If it was crashing German business confidence yesterday setting the somber mood for European economic "growth" in the second half, with a European GDP decline if not outright contraction now almost practically inevitable, then overnight it was disappointing data from virtually every other spot in the globe (and Europe again) to hammer the message in, starting with a historic 6.8% drop in Japanese GDP driven by a record plunge in consumption, quickly followed by total social financing out of China which in aggregate rose by only RMB273.1bn in July, or just 18% of what was expected, with missing industrial production and retail sales just the cherry on top. Then it was Europe's turn again, where June Industrial Production contracted -0.3% on expectations of a 0.4% increase, to set the stage for tomorrow's Eurozone GDP print which, following Italy's triple-drip recession shocker last week, probably means it will be not only Japan but also Europe which are about to have taken a sharp move for the worse. All of which of course, explains why just as Europe opened, the USDJPY blasted off and took both EuroSTOXX and US equity futures higher with it, and at last check ES was some 10 higher.
In central planning news, it was BOE's Carney who during this morning's Inflation Report reprised a dovish Yellen (whose take by Reuters [29]is what supposedly moved the market higher in the last minutes of trading yesterday) in saying a rate hike will likely not happen any time soon, just in case anyone thought that the bubble blowers were done blowing bubbles. As a result the GBP has tumbled by over 100 pips overnight with the GBPUSD sliding from 1.6825 to roughly 1.671.
The strength in Asia overnight came on the back of a softer session in US and Europe yesterday. The S&P 500 (-0.16%) and the Stoxx600 (-0.19%) were both down moderately on the day. The German ZEW survey for August turned out to be much weaker than expected. The current situation index came in at 44.3, 17.5pts lower than last month and 9.7pts below consensus forecast. More importantly the expectation index was down 18.5pts to just 8.6 to the lowest reading since December 2012. The market was looking for a print closer to 17.0 so it is a sizeable even if much of the weakness has been driven by the geopolitical volatility that’s been driving sentiment over the past month or so. With that the underperformance of the DAX (-1.2%) clearly stood out amongst peers although 10yr Bund yields were little changed at 1.06% after having fallen by 10bps already in August.
Stocks traded higher since the get-go this morning in Europe, with the DAX index outperforming following earnings by EON (+4.33%) and Merck (+0.90%). As a result, utilities led on the sector breakdown, as the likes of RWE (+2.27%) and GDF Suez (+0.78%) also benefited from a positive earnings report by the German utilities giant. At the same time, the FTSE-100 index underperformed its peers, as number of blue-chip companies traded ex-dividend and in turn subtracted 21.93 points off the index.
It was another decent day for ETF inflows in US HY. The SPDR Barclays High Yield Bond ETF received US$81.5m of inflows yesterday which was the strongest daily number since 20 May this year thus helping the ETF to close modestly higher (+0.05%) for the third consecutive session. On the other hand, iShares iBoxx $ High Yield Corporate Bond ETF (-0.02%) was broadly unchanged on the day despite US$74.4m of inflows yesterday which brings the cumulative inflows to a total of US$555.4m over the last 7 days.
In terms of geopolitics, a large Russia’s convoy appears to be on its way to the Ukrainian border overnight in the name of humanitarian support. According to the Washington Post, Russian state television showed white-painted Kamaz trucks without license plates being loaded at dawn near Moscow. At least one appeared to be flying a Red Cross flag whilst others flew the flag of Russia. The Russian Foreign Ministry said the trucks were carrying food, water, medicine, medical equipment, sleeping bags etc. It also looks like Russia and Ukraine have worked out a rough agreement that Russia would deliver the contents of the trucks to the International Committee of the Red Cross at a Ukrainian-controlled border post near the city of Kharkiv. It remains unclear, however, whether Russian vehicles would be allowed to cross the border and venture into the hard-hit areas of Eastern Ukraine.
Moving on to today, US retail sales for July will be a key number to watch as a snapshot of consumer spending in Q3. The market is expecting a 0.2% and 0.4% m/m increase for the headline and ex-auto series for July. Additional focus going forward will be on DoE inventories reports, as well as earnings by Cisco and Macy’s.
European shares remain higher with the bank and utilities sectors outperforming and basic resources, oil & gas underperforming. Bank of England governor Carney says he won’t raise interest rates too soon or too fast.
