Futures Levitate As FOMC Begins Two-Day Meeting

Overnight markets have been a continuation of the relative peace observed yesterday before the onslaught of key data later in the week, with the biggest mover standing out as the USDJPY, which briefly touched 102 before sliding lower then recouping losses. This sent the Nikkei 225 up 0.57% despite absolutely atrocious Japanese household spending data, coupled with a major deterioration in employment: at this rate if Abenomics doesn't fix the economy it just may destroy it. Aside from that the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. And while the SHCOMP is starting to fade its recent euphoria and China was up only 0.24%, Europe continues to cower in the shade of Russian sanctions as both German Bund yields rose to record highs, and Portugal's BES tumbled by 10% once again to 1 week lows. Today Europe is expected to formally reveal its latest Russian sanctions, which should in turn push Europe's already teetering economy back over the edge.

Expect the DE Shaws to recalibrate the Spoos correlation algo from AUDJPY to USDJPY today following renewed calls from the street that the RBA will be forced to cut rates before the end of the year: the US stock market clearly can't have that overhang.

Stateside, the FOMC begins its two-day meeting today, but won’t release its policy statement until tomorrow. Consensus believes that the Fed will take a pass on saying anything that it thinks would move markets this week. Neither the overall economic activity picture nor the inflation data have been firm enough recently to move the Committee to signal that they are moving closer to lift-off. Employment growth has been stronger than expected in recent months. But wage inflation remains low, business and housing investment numbers have softened most recently, and core inflation has moved sideways. On balance, this is not a picture that will get a data-driven Fed excited. Even an upward surprise in the Q2 GDP release on Wednesday is unlikely to elicit any significant change in the wording of the FOMC statement. Of greater interest to the market (and the Fed) will be how the PCE and ECI inflation numbers, as well as the July employment report, come out later this week. These data, along with ensuing data reports ahead of the September FOMC meeting, will be important in shaping the potentially important message the Fed delivers at that time as it likely updates its exit guidance.

Turning to Asia, Chinese equities are consolidating their 2%+ gains from yesterday with HSCEI up 0.15% as we type. As we mentioned yesterday, Chinese A-shares are up around 20% from the YTD lows and this morning a number of commentators have suggested that we are in the midst of a Chinese equity bull market. The KOSPI and Nikkei are the outperformers today though, off the back of stronger corporate earnings from the likes of Kia, Hyundai and Nissan. In rates, most Asia-Pac bonds are trading slightly lower today, which is a spillover of the mild EM selloff seen in EMEA and LATAM yesterday (Brazil 10yr yield +8bp). The USD is down slightly against most major Asian currencies overnight. Asian stocks rise with the Hang Seng outperforming. MSCI Asia Pacific up 0.3% to 149.6; Nikkei 225 up 0.6%, Hang Seng up 0.9%, Kospi up 0.6%, Shanghai Composite up 0.2%, ASX up 0.2%; 8 out of 10 sectors rise with consumer, tech outperforming and energy, utilities underperforming

Heading into the North American open, stocks in Europe are seen broadly lower, with the Portuguese PSI-20 index underperforming amid fresh concerns over the troubled lender Banco Espirito Santo (-6.5%). On the sector breakdown, energy related stocks underperformed, with BP (-1.0%) shares reversing initial gains after the oil-giant posted a rise in second quarter profits, with the company also noting that further sanctions against Russia could affect its business as it posted a rise in second quarter profits. 11 out of 19 Stoxx 600 sectors rise; real estate, bank outperform, autos, oil & gas underperform. 58.7% of Stoxx 600 members gain, 38.5% decline. Eurostoxx 50 +0.2%, FTSE 100 +0.2%, CAC 40 +0.1%, DAX +0.1%, IBEX +0.3%, FTSEMIB +0.6%, SMI -0.2%

Looking at the day ahead, there is Spanish retail sales and UK mortgage approvals data this morning. US CaseShiller house prices (May) and the Conference Board’s consumer confidence numbers (July) follow thereafter. Its another big day for corporate earnings today, with European financials in focus, together with around 45 S&P500 companies including Wynn Resorts, Boston Properties and American Express. As mentioned above, it’s worth keeping an eye on potential EU sanctions headlines.

