Risk On After Ukraine's "Convoy Shelling" Hoax Forgotten

Friday's main event, Ukraine's alleged attack of a Russian military convoy, has come and gone, and as we mused on Friday [31]has promptly faded into the memory of all other fabricated headlines released by the country engaged in a major civil war and an even more major disinformation war. To be sure, Germany's DAX has recovered virtually all losses, US futures are up about 9 points, and the 10 Year is back to 2.37%. One wonders what algo-slamming headline amusement Ukraine has in stock for us today, although anyone hoping for a quick "de-escalation" (there's that word again) will have to wait following yesterday's meeting of Russian, Ukraine, German and French ministers in Berlin where Russia's Lavrov said he saw no progress on Ukraine cease-fire, Foreign Minister Sergei Lavrov says in Berlin, adding that a cease-fire should be unconditional.

"As long as they’re betting on a military solution, and as long as the authorities in Kiev are using military victories over their own people to shore up their position in Kiev, I don’t think there’s any point to what we’re trying to do now." He also said that Russia takes full responsibility for ensuring there are no illegal border crossings and Russia doing all it can to control border, sees progress. He concluded that he expects humanitarian aid to be delivered soon. In other words, nothing new.

Asian equities are a bit of a mixed bag this morning following a fairly volatile session for US and European markets on Friday. Chinese stocks are the notable outperformers overnight despite headlines of weaker home prices in China. Indeed new home prices fell in 64 of the 70 Chinese cities in July, the most since January 2011. Beijing (-1%) also posted its first decline since April 2012. The CSI 300 and Shanghai Composite are both up about six tenths of a percent as we type. Elsewhere, the Hang Seng and KOSPI are moderately lower whilst the Nikkei is flat on the day. Asian IG credit spreads are mostly unchanged overnight amid the absence of major news flows and supply. Bond investors of China’s first onshore corporate defaulter Chaori Solar meets in Shanghai today so we’ll see anything interesting comes out from that. Asian stocks little changed with the Sensex outperforming and the Kospi underperforming MSCI Asia Pacific at 148. Nikkei 225 little changed, Hang Seng up 0%, Kospi down 0.5%, Shanghai Composite up 0.6%, ASX up 0.4%, Sensex up 1.1%. 6 out of 10 sectors rise with energy, telcos outperforming and consumer, tech underperforming

European equity futures gapped higher at the open, however are still yet to test Friday's best levels, indicating markets still remain somewhat nervy despite modest progress made between Russia and Ukraine. The top gainers today include airlines and steelmakers (some of last week’s poorest performers), however UK supermarket name Tesco (TSCO LN) has fallen sharply on fears the Co. could cut their dividend. US stock futures indicate a higher open on Wall Street, with earnings season looking to come to a close as of this week. German 10yr bond yields rise; French yields increase. 19 out of 19 Stoxx 600 sectors rise; autos, chemicals outperform, insurance, utilities underperform. 92.5% of Stoxx 600 members gain, 7% decline. Eurostoxx 50 +1.1%, FTSE 100 +0.6%, CAC 40 +1.1%, DAX +1.4%, IBEX +1.1%, FTSEMIB +1%, SMI +0.9%.

Away from Russia, we can expect more coverage on the Israel-Hamas negotiations in Cairo as we approach a 5-day temporary truce which expires at midnight on Monday. Leaders from both sides traded some fairly aggressive rhetoric over the weekend and it looks like there is still a sizeable gap between the two sides to bridge before a deal could be reach before the deadline. A member of the Palestinian delegation told the AP on Sunday that he is less optimistic than before on a deal. A key sticking point remains Hamas's insistence that Israel pledge to end its Gaza blockade before the talks conclude.

Looking at the week ahead, we also expect a fairly eventful week for data watchers. In Europe the focus will likely be on the flash August PMI readings. The readings for the Euro area, Germany and France are due on Thursday. Markets are expecting a modest 0.4pt decline for the Euro area composite PMI but we suspect plenty of focus will be on the flash manufacturing PMI reading for Germany given the softening data momentum over there. The other notable European releases this week also include the Euroarea trade balance today, UK inflation tomorrow, and German PPI on Wednesday. In the US, we will get the NAHB housing market index today, July CPI and housing permits/starts on Tuesday and the Philly Fed survey on Thursday. We will also get the latest FOMC and BoE's meeting minutes on Wednesday. In Asia, the focus will be on China's HSBC flash manufacturing PMI for August on Thursday. Still, all eyes (and minds) will be on Jackson Hole this week.

