Following yesterday's disappointing results by Visa, which is the largest DJIA component accounting for 8% of the index and which dropped nearly 3%, while AMZN's 10% tumble has weighed heavily on NASDAQ futures, it has been up to the USDJPY to push US equity futures from dropping further, which it has done admirably so far with the tried and true levitation pump taking place just as Europe opened. One thing to keep in mind: yesterday the CME quietly hiked ES and NQ margins [26]by 6% and 11% respectively. A modest warning shot across the bow of what may be coming down the line?
And speaking of Europe, it was another baffle with BS session from the very beginning: first, the German GfK Consumer Confidence print rose from 8.9 to 9 in August, the highest print since December 2006, while a few hours later that other confidence index, the IFO Business Climate, dropped from 109.7 to 108.0, sliding below expectations of 109.4, and its third monthly decline in a row making economists caution on the second half German GDP. The EURUSD promptly reacted to this report by dropping to overnight lows below 1.345.
Also in Europe, the ECB reported the latest monetary aggregate data for the month of June where M3 supposedly rose from 1.0% (and 0.7% in April) to 1.5%, while loans to the private sector appeared to have tapered their pace of contraction modestly from -2.0% to -1.7%. Of course, following the conversion of ZIRP to NIRP one would hope there is some monetary response. If this is all there will be, QE is clearly inevitable.
Turning to the overnight markets, there is a broadly firmer tone across Asian equities this morning but gains have been capped by the soft performance of S&P500 futures after US markets closed - partially attributed to Amazon Inc’s 10%+ drop in after-hours trading. Asian equities are being paced by gains on the Nikkei (+1.1%), Hang Seng (+0.3%) and KOSPI (+0.4%). There was no major reaction following the Japanese CPI data where core inflation came in line with expectations (2.3% YoY). In China, following the bailout of trust product “Credit Equals Gold #1” in January, it’s perhaps not too surprising that a similar product “Credit Equals Gold #2” has delayed a $210m principal repayment scheduled for today (China Securities Daily). The trust’s sponsor, China Credit Trust Co, failed to raise funds in time to repay investors according to the report, and has pledged to liquidate assets within the product to repay investors over the next 15 months.
Stocks in Europe are seen mixed, as earnings by RBS (+13%) which in turn lifted other financials in Europe, offset the weakness stemming from the release of weaker than expected German IFO. On the other hand, disappointing earnings by Danone (-0.5%) and LVMH (-6.51%) meant that consumer discretionary related stocks underperformed, in turn weighing on the CAC index which lagged its EU peers. 7 out of 19 Stoxx 600 sectors rise; banks, telecom outperform, personal & household, oil & gas underperform. 37% of Stoxx 600 members gain, 58.2% decline. Eurostoxx 50 -0.3%, FTSE 100 -0%, CAC 40 -0.7%, DAX -0.1%, IBEX +0.1%, FTSEMIB +0%, SMI -0.4%.
Looking at today’s calendar, the major focus today will be on the US durable goods order data. Ahead of that, there is UK Q2 GDP (meeting expectations), the German IFO survey (missing expectations) and the Euroarea money and lending aggregates (beating expectations). Russia’s central bank will announce its rate decision today (surprisingly rising rates to 8% on expectations of an unchanged 7.5%).
Market Wrap
- S&P 500 futures down 0.2% to 1977
- Stoxx 600 down 0.1% to 343.9
- US 10Yr yield up 1bps to 2.51%
- German 10Yr yield up 0bps to 1.18%
- MSCI Asia Pacific up 0.2% to 148.6
- Gold spot down 0.1% to $1292.8/oz
Bulletin Headline Summary from Bloomberg and RanSquawk
- Stocks in Europe are mixed (Eurostoxx 50, -0.33%), with CAC underperforming following earnings by LVMH and Danone, while earnings by RBS lift financials in Europe.
- Focus turns to earnings by AbbVie, Lorillard and LyondellBasell, as well as the release of the latest US durable goods.
- Treasuries lower on the week, curve flattening trend continues as 5Y and lower yields rise amid expectations for Fed policy tightening, low inflation and wide spreads vs other major developed sovereigns helps long end.
