De-Escalation Algo Pushes Futures To Overnight Highs

It is unclear exactly why stock futures, bonds - with European peripheral yields hitting new record lows for the second day in a row - gold, oil and pretty much everything else is up this morning but it is safe to say the central banks are behind it, as is the "de-escalation" algo as a meeting between Russia and Ukraine begins today in Belarus' capital Minsk. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week. What he didn't say is that he would also send a cohort of Russian troops which supposedly were captured by overnight by the Ukraine army (more shortly).

Asian equity markets haven’t really followed suit the US/European rally with bourses in Japan, Hong Kong, and China down 0.6%, 0.4% and 1%. The Dollar is softer against the Yen which perhaps added some pressure on Japanese equities. There isn’t much Asian headlines this morning and we suspect parts of the market (HK/China) are still busy with the ongoing earnings season. Asian credits are doing better in relative terms led by sovereigns. Indonesia’s USD bonds continued its march higher (helped by Treasuries) whilst its 5yr CDS spreads are marked 4bps tighter overnight. Asian stocks fall with the Kospi outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0.2% to 148.4. Nikkei 225 down 0.6%, Hang Seng down 0.4%, Kospi up 0.3%, Shanghai Composite down 1%, ASX up 0%, Sensex up 0%. 2 out of 10 sectors rise with health care, energy outperforming and utilities, telcos underperforming

European shares remain mixed though are off intraday lows with the tech and basic resources sectors underperforming and travel & leisure, retail outperforming. The German and Swedish markets are the worst-performing larger bourses, the Spanish the best. The euro is little changed against the dollar. Spanish, Portuguese, Greek, Irish, French 10yr bond yields fall; U.K. yields increase. Commodities gain, with soybeans, copper underperforming and silver outperforming. 7 out of 19 Stoxx 600 sectors rise; travel & leisure, retail outperform, tech, basic resources underperform; 51.7% of Stoxx 600 members gain, 45% decline; Eurostoxx 50 -0.2%, FTSE 100 +0.2%, CAC 40 +0%, DAX -0.4%, IBEX +0.3%, FTSEMIB -0.1%, SMI +0%.

In terms of today we are expecting a handful of data from the US including durable goods orders (Aug), the S&P/Case Shiller home price index, Conference Board Consumer Confidence (Aug) and the Richmond Fed Manufacturing (Aug). It will be a quiet day for European data flow but looking at the week ahead in Europe we have French Business Confidence surveys on Wednesday and German August unemployment and inflation data on Thursday as well as Eurozone and Italian Business Confidence surveys. Friday will see the release of German and Spanish July retail sales figures and Italian unemployment data.

Market Wrap

S&P 500 futures little changed at 1995.7
Stoxx 600 little changed at 340.4
US 10Yr yield down 1bps to 2.37%
German 10Yr yield down 1bps to 0.94%
MSCI Asia Pacific down 0.2% to 148.4
Gold spot up 0.9% to $1287.9/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

Continued speculation over an ECB QE programme has provided fixed income markets with further direction as the Italian and Spanish 10yr yields print record lows for the second consecutive session.
Markets continue to hold their ground ahead of the key meeting between Russian President Putin and Ukraine President Poroshenko where the leaders are due to hold talks on the de-escalation of tensions between the two nations.
US durable goods orders is due for release at 1330BST/0730CDT and is expected to show a sharp rise from the previous month (8.00% vs. Prev. 0.70%) following Boeing’s order book at the Farnborough Airshow. At 1:00PM markets will be looking out for the results of the US 2y note auction.
Treasuries gain as rally in EU sovereigns continues; Italian and Spanish 10Y yields fall to new record lows, UST 10Y/bund spread widest since 1999.
UST curve spreads continue flattening before week’s auctions begin with $29b 2Y; 0.528% WI bid vs 0.544% award in July
Treasuries also may be supported by month-end index extension; Barclays estimated 0.12yrs for Treasury Index, biggest since May
Muni bonds will be excluded from the group of easily sellable assets that banks can use to show they’re able to survive a credit crunch, according to a person familiar with the rule
Russia’s Putin is set to meet his Ukrainian counterpart, Petro Poroshenko, as tensions flare on the two nations’ border; Ukraine said yesterday an armored column entered from Russia while Moscow announced plans to send a second convoy with humanitarian aid into rebel-held Ukrainian territory
French President Hollande’s firing of malcontent minister Arnaud Montebourg risks unleashing the ruling Socialist Party’s chief critic of budget cuts, adding to an austerity backlash stirring across Europe
The U.S. has begun surveillance flights over Syria after Obama gave the OK, U.S. officials said, a move that could pave the way for airstrikes against Islamic State militant targets there: AP
Obama, who this month ordered airstrikes against Islamist militants in Iraq, hasn’t reached a conclusion about similar actions in Syria, White House press secretary Josh Earnest said yesterday
Twice in the last seven days, Egypt and the United Arab Emirates have secretly launched airstrikes against Islamist-allied militias battling for control of Tripoli, Libya, four senior American officials said, in a major escalation of a regional power struggle sparked by the Arab Spring: NYT
Warren Buffett is helping to finance Burger King’s planned takeover of Tim Hortons, according to people familiar with the matter, backing a buyer that would move its headquarters to Canada where corporate taxes are lower
Obama has criticized inversion deals, while Buffett has supported Obama’s push to increase personal income taxes on wealthiest individuals
Sovereign yields extend declines. Asian and European stocks mostly lower, European equities gain. U.S. stock futures decline. WTI crude and gold higher, copper lower