Market Wrap

S&P 500 futures up 0.5% to 1961.5
Stoxx 600 up 1% to 333.2
US 10Yr yield up 2bps to 2.36%
German 10Yr yield up 4bps to 1%
MSCI Asia Pacific little changed at 148
Gold spot down 0.2% to $1302.6/oz

Bulletin Headline Summary

Prospects of peace in eastern Ukraine increase as Russian and Ukrainian foreign ministers hold discussions on a potential ceasefire that could be effective within weeks
BoE governor Carney throws another curveball, stating the BoE will not wait to see real wage growth before hiking the bank rate from historic lows
Treasuries decline, with markets focused on Wednesday’s release of Fed’s July meeting minutes for possible indications of timing of first rate increase after end of QE.
Yellen has a stubborn warning light blinking on her labor market dashboard: A group of Americans larger than Washington state’s population can find only part-time work
Economists in a Bloomberg Survey cut their estimate of the take-up of funds under an ECB program designed to boost bank lending, signaling concern that the outlook for bloc may be too weak to drive demand for loans
Non-financial foreign direct investment in China fell 17% in July to $7.81b and Jan.-July foreign direct investment fells 0.35% to $71.14b, according to the Ministry of Commerce
China new home prices fell m/m in July in 64 out of 70 cities tracked by China’s statistics bureau, compared with 55 cities in June, according to a statement posted to the bureau’s website today
Holders of China’s first corporate bond to default onshore met today in Shanghai, as investors look for clues on how the government will balance market liberalization with steps to maintain stability
London home sellers cut asking prices by the most in more than six years this month, adding to signs that the property market in the U.K. capital is coming off the boil
Israeli and Palestinian negotiators showed little movement from long-held positions ahead of a midnight deadline to extend talks that have kept the Gaza Strip free from military conflict for a week
Kurdish forces took control of most of Iraq’s largest dam as the largest U.S. deployment of air power in the campaign helped reverse some of the gains made by Islamic State militants in the north
The Ukraine crisis is pushing European governments to review the role of the weapon that dominated Cold War defenses as the strength of Russian ground forces stirs political concerns: the battle tank
The best chance for an immediate treatment for Ebola patients in the worst outbreak ever may be readily available, in the blood of survivors
An attack on an Ebola clinic in Liberia’s capital city is complicating already strained efforts there to contain the virus’s spread
Missouri Governor Jay Nixon ordered the National Guard to restore peace after a third straight night of violence in the St. Louis suburb rocked by protests over killing of an unarmed black teenager by a police officer; organized groups attacking police officers with firearms and gasoline bombs
Texas Governor Rick Perry’s indictment, initially seen as a political dagger in his 2016 presidential aspirations, could turn into an asset -- especially if he beats the abuse-of- power charges
The New York Yankees are getting a jump on a Major League Baseball mandate that all stadiums install metal detectors before the 2015 season
Sovereign yields mostly higher. Euro Stoxx Banks +1.03%. Asian and European equities higher, U.S. stock futures gain. WTI crude and gold lower, copper little changed
Monday’s calendar particularly quiet ahead of central bank releases
later this week, including the Fed & BoE minutes and the Jackson
Hole monetary policy symposium

US Event Calendar

10:00am: NAHB Housing Market Index, Aug., est. 53 (prior 53) Central Banks
11:00am POMO: Fed to purchase $950m-$1.15b notes in 2036-2044 sector

ASIAN HEADLINES

The Asia-Pacific session was relatively muted, as the Shanghai Composite (+0.4%) advanced on monetary easing hopes from the PBoC after Chinese property prices fell for a third consecutive month. The Nikkei 225 traded on little domestic newsflow, but was supported by the healthcare sector after Chugai Pharma (+16%) gained on M&A prospects, with Roche said to be considering a bid.

FIXED INCOME

Core fixed income markets trade negatively as Bund futures and T-notes fall on the back of brightening prospects for a Russian rebel/Ukraine ceasefire. The Russian foreign minister Lavrov met with his Ukrainian, French and German counterparts over the weekend in order to discuss the situation - no conclusions were met as of Sunday evening, however Lavrov stated progress had been made on many issues. Negotiations are to continue both today as well as tomorrow. In peripheral Europe, Irish debt modestly outperforms, with the IR/GE spread tighter by around 2bps after Fitch upgraded the Irish sovereign rating late on Friday. Elsewhere, Gilts sharply underperform after Carney struck a hawkish tone in his interview with the Sunday Times.

EQUITIES

GBP/USD opened above 1.6700, with EUR/GBP looking to break 0.8000 after the BoE governor Carney provided threw another curveball in an interview with the Sunday Times. Last week's Quarterly Inflation Report showed the Bank of England paying heed to the poor pay growth in the UK, however the BoE governor stated that real wage growth will not have to turn positive before the Bank can hike rates from historic lows of 0.5%. Looking ahead, the session remains quiet, with focus shifting to the central bank events later this week (BoE, Fed minutes and Jackson Hole Symposium).

COMMODITIES

Brent crude futures trade markedly softer and sit just above the USD 102/bbl mark after Kurdish forces regained power over Iraq's Mosul dam, signalling the Islamic State militants' largest losses to date in the northern regions of the country. The somewhat more benign geopolitical risk in the area has pushed OPEC's basket of crudes below USD 100/bbl for the first time in 14 months. Spot gold came under pressure in early Asia-Pacific trade as markets eyed the discussions between Ukraine and Russia, nonetheless, palladium rose to multi-decade highs and above USD 900/oz as Russian press Vedomosti reported that car imports to Russia could be the next target of sanctions.

