If last week's big "Risk Off" event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday's acceleration in the Portuguese lender's troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors (hopefully it ends up more lucrative for said "investor" than the recent capital raise with Baupost). No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the "good", if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.
As a result the turnaround in Portuguese sentiment has helped send European stocks surging some 1.3% to the highest since July 8, with 19 out of 19 Stoxx 600 sectors rise; bank, basic resources outperform, health care, personal & household underperform. 94.3% of Stoxx 600 members gain. Eurostoxx 50 +1.3%, FTSE 100 +0.9%, CAC 40 +1.5%, DAX +1.2%, IBEX +1.3%, FTSEMIB +1.7%, SMI +0.8%. The euro is weaker against the dollar. Spanish 10yr bond yields fall; Portuguese yields decline.
Turning to Asia, it’s been a mixed session this morning with markets digesting the latest monthly data download from China. In terms of the Chinese data, Q2 GDP printed at 7.5% YoY, which is in line with the government’s overall 2014 growth target. This has also marked the first acceleration in growth in three quarters . However risk markets have sold off slightly on the back of the weaker than expected retail sales data (12.4% YoY vs 12.5% expected). June industrial production (9.2% YoY vs 9.0% expected) was slightly better than consensus. Asian equity markets are generally trading firmer on the day though, with the exception of HSCECI (-0.4%) and Hang Seng (unch). In currencies, the AUDUSD (-0.3%) is under some pressure on the back of yesterday’s USD rally and the mixed Chinese data today. 10yr UST yields are down 1bp in Japanese trading. In summary, Asia little changed with the Sensex outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0% to 147. Nikkei 225 down 0.1%, Hang Seng up 0.3%, Kospi up 0%, Shanghai Composite down 0.1%, ASX up 0.1%, Sensex up 0.4%
European shares rise close to intraday highs, to highest since July 8, with the bank and basic resources sectors outperforming and health care, personal & household underperforming. China’s economic growth accelerates for first time in 3 quarters, U.K. unemployment drops more than forecast. The Italian and French markets are the best-performing larger bourses, Swiss the worst.
On today's calendar we have Yellen giving part 2 of her testimony. It should be pretty identical to yesterday's so no new surprises are expected. The Q&A could be worth watching though. Bank of America and eBay are amongst the S&P500 constituents reporting. The US data docket rolls on with PPI, industrial production and the NAHB housing index today. The Fed releases its Beige book and the Dallas Fed’s Fisher speaks on monetary policy today. The Bank of Canada and Brazil’s BCB meet though no change in policy is expected from either.
Market Wrap
- S&P 500 futures up 0.3% to 1973.7
- Stoxx 600 up 1.1% to 342.2
- US 10Yr yield down 1bps to 2.53%
- German 10Yr yield down 0bps to 1.2%
- MSCI Asia Pacific down 0% to 147
- Gold spot up 0.3% to $1298/oz
Bulletin headline summary from RanSquawk
Stocks traded higher in Europe (Eurostoxx 50, +1.19%), supported by
encouraging Chinese data and reports that Banco Espirito Santo (16.84%)
has potential to raise capital from private investors.
GBP failed to maintain its recent upside bias and traded lower, after the latest UK jobs report showed that earnings ex-bonus growth between Mar-May stood at record low levels.
Focus turns to more US based corporate earnings from Bank of America, eBay and Blackrock, as well as the release of the latest US PPI, NAHB data and Bank of Canada rate decision.
ASIA
Chinese GDP accelerated for the first time in three quarters, (Q2) Y/Y 7.5% vs. Exp. 7.4% (Prev. 7.4%), and is now in-line with the government’s growth target which has prompted some fears that the government will not do much more to support growth. Chinese Retail Sales missed expectations (12.4% vs Exp. 12.5% Y/Y) whilst Housing sales in China in the first half of 2014 fell by 9.2% with industrial production at 9.2% vs. Exp. 9.0% for June.
