Following Wednesday's laughable tape painting close where an algo, supposedly that of Citadel under the usual instructions of the NY Fed, ramped futures just over 2,000 to preserve faith in central planning, yesterday everyone was expecting a comparable rigged move... and got it, only this time milliseconds after the close [33], when futures moved from solidly in the red, to a fresh record high in seconds on no news - although some speculate that Obama not announcing Syrian air strikes yesterday was somehow the bullish catalyst - and purely on another bout of algo buying whose only purpose was to preserve the overnight momentum. Sure enough, this morning we find that even as bond yields around the world continue to probe 2014 lows, and with the Ruble sinking to fresh record lows as the Ukraine situation has deteriorated to unprecedented lows, so US equity futures have once, driven by the now generic USDJPY spike just after the European open, again soared overnight, well above 2000 and are now at all time highs, driven likely by the ongoing deflationary collapse in Europe where August inflation printed 0.3%, the lowest since 2009 while the unemployment remained close to record high, while the Japanese economic abemination is now fully featured for every Keynesian professor to see, with the latest Japanese data basically continuing the pattern of sheer horror as we reported yesterday [34].
As a result, with the Fed firmly in tapering mode for now, all hopes are once again firmly pinned on Draghi, and as Bloomberg says the European economic crash is "increasing pressure on the ECB to take action to kindle the bloc’s faltering recovery" even as Germany's finance minister poured cold water overnight on more action out of the ECB, in line with the Reuters headline earlier this week. In short, complete confusion reigns in the Fed's "Mutant, broken market [35]" in which nothing really matters and where a green EOD print is now a matter of urgent national security and policy.
Asian markets are a bit of a mixed bag overnight. The escalation of the geopolitical tension between Russia and Ukraine is certainly being felt by markets. Other than Chinese indices, bourses in Japan, Korea, and most parts of South East Asia are down somewhere around 0.2-0.5%. Chinese stocks are up overnight reversing of yesterday's decline. There wasn't much in the way of specific news flows behind that but there were stories that China ETF has attracted just over US$500m of inflows in August which was the biggest since December 2012 as investors optimism rose on government's stimulus measures. A good set of results from ICBC probably also helped the Financial sector performance overnight. Away from equities, Asian IG and HY credit markets continued to firm up as technicals remain rather one sided in light of thin supply. This may start to change as we gradually exit earnings season in China and HK from next week onwards. In other markets overnight, Treasuries remain well supported with the 10yr holding in at below 2.34%, Gold is up for its fourth consecutive day, and the AUD is seeing some consolidation after a decent streak over the last 3 days. Asian stocks fall with the Shanghai Composite outperforming and the Kospi underperforming. MSCI Asia Pacific down 0.3% to 147.9. Nikkei 225 down 0.2%, Hang Seng up 0%, Kospi down 0.3%, Shanghai Composite up 1%, ASX up 0%, Sensex up 0.3%. 2 out of 10 sectors rise with telcos, energy outperforming and staples, materials underperforming
European shares little changed, down from earlier gains, with the insurance and financial services sectors outperforming and retail, media underperforming. The Italian and Swedish markets are the best-performing larger bourses, Spanish the worst. Euro-area inflation slows to 0.3% as Draghi hints at more ECB stimulus. The euro is little changed against the dollar. Greek 10yr bond yields rise; German yields increase.
It’s a busy day for data over in the US where we will get July personal income and spending (expected at +0.3% and +0.2%), July’s PCE Core and deflator reads (both expected at +0.1% MoM) and the Chicago August PMI (expected to rise to 56.5) and U.Mich August confidence read (expected in at 80).
Bulletin Headline Summary from RanSquawk And Bloomberg
- EUR/USD rises further from the YTD lows at 1.3153 as the inline Eurozone CPI at 0.3% keeps imminent ECB easing at bay for another month
- E-Mini S&P rises to record levels ahead of the open as month-end flows dictate equity dominance in the final trading session of the month
- Ahead of Labor Day on Monday, markets have a slew of data to work their way through, with US Personal Income/Spending, Chicago PMI and Uni. Of Michigan Confidence all due ahead of the early electronic close
- Long Treasuries lead week’s gains amid rally in EGBs on Russia/Ukraine tensions, ECB stimulus speculation that pushed bund yields below 0.90%.