Market Wrap

S&P 500 futures up 0.01% to 1973
Stoxx 600 up 0.1% to 341.5
US 10Yr yield down 2bps to 2.47%
German 10Yr yield down 3bps to 1.12%
MSCI Asia Pacific up 0.3% to 149.6
Gold spot up 0.3% to $1307.8/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

Both Germany and Spain print record low 10yr yields, as positive cash flow and fading optimism from European earnings lifts Bunds to contract highs
Treasury curves flatten, 5/30 at tightest since January 2009 as week’s auctions continue with $35b 5Y notes; yield 1.719% in WI, implying highest auction stop since May 2011.
Fed begins its two-day meeting in Washington; most expect Fed to taper by another $10b, see possibility of 1st rate increase sooner than many expect, based on published research
Israel intensified its attacks against Gaza after Netanyahu told his country to brace for an extended military campaign and said any truce must be based on disarming Hamas
Germany’s business and political leaders are lining up to upport a tougher stance on Russia, giving Chancellor Angela Merkel critical backing as she pushes her EU counterparts to expand sanctions
Japan’s retail sales fell 0.6% in June, more than forecast, capping a weak quarter that challenges Abe’s bid to reflate the economy while heaping a heavier tax burden on consumers
Ebola, the killer of more than 670 people in four West African countries since February, has spread beyond Africa only once. That doesn’t mean it can’t happen now, infectious disease experts warn
China regulators opened an anti-monopoly investigation into Microsoft, seizing computers and documents from offices in four cities amid escalating tensions with U.S. technology companies
Obama will host more than 40 African leaders at a summit in Washington next week as the U.S. tries to challenge China’s status as Africa’s number one investor and trading partner
Sovereign yields mostly lower. Euro Stoxx Banks +0.3%. Asian stocks, European equities mostly higher, U.S. stock futures fall. WTI crude little changed, copper falls, gold higher
USD-index holds near a six-month high as AUD and NZD lag on policy cues and lower than expected milk prices for the current season

US Event Calendar

9:00am: S&P/CS 20 City m/m, May, est. 0.3% (prior 0.19%)
S&P/CS Composite-20 y/y, May, est. 9.9% (prior 10.82%)
S&P/CaseShiller Home Price Index, May, est. 171.25 (prior 168.71)
10:00am: Consumer Confidence Index, July, est. 85.4 (prior 85.2)
11:00am POMO: Fed to buy $300m-$450m notes in 2024-2031 sector
1:00pm: U.S. to sell $35b 5Y notes

FIXED INCOME

Month-end, as well as coupon/redemption related flow saw Bunds touch on a fresh contract high, also supported by the looming risk events such as FOMC, US GDP and the monthly jobs report. The gains in bonds are relatively broad-based, with Spanish 10yr yields also falling to historic lows. Bonds continue to benefit from the glut of liquidity provided by just shy of EUR 60bln in coupons and redemptions due from Spain, Italy and Portugal this week. At the same time, the upside was driven by the renewed uncertainty surrounding Banco Espirito Santo amid reports that the bank may need to raise capital, resulting in shares and also sub-2 bonds sliding since the get-go. As a result, PO/GE 10y spreads widened.

In terms of month-end revisions, Barclays Final Pan Euro Agg Month-end Extension +0.12y vs. Prelim. +0.11y (Prev. month 0.09y, 12m Avg. 0.08y) and Barclays Prelim Sterling Agg Month-end Extension +0.04y (Prev. month 0.03y).

EQUITIES

USD-index holds near its 6-month high ahead of this week’s key risk events incl. US GDP, NFP and tomorrow’s FOMC rate decision, which is consequently weighing on major USD pairs and crosses. AUD/USD broke below the 0.9400 handle despite S&P affirming Australia at 'AAA'; outlook stable as Goldman Sachs said RBA may be forced to cut the official cash rate before the end of the year. NZD/USD fell to fresh 1-month low after Fonterra revised lower their milk pay-out forecast by close to 15% (one of New Zealand’s largest GDP components). Analysts at Westpac see the drop in prices shaving 1.9ppts of GDP to collective income of dairy farmers.

COMMODITIES

After thin volumes overnight, gold moved above the USD 1310 level in early European trade benefiting from inflows into fixed income as global geo-political tensions remain on the boil. The yellow metal has since come off its best levels, yet remains supported above the USD 1300/oz mark. Brent crude futures are marginally outperforming WTI, which trades near a 2-week low ahead of the US API inventories, expected later today at 2135BST1535CDT.

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The conclusion comes as usual from DB's Jim Reid

Markets enjoyed the relative peace yesterday before the onslaught of key data later in the week. Indeed the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. Disappointing US pending home sales drew equities to an intra-day low early in the NY session, but in the end it was fresh M&A activity which helped equities recover from the opening lows. The M&A transactions announced yesterday takes year-to-date activity to $2.5 trillion, or an increase of 70% YoY, led by North America ($1.2 trillion, +83%) and Europe ($773bn, +85%).

