50 +0.3%, FTSE 100 -0.4%, CAC 40 -0.1%, DAX +0.1%, IBEX +0.4%, FTSEMIB +0.6%, SMI -0.2%

ASIA MARKETS

Asian stocks fall with the Nikkei outperforming and the Hang Seng underperforming.
MSCI Asia Pacific down 0.7% to 146.6
Nikkei 225 down 0.1%, Hang Seng down 1.6%, Kospi down 0.3%, Shanghai Composite down 1.2%, ASX down 1.1%, Sensex down 0.5%
All 10 sectors fall with telcos, staples outperforming and utilities, tech underperforming

ASIA NEWS

The Japanese 10y yield fell to the lowest since April’13, as Asian equities followed suit from their US counterparts following a negative Wall Street close. The Nikkei 225 traded down 0.08%, whilst the Shanghai Comp (-1.2%) and Hang Seng (-1.53%) remained under pressure following the release of a worse than expected Chinese PPI (-1.1% vs. Exp. -1.0%) and CPI (2.3% vs. Exp. 2.4%).

FIXED INCOME

With European newsflow remaining light, T-notes trade range bound ahead of a USD 21bln 10y auction later today, slightly under-performing European fixed income, with Bund and Gilt futures both back in positive territory after earlier coming off their highs. However the European laggard is Greek bonds which continue to underperform in Europe, ahead of the expected 3y bond syndication by the Greek PDMA which is expected to yield no more than 3% and amount to up to EUR 3bln.

The PO/GE spread trades at the widest level since late-March, wider by over 25bps today as Portuguese corporate governance concerns rise to the fore after Espirito Santo Financial (EFS PL) delayed payments on short-term debt yesterday.

EQUITIES

European market sentiment is negative amid very thin volumes after the poor performance by Asian stocks filtered through to local indices. The FTSE 100 under-performing, down 0.% vs. EuroStoxx50 which is up 0.%, as heavy weight stock BP (BP/ LN), fell 1.15%, weighs on the index due to a downgrade at Barclays and Aviva (AV/ LN) down 4.4% after their lacklustre market update. Notably however the FTSE MIB is the leader in European indices, after Azimut (AZM IM), up 3.5%, out-performs on a Deutsche Bank upgrade.

Looking to FX markets, the major pairs are range-bound on little fundamental news. Notably ECB Coene said the EUR is not too strong, the exchange rate is not an objective for ECB, however the comments led EUR/USD marginally to the downside, with GBP/USD following suit as the USD strengthens.

COMMODITIES

Brent trades close to the June monthly low at USD 108.40 as the war premium continues to be removed after the Iraq inspired gains with the WTI-Brent spread its tightest in 4 weeks at USD 5.25, leading the energy complex to flat, ahead of the DoE Inventories today where a drawdown of 1.7mln is expected.

Gold is trading sideways after overnight gains, made primarily on the 2nd consecutive day of inflows into SPDR Gold Holdings who have now erased this year’s decline, with the pressure on fixed income spreading into the risk averse yellow metal.

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DB's Jim Reid concludes as usual the overnight recap

there must have been a few market participants that hoped yesterday would end quicker than it did as risk markets struggled and bonds rallied with a few core European markets again hitting fresh multi-century yield lows. European equities fell for the third day with the Stoxx 600 (-1.4%) seeing its biggest fall for nearly 3 months. In the US the Nasdaq (-1.35%) saw the worst of the sell-off with the weakest day since May 6th. Interestingly the S&P 500 (-0.70%) maintained its 56 day run of not having a +/- 1% day though. Looking at the sector performances, it was clear that cyclical stocks bore the worst of yesterday’s selloff with US consumer discretionary (-1.00%), info tech (-0.99%), healthcare (-0.92%) and financials (-0.86%) amongst the worst performers. But it’s fair to say the rout in cyclicals had started at the European opening bell with Air-France KLM’s profit warning (-8.7%) that set off weakness in other airlines such as IAG (-7.0%) and Easyjet (-5.8%). Yesterday’s risk-off session was redeemed in small part with Alcoa’s after-market earnings announcement which got the US earnings season off to a positive start. Aside from the bottom line beat (EPS 18c vs 12c estimated), the company also managed to exceed the highest analyst estimate on the revenue side ($5.84bn vs est $5.65bn, highest estimate was $5.82bn) and operating margins were firmer than expected. At a more macro level, Alcoa reaffirmed its 2014 global aluminium demand growth forecast of 7%. Alcoa’s shares were trading around 3% higher in after-market trade, adding to a 0.75% gain during the regular trading session, and this helped equity futures find a floor after the NYSE close (S&P500 futures are fairly flat this morning).