- This year’s Treasury market rally has been stronger than every economist surveyed by Bloomberg News predicted; 10Y yields that slid to 2.32% yesterday were lower than the levels projected by all 66 economists surveyed for their Sept. 30 forecasts
- German bunds are set for an eighth monthly advance, longest run since Jan. 2005
- Euro-area inflation slowed in August, rising 0.3% vs 0.4% in August, weakest rate since Oct 2009 and region’s unemployment rate remained close to a record, increasing pressure on the ECB to take action to kindle the bloc’s faltering recovery
- The ECB has run out of ways to help the euro area, putting the burden on governments to spur growth without running excessive deficits, German Finance Minister Wolfgang Schaeuble said
- ECB Governing Council member Ewald Nowotny suggested the bank may cut its economic forecast when it presents an updated estimate next week
- Obama indicated the U.S. has no immediate plans to strike Islamic State havens inside Syria; “we don’t have a strategy yet,” he said at the White House yesterday when asked if he would need congressional approval to hit targets in Syria
- The U.S. and European powers closed ranks with Ukraine in condemning what they said is an upsurge in Russian troop incursions and intensified fighting as the government in Kiev struggles to counter a separatist offensive
- Finland’s government said its fighter jets were ready to intercept foreign aircraft after Russian planes repeatedly violated the northernmost euro member’s airspace
- Three days ago, in an English seaside town, Nigel Farage boasted he was Prime Minister Cameron’s worst nightmare; yesterday, one of the Conservative Party’s highest-profile lawmakers announced he was defecting to UKIP
- Sovereign yields mostly higher. Asian stocks mixed, with Nikkei lower, Shanghai higher, European stocks, U.S. stock futures gain. WTI crude and copper gain, gold lower
US Economic Docket
- 8:30am: Personal Income, July, est. 0.3% (prior 0.4%)
- Personal Spending, July, est. 0.2% (prior 0.4%)
- PCE Deflator m/m, July, est. 0.1% (prior 0.2%)
- PCE Deflator y/y, July, est. 1.6% (prior 1.6%)
- PCE Core m/m, July, est. 0.1% (prior 0.1%)
- PCE Core y/y, July, est. 1.5% (prior 1.5%)
- 9:00am: ISM Milwaukee, Aug., est. 60 (prior 63.87)
- 9:45am: Chicago Purchasing Manager, Aug. 56.5 (prior 52.6)
- 9:55am: UMich Confidence, Aug. final, est. 80 (prior 79.2)
FIXED INCOME
German 10yr yields have climbed back towards 0.9% as markets pull back on bets of outright QE purchases. Today’s CPI Estimate (0.3% vs. Exp. 0.3%) from the Eurozone solidified expectations that the ECB may be content holding off for one more month before embarking on broad-based easing, however the longer-term expectations of easing have kept peripheral bonds bid. Credit Suisse, Commerzbank and BNP Paribas added their names to the ever-growing list of those expecting Draghi to act in order to lift inflation expectations. Ahead of the Wall Street open, the E-Mini S&P has climbed to record levels of 2,003.75 as month-end flows dictate equity dominance in the final trading of August, with a number of desks noting the month-end flows in fixed income now coming to a conclusion in a shorter-session today.
EQUITIES
European equities trade tentatively in positive territory (EuroStoxx +0.25%) as markets cover shorts initiated in yesterday’s sharp sell-off. The DAX future is still yet to pull back half of yesterday’s steep decline, as traders remain concerned over the deterioration in relations between Ukraine and Russia. The FTSE-100 underperforms as Tesco (-6.1%) fell to the lowest level in over a decade after issuing a stark profit warning over challenging market conditions, being forced to slash dividends by over 75% - dragging down other UK supermarket names including J Sainsbury (-4.5%) and WM Morrison (-4.3%).
FX
The inline Eurozone CPI data prompted a minor relief rally in EUR/USD and kept the pair comfortably above the YTD lows of 1.3153, with turning to a slew of option expiries at the 1.32 handle (1.14bln rolling off at the 10am NY cut). NZD weakened after August New Zealand ANZ Business Confidence fell for a 6th consecutive month to the lowest level since 2012 (24.4 vs. Prev. 39.7). Elsewhere, despite initially shrugging off largely poor Japanese data, JPY remains steady despite a raft of Japanese data which showed inflation remaining unchanged, a result likely to be welcome by the BoJ ahead of Thursday's rate decision, while household spending, comprising of almost 60% of the economy, plummeted for a 4th consecutive time.
COMMODITIES
WTI and Brent crude futures trade higher, with WTI on track for the first weekly gain in over one month on short-covering and caution surrounding the south-eastern front in Ukraine. The latest reports suggest the pro-Russian separatists are to open a humanitarian corridor through which the encircled Ukrainian army can leave peacefully. Spot gold trades lower after tripping stops on the way through the 200DMA at USD 1,285.50 well ahead of the COMEX open.
* * *
DB's Jim Reid and team conclude the overnight recap
Markets had a rather weak day yesterday as the ratcheting up of Ukraine-Russia tensions and the continued darkening of the European economic picture outweighed positive data from the US to weigh on assets across the board.