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DB's Jim Reid completes the summary of most recent events

The main focal point of the week may actually come just as the Europeans are starting to think about heading out the door for the weekend as Yellen's long awaited speech at the Jackson Hole 3-day symposium arrives. I say it every year but I love the word symposium. I plan to host one one day! The theme of this year's symposium is entitled "Re-Evaluating Labour Market Dynamics" and Yellen is expected to deliver her keynote address on Friday morning US time. Our US economists think she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is probably not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September. Interestingly Mr. Draghi will also be attending this time and is expected to deliver a luncheon speech at 12.30pm local time on the same day. Other participants at the symposium also include BoJ’s Governor Mr. Kuroda, Central Bank of Brazil’s Governor Mr. Tombini and BoE’s Deputy Governor Mr. Broadbent.

Back to markets, Asian equities are a bit of a mixed bag this morning following a fairly volatile session for US and European markets on Friday. Chinese stocks are the notable outperformers overnight despite headlines of weaker home prices in China. Indeed new home prices fell in 64 of the 70 Chinese cities in July, the most since January 2011. Beijing (-1%) also posted its first decline since April 2012. The CSI 300 and Shanghai Composite are both up about four tenths of a percent as we type. Elsewhere, the Hang Seng and KOSPI are moderately lower whilst the Nikkei is flat on the day. Asian IG credit spreads are mostly unchanged overnight amid the absence of major news flows and supply. Bond investors of China’s first onshore corporate defaulter Chaori Solar meets in Shanghai today so we’ll see anything interesting comes out from that.

Recapping Friday’s session, headlines that Ukraine troops had destroyed part of Russia’s armed convoy drove the Stoxx 600 (-0.40%) to close at the day’s lows (updates on this below). Risk sentiment recovered steadily during the US trading session though which helped the S&P 500 recover all of its earlier losses to close the day unchanged. Geopolitics aside, the Empire Manufacturing and UofM Consumer Sentiment print for August were softer though the Industrial Production reading for July was firmer although data flow was pretty much on the backseat on Friday.

The big moves on Friday were really in Rates though with government bond markets rallying strongly on both sides of the Atlantic. The 10-year Treasury and Bund closed 6-7bps lower on the day at 2.34% and 0.95% respectively. This marks yet another record low for the Bund and the lowest closing level for Treasuries since 18 June 2013. The 10yr Gilts enjoyed its best single day performance since late August 2013 closing 12bps lower at 2.33%.

With the 10-year UST yield currently at about the half-way point between the pre-taper lows in May last year and the post-taper tantrum highs at the end of 2013, the key question is where do we go from here? Our US rates strategist Dominic Konstam thinks much depends on the cyclical outlook for growth in 2H and (related) geopolitical concerns. But his inclination is that positioning still offers investors better risk reward for applying rates from the long side. He notes that there has been some short capitulation but it is in no way overwhelming.

As we wrote last Friday, the HY flow picture is starting to stabilize despite some mixed signals reported last week between EPFR and Lipper. Friday was a continuation of that trend. The iShares iBoxx $ High Yield Corporate Bond ETF (+0.2%) rose for its third consecutive day as well as net receiving US$37m of inflows. The SPDR Barclays High Yield Bond ETF (+0.07%) was a smidgen higher on and also recorded US$82m of inflows on Friday. We’ve updated the US and European HY fund flow charts in last Friday’s EMR for those who’ve missed.

The weekend news flow has been fairly quiet for most part barring an intensified diplomatic effort by Europe to de-escalate the Russian/Ukraine situation following Friday’s incident. The foreign ministers of Russia and Ukraine were invited to a four-way talk in Berlin overnight with their German and French counterparts. The meeting lasted for five hours and ‘some progress’ had been apparently made on important issues (per RT.com). German’s FM Frank-Walter Steinmeier informed the press following the talks that the negotiations will continue next week emphasizing that the ministers will use any possibility to ease the humanitarian situation in Ukraine and avoid further victims. Away from the peace talks in Berlin, the UK Telegraph reported that the Ukrainian army pushed into a key city controlled by Russia-backed separatists on Sunday. Kiev also admitted the rebels had shot down one of its fighter aircraft, while accusing the separatists of bringing three missile launchers onto Ukrainian territory from Russia.

Elsewhere, Ireland’s upgrade last Friday to A-/Stable from BBB+ by Fitch feels a bit of a catch-up play given S&P is already at A-/Pos and Moody’s at Aa3/Stable. The more interesting part though was FT’s front page article overnight which noted that US banks are drawing preliminary plans to move some London-based activities to Ireland to address concerns that the UK is drifting apart from the EU. The plans were still in very early stages though for most.

Markets are expecting a modest 0.4pt decline for the Euro area composite PMI but we suspect plenty of focus will be on the flash manufacturing PMI reading for Germany given the softening data momentum over there. The other notable European releases this week also include the Euroarea trade balance today, UK inflation tomorrow, and German PPI on Wednesday. In the US, we will get the NAHB housing market index today, July CPI and housing permits/starts on Tuesday and the Philly Fed survey on Thursday. We will also get the latest FOMC and BoE's meeting minutes on Wednesday. In Asia, the focus will be on China's HSBC flash manufacturing PMI for August on Thursday. Still, all eyes (and minds) will be on Jackson Hole this week.