Overnight Futures Levitation Mode Engaged But Subdued

For all the talk of how stellar this earnings season has been so far (mostly for the financials if only relative to crushed expectations, and all in non-GAAP terms of course), some of the biggest bellwethers had nothing to write home about yesterday with Coca-cola (-2.85%), Travelers (-3.8%) and McDonalds (-1.3%) all falling after reporting mixed Q2 results with the latter saying that there was some “some trepidation” amongst franchisees about boosting staffing amid rising labor costs related to state minimum-wage increases and health care expenses. Adding to that, Apple, the largest company by market cap, fell 0.6% in afterhours trading after reporting Q2 EPS of $1.28 (vs 1.23 consensus), but missing top line estimates ($37.4bn vs $37.9 expected).

And if despite yesterday's lackluster earnings the most recent market levitation on low volume was largely due to what some considered a moderation in geopolitical tensions after Europe once again showed it is completely incapable of stopping Putin from dominating Europe with his energy trump card, and is so conflicted it is even unable to impose sanctions (despite the US prodding first France with BNP and now Germany with the latest DB revelations to get their act together), as well as it being, well, Tuesday, today's moderate run-up in equity futures can likely be best attributed to momentum algos, which are also rushing to recalibrate and follow the overnight surge in the AUDJPY while ignoring any drifting USDJPY signals.

Elswhere in Asia, global markets continue to watch the developments in the Chinese property market and today there were further signs that some Chinese cities are loosening home purchase restrictions to boost sales. Chinese construction material stocks are up 1.1% today and this is news has boosted the Shanghai Composite to a six-week high. We’ve also got one eye on what could be the second ever default in the Chinese onshore bond market by a company called Huatong Road & Bridge. The company failed to meet a principal repayment yesterday, but there are reports today that the local government may step in to help ensure the company meets bondholder obligations. How the Chinese authorities react to this case will be interesting.Asian stocks mostly rise with Hang Seng outperforming and Nikkei underperforming; MSCI Asia Pacific up 0.4% to 148.5; Nikkei 225 down 0.1%, Hang Seng up 0.8%, Kospi little changed, Shanghai Composite up 0.1%, ASX up 0.6%, Sensex up 0.4%; 8 out of 10 sectors rise with energy, materials outperforming and information technology, telecom services underperforming.

Heading into the North American open, stocks in Europe are seen broadly higher, with the German DAX outperforming following earnings by Daimler (+1.41%) pre-market. At the same time, Deutsche Bank (-0.98%) shares remained under pressure and headed for their largest fall in a month as market participants reacted to reports by the WSJ which indicated that bank overseers faulted some of the firm’s businesses in the US last year for “inaccurate and unreliable” financial reports. 17 out of 19 Stoxx 600 sectors rise; autos, basic resources outperform; utilities, banking underperform; 63.3% of Stoxx 600 members gain, 31.5% decline; Eurostoxx 50 +0.2%, FTSE 100 +0.1%, CAC 40 +0.2%, DAX +0.4%, IBEX -0.1%, FTSEMIB -0.5%, SMI +0%

Events in Ukraine have somewhat pushed Portugal’s banking troubles out of the headlines over the past few days even as the situation has continued to evolve. Banco’s parent ESI asked for protection from creditors at the end of last week and over the weekend BES promised to reimburse at maturity all the CP’s issued by its various parent holdco’s - a commitment worth around €820mn. Adding in Banco’s other exposures to the rest of the Espirito Santo Group it seems likely that BES at some point will have to raise further capital. On this note the Governor of the Bank of Portugal, Carlos Costa, was quoted on Friday in remarks to Parliament that, “preliminary contacts between BES and international investment banks, as well as interest shown by several entities, [namely] investment funds and European banks, show that a private solution to reinforce capital is possible" (Bloomberg). Yesterday it came out that Banco has postponed its Q2 earnings report, due on July 25th. In related news there were headlines after the market close last night that Compagnie Bancaire Helvetique had acquired a majority stake in Espirito Santo Private Bank although no further details beyond this announcement were given.

Looking at the day ahead, the corporate reporting season rolls on with Daimler, Iberdrola, Boeing, Dow Chemical, Simon Property reporting today. Facebook reports after the US market close. The Bank of England publishes its July meeting minutes this morning. Finally, today the SEC meets to vote on rules imposing redemption gates on money market funds: expect the money market gates we first discussed in 2010 to be finally imposed [45].

Market Wrap

S&P 500 futures up 0.1% to 1976.3
Stoxx 600 up 0.2% to 343.2
US 10Yr yield up 1bps to 2.47%
German 10Yr yield up 0bps to 1.17%
MSCI Asia Pacific up 0.4% to 148.5
Gold spot up 0% to $1306.9/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

Treasury curve spreads steepen led by modest weakness in long end as global stocks gain amid strong corporate earnings; Daimler AG, Apple Inc. among companies beating estimates.
China avoided a second default in its onshore corporate bond market as Huatong Road & Bridge Group Co. paid all principal and interest on 400 million yuan ($65 million) of notes today, four people familiar with the matter said
The Bundesbank is resisting a weaker euro and opposing the most aggressive strategies Mario Draghi could deploy to ignite growth in Europe, says Simon Derrick, chief market strategist at Bank of New York Mellon Corp
The Bank of England said some members of its Monetary Policy Committee have started to argue that the risk of a rate increase undermining the recovery has diminished as growth becomes more entrenched
Deutsche Bank AG dropped in Frankfurt trading after the NY Fed was said to have faulted the regulatory reports of some of the firm’s U.S. businesses last year
Obamacare and the cost of health coverage for millions of Americans were cast into doubt after two federal appeals courts issued opposite verdicts on whether the government can subsidize policies through federally run insurance exchanges
Chinese banks will probably offer discounted mortgage rates to their clients in the second half of 2014 as demand in the country’s housing market weakens, according to a Bloomberg News survey
Diplomatic pressure to halt more than two weeks of fighting between Israel and Hamas mounted; complicating efforts is the hostility between the new government of Egypt, a traditional mediator of Gaza truce deals, and Hamas
The first plane carrying bodies from flight MH17 left eastern Ukraine for the Netherlands for identification, as questions arose over whether all victims’ remains had been recovered from rebel-held territory
Sovereign yields mostly lower. Euro Stoxx Banks +1.1%. Asian mostly higher. European equities, U.S. stock futures gain. WTI crude steady, copper and gold gain

US Event Calendar

7:00am: MBA Mortgage Applications, July 18 (prior -3.6%) Central Banks
7:45am: Bank of England’s Carney speaks in Glasgow
5:00pm: Reserve Bank of New Zealand seen raising official cash rate to 3.5% from 3.25%
11:00am: Fed to purchase $2.5b-$3.25b notes in 2021-2024 sector

FIXED INCOME

Despite the alleviation of tensions between the West and Russia which resulted in the MICEX snapping a six day losing streak, Bunds traded higher, largely mimicking the upside surge by Gilts after the minutes from the most recent MPC meeting revealed a unanimous vote to keep rates unchanged. At the same time, the MPC remained reluctant towards committing to rate hikes and pointed to the need to re-assess spare capacity after the QIR release in August. As a result, Short-Sterling curve bull flattened, while the UK/GE 10y spread narrowed to its tightest level since July 14th.

Barclays Prelim Pan Euro Agg Month-end Extension +0.11y (Prev. month 0.09y, 12m avg. 0.08y), Prelim Treasury Month-end Extension +0.08y (Prev. month 0.08y, 12m avg. 0.09y)

EQUITIES

As a reminder, after the closing bell yesterday Apple reported Q3 EPS USD 1.28 vs. Exp. USD 1.23 and Q3 Gross margin 39.4% vs. Exp. 37.8%, while Microsoft Corp reported Q4 EPS USD 0.55 vs. Exp. USD 0.60; adding that Nokia accounted for 0.08/shr loss in Q4.

The release of somewhat dovish MPC minutes resulted in GBP reversing some of the outperformance vs. EUR, which saw EUR/GBP come off multi-month lows, while also lifting EUR/USD off its 8-month low printed earlier in the session and back into positive territory. Elsewhere, AUD/USD rose to a 2-week high after trimmed mean inflation reading, the RBAs preferred measure, rose to 2.9% vs. Exp. 2.7%, close to the upper bound of the central bank’s 2-3% target band, which prompted fears that the central bank may subvert its neutral tone.

COMMODITIES

In terms precious metals, the price action was range-bound by both gold and silver, with gold remaining above the key USD 1,300 level as geo-political related premium (Israel/Gaza and Russia/Ukraine) continued to offset growing expectations for a Fed rate hike. Elsewhere, both WTI and Brent crude futures are seen little changed ahead of DoE inventories data later on in the session

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DB's Jim Reid concludes the overnight market recap

Markets are struggling for direction at the moment with geopolitical concerns halting what was a strong run to the end of Q2 and start of Q3. Indeed, in recent weeks the S&P 500’s 13%+ rally from the February lows has stalled at just below the optically-important 2,000 level. Yesterday’s +0.50% gain in the index notched up seven consecutive days where the S&P500 has moved in the opposite direction to the session before. This is the longest streak since late February and one of the longest since the financial crisis.

While geopolitical risks may be to blame for the recent risk-on/risk-off episodes, it was interesting to see corporate earnings turn from a supportive factor to a drag on markets yesterday. Indeed, Coca-cola (-2.85%), McDonalds (-1.3%) and Travelers (-3.8%) all fell after reporting mixed Q2 results. For what it’s worth, McDonald’s CEO said yesterday that there some “some trepidation” amongst franchisees about boosting staffing amid rising labor costs related to state minimum-wage increases and health care expenses (WSJ). Adding to that, Apple, the largest company by market cap, fell slightly in late-hours trading after reporting Q2 EPS of $1.28 (vs 1.23 consensus), but missing top line estimates ($37.4bn vs $37.9 expected). The tech giant also said that the current quarter’s revenue will be US$37-40bn, below consensus of $40.5bn, which may have added to the mixed investor reaction.

The better sentiment over the last 24 hours was in part driven by the outcome of the EU foreign ministers meeting where leaders agreed to expand a list of Russian entities subject to asset freezes and travel bans but did not take the extra step of introducing phase three sanctions. Europe is always going to struggle to reach an aggressive agreement on sanctions given the different countries level of trade/activity with Russia. This is an evolving story though, and the ministers agreed to prepare by Thursday a list of possible options including potential sanctions targeting the energy and financial sectors (Washington Post) and restrictions on Russian companies accessing parts of the EU capital markets. However such measures would be imposed later only if Russia does not force pro-Moscow separatists to grant unfettered access to the crash site and fulfil its pledge to co-operate with an international investigation. The Ruble squeezed 0.7% and Russian CDS tightened 12bp on the day.

Overnight markets have shaken off the mixed US earnings tape to trade higher across credit, FX and equities. The major mover during the Asian timezone is the AUD, which is about 0.4% firmer against the greenback following the Australian CPI print which rose to +3.0% YoY. The front end of the Australian bond curve has sold off by around 4-5bp. In EM Asia, Indonesia has seen a 1% richening in the IDR and 5-yr sovereign CDS has tightened 6bp following official news that the market-friendly Jokowi has indeed won the presidential election. However there has been profit-taking in Indonesian assets as we go to print, with headlines that the runner-up, Prabowo is planning to contest the vote in the Constitutional Court (Bloomberg). Elswhere in Asia, global markets continue to watch the developments in the Chinese property market and today there were further signs that some Chinese cities are loosening home purchase restrictions to boost sales. Chinese construction material stocks are up 1.1% today and this is news has boosted the Shanghai Composite to a six-week high. We’ve also got one eye on what could be the second ever default in the Chinese onshore bond market by a company called Huatong Road & Bridge. The company failed to meet a principal repayment yesterday, but there are reports today that the local government may step in to help ensure the company meets bondholder obligations. How the Chinese authorities react to this case will be interesting.

Yesterday’s data docket was pretty supportive for risk, most notably the benign US CPI reading. Going into the day, there was some concern that we could see a high CPI print, and indeed 10yr USTs sold off by around 3bp leading into the data. For the record, US core inflation's YoY growth rate slipped back to 1.9% from 2.0% previously. Headline inflation rose 0.3% (in line with consensus), as food/beverages was unchanged and energy rose 1.6% in the month—mainly due to seasonal factors related to gasoline prices. The release of the data saw yields rally 4bp, to close 1bp lower of the day at 2.46%. The manufacturing and housing data was also fairly positive from a markets point of view. US existing home sales rose 2.6% in June (1.9% expected) to an annualized rate of 5.04m units. The Richmond Fed manufacturing index rose to 7 (vs 3 in the prior month and 5 expected).

Elsewhere in the periphery banking sector, Cyprus’ largest bank (Bank of Cyprus) is potentially returning to capital markets with a senior unsecured bond. According to the FT, there is investor demand for products that leverage the expected Cypriot recovery and there has been a steady OTC trade in deposits that were turned into Bank of Cyprus equity last year. Non-performing loans of EUR12.8bn make up almost half its balance sheet and have been shifted into an internal “bad bank” to be run down, sold or restructured, per the article. The Financial Times also reports that there has been growing US demand for total return swaps linked to Markit bond and loan indices. According to the article, there is sufficiently broad demand that a major US bank is looking to issue EUR10bn of the instruments in one deal – the funds are being deployed to offer leveraged returns at a time when credit spreads are low and volatility is low. This is perhaps an offset to the recent news of outflows in US HY.

Looking at the day ahead, the corporate reporting season rolls on with Daimler, Iberdrola, Boeing, Dow Chemical, Simon Property reporting today. Facebook reports after the US market close. The Bank of England publishes its July meeting minutes this morning. The US SEC meets to vote on rules imposing redemption gates on money market funds.