On the Ukraine-Russia situation, Ukraine’s President yesterday cancelled a visit to Turkey citing “Russian troop deployments” in the east of the country and Nato said it had detected a significant increase in Russian arms being supplied to rebels over the past couple of weeks with Nato Brigadier General Niko Tak stating that there had been a, "significant escalation in the level and sophistication of Russia's military interference in Ukraine" (BBC). Later on in the day Nato released satellite images it says shows Russian armed forces in Ukraine and the UN Security Council held an emergency meeting. Russia denied that there were any Russian troops in Ukraine. Yesterday Britain’s ambassador to the UN Sir Mark Lyall Grant said that the conflict in Ukraine would, “no longer exist” without Russia’s direct support for the rebels whilst overnight President Obama accused Russia of being responsible for the violence, stating that fighting was not the result of a local uprising but instead of “deep Russian involvement.” Nato will hold an emergency meeting later today. All of this comes after the Ukrainian army had been making headway against the rebels although the rebels have now opened up a new front in the south of the country (BBC).
European economic data also provided little cause for cheer as Italian and Euro area confidence surveys broadly disappointed already low expectations. Italian business confidence came in at 95.7 vs 99.2 expected (the previous read had been 99.7) whilst Euro area economic, industrial, consumer and services confidence came in at 100.6 (vs 101.5 expected), -5.3 (vs -4.5 expected), -10 (vs -10 expected) and 3.1 (vs 3.5 expected) respectively. Some slightly better reads including the euro area business climate (0.16 vs 0.1 expected), Spanish YoY CPI (-0.5% vs -0.6% expected) and German inflation and unemployment which came in line with expectations at 0.8% YoY and 6.7% respectively did not help to lift the general gloom. The data helped to drive a divergence of performance between core and peripheral government debt as core debt outperformed (German 10Y’s tightened another 3bps and French 10Y’s 1bp) whilst peripheral debt sold off (Italian Spanish and Portuguese 10Y paper widened 5bps, 8bps and 14bps respectively).
Staying on this theme, ECB's Governing Council member Nowotny was on the wires overnight hinting that the ECB may cut its economic forecast at the next meeting. He said he is worried about the Eurozone's economic situation and said it would be a big mistake for banks not to take up TLTRO. He also added that Germany is no longer able to be a locomotive for growth. Overall he seems to be on the same page as Draghi as we continue to build up towards the key policy meeting next Thursday.
As mentioned before most US economic releases yesterday came in above consensus. The US Q2 GDP was revised up to +4.2% annualised QoQ (vs expectation of a slight fall to 3.9%), initial jobless claims fell to 298k and July pending home sales rose +3.3% MoM (vs +0.5% expected). The August Kansas Fed read (3 vs 7 expected) disappointed though. Overall the combination of the Ukraine crisis, weak European economic data, and the strong rally in equities over the past month proved to be a negative mix for assets. In Europe, the Stoxx 600, DAX, and FTSEMIB were -0.66%, -1.12%, and -2.03%, respectively, On the other side of the Atlantic, we saw the S&P500 down -0.17% at the closing bell after having recovered from an intraday decline of nearly half a percent around the open. Credit also struggled with Europe Main and Xover widening out by 2bps and 6bps whilst in the US CDX IG and HY drifted by 1bp and 2bps wider.
Asian markets are once again a bit of a mixed bag overnight. The escalation of the geopolitical tension between Russia and Ukraine is certainly being felt by markets. Other than Chinese indices, bourses in Japan, Korea, and most parts of South East Asia are down somewhere around 0.2-0.4% as we type. Chinese stocks are up by about two-tenths of a percent overnight reversing of yesterday's decline. There wasn't much in the way of specific news flows behind that but there were stories that China ETF has attracted just over US$500m of inflows in August which was the biggest since December 2012 as investors optimism rose on government's stimulus measures. A good set of results from ICBC probably also helped the Financial sector performance overnight. Away from equities, Asian IG and HY credit markets continued to firm up as technicals remain rather one sided in light of thin supply. This may start to change as we gradually exit earnings season in China and HK from next week onwards. In other markets overnight, Treasuries remain well supported with the 10yr holding in at below 2.34%, Gold is up for its fourth consecutive day, and the AUD is seeing some consolidation after a decent streak over the last 3 days
Looking to the day ahead in Europe we have German and Spanish July retail sales. We will also have Italy’s July and Q2 unemployment rate read (expected at +12.3% and +12.5% respectively), final Q2 GDP (expected unchanged) as well as the August inflation read which is expected to show that Italy has slipped into deflation with MoM and YoY reads of -0.1% expected. We will also get Euro area August core CPI which is estimated to be +0.8% YoY. It’s also a busