More Bad News Out Of Europe Coupled With Hopes For More QE Push Stocks, Bonds Higher

If the big hope propelling both ES and S&P cash over 2,000 was the Ukraine-Russian talks, leading to some de-escalation and a thawing of Russian-German conditions, then it was clearly a dud. As the WSJ reports, "face-to-face talks between the Russian and Ukrainian presidents failed to produce a breakthrough for ending the conflict over eastern Ukraine, as Kiev released videos of captured Russian soldiers and rebels pushed toward a government-held city. The one-on-one session, which Ukraine's President Petro Poroshenko described as "tough and complex," ended early Wednesday after a day of talks on the crisis in the Belarusian capital of Minsk. Mr. Poroshenko said afterward that he would prepare a "road map" toward a possible cease-fire with the pro-Russia separatists." In other words, absolutely no progress. There was however escalation, when overnight the September Bund future rose as much as 36 ticks to 151.18, after Poland PM Tusk said “regular” Russian troops are operating in eastern Ukraine. And so we are back to square one, with concerns over Russia pushing European bonds to new record highs, in turn leading to more US Treasury buying, while a brand new rumor of more easing from the ECB, this time by Deutsche Bank, has propped up European equities, which like US futures are trading water around the critical 2000 level.

As noted, after JPM yesterday DB was the latest bank to join in with expecting more easing from Draghi. DB's European economists now think that ‘private’ QE will be unveiled at the next ECB’s policy meeting on the 4th September as opposed to early next year. In their view, the weak data recently and Draghi's latest comments on inflation expectations were enough to prompt the ECB into action. They said that it will be a very close call though as an announcement could wait which will probably disappoint the markets. What they expect is not a generic QE with government bond purchases rather the ECB will engage in ABS purchasing as a complement to the TLTRO. How this is news is arguable: after all Draghi already announced this but algos need fresh headlines to keep buying, even if it is of perfectly stale data. Also, if private QE does not emerge in September, they think it will follow shortly thereafter.

As for the Russian re-escalation,"“Regular Russian units are operating in eastern Ukraine," Poland’s Prime Minister Donald Tusk tells parliament in Warsaw, citing information from the country’s intelligence services and NATO. Poland must influence EU, U.S., Canada and NATO to conduct common policy towards Ukraine and Russia, Tusk says, adding that unilateral actions against Russia wouldn’t be wise. Is Poland also finally jumping on the "no more sanctions" bandwagon? It seems that Europe is tired of bearing the US "Costs" of containing Russia. Especially now that winter is just around the corner...

In other news, Asian equities are generally having a good day this morning with most bourses trading firmer. The Nikkei is up but as are the Shanghai Composite, KOPSI and Nifty. Away from equities, technicals remain pretty solid for Asian Credit with CDS spreads generally 1-2bp tighter on the day. All eyes are still fixated on the earnings season in that part of the world right now but it won't be long before the new issue pipeline becomes the center of attraction again. There was not much Asian specific news flow that we think is driving the market but some supportive geopolitical headlines over the last 24 hours may have also helped. Asian stocks rise with the Sensex outperforming and the Hang Seng underperforming; MSCI Asia Pacific up 0.3% to 148.8; Nikkei 225 up 0.1%, Hang Seng down 0.6%, Kospi up 0.3%, Shanghai Composite up 0.1%, ASX up 0.2%, Sensex up 0.4%. 9 out of 10 sectors rise with health care, tech outperforming and staples, energy underperforming

European shares remain little changed with the travel & leisure and basic resources sectors outperforming and autos, oil & gas underperforming. The Spanish and Italian markets are the best-performing larger bourses, French the worst. The euro is stronger against the dollar. Spanish, French, Italian, Portuguese 10yr bond yields fall; German yields decline. 9 out of 19 Stoxx Europe 600 sectors rise; travel & leisure, basic resources outperform, autos, oil & gas underperform. 59% of Stoxx 600 members gain, 39.2% decline. Eurostoxx 50 -0.1%, FTSE 100 +0.1%, CAC 40 -0.1%, DAX -0.1%, IBEX +0.3%, FTSEMIB +0.2%, SMI -0%

Looking to the day ahead, whilst it is a quiet day for US data there are some important confidence releases coming out of Europe. We have the German GfK consumer confidence survey (consensus is for an 8.9 read), French manufacturing and business confidence (consensus is for reads of 96 and 93 respectively) and the Italian consumer confidence index (consensus expects a read of 104). We will also get July German import prices (forecast 0.1% MoM) and French jobseekers data, with consensus forecasting a total read of 3412.5k. Otherwise, let’s see if we can hold on to the 2,000 mark again today!

Market Wrap

S&P 500 futures up 0.1% to 1999.7
Stoxx 600 up 0.1% to 343.3
US 10Yr yield down 2bps to 2.37%
German 10Yr yield down 3bps to 0.91%
MSCI Asia Pacific up 0.3% to 148.8
Gold spot up 0.3% to $1285.7/oz

Bulletin Headline Summary from RanSquawk and Bloomberg:

Expectations of ECB easing run further as Deutsche Bank forecast ECB’s Draghi embarking on ABS purchases next Thursday, sending IT and SP 10yr yields to all-time lows
European equity rally runs out of steam as stocks going ex-dividend and negative broker calls cap the week’s gains
Treasuries gain as rally in euro- area bonds continues, with 10Y yields from Germany to Spain falling to record lows amid expectations ECB is preparing to expand stimulus; central bank meets on Sept. 4.
Week’s UST auctions continue with $13b 2Y FRN, $35b 5Y notes; 5Y WI bid at 1.662% vs 1.72% award in July
The value of global equities rose to a record $66 trillion amid rallies from Brazil to Japan and the S&P 500’s first trip above 2,000
Agricultural Bank of China Ltd., the government-controlled lender set up by Mao in 1951, boosted provisions for potential bad loans by 56% to 15.6b yuan ($2.5b) in the three months ended June 30 from a year earlier, according to a Hong Kong exchange filing yesterday
Scotland opting for independence from the U.K. might sharpen investors’ fears of Britain leaving the EU, Deutsche Bank AG Chief European Economist Gilles Moec said; referendum scheduled for Sept. 18
French factory confidence fell to the lowest in 13 months in August, adding to signs that the economy may struggle to grow after a stagnant first half
The U.S. has begun to mobilize a broad coalition of allies behind potential American military action in Syria and is moving toward expanded airstrikes in northern Iraq, administration officials said on Tuesday: NYT
The U.S. said an American citizen was killed while fighting alongside Islamic extremists in Syria, highlighting concerns that foreign combatants involved in the conflict pose an increasing global threat
Israel’s Netanyahu faced criticism at home from allies and opponents both for accepting an Egyptian-brokered truce with the Gaza Strip’s Hamas rulers that detractors say doesn’t assure Israel’s security
IMF managing director Christine Lagarde has been put under formal investigation for her role in an arbitration case during her time as French finance minister
Sovereign yields extend declines. Asian stocks gain, Europe mixed. U.S. stock futures higher. WTI crude and gold higher, copper lower
Data calendar remains sparse as focus turns to the second auction from
the US Treasury; USD 35bln 5yr Notes as well as the USD 13bln 2yr FRN
auction

US Event Calendar

7:00 a.m.: MBA Mortgage Applications, Aug. 22 (prior 1.4%) Supply
11:00am: Fed to purchase $950m-$1.15b in 2036-2044 sector
11:30am: U.S. to sell $13b 2Y FRN reopening
1:00pm: U.S. to sell $35b 5Y notes

FIXED INCOME

Core fixed income markets have been well supported from the open by heightening expectations of imminent easing from the ECB, as Deutsche Bank add their name to the long list of research houses now expecting Draghi to embark on an ABS purchasing program next Thursday. Spanish and Italian 10yr yields fell to fresh record lows once more this morning, with foreign accounts buying peripheral bonds throughout the day. Furthermore, real-money buying in Treasuries, Bunds and Gilts ahead of month-end has assisted in pushing the German 10yr yields closer toward 0.9%.

Final Barclays month end extension for Pan-Euro Agg at +0.03y (Prev. 0.12yrs, 12m average +0.03yrs)
Final Barclays month end extension for Sterling Agg Tsy at +0.08y
Final Barclays month end extension for US Treasuries +0.13yrs (Prelim. +0.12yrs, 12m average +0.09yrs)

EQUITIES

The rally in European equity markets has slightly run out of steam, however European stock futures sit close to the week’s best levels. The downside in equities follows a number of companies going ex-dividend and falling after negative broker moves, most notably United Utilities and ST Microelectronics. Earnings have been relatively sparse barring SeaDrill, the Norwegian driller, who reported better than expected net profits in Q2, however an uncertain outlook and a cloudy forecast on rig orders sent their shares lower by over 3%.