- Germany’s Ifo institute business climate index fell to 108 from 109.7 in June, the third straight monthly decline; follows a series of weak German data including industrial production, factory orders and retail sales
- The U.S. accused Russia of shelling Ukrainian military positions across its border, raising tensions after the ruling coalition in Kiev broke apart while voting over the costs of funding its army and keeping a bailout deal afloat
- Putin will resist mounting pressure to abandon pro- Russian rebels immediately while seeking to convince the world that Ukraine, not the insurgents, shot down Malaysian Air Flight MH17, according to three people familiar with Kremlin discussions
- Russia’s central bank unexpectedly increased borrowing costs for a third time this year as the intensifying conflict over Ukraine and the threat of wider sanctions squeeze the economy and undercut the ruble
- Israel and Hamas will weigh a U.S.-backed proposal for a temporary cease-fire as the conflict in the Gaza Strip intensified and spurred violent Palestinian protests in the West Bank and east Jerusalem
- The U.K. has completely recovered the output lost during the financial crisis and is on track to be the best-performing G7 economy this year; 2Q GDP rose 0.8%, while the IMG raised its U.K. growth forecast to 3.2%
- RBS shares soared as the company said pretax profit almost doubled in 1H and forecast that it will meet a target to cut costs by GBP1b ($1.7b) in 2014
- Sovereign yields mixed, with EU sovereign yields sliding. Euro Stoxx Banks +1.5%. Asian stocks mostly higher. European equities, U.S. stock futures fall. WTI crude and gold steady, copper little changed
US Event Calendar
- 8:30am: Durable Goods Orders, June, est. 0.5% (prior -1%, revised -0.9%)
- Durables Ex-Transportation, June, est. 0.5% (prior -0.1%, revised 0.0%)
- Cap Goods Shipments Non-Defense, Ex-Aircraft, June, est. 1.3% (prior 0.4%, revised 0.5%)
- Cap Goods Orders Non-Defense, Ex-Aircraft, June, est. 0.5% (prior 0.7%)
FIXED INCOME
Bunds traded steady ahead of the LTRO repayment announcement by the ECB which is unlikely to result in excess liquidity falling below EUR 100bln level. However the release of weaker than expected German IFO survey ensured that prices remained in positive territory. Looking elsewhere, peripheral bond yield spreads traded tighter this morning, with 10y SP/GE -1.8bps and IT/GE -1.2bps, supported by redemption payments due next week.
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
Stocks in Europe are seen mixed, as earnings by RBS (+13%) which in turn lifted other financials in Europe, offset the weakness stemming from the release of weaker than expected German IFO. On the other hand, disappointing earnings by Danone (-0.5%) and LVMH (-6.51%) meant that consumer discretionary related stocks underperformed, in turn weighing on the CAC index which lagged its EU peers. Of note, US stock futures gapped lower at the reopen of trade yesterday, with particular weakness in NASDAQ-100 as Amazon (AMZN) traded lower by 6% after-hours following a bigger loss than expected. Also, Visa (V), the largest DJIA component, accounting for 8% of the index, traded down 2.8% in after-hours and have led to weakness in DJIA futures
FX
In spite of an inline UK GDP report, GBP/USD was dragged lower by firmer USD, driven by broad based EUR weakness following IFO release. Technically, the pair remains below the key 1.7000 level and supports are seen at the 50 DMA at 1.6967, and at the 55DMA at 1.6953, which is 50% Fib move of May to July rise
COMMODITIES
In terms of gold and other precious metals, price action remained steady overnight and in Europe this morning after breaking key technical levels yesterday following US data inspired moves, as the news flow remained relatively light. At the same time, both WTI and Brent prices traded near unchanged mark
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DB's Jim Reid Concludes the Overnight Recap
US equities struggled to build on their recent gains, as concerns around EU sanctions against Russia, weaker housing data and mixed corporate earnings offset better global PMIs. The S&P500 (+0.05%) failed to break through the 1,991 level and spent virtually the entire day in a narrow four-point trading range before closing almost unchanged. Much of the focus was on the micro tape with Thursday being of the heaviest days of the Q2 company reporting calendar (more than 50 index constituents reported earnings). Consensus-beating earnings from Ford (+0.34%) helped set an upbeat tone early in the session, but stocks were weighed by mixed results from GM (-4.5%) and Caterpillar (-3.1%). As always, Caterpillar’s management had some interesting words to say on the macro environment. The CEO said that US growth was “certainly purring along” which was offsetting flat sales in China. On the slowdown in the mining sector, the CEO said that the equipment maker’s business is still very slow but “for the first time in a long time, really since 2012 ....our second-quarter mining business was up very slightly from our first. That might be a green shoot”. He added that “We're past the bottom in mining for sure". Overall it was a fairly positive day for Q2 earnings. Of the 50 companies who reported yesterday, 78% beat EPS estimates, and around 67% beat top line estimates - both are higher than long term averages. We’ll provide a fuller summary of the Q2 earnings season to date in the EMR early next week.