The German and Swedish markets are the best-performing larger bourses, U.K. the worst. The euro is weaker against the dollar.
Commodities decline, with zinc, copper underperforming and wheat outperforming. U.S. mortgage applications, retail sales, business inventories due later.
Market Wrap
- S&P 500 futures up 0.4% to 1938
- Stoxx 600 up 0.3% to 329.7
- US 10Yr yield up 1bps to 2.46%
- German 10Yr yield up 1bps to 1.07%
- MSCI Asia Pacific up 0.4% to 147.2
- Gold spot little changed at $1309.5/oz
Bulletin Headline Summary
- Short-Sterling curve bull flattened aggressively and GBP came under broad based selling pressure, with GBP/USD falling to early June levels, after the BoE slashed its Q4 2014 annual wage growth forecast to 1.25% vs. 2.5%.
- Encouraging set of earnings by German heavy-weights saw stocks in Europe trade higher since the open, though the FTSE-100 index underperformed, where ex-dividends subtracted 21.93 points off the index.
- Focus going forward will be on US retail sales, DoE inventories reports, as well as earnings by Cisco and Macy’s.
ASIA
Supportive comments by Japanese economy minister Amari following the release of somewhat concerning Japanese GDP report which posted the biggest drop since 2011 while consumer spending declined the most on record (-5.2% vs. Exp. -3.7%) ensured that the Nikkei 225 index recovered and settled higher (+0.35%). At the same time, the release of weaker than expected Chinese July new credit and money supply data, industrial production and retail sales reports also failed to weigh on Shanghai Comp, which too settled higher (+0.1%) after the PBoC attributing the drop to regulation and risk control.
FIXED INCOME
Initial weakness observed by Gilts and Bunds amid higher stocks and supply was reversed, though the two still remain in the red, after the BoE slashed its Q4 2014 annual wage growth forecast to 1.25% vs. 2.5%. This also resulted in an aggressive bull flattening of the Short-Sterling curve, as market participants were forced to re-price rate path expectations. This morning also saw the release of the latest UK jobs report which showed yet another lethargic wage growth. Looking elsewhere, higher equities encouraged flows into peripheral debt markets, leading to peripheral bond yield spread tightening.
EQUITIES
Stocks traded higher since the get-go this morning in Europe, with the DAX index outperforming following earnings by EON (+4.33%) and Merck (+0.90%). As a result, utilities led on the sector breakdown, as the likes of RWE (+2.27%) and GDF Suez (+0.78%) also benefited from a positive earnings report by the German utilities giant. At the same time, the FTSE-100 index underperformed its peers, as number of blue-chip companies traded ex-dividend and in turn subtracted 21.93 points off the index.
FX
GBP pared initial strength vs EUR following the release of the latest UK jobs report which another sluggish wages growth, with avg. earnings ex-bonus growth hitting a record low, before another bout of selling pressure was witnessed after the BoE surprised markets and emphasized lacklustre wage growth and the uncertainty around MPC view of 1% slack. As a result, EUR/GBP moved off its 21MDA line, while GBP/USD fell to its lowest level since early June. Elsewhere, favourable interest rate differential flows saw USD/JPY reclaim the key 200DMA line.
COMMODITIES
The release of less than impressive macroeconomic data from China was offset by the lingering geo-political tensions, which in turn ensured that precious metals and energy complex based products traded near the unchanged mark. Of note, API crude oil inventories showed a build in crude stockpiles vs. last week’s drawdown (229k vs. Prev. -5500k) and ahead of today’s DOE inventory report.
DB's Jim Reid concludes the overnight recap
Looking at markets this morning, Japanese and China data are dominating proceedings. Firstly we have the big (albeit expected) contraction in Japan’s Q2 GDP. The economy shrunk by 6.8% QoQ (seasonally adjusted annualised) in the second quarter. This marks the country’s biggest GDP decline for Japan since the 2011 Tsunami 3 years ago. The market was already looking for a 7% decline due to April's sales tax hike so the actual print was broadly consistent with expectations. The mix, however, paints a more resilient picture for businesses than consumers. The consumer spending component of the report fell 5.2% QoQ worse than -3.7% expected by forecasters whilst business spending looks to have held up better at -2.5% v -3.0% expected.