Despite encouraging labour market indicators within the JOLTs and NFIB business optimism data, it’s hard to conclude that there was any further heightening of Fed rate hike concerns given that the short end of the UST curve was essentially unchanged yesterday – though we note it did underperform the long end of the curve. Indeed, the UST curve continued to flatten on Tuesday, this time by around 4-6bps, helped along by the negative sentiment in equities, credit and the European periphery. The latest US JOLTS data showed job openings increased to 4.635m in May, up from 4.464m in the previous month and above expectations of 4.350m. Though the number of job openings is approaching the 2007 highs, the quit rate did not show significant improvement (unch at 1.8%) and the gross number of monthly quits edged up slightly to 2,527,000 from 2,467,000. The NFIB small business optimism index printed at 95.0, lower than the 97.0 consensus expectations, but again there were some improvements in hiring indicators. The net percentage of small-business owners who planned to hire more employees in the next three months rose to 12% in June from 10% the previous month. According to the NFIB, the figure is approaching a normal level and was the best since 2007. Outside of treasuries, we noted the continued downtrend in oil prices even with the heightened tensions in Israel & the Gaza Strip. Brent is now down for seven straight days (during which it has lost 4%) and it’s traded down in 12 out of the last 14 days. It’s a similar trend in WTI crude which is down 10 out of the last 12 days though it was reported that US consumers paid the highest average gasoline price for the 4th of July this year since 2008. US gasoline was priced at an average of $3.67 a gallon over the holiday weekend compared with $3.47 a gallon a year ago according to USA today.

Ahead of today’s FOMC minutes, the USD dollar is trading a little stronger in the Asian timezone. USDJPY has inched up +0.05% to around 101.6 and AUDUSD is a touch lower (-0.05% at 0.939). The tone from Tuesday has carried through to overnight markets with losses across all the major equity bourses including Japan (Nikkei -0.4%), Hong Kong (HSI -1.2%) and Korea (-0.5%). In the Asian EM space, all eyes are on Indonesia’s presidential elections. Voting ends at around the time that we go to print and ‘quick count results’ will begin to emerge during the London morning today. However the official results won’t be announced until around July 21st or 22nd, or possibly late August if there are legal challenges (Bloomberg). Local Indonesian financial markets are shut today for the elections, however offshore USD Indonesian bonds are trading stronger yet again in anticipation of a Jokowi-win. In China, the June inflation numbers came in below expectation with CPI at 2.3% yoy (2.4% consensus) and PPI at -1.1% yoy (vs -1.0% consensus).

There seems to be a fair amount of anxiousness ahead of today’s FOMC minutes but European investors will have to wait until after the market close for their release (7pm London). DB’s Joe Lavorgna expects the minutes to reveal a more hawkish side to the FOMC than has been presented from Yellen’s recent public commentary. Judging by the trading patterns on previous FOMC minutes days, the minutes have been a bridge between the Fed leadership and perhaps a less dovish overall Committee. Indeed FX strategist Alan Ruskin notes that 10y yields have gone up on ten consecutive FOMC minutes release days. The USD Trade-weighted index versus major currencies, has been up on 11 of the last 13 FOMC minutes release days, suggesting the bearish bias in US longer-dated yields has largely translated to a stronger USD. On the day of the last 8 FOMC minutes releases, the EUR has been weaker 6 times. Speaking of Yellen, it was announced that the Fed chair will be taking part in the semi-annual Humphrey Hawkins testimony before the US senate next week (July 15th). Given her recent public comments, it’s difficult to envisage any major departure from her dovish stance.

There is not a whole lot on the calendar today except for the FOMC minutes. As we mentioned above Indonesian election results are due shortly after we go to print. The ECB’s Coeure and Praet will be speaking early this morning. Mario Draghi delivers the Tommaso Padoa-Schioppa Memorial Lecture at the Tate Modern art museum in London this evening – the Lecture aims to support the interaction between financial reporting and public policy.