As we’ve mentioned over the past couple of weeks, the developments in the US high yield sector are worth keeping a close eye on. The latest fund flow data released by Lipper late yesterday showed that US high yield funds experienced another large outflow this week. For the week ended Wednesday July 23rd, outflows from HY funds were $2.38bn which is the highest outflow in 13 months. It tops an already steep $1.67bn of outflows for the previous week, which had been the biggest since August 2013. Year-to-date cumulative flows remain in positive territory; however this number has fallen to just $2.6bn.
Though US HY has been struggling in terms of performance this month, there have not been broader signs of stress as of yet. Firstly, HY outflows seem to have been significantly driven by ETFs, suggesting that retail money is largely responsible for the last two weeks combined outflows of more than $4bn. Indeed, the ETF influence accounted for 45% of the latest week’s withdrawal, while ETF’s accounted for 63% of outflows in the prior week. The WSJ highlights that bearishness around HY ETFs has increased, pointing to the ratio of outstanding puts to calls written on the iShares iBoxx $ HY Corporate Bond ETF which has reached a 14-month high of 8 to 1. This compares to a 4.3 to 1 average since 2010. The largest options positions on this ETF are in September puts, rather than the next available monthly contract of August, possibly because the September FOMC will conclude two days before the September option expiry (WSJ). A number of Street forecasters have highlighted that September’s FOMC could see a more hawkish shift in the Fed’s rhetoric and perhaps the hedging activity is representative of that. The second thing to note is that the HY primary market remains open with another $1.3bn priced across 3 deals on Thursday – including yet another Private-equity-sponsored PIK toggle deal. US high yield, like most carry strategies, have worked well this year though we are keeping a firm eye on potential cracks in the market.
Turning to the overnight markets, there is a broadly firmer tone across Asian equities this morning but gains have been capped by the soft performance of S&P500 futures after US markets closed - partially attributed to Amazon Inc’s 10%+ drop in after-hours trading. Asian equities are being paced by gains on the Nikkei (+0.6%) and KOSPI (+0.3%). There was no major reaction following the Japanese CPI data where core inflation came in line with expectations (2.3% YoY). In China, following the bailout of trust product “Credit Equals Gold #1” in January, it’s perhaps not too surprising that a similar product “Credit Equals Gold #2” has delayed a $210m principal repayment scheduled for today (China Securities Daily). The trust’s sponsor, China Credit Trust Co, failed to raise funds in time to repay investors according to the report, and has pledged to liquidate assets within the product to repay investors over the next 15 months.
Recapping the other developments from Thursday, UST yields traded around 3-4bp higher, partly driven by jobless claims data, in a generally weaker day for rates overall. The data flow supported the move higher in US rates. Aside from the European PMIs, US jobless claims fell to an eight-and-a-half year low of 284k, which was 19k less than the prior week and 23k lower than consensus estimates. There was some caution around the claims number given the timing of auto plant shutdowns for retooling. Nevertheless, the four-week moving average was down by 7,250 to 302k. That was the lowest level since May 2007. Balancing against this, US new home sales data disappointed (406k vs 475k expected), and this sent the S&P500 homebuilder index down 5.9%. The US TIPs auction saw solid demand with the lowest yield in more than a year, and this sent US 10yr breakevens up 3.5bp to 2.24%.
On the topic of EU sanctions, the WSJ is reporting that governments could decide as early as Tuesday to move forward with economic sanctions that would restrict Russian access to European capital markets and prohibit exports of militarily sensitive goods and energy-sector technology to Russia. According to the article, there was little disagreement over the proposals for economic sanctions that were discussed by the EU on Thursday, and the chance of governments moving ahead is now very high, according to unnamed diplomats. The restrictions contain a number of exceptions. Access to EU capital markets will be mostly imposed on Russian banks but would neither affect institutions less than 50%-owned by the Russian government nor trade in financial assets issued before the sanction came into force. EU citizens would at first still be allowed to buy Russian sovereign bonds, since "Russia is a significant investor in issuance by several EU (member states)," the document says. EU bans on energy technology exports to Russia would only apply to longer term production and are not aimed to disrupt current supply. How these sanctions develop between now and Tuesday will be something to watch for early next week.
Looking at today’s calendar, the major focus today will be on the US durable goods order data. Ahead of that, there is UK Q2 GDP, the German IFO survey and the Euroarea money and lending aggregates. Russia’s central bank will announce its rate decision today (consensus is for the central bank to hold). As we go to print, mining giant Anglo American will report 1H earnings.