Futures Levitate As Portugal Troubles Swept Under The Rug

Futures took off earlier today, driven by a round of risk on exhuberance starting in Asia, where bourses were up around a third of a percent this morning. Gains are being led by the Shanghai Composite (+1%), Nikkei (+0.9%), HSCEI (+0.5%) and KOSPI (+0.3%). The Indonesian rupiah is down 0.6% today after the country’s central bank said that the current account deficit widened to around 4% in Q2, compared with around 2% in the prior quarter. The Singaporean dollar is also slightly weaker (-0.1%) after Singapore reported a weaker than expected Q2 GDP number (-0.8% QoQ saar vs +2.4% expected).

This helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team [38], concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company [39]to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more importantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers [40]would not be called on to bail out failing banks, making clear there would be no state support for BES.

As a result European shares rise, with the Eurostoxx 600 up 0.6%, FTSE 100 +0.7%, CAC 40 +0.6%, DAX +0.8%, IBEX +0.2%, FTSEMIB -0%, SMI +1.1%, though are off intraday highs, with the basic resources and construction sectors outperforming and utilities, travel & leisure underperforming. The Swiss and Swedish markets are the best- performing larger bourses, Italian the worst. The euro is stronger against the dollar. Portuguese 10yr bond yields fall; Japanese yields increase. Commodities little changed, with silver, gold underperforming and zinc outperforming.

There is little on the US docket today when Mario Draghi will be speaking at the European Parliament’s Economic and Monetary Affairs committee at 1:30pm Eastern. Tuesday will be largely dictated by Yellen’s appearance before the Senate but we should also highlight speeches from Juncker (before the European parliament ahead of a vote on his nomination to be EC president) and Carney (at the House of Commons Treasury Committee on the BoE’s June financial stability report). The BoJ meets on Tuesday as well. Datawise, the highlights on Tuesday are the US Empire manufacturing and German ZEW surveys.

Yellen’s semi annual congressional testimony continues on Wednesday at the House Financial Services Committee, but the comments should be largely the same as her Senate comments on Tuesday. Of more focus perhaps will be the Chinese Q2 GDP data (Bloomberg consensus is 7.4%) and US industrial production for June. China also reports June retail sales and industrial production numbers with its Q2 GDP. In terms of central bank actions, the Fed releases its latest Beige Book, the Bank of Canada meets (no policy change expected) and Brazil’s BCB is expected to keep rates unchanged.

Market Wrap

S&P 500 futures up 0.3% to 1969.2
Stoxx 600 up 0.7% to 339.2
US 10Yr yield up 1bps to 2.53%
German 10Yr yield up 1bps to 1.21%
MSCI Asia Pacific up 0.4% to 146.6
Gold spot down 1.3% to $1321.9/oz

Bulletin Headline Summary

Treasury yields slightly higher in overnight trading; last week saw 10Y yield take biggest weekly drop since March, back below its 50-DMA, driven by decline in U.S. equity benchmarks from record highs.
Mario Draghi’s newest stimulus tool will hand banks more than EU700b ($950b) of cheap funding, economists say; Draghi may address the topic today when he testifies at the European Parliament in Strasbourg
European banks and asset managers plan to sell or restructure EU584b ($795b) of riskier real estate as they try to clean up their balance sheets, Cushman & Wakefield Inc. said
Peripheral bond yield spreads traded tighter and Bunds lower in Europe this morning, as market participants welcomed the latest developments over in Portugal where the central bank continued to push for the overhaul of the troubled Banco Espirito Santo.
Gold prices came under significant selling pressure this morning, falling over USD 15 as stops were tripped, as further reduction in risks relating to the stability of the Portuguese banking system and GS reiterating its bearish stance on gold weighed on safe-haven assets.
Banco Espirito Santo SA’s parent sold a 4.99% stake to meet loan repayments and the bank appointed Vitor Bento CEO after financial troubles at the group roiled global markets
Israel targeted more than 40 “terror sites” in the Hamas-controlled Palestinian enclave overnight while at least 20 rockets were fired into Israel today, the army said in an e-mailed statement
Russia and Germany called for a resumption of Ukraine crisis talks as President Vladimir Putin’s government condemned the shelling of its territory that left one person dead
Germany beat Argentina 1-0 to win its fourth World Cup, taking soccer’s biggest prize for the first time in 24 years
Sovereign yields mixed with Ireland, Greece and Portugal 10Y spreads all tighter. Euro Stoxx Banks index fell 7.8% last week to 141.2; Thursday hit lowest level (140.89) since January. Asian stocks mostly higher; Japan rises, China rises. European equities, U.S. stock futures higher. WTI crude lower, copper rises; gold drops

US Econ Calendar

1:30pm: ECB’s Draghi speaks to EU Parliament Committee
9:30pm: Reserve Bank of Australia July meeting minutes
Bank of Japan Monetary Policy Statement
Bank of Japan 2014 Monetary Base Target, est. JPY270t (prior JPY270t)
11:00am POMO: Fed to purchase $1b-$1.25b notes in 2036-2044 sector

FIXED INCOME

Touted buying by leverage accounts resulted in PO/GE 10y spread tightening by around 10bps, however overall volumes remained thin, with just over 80k contracts traded in the German Bund future. There was little in terms of tier-1 macroeconomic releases but over the weekend, ECB’s Weidmann (hawk, German) said that the ECB risks becoming bad bank of Euro-area if it starts buying ABS linked to loans to SMEs, adding that monetary policy shouldn’t remain loose longer than needed. (Welt am Sonntag/WiWo)

EQUITIES

Stocks in Europe got off to a good start today, as further reduction in risks relating to the stability of the Portuguese banking system buoyed demand for riskier assets. However as the session progressed, stocks pared some of the initial upside, with the in focus Banco Espirito Santo consequently moving into negative territory and dragging the sector lower, while the Italian FTSE-MIB index also edged into negative territory, with smaller cap banks under pressure.

EUR/USD and GBP/USD traded higher this morning, albeit marginally, supported by broad based JPY weakness which was evident overnight in Asia and in Europe this morning amid a reversal in sentiment which also saw the Nikkei 225 settle up 0.9%. Of note, despite GBP/USD trading in minor positive territory, implied vols were bid and the 1-month contract traded at its highest level in nearly 1-month. Although the net long GBP position remains the largest at USD 4.5bln, the shift in CFTC positions last week (-USD 1.5bln) indicates that there is a risk of a potential change in sentiment.

COMMODITIES

Last week’s 6th straight consecutive gain in gold, its longest run since 2011, led to early profit taking, with the metal selling off in overnight and early EU trade, amid weekend reports from GS who reiterated its bearish stance for the safe-haven commodity. In addition as Europe came to market the metal hit stops at USD 1325 to the downside amid thin trade to print session lows at USD 1317.21. Elsewhere, Brent trades in minor positive territory after weekend-reports of protesters having shut down the eastern Libyan oil port Brega, which in combination with lower WTI prices has resulted in a moderate re-widening of the spread.

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DB's Jim Reid concludes the weekend news recap

Last week felt fairly tough for markets especially for European credit but so far the sell off has been little more than a barely noticeable blip when looked at on say a 6, 12 or 24 month chart. iTraxx Main, Senior Fins, Sub Fins and Crossover widened 5bps, 11bps, 19bps and 24bps respectively last week but are still -16bps, -23bps, -36bps and -73bps tighter on a 6-month basis. As we discussed on Friday whilst we think Europe still has major medium-long term problems, we don't think the Banco Espirito Santo situation is a catalyst for an imminent escalation of traumas in the continent. The problem corporate structure in question is a fairly unusual and unique one and the financial irregularities uncovered likely make this an isolated one-off. However sentiment is likely to be dented by this and scrutiny will likely be placed on banks with more opaque structures.

In terms of the impact of the situation on the sovereign, DB’s Gilles Moec thinks that a bailout of BES, if required, would be within the financial capacity of the Portuguese sovereign, unless significant risks beyond the exposure to the Espirito Santo family and BES’ subsidiary in Angola materialise. Based on bond issuance from the Portuguese sovereign since January, the sovereign can deal with redemptions and deficit funding without accessing the market for the remainder of this year. In addition, slightly more than half (EUR6.4bn) of the EUR 12bn of the Troika program earmarked for bank recapitalisation was left untouched and available to the government, counting towards the EUR 15.3bn cash position of the government at the of 2013. In other words, Gilles thinks that - unless bigger "holes" emerge either on BES specifically or Portuguese banks in general (eg from the ECB's stress-tests/AQR results) - a bailout is unlikely to create massive tension on the sovereign's financing capacity.

