Quiet Economic Calendar Means All Attention Focused On Ukraine And Gaza

In the absence of any major economic events, it will be another day tracking geopolitical headlines out of Ukraine (lots of accusations, propaganda and fingerpointing on both sides, zero actual evidence and facts - expect more European sanctions to be announced today to match last week's latest US-led round ) and Israel (where the death toll has now risen over 500, almost entirely on the Gaza side), and then promptly spinning any bad news as great news. For now, however, futures are modestly lower from the Friday close pushed down by the AUDJPY which has rebased around 95.00. We expect the momentum ignition correlation algos will promptly take of that as soon as the US market opens, a market which has now been described as bubbly by the BIS, the Fed and the IMF.

European equity markets fell from the open as concerns of further sanctions on Russia weighed on sentiment. With sanctions against energy, financial and infrastructure firms already in place, markets are eyeing the risk of further sector-wide sanctions, as the next step could hypothetically include measures such as trade embargos and import bans of certain Russian-based products. The DAX future fell below the 100DMA in early trade, with 9600 the next level to the downside, having not been broken since May 21s. 1 out of 19 Stoxx 600 sectors rise; utilities outperform; autos, travel & leisure, personal & household underperform * 16.7% of Stoxx 600 members gain, 80.5% decline; Eurostoxx 50 -0.6%, FTSE 100 -0.4%, CAC 40 -0.6%, DAX -0.7%, IBEX -0.5%, FTSEMIB -1%, SMI -0.2%. Those who still follow actual economic data will be delighted to learn that in May, Italy's industrial orders tumbled by 2.1%, compared to a 3.6% increase in April. Weather's fault again? Or is the German weakness starting to catch up to the periphery?

Asian equities have opened this week largely unchanged from Friday’s close and S&P500 futures are essentially unchanged (-0.05%). In Indonesia, markets are gearing up for the final tally in the country’s presidential vote which will be released tomorrow. Reports suggest that even after the official tally is announced, there is a material chance that the losing candidate will seek a court challenge. Nevertheless, the IDR is trading 0.4% stronger today. In China a landmark transaction is near, with the country set to see its first mortgage backed bond issue in six year with Postal Savings Bank of China set to price around $1.1bn of mortgage bonds tomorrow. The move is being seen as a means of freeing up capacity for more mortgage lending to support softer real estate markets. Elsewhere in Asia, Treasury markets are shut with Japan closed for the Marine Day holiday. Asian stocks rise with Kospi underperforming. MSCI Asia Pacific up 0.2% to 147. Hang Seng down 0.2%, Kospi down 0%, Shanghai Composite down 0.2%, ASX up 0.1%, Sensex up 0.4%. 9 out of 10 sectors rise with utilities, information technology outperforming; materials underperforming

In other asset classess, the euro is little changed against the dollar. Japanese 10yr bond yields rise; German yields decline. Commodities decline, with natural gas, soybeans underperforming and silver outperforming.

The dataflow will be relatively light but the key data report to look out for Stateside is Tuesday’s US consumer price index given all the recent talk about the Fed’s potential rate hikes. The market consensus is for the headline CPI and core CPI to remain at 2.1% and 2.0% respectively. Outside of CPI, it’s a relatively light data docket but we would highlight tomorrow’s existing home sales, Thursday’s new homes sales and Friday’s durable goods. Lost amongst all the geopolitical headlines, last week’s building permits and starts data were fairly disappointing, so all eyes on where the housing data goes from here.

The key event this week are earnings, with just under 150 S&P500 constituents, accounting for around 31% of the index market cap, reporting. This includes a number of market heavyweights including Apple, Microsoft, Verizon and Coca Cola tomorrow, followed by AT&T and Facebook on Wednesday and Amazon on Thursday. Across the Atlantic, more than 70 Stoxx600 companies will be reporting including the first of the major banks namely Credit Suisse tomorrow. A very interesting earnings announcement to watch will be Banco Espirito Santo’s on Thursday. A number of large cap industrial earnings reports are also worth watching too, including Unilever (Thursday), Lafarge and Anglo American (Friday).

In Europe, tomorrow's meeting of foreign ministers is shaping up to be a potentially market moving event which may see additional EU sanctions being placed on Russian individuals or companies. The major piece of data will be Thursday’s preliminary manufacturing and service sector PMIs. Bloomberg consensus is pointing to a further softening in PMIs across the Euroarea. The German IFO and Euroarea money aggregates are released on Friday. A fairly active week in the UK with BoE minutes on Wednesday, retail sales on Thursday and the advanced reading of Q2 GDP on Friday.

In Asia, China’s latest flash HSBC PMI is scheduled for Thursday. In Japan, the key releases include trade data for the month of June on Thursday and June CPI data on Friday. Australia reports Q2 CPI on Wednesday.

The biggest event

Market Wrap

S&P 500 futures down 0.3% to 1966
Stoxx 600 down 0.6% to 337.5
US 10Yr yield down 1bps to 2.47%
German 10Yr yield down 1bps to 1.15%
MSCI Asia Pacific up 0.1% to 147
Gold spot up 0.2% to $1314.1/oz

Bulletin headline summary:

Sanctions risk back on the table, as the EU are to discuss further measures against Russia on Tuesday – US and Ukrainian briefings see the downing of MH17 as a mistake carried out by the pro-Russian separatists with assistance from Russian military personnel.
US fixed income markets and the USD trade firmer, with investors eschewing European equities due to sanctions risk and earnings concerns ahead of European reporting season.
US focus shifts to earnings this week from Apple, Microsoft, Facebook, AT&T, Boeing, Visa, Amazon, GM and more
Treasuries steady, 10Y yield holds near YTD closing low amid ongoing tensions over shooting down of Malaysia Airlines flight over Ukraine, intensified fighting in Gaza Strip.
Putin defied international anger over Russia’s alleged role in the shooting down of flight MH17 as the U.S. and Europe threaten further sanctions against his country
Russia’s parliament is preparing new regulations to reduce its reliance on foreign technology suppliers after the U.S. imposed sanctions against some of its largest companies, a move that could hurt sales at vendors such as Microsoft and IBM
Diplomatic efforts to end two weeks of Gaza Strip fighting intensified after battles killed dozens of Palestinians and 13 Israeli soldiers in the conflict’s bloodiest single day; Palestinian death toll has surpassed 500
Almost half of all finance professionals expect bonuses to be smaller this year, if they get one at all, according to a Bloomberg Global Poll
The IMF is poised this week to cut its estimate for global expansion in 2014 from 3.6% in April, which was a reduction from the 3.7% it anticipated in January and the 4.1% in January 2013
China sent a surveillance vessel to waters off Hawaii even as the country participated for the first time in the world’s largest international naval exercise led by the U.S
More than three years after Obama’s former chief of staff Rahm Emanuel cruised into Chicago’s City Hall, people are asking if the middle finger-flipping mayor just might fail to win re-election in the nation’s third-most populous city
The leaders of three Central American countries will meet with Obama next week in Washington as part of U.S. efforts to stem a flood of children coming across the Mexican border
Sovereign yields decline. Euro Stoxx Banks index falls 0.9%. Tokyo closed for holiday; China stocks lower. European equities, U.S. stock futures fall. WTI crude and copper little changed, gold higher

US Event Calendar

8:30am: Chicago Fed Nat Activity Index, June (prior 0.21) Central Banks
11:00pm: Reserve Bank of Australia’s Stevens speaks in Sydney
Supply
11:00am: Fed to purchase $1b-$1.25b notes in 2036-2044 sector
11:30am: U.S. to sell $26b 3M bills, $24b 6M bills

ASIAN HEADLINES

With Japan closed, Asia-Pacific trading was muted, however the Shanghai Composite (and Hang Seng traded softer following an article in PBoC-backed press stating it is not realistic to expect large-scale easing in H2.

FIXED INCOME

Bund futures remained supported from the open by softer stocks, however volumes remained thin with Japan out of market due to a market holiday. UK fixed income underperforms, particularly in the long-end, as the UK Treasury unveiled reforms allowing pensioners more control over their pension pots in the future, lessening the dependence on UK Gilts. Barclays Prelim Pan Euro Agg Month-end Extension +0.11y (Prev. month 0.09y, 12m ave. 0.08y), Treasury Month-end Extension +0.08y (Prev. month 0.08y, 12m ave. 0.09y)

EQUITIES

The USD has benefited from modest weakness in both EUR and GBP this morning, with GBP slightly softer after UK Rightmove house prices showed the first price fall in 2014 in the month of June. In light volumes, the EUR/USD pair remains well supported by Asian bids ahead of the 1.3500 handle, with vanilla option expiries at that level. Below, at 1.3450, analysts at IFR have noted touted option barriers.

COMMODITIES

Precious metals as well as energy has been supported by the continued conflict in the middle-east and eastern Europe, with reports suggesting as many as 90 Palestinians in Gaza said to have been killed in clashes with the Israeli army. Russian President Putin and US President Obama’s calls for a ceasefire in eastern Ukraine have gone unheeded, as reports early on Monday recorded loud explosions and exchange of gunfire in the rebel-held city of Donetsk.

* * *

DB's Jim Reid concludes the overnight recap

Although we're still constructive on risk over the rest of the summer, we were very surprised markets performed so well on Friday given what we think is an extremely dangerous and delicate international situation post the Malaysia Airline plane tragedy. The S&P 500 (+1.03%) saw its best day since April 16th on Friday and nearly wiped out the previous day’s losses. Perhaps markets feel that either the stakes are so high that diplomacy is the only sensible outcome or that Russia's position has been weakened by the incident thereby forcing Putin into less confrontational politics in Ukraine and the surrounding regions. This is perhaps an understandable conclusion but the risk of a destabilising false step by a politician somewhere is not something that can be ruled out so this story still has a long way to run.

Indeed the pressure on Russia is building. John Kerry the US secretary of state said last night on NBC's "Meet the Press' that there was a build-up of circumstantial evidence that Russia supplied the missile that downed the jet. He said, “We picked up the imagery of this launch. We know the trajectory. We know where it came from. We know the timing.” He also said that it was clear that Russia "supports the separatists, supplies the separatists, encourages the separatists, trains the separatists". This represents a stepping up in the rhetoric since Obama’s press conference on Friday when the President said it was clear the MH17 had been fired at by a missile launched from a rebel-held area, but stopped short of attributing blame.

Over the weekend, western leaders essentially gave President Putin an ultimatum - that he ensures international investigators have full access to the crash site in eastern Ukraine, or face the prospect of further sanctions as early as this week. According to various media reports, the UK, Germany and France agreed on Sunday they should be ready to ratchet up sanctions on Russia. European foreign ministers meet in Brussels tomorrow and UK PM David Cameron's office said that ministers should be ready to announce a fresh round of sanctions at a meeting of the European Union's Foreign Affairs Council. This ultimatum may have already had some effect, with various media agencies saying that international access at the crash site had indeed improved on Sunday. It’s not clear at this stage what form the EU sanctions will take, if they come at all, however it’s been suggested that they could involve EU asset freezes applying to Putin’s associates or more sanctions on Russian companies. The sanctions could fall short of imposing “sectoral sanctions” that would have more negative economic outcomes (Bloomberg).

Moving to the other major geopolitical risk of late, the UN security council convened an emergency meeting overnight to discuss the situation in Israel/Gaza. The outcome of this meeting hasn’t hit newswires yet. This comes after both Israel and Palestinian authorities reported death tolls that make yesterday the deadliest day so far in the current conflict. The Palestinian Health Ministry reported that 87 Palestinians had died (according to other reports this number has now increased to above 100), and the Israeli military said 13 of its soldiers were dead. Sunday’s death toll for the Israeli soldiers surpassed the number of soldiers killed in the past two Gaza offensives. In the 2008-9 war, 10 died, four of them from “friendly fire” according to the NY Times.

Despite this backdrop, Asian equities have opened this week largely unchanged from Friday’s close and S&P500 futures are essentially unchanged (-0.05%). In Indonesia, markets are gearing up for the final tally in the country’s presidential vote which will be released tomorrow. Reports suggest that even after the official tally is announced, there is a material chance that the losing candidate will seek a court challenge. Nevertheless, the IDR is trading 0.4% stronger today. In China a landmark transaction is near, with the country set to see its first mortgage backed bond issue in six year with Postal Savings Bank of China set to price around $1.1bn of mortgage bonds tomorrow. The move is being seen as a means of freeing up capacity for more mortgage lending to support softer real estate markets. Elsewhere in Asia, Treasury markets are shut with Japan closed for the Marine Day holiday.

One of the reasons for the US equity market’s resilience so far has been the positive surprises from Q2 earnings - particularly from the mega banks. So far 82 S&P500 companies have reported results in the current earnings season which is roughly 16% of the index and around 25% of the market capitalisation. So a pretty reasonable sample size. After controlling for outliers (those with a beat/miss of >50% relative to consensus), around 76% and 69% of companies have beaten EPS and revenue estimates respectively. This is tracking significantly better than Europe, where so far 62% and 63% of Stoxx600 companies have beaten EPS and revenue estimates respectively. We should note though that the sample size in Europe is relatively small so far with less than 50 companies having reported thus far. Our usual earnings tracker table is included in the PDF version of today’s EMR.

Speaking of earnings, this will be a pivotal week with just under 150 S&P500 constituents, accounting for around 31% of the index market cap, reporting. This includes a number of market heavyweights including Apple, Microsoft, Verizon and Coca Cola tomorrow, followed by AT&T and Facebook on Wednesday and Amazon on Thursday. Across the Atlantic, more than 70 Stoxx600 companies will be reporting including the first of the major banks namely Credit Suisse tomorrow. A very interesting earnings announcement to watch will be Banco Espirito Santo’s on Thursday. A number of large cap industrial earnings reports are also worth watching too, including Unilever (Thursday), Lafarge and Anglo American (Friday).