US Economic Calendar

8:30am: Durable Goods Orders, July, est. 8% (prior 0.7%, revised 1.7%)
- Durables Ex-Transportation, July, est. 0.5% (prior 0.8%, revised 1.9%)
- Capital Goods Shipments Non-Defense Excluding Aircraft, July, est. 0.7% (prior -1%, revised -0.3%)
- Capital Goods Orders Non-Defense Excluding Aircraft, July, est. 0.2% (prior 1.4%, revised 3.3%)
9:00am: FHFA House Price Index m/m, June, est. 0.3% (prior 0.4%); House Price Purchase Index, 2Q, est. 3.15% (prior 1.3%)
9:00am: Standard & Poor’s/Case Shiller 20-City m/m SA, June, est. 0.0% (prior -0.31%)
- S&P/CS Composite-20 y/y, June, est. 8.3% (prior 9.34%)
- S&P/CS Home Price Index, June, est. 172.84 (prior 170.64)
- S&P/CS U.S. HPI NSA, 2Q (prior 150.76)
- S&P/CS U.S. HPI y/y, 2Q (prior 10.35%)
10:00am: Consumer Confidence Index, Aug., est. 89 (prior 90.9)
10:00am: Richmond Fed Manufacturing Index, Aug., est. 6 (prior 7)
11:00am POMO: Fed to purchase $2b-$2.5b in 2020-2021 sector

FIXED INCOME

Following on from yesterday’s Draghi inspired gains in peripheral fixed income markets, both the Spanish and Italian 10yr yields have printed record lows for the second consecutive session as participants weigh the prospect of an imminent QE programme (note the ECB meetin next on Sept. 4th). This has subsequently provided a boost for UK Gilts, although the upside has been limited as UK participants react to hawkish comments from over the weekend by BoE’s Broadbent after UK markets were closed yesterday. Elsewhere, Bunds have also extended on yesterday’s gains and 2/10’s have reached their lowest level since 2008 with markets now awaiting further direction ahead of the carefully watched meeting between Ukraine President Poroshenko and Russian

President Putin. Ahead of which, NATO’s Rasmussen has said in an FT interview that he believes Russia’s convoy is a mask for military action in Ukraine.
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 trade relatively mixed heading into the North American open, with a lack of downside catalyst to weigh on prices. The FTSE 100 (+0.3%) outperforms as the UK plays catch up from yesterday’s substantial gains in European indices yesterday which saw the Eurostoxx 50 close with gains of over 2%. On a sector basis, utilities names have lagged throughout the session after GDF Suez were subject to a downgrade by UBS, which has subsequently weighed on E.ON and RWE.

Overnight, the USD index ebbed lower after failing to break above yesterday’s session highs, which subsequently saw USD/JPY break back below the 104.00 level. The USD weakness also saw EUR/USD recoup some of yesterday’s heavy losses in early trade, although these gains have since been trimmed with no pertinent fundamental newsflow. Although there is talk doing the rounds that an informal agreement was reached at Jackson Hole with Draghi wanting to see a much weaker EUR and Yellen a stronger USD, acting as a de facto tightening and thus potentially limiting the upside to US rate hikes. Finally, NZD/USD has pulled off its 6-month lows set after New Zealand trade balance data showed the first deficit since October 2013.