It'll be interesting to see whether this story can overshadow the main event of the week which will be Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee (tomorrow) and the House Financial Services Committee (Wednesday). She will be testifying on behalf of her committee and as its clear that she's more dovish than most of her colleagues there's always a chance she will be more hawkish in her testimony than she is when purveying her own views. However in her chair role so far she has tended be dovish even when fears mount that she might be on the turn or might be representing her committee's views.

In the meantime, markets are left watching and interpreting the clues amongst the comments of other Fed officials. On that note, the WSJ’s Hilsenrath ran an article late on Friday suggesting that one of the key members of the “dovish camp” within the Fed, San Francisco Fed President John Williams, has perhaps become less dovish recently. The article quoted Williams as saying that “We have made more progress toward our unemployment goals than we would have thought” earlier this year. Williams added that this development “suggests that monetary policy can safely start the process of normalization a touch earlier” than previously expected. He didn’t specify when that point would be, but has said in the past that he sees the first Fed rate hike in the second half of 2015. The article acknowledged however that William sees “quite a bit” of slack in the economy that will hold inflation down.

Aside from the events on Capitol Hill this week, we’ve also reached the first “real” week of the US reporting season. This is the week when the major US banks will be reporting earnings, together with some of the market leaders in the tech space. Indeed if we look at the numbers, though only around 58 S&P500 companies are reporting this week (or 11% of constituents), they together represent around one-fifth of the index’s market cap.

Perhaps of most interest will be how the US bulge bracket banks have done in Q2 given all the debate in recent months about whether we are in the midst of a cyclical, volatility-suppressed slowdown in the FICC business or whether these banks are facing something more structural in nature. We doubt that this question will be answered in the Q2 results, but certainly the expectation is that the trading business of the major banks has been subdued. However, DB’s US bank analysts think that FICC expectations likely bottomed in May and they sense some pick up within FICC in June given strong credit issuance, tighter spreads and a pickup in broker dealer inventory levels. So it will be interesting to see how all these factors play out in the Q2 results. First off the rank is Citigroup who reports today before the US opening bell. This will be followed by JPM and GS tomorrow, BofA on Wednesday and Morgan Stanley on Thursday. Last week, the bank earnings season got off to a mixed start with the Wells Fargo result on Friday. According to DB’s analysts, it was the first time WFC hasn’t beat consensus since 4Q10 (or 13 qtrs) and the 3% yoy EPS growth is the lowest since 1Q10. For the record, WFC reported EPS $1.01 which was in line with Bloomberg median. The stock closed 0.62% lower on Friday.

Outside of the banks, other earnings to look out for this week are from tech giant Intel on Tuesday, Google on Thursday and GE on Friday. With the emphasis on tech and bank earnings this week, it’s interesting to note that the tech sector is expected to have the highest projected earnings growth rate among the 10 S&P sectors for the second quarter at 12.3%, potentially marking its best quarter since the first quarter of 2012. Meanwhile financials have the worst earnings forecast with a decline of 3.5% YoY, according to Thomson Reuters data.

Taking a quick look at overnight markets, risk has started the week with a positive tone with most Asian bourses up around a third of a percent this morning. Gains are being led by the Nikkei (+0.9%), HSCEI (+0.3%) and KOSPI (+0.36%). The Indonesian rupiah is down 0.6% today after the country’s central bank said that the current account deficit widened to around 4% in Q2, compared with around 2% in the prior quarter. The Singaporean dollar is also slightly weaker (-0.1%) after Singapore reported a weaker than expected Q2 GDP number (-0.8% QoQ saar vs +2.4% expected).

Looking out over the rest of the week, Mario Draghi will be speaking at the European Parliament’s Economic and Monetary Affairs committee today. Tuesday will be largely dictated by Yellen’s appearance before the Senate but we should also highlight speeches from Juncker (before the European parliament ahead of a vote on his nomination to be EC president) and Carney (at the House of Commons Treasury Committee on the BoE’s June financial stability report). The BoJ meets on Tuesday as well. Datawise, the highlights on Tuesday are the US Empire manufacturing and German ZEW surveys.

The focus returns to the data on Thursday with US housing starts, weekly jobless claims, building permits and the Philly Fed. In the Euroarea, the final inflation numbers will be released, and further east, the Turkish central bank announces its latest rate decision. On Friday, the highlight will be the preliminary UofMichigan consumer sentiment survey. A busy week!!