Staying on the same theme we are also expecting a batch of Chinese data today but only the aggregate credit numbers has been released so far as we go to print. On that, New Yuan Loans for July was sharply lower than expected at RMB385.2bn, less than half of what the market was looking for (ie RMB780.0B). Total social financing aggregate fell to RMB273.1bn in July, which is only 18% of what was expected by the market. Broad M2 money supply rose 13.5% in July YoY vs consensus forecast of 14.4%. The PBOC noted that the sharp drop in July was caused by regulation and risk control. Overall the central bank appears comfortable with money supply and credit being in a “reasonable range”. We await the rest of the numbers from China which come just after we publish.
The market reaction has been somewhat mixed with Chinese markets (-0.6%) being the notable laggard across Asia. Japanese equities (+0.2%) are up on the day as the GDP number was not as bad as some feared. Elsewhere, bourses in Seoul and Bangkok are up +0.5% and +1.0%, respectively. Asian cash credit spreads are also considerably tighter overnight with some short covering flows dictating the moves in lower beta parts of the curve. Cash bonds are outperforming CDS for now which is reversing most of the underperformance we saw into the back end of last week. US rates markets are slightly weaker. 5-year and 10-year Treasury yields are about 1bp and 3bp higher at 1.63% and 2.46%, respectively.
The strength in Asia overnight came on the back of a softer session in US and Europe yesterday. The S&P 500 (-0.16%) and the Stoxx600 (-0.19%) were both down moderately on the day. The German ZEW survey for August turned out to be much weaker than expected. The current situation index came in at 44.3, 17.5pts lower than last month and 9.7pts below consensus forecast. More importantly the expectation index was down 18.5pts to just 8.6 to the lowest reading since December 2012. The market was looking for a print closer to 17.0 so it is a sizeable even if much of the weakness has been driven by the geopolitical volatility that’s been driving sentiment over the past month or so. With that the underperformance of the DAX (-1.2%) clearly stood out amongst peers although 10yr Bund yields were little changed at 1.06% after having fallen by 10bps already in August.
In the US the JOLTS report was consistent with increased job openings in June. Jobs opening came in at 4671 in June up from a downward revised 4577 in May. This was also ahead of the 4600 consensus forecast. Our economist noted that the quits rate (a measure of the proportion of the labour force willingly leaving their present employment) was steady at 1.8%. This is thought to be a gauge of confidence and labour market health, and also one of Yellen’s favoured labour market indicators.
It was another decent day for ETF inflows in US HY. The SPDR Barclays High Yield Bond ETF received US$81.5m of inflows yesterday which was the strongest daily number since 20 May this year thus helping the ETF to close modestly higher (+0.05%) for the third consecutive session. On the other hand, iShares iBoxx $ High Yield Corporate Bond ETF (-0.02%) was broadly unchanged on the day despite US$74.4m of inflows yesterday which brings the cumulative inflows to a total of US$555.4m over the last 7 days.
In terms of geopolitics, a large Russia’s convoy appears to be on its way to the Ukrainian border overnight in the name of humanitarian support. According to the Washington Post, Russian state television showed white-painted Kamaz trucks without license plates being loaded at dawn near Moscow. At least one appeared to be flying a Red Cross flag whilst others flew the flag of Russia. The Russian Foreign Ministry said the trucks were carrying food, water, medicine, medical equipment, sleeping bags etc. It also looks like Russia and Ukraine have worked out a rough agreement that Russia would deliver the contents of the trucks to the International Committee of the Red Cross at a Ukrainian-controlled border post near the city of Kharkiv. It remains unclear, however, whether Russian vehicles would be allowed to cross the border and venture into the hard-hit areas of Eastern Ukraine.
Moving on to today, US retail sales for July will be a key number to watch as a snapshot of consumer spending in Q3. Our US economics team noted that while the portion of retail sales that is used to estimate consumer spending in GDP is relatively small (ie retail control) at only around 24%, it tends to be highly correlated with real consumer spending. The market is expecting a 0.2% and 0.4% m/m increase for the headline and ex-auto series for July. In Europe the highlights will be inflation readings for Germany, France and Spain as well as June IP print for the euro area. Any European inflation number is important at the moment so this will likely be a big focus for the day.