Aside from the downpour of macro data to come this week, there is also the looming prospect of wider EU sanctions on Russian business interests hanging over markets. Reports continue to filter through suggesting that the EU is putting the finishing touches on sectorwide sanctions targeting Russia’s state-owned banks and restricting exports of sensitive technology used in oil production. According to the WSJ and Reuters, the EU's plans for economic sanctions could be announced as early as today, when EU ambassadors meet in Brussels, or tomorrow. Russia’s ITAR-TASS news agency writes that two decisions are to be taken today. Firstly, the EU ambassadors will either speak out in support of the whole package of sanctions or hand it over to the European Commission for finalization. Secondly, the ambassadors will decide on whether the sanctions can be introduced by a formal written procedure or whether this will require a new EU summit. If they choose the written option, the relevant measures can then be brought in as early as next week (ITAR-TASS). Speaking ahead of today’s meeting, UK PM David Cameron said he and fellow European leaders have agreed that "strong" economic sanctions should be imposed on Russia as soon as possible. Mr Cameron said he and his French, German and Italian counterparts had agreed on the need for further action against Moscow in a conference call with US president Barack Obama (BBC) that was held on Monday. Outside of the sanctions, the Kremlin came under further pressure yesterday when an international tribunal in The Hague ordered Russia to pay $50bn in damages to former shareholders of the Yukos oil company. The Ruble finished on a soft note yesterday, losing 1% against the USD, while the shares in Russian government affiliated banks such as Sberbank (-3.1%) declined. The Ruble is again approaching the March lows.

Turning to Asia, Chinese equities are consolidating their 2%+ gains from yesterday with HSCEI up 0.15% as we type. As we mentioned yesterday, Chinese A-shares are up around 20% from the YTD lows and this morning a number of commentators have suggested that we are in the midst of a Chinese equity bull market. The KOSPI (+0.6%) and Nikkei (+0.5%) are the outperformers today though, off the back of stronger corporate earnings from the likes of Kia, Hyundai and Nissan. In rates, most Asia-Pac bonds are trading slightly lower today, which is a spillover of the mild EM selloff seen in EMEA and LATAM yesterday (Brazil 10yr yield +8bp). The AUD is down a touch (-0.2%) following renewed calls from the street that the RBA will be forced to cut rates before the end of the year. The USD is down slightly against most major Asian currencies overnight.

Looking more closely at the data docket over the last 24 hours, pending home sales (-1.1% MoM vs +0.5% expected) hardly inspired confidence in the housing sector and follows the disappointing new home sales data from last Thursday. This put pressure on the S&P500 homebuilders index (-1.23%) as well as construction materials stocks (-1.32%). The fall in pending home sales was largely concentrated in the US northeast (-2.9%) and in the south (-2.4%) with all other regions either flat or slightly positive. In Europe, Spanish bonds at multi-century all time yield lows and Italian bonds not far behind helped keep a lid on any credit spread widening. Indeed, European Crossover (-1bp) and Main (unch) were both broadly unchanged on a day when the Stoxx600 (-0.18%) traded with a defensive tone. Elsewhere in the periphery, the Bank of Portugal commented late yesterday that Banco Espirito Santo is able to raise capital should it prove necessary. The central bank said that if solvency becomes an issue, there is sufficient interest shown by various entities in buying BES shares, and State aid will also be available as a last resort. BES reports its 1H14 earnings tomorrow, which will likely be one of the more interesting earnings reports of this reporting season.

The FOMC begins its two-day meeting today, but won’t release its policy statement until tomorrow. DB’s Peter Hooper thinks that the Fed will, with high probability, take a pass on saying anything that it thinks would move markets this week. Neither the overall economic activity picture nor the inflation data have been firm enough recently to move the Committee to signal that they are moving closer to lift-off. Employment growth has been stronger than expected in recent months. But wage inflation remains low, business and housing investment numbers have softened most recently, and core inflation has moved sideways. On balance, this is not a picture that will get a data-driven Fed excited. Even an upward surprise in the Q2 GDP release on Wednesday is unlikely to elicit any significant change in the wording of the FOMC statement. Of greater interest to the market (and the Fed) will be how the PCE and ECI inflation numbers, as well as the July employment report, come out later this week. These data, along with ensuing data reports ahead of the September FOMC meeting, will be important in shaping the potentially important message the Fed delivers at that time as it likely updates its exit guidance. While the hawks on the committee have become increasingly restless, Peter does not expect either Fisher or Plosser to dissent at this point. Rather, he expects they will save those dissents for when they might carry more force, alongside the release of a new exit manifesto and backed up by some firmer macro data.