FIXED INCOME
Despite the evident risk on sentiment as evidenced by upward trending equity markets in Europe, seemingly supported by encouraging Chinese data and also reports that Banco Espirito Santo has potential to raise capital from private investors, Bunds remained bid, supported by good Bund auction. In part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.
EQUITIES
Stocks in Europe traded broadly higher this morning, with the positive Chinese macro-data and a trade update from Rio Tinto (+2.07%), which reported another H1 record for iron ore production and shipments despite a fall in prices, supporting the materials sector. As a reminder, Intel (INTC) and Yahoo! (YHOO) both traded higher after-market yesterday by over 3% after their earnings report, which showed INTC beat on EPS, revenue, gross margins and Q3 rev guidance above exp., and YHOO pact with Alibaba cuts shares it's required to sell at IPO.
FX
GBP/USD failed to maintain its recent upside bias and traded lower, although losses were capped by lower trading EUR/GBP, after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Elsewhere, AUD weakened despite positive Chinese GDP as other data (IP & property data) disappoints and NZD falls after weaker than expected CPI figures.
COMMODITIES
WTI crude futures continue to tick upwards as API inventories showed a drawdown of 4.8mln yesterday, supporting the energy complex and pushing Of note, BofA has said that Brent crude oil price curve has slumped into 'supercontango', as the WTI-Brent spread tightens to USD 5.53. After a further sell off in gold yesterday the metal traded largely sideway overnight, finding some upside momentum in early European trade.
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Jim Reid concludes the overnight recap
There was much transatlantic tension in markets yesterday as the day seemed like a repeat of the USA vs Portugal World Cup match 3 weeks ago. On one hand we had pretty strong US mega bank earnings (relative to expectations) but on the other a deterioration in the Portuguese banking drama. Meanwhile as much as some tried to over analyse Yellen she basically stayed on script and remained fairly dovish. More on this later but first the banks.
It was another weak day for credit as it became clear that the Espirito Santo Group would be unable to repay €847mn of maturing debt due at 10pm last night to Portugal Telecom and so was preparing to file for creditor protection at one of its holding companies (Rioforte) to prevent insolvency and avoid an asset fire sale. These concerns took a heavy toll on Banco Espirito Santo (which is part owned by the Group) which saw its share price close down around 15% (as low as it has been since Bloomberg starts it data in 1993), it’s senior debt down a little under half a point and its LT2 debt suffering sharp losses, closing down 10 points at around 70 cents on the euro. Despite all this, the Bank of Portugal said that the bank has a sufficient "capital cushion to deal with the risks with which its confronted" and that "if some additional capital is necessary, because of risks at this moment we're not seeing, there are certainly shareholders interested in participating in a capital increase".
The broader credit market was soft on the back of the moves in Banco’s securities – iTraxx Fin Senior finished the day 3 bps wider whilst Main widened by about 1bp. iTraxx Sub Fin and Xover widened 5bps and 10bps respectively. To put these moves in some perspective though iTraxx Xover, Fin Sen and Fin Sub yesterday closed at levels seen in the run-up to the ECB’s June 5th press conference when it announced its latest raft of easing measures. So we've retraced the gains seen since then but little more.
Also to put things in perspective Europe's troubled Banco’s market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn) which reported better earnings yesterday lifting financials generally. The key theme that we’ve seen so far from the earnings at Citi, JPM and GS is that the FICC businesses have generally been performing better than expectations, albeit FICC revenues are down 10-15% yoy. GS and JPM stock were up 1.3% and 3.5% respectively helping US financials (+0.66%) outperform the S&P 500 (-0.19%). Intel also reported consensus-beating earnings after the closing bell which helped S&P500 futures pare losses in after-market trading.