Despite heavy French selling in EUR/CAD in the Asia-Pacific session, downside in EUR/USD has been stemmed by a successful defence of a touted option barrier at the 1.3150 level, allowing the major pair to recoup the majority of the overnight losses. USD/CAD tests the 200DMA at 1.0885 and lower Bollinger band at 1.0880/85, after European real money names sold USD/CAD below 1.0900 and markets eyed Burger King’s CAD 12.5bln purchase of Tim Hortons alongside month-end related demand for CAD. Finally, NZD firmed across the board after Fonterra, the world’s biggest dairy exporter, kept its milk pay-out forecast unchanged at NZD 6/kg amid concern that the Co. may cut its forecasts.

COMMODITIES

WTI crude futures trade stronger ahead of the NYMEX open, supported by expectations of the second consecutive drawdown in the DoE inventories scheduled for later today. Today's DOE inventories are expected to show a draw of 2.5mln barrels. This would be the second consecutive drawdown and the eighth in the past 9 weeks. Gold has been supported by the somewhat softer USD and ECB easing hopes propping gold as an inflation hedge.

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We conclude as usual with Deutsche Bank's summary of the balance of overnight events

Yesterday was certainly a landmark day for the S&P 500 with the index crossing the 2,000 milestone for the first time in history. The index actually hit an intraday high of 2005.04 before closing +0.11% higher at 2002.02. We have come a long way from the post-crisis lows of 676.5 in March 2009 which means the S&P 500 has effectively doubled itself in the space in just over 5 years. Not bad indeed! The US data flow yesterday was encouraging but the risk tone was probably also supported by market celebrations on the other side of the Atlantic as expectations of an imminent ECB QE gathers pace.

Indeed the ongoing chatter of ECB’s private QE gained further momentum yesterday which pushed European bond and equity markets higher once again. Upon reflecting on Draghi’s Jackson Hole commentary over the weekend, our European economists now think that ‘private’ QE will be unveiled at the next ECB’s policy meeting on the 4th September as opposed to early next year. In their view, the weak data recently and Draghi's latest comments on inflation expectations were enough to prompt the ECB into action. That said, it will be a very close call though as an announcement could wait which will probably disappoint the markets. To be clear, what Mark and Gilles expect is not a generic QE with government bond purchases rather the ECB will engage in ABS purchasing as a complement to the TLTRO. If private QE does not emerge in September, they think it will follow shortly thereafter.

Given the focus on private debt QE, rather than governments, the sharp rally in European peripheral bond markets certainly offers some interesting food for thought. It may well be down to the ‘crowding out’ effect, but yesterday was another strong day for bonds. The 10yr government bond yield in Germany, Spain and Italy fell -1bp, -9bp and -7bp to close at their new lows of 0.939%, 2.172% and 2.413% respectively. Treasuries were steady for the day with the 10yr closing 1bp higher at 2.396%. So with Spanish 10yr currently 20bps inside and Italian 10yr nearly flat to Treasuries, the spread between peripheral bonds and US Treasuries is now at the lows not seen consistently since 2007 and also marks a continuation of the impressive decline seen since the summer of 2012.

Away from the QE chatter the US data flow was also generally better than expected. Durable goods orders headline jumped by a sharp 22.6% in July versus an expectation of +8.0%. Core capex orders fell 0.5% mom in July but June’s numbers were revised higher which seems consistent with solid shipments in Q3. The Richmond Fed manufacturing index (12 v 5 expected) and Consumer Confidence readings (92.4 v 89.0) were both beats. Housing data was perhaps the soft spot yesterday with the Case-Shiller registering a 0.20% mom drop in June.

Back to markets Asian equities are generally having a good day this morning with most bourses (except for Japan and Hong Kong) trading firmer as we type. The Nikkei is down 0.3% but the Shanghai Composite, KOPSI and Nifty are up +0.2%, +0.2% and +0.4%, respectively. Away from equities, technicals remain pretty solid for Asian Credit with CDS spreads generally 1-2bp tighter on the day. All eyes are still fixated on the earnings season in that part of the world right now but it won't be long before the new issue pipeline becomes the center of attraction again. There was not much Asian specific news flow that we think is driving the market but some supportive geopolitical headlines over the last 24 hours may have also helped.

During the Russia-Ukraine summit in Minsk yesterday, Russia and Ukraine have agreed to commence immediate consultations on how to jointly facilitate restoration of peace in the East of Ukraine (including closure of border for military purpose). There are also headlines ( FT) of an open-ended truce between Israel and Hamas which raises hopes to a longer lasting peace in that region.