COMMODITIES

Heading into the North American open, both WTI and Brent crude futures are trading relatively unchanged with Brent crude futures failing to break above the USD 103.00bbl level as well supplied markets continues to supress prices. In the precious metals complex, spot gold has been seen higher from the get-go after breaking above the 200DMA at USD 1284.50 alongside the weaker USD, with participants also positioning themselves ahead of the meeting between Poroshenko and Putin.

* * *

DB's Jim Reid concludes the overnight recap

Whilst Yellen’s Jackson Hole remarks were a bit of a non-event, Draghi's luncheon speech was surprisingly dovish which has managed to keep the markets going since then. In terms of some of the highlights of his speech, our FX strategist Alan Ruskin noted there is an asymmetric policy bias to err on the easy side as well as an emphasis for more action going forward. Draghi was fairly explicit in noting that monetary policy can and should play a central role in stimulating demand which currently means an accommodative monetary policy for an extended period of time. On upcoming policy, Draghi also signalled the first TLTRO in September and noted that the ECB’s preparation for outright purchases in asset-backed security (ABS) markets is 'fast moving forward'.

On the back of those we saw European government bond yields fall sharply yesterday to multiple record lows across the board. The 10yr Italian and Spanish yields were down 10bps and 12bps, closing at new lows of 2.479% and 2.260%, respectively. The 10-year Bund yield dropped 3bps also to a fresh low of 0.948%. The 2yr Bund yield fell further into negative territory to -0.032% at the close. We can't help to think that the widespread rally in European yields will probably continue help anchor other developed government bond markets for the time being. On that note the 10-yr Treasury edged 2bp lower to 2.38% yesterday but that is still about 12bps ‘wider’ than its Spanish equivalents. With hopes of more ECB liquidity in the making, yesterday also proved to be a positive day for stocks on both sides of the Atlantic. The CAC, DAX, IBEX and FTSEMIB were all up +2.1%, +1.8, +1.8% and +2.3% on the day, respectively. The S&P 500 added +0.48% and is now just 2pts away from celebrating the 2,000 mark.

Having said all that Asian equity markets haven’t really followed suit the US/European rally with bourses in Japan, Hong Kong, and China down 0.4%, 0.1% and 0.4%, respectively as we type. The Dollar is softer against the Yen which perhaps added some pressure on Japanese equities. There isn’t much Asian headlines this morning and we suspect parts of the market (HK/China) are still busy with the ongoing earnings season. Asian credits are doing better in relative terms led by sovereigns. Indonesia’s USD bonds continued its march higher (helped by Treasuries) whilst its 5yr CDS spreads are marked 4bps tighter overnight.

Draghi’s dovishness may have also helped cushion some of the geopolitical headlines from markets over the last 24 hours. Indeed we technically don’t have a government in France as we type this morning after French PM Manuel Valls yesterday announced that he would dissolve his government after a disagreement in his cabinet whether fiscal tightening measures (at the urge of Germany and Brussels) were impeding France’s recovery (NYT). This was the second major shakeup since Mr Hollande took over presidency in 2012. Mr. Hollande has asked PM Valls to form a new government which is expected to be announced today.

In Ukraine, the President Poroshenko yesterday tweeted that he has taken a decision to early dissolve the parliament. This comes as a delicate time with both leaders from Russia and Ukraine being scheduled to come together in Minsk today. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week.

In terms of data the US releases yesterday was mixed with activity surveys and housing coming in on the softer side. New home sales fell -2.4% in July against a +5.8% growth expected by the market. Dallas Fed manufacturing survey came in at 7.1 which is also below consensus of 12.8. The Markit US composite PMI also fell to 58.8 in August from 60.6 in July. The Chicago Fed National Activity Index was the better though (0.39 v 0.20 expected) for July. Away from the US, Germany’s IFO readings for August were lower across the board. Business Climate, Current Assessment and Expectations came in at 106.3, 111.1, 101.7 versus consensus of 107.0, 112.0, and 102.1, respectively.

Over in the US we will get initial jobless claims and the second read on Q2 GDP and July Core PCE inflation as well as the Kansas City manufacturing index all on Thursday. We close the week on Friday with July personal income growth and core PCE inflation data as well as the August Chicago purchasing managers index and University of Michigan confidence index reads.