It's been one of those days. First, the CME broke for 4 hours due to what some suggested [17]were HFT connectivity issues, then Russia announced it would send a second humanitarian convoy into Ukraine (a big risk off move the first time it was announced, now not even an algo stirred), then Germany reported that the IFO Business Confidence/Climate dropped for the fourth consecutive month to 106.3 from 108.0, below the 107.0 expected, with the IFO chief economist stating that German GDP expectations are likely to be cut to 1.5% from 2.0% later in the year, and finally the French government collapsed due to disagreement over policy between finance minister Valls and economy minister Montebourg. All in all, a typical day in Europe's slow-motion implosion. So why are Spanish and Italian bank stocks soaring and European bond yields reaching new record highs? Simple: following Draghi's speech on Friday at Jackson Hole, which at initial read was hardly as dovish as many had expected, the FT and various other media outlets promptly changed the narrative and made it seem as if the ECB head was about to unleash QE.
European QE that is, of course, assuming Draghi ever goes about revealing either the TLTRO or the ABS plan he revealed months ago. Then again, this being the ECB it is all about speculation and innuendo, with QE almost virtually assured not to happen unless European GDP (adjusted for hookers and blow or otherwise) is in freefall mode and rioting is on the street, well even more than usual.
It will be a quieter week than even usual (keep in mind volumes last week were the lowest in years) with a US holiday on the horizon (there will be nobody manning trading desks on Friday as everyone rushes to catch one last weekend on Hamptons frat boy fun) and so attention turns to US New Home Sales, the Markit Composite PMI, the Dallas Fed and tomorrow’s meeting between the Ukrainian and Russian Presidents, which Merkel previewed over the weekend saying not to expect much if anything.
Bulletin headline summary from RanSquawk and Bloomberg
- EUR/USD slumps to an 11-month low as markets bet on diverging policy between the Fed and ECB, widening the US/GE 10yr yield spread to levels not seen since 1999
- US stock futures sit at all-time highs ahead of the US open as markets price-in the increasing likelihood of ECB asset purchases
- UK bank holiday keeps volumes muted, but attention turns to US New Home Sales and tomorrow’s meeting between the Ukrainian and Russian Presidents
- Long Treasuries gain, curve spreads flatten led by 5/30; overnight volumes light as U.S. Labor Day weekend looms.
- With euro-area data this week likely to show the weakest inflation since 2009, Draghi pushed the ECB closer to QE by warning in his Jackson Hole speech that investor bets on prices have “exhibited significant declines”
- Jackson Hole Roundup: Yellen shift to neutral vs Draghi easing
- Germany’s Ifo institute business climate index fell to 106.3 in August, more than expected and a fourth consecutive monthly decline, from 108 in July
- French President Hollande asked Prime Minister Valls to form a new government amid a cabinet dispute over the direction of the euro area’s second-biggest economy
- Greece plans to reopen its 3Y & 5Y bond issues in next two weeks to top them up by up to EU1.5b; payment to be in outstanding T-bills instead of cash, Reuters reports, citing unidentified senior govt. official
- Sellers of bonds backed by mortgages and auto loans would have to give investors details including the borrowers’ income and credit scores under rules the SEC is poised to consider this week, according to two people briefed on the plan
- Russia plans to send a second convoy loaded with humanitarian aid to eastern Ukraine, Foreign Minister Lavrov said, days after the first delivery sparked international condemnation by crossing its neighbor’s border without authorization
- The Democratic Republic of Congo said as many as 13 people have died of Ebola in a separate outbreak from the one raging in three West African nations
- Islamic State militants seized a Syrian air base, dislodging forces loyal to Assad from the last stronghold in the northeastern Raqqa province
- An alliance of Islamist militias said it wrested control of Tripoli’s international airport from a rival force after weeks of fighting that triggered an exodus of foreigners and threatened to plunge Libya deeper into chaos
- Sovereign yields decline. Asian stocks mixed, European equities gain. U.S. stock futures higher. WTI crude and copper gain; gold lower
US Event Calendar
- 8:30am: Chicago Fed National Activity Index, July, est. 0.20= (prior 0.12)
- 9:45am: Markit U.S. Composite PMI, Aug. preliminary (prior 60.6)
- Markit U.S. Services PMI, Aug. preliminary, est. 57 (prior 60.8)
- 10:00am: New Home Sales, July, est. 426k (prior 406k); New Home Sales m/m, July, est. 4.9% (prior -8.1%)
- 10:30am: Dallas Fed Manufacturing Activity, Aug., est. 12.5 (prior 12.7)
- No POMO
FIXED INCOME
German, Italian and Spanish 10yr yields hit all-time lows this morning after the continued dovish digestion of Draghi's comments at Jackson Hole on Friday. Draghi highlighted that the ECB will acknowledge the deterioration in inflation expectations seen over the past few months - leading to more speculation bets of QE and further easing from the ECB. The upside in Bund futures was cemented by the lower than expected IFO Business Climate survey, with the IFO chief economist stating that German GDP expectations are likely to be cut to 1.5% from 2.0% later in the year. T-notes trade higher, but underperform their European counterparts as traders highlight the policy divergence themes evident in Yellen's speech on Friday against Draghi's particularly dovish tones.
Prelim Barclays month end extension for Pan-Euro Agg at +0.03y (Prev. 0.12yrs, 12m average +0.03yrs)
Prelim Barclays month end extension for Sterling Agg Tsy at +0.08y
Prelim Barclays month end extension for US Treasuries +0.12yrs (Prev. 0.08yrs, 12m average +0.09yrs)
EQUITIES
European equities surged from the open, led higher by Italian and Spanish banks (Banca Monte dei Paschi up over 5%) as markets eye the increasing likelihood of broad-based asset purchases from the ECB. French markets have shrugged off the resignation of the French government, after the PM Valls handed in notice of the dissolution of the parliament after economic policy hit the rails after slashing growth forecasts last week. US stock futures have struck all-time highs (E-Mini S&P all-time high now at 1997.50) on the back of ECB easing hopes, indicating a strong open on Wall Street later today.
FX
USD-index trades at its best levels since September 2013 as policy divergence between the Fed and ECB continues to support the USD, which saw EUR/USD hit an 11-month low following Draghi’s comments. Separately, USD/JPY touched a 7-month high following dovish comments from BoJ Governor Kuroda, who said that QE will continue until inflation expectations are anchored which may take “some time”. Nonetheless, the pair has drifted back towards the 104.00 handle which is said to be a large option expiry worth USD 1bln.
COMMODITIES
Energy markets trade relatively unchanged, with traders looking ahead to the meeting between the Ukrainian President Poroshenko and Russian President Putin tomorrow, where the two are to discuss de-escalation in Ukraine. The Russian foreign minister this morning announced a second aid convoy is to cross over to Luhansk by the end of the week, despite the controversy over last week's violation of the Ukrainian border. Spot gold and silver trade slightly softer after the USD-index struck the best levels since Sep'13 on the continued digestion of Yellen's less-dovish speech on Friday.