Yellen’s congressional comments were fairly dovish but some in the market have zeroed in on a couple of the Fedchair’s more hawkish turns of phrase. Yellen began her prepared remarks saying, “The recovery is not yet complete” and that “significant slack remains in the labor markets” which was corroborated by “the continued slow pace of growth in most measures of hourly compensation”. The oft-repeated stance that “a high degree of monetary policy accommodation remains appropriate” stayed largely intact. Ms Yellen attributed much of the recent uptick in inflation measures to food and energy prices, and the drop in the unemployment rate was countered with comments that the participation rate remains near historic lows. In summary, these remarks are pretty much true to recent form.
The two less-dovish elements of Yellen’s came later in her testimony and in the Q&A. Firstly, Yellen acknowledged the reach for yield in credit markets that has arisen in an environment of accommodative monetary policy and she highlighted areas of concern being in leveraged loans and high yield debt. By our count, Yellen has now raised the issue of potential overheating in credit markets three times in the last month (prior times were at the last FOMC press conference on June 18th and at the IMF’s Michel Camdessus Central Banking Lecture on July 2nd). However each time she has stressed the importance of macroprudential policies as the first line of defence in guarding against risks to financial stability and that monetary policy is a blunt instrument against asset bubbles that itself carries its own costs and risks. Yellen also seemed to stress yesterday that the Fed remains wedded to its dual inflation and employment mandate rather than to financial stability. Outside of credit markets, the Fed said in its Monetary Policy Report which accompanied Yellen’s testimony, that "valuation metrics in some sectors do appear substantially stretched -- particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year”. So the riskier end of the debt (HY bonds and leveraged loans) and equity markets (social media and biotech) were singled out for special mentions yesterday. Social media stocks such as Yelp (-2.9%), Facebook (-1.1%) and Twitter (-1.1%) were amongst the underperformers on Tuesday and the broader NASDAQ fell by 0.54%.
The other less dovish element to Yellen’s testimony came when she said that if the labour market "continues to" improve more quickly than anticipated by the Committee, rate hikes likely would occur "sooner" and be "more rapid" than currently envisioned. Here markets seemed to focus on the choice of words. The use of the word “continues” perhaps suggested that the labour market is already improving faster than Fed policymakers had anticipated and that it would take a downward change in the current trajectory for the Fed not to hike sooner. The WSJ’s Fed-watcher Hilsenrath described this comment as “a notable new hedge”. A hedge or not, Yellen’s comments prompted a mild underperformance in the front end of the UST curve yesterday, while 10yr yields closed pretty much unchanged. Gold lost 1% and the dollar index closed 0.25% higher. We still think she was dovish but as ever data will dictate any changes in this over the weeks and months ahead.
Turning to Asia, it’s been a mixed session this morning with markets digesting the latest monthly data download from China. In terms of the Chinese data, Q2 GDP printed at 7.5% YoY, which is in line with the government’s overall 2014 growth target. This has also marked the first acceleration in growth in three quarters . However risk markets have sold off slightly on the back of the weaker than expected retail sales data (12.4% YoY vs 12.5% expected). June industrial production (9.2% YoY vs 9.0% expected) was slightly better than consensus. Asian equity markets are generally trading firmer on the day though, with the exception of HSCECI (-0.4%) and Hang Seng (unch). In currencies, the AUDUSD (-0.3%) is under some pressure on the back of yesterday’s USD rally and the mixed Chinese data today. 10yr UST yields are down 1bp in Japanese trading.
We have another relative eventful calendar ahead including Yellen giving part 2 of her testimony. It should be pretty identical to yesterday's so no new surprises are expected. The Q&A could be worth watching though. Euroarea trade and the UK employment report are the notable data releases in the European timezone. Bank of America and eBay are amongst the S&P500 constituents reporting. The US data docket rolls on with PPI, industrial production and the NAHB housing index today. The Fed releases its Beige book and the Dallas Fed’s Fisher speaks on monetary policy today. The Bank of Canada and Brazil’s BCB meet though no change in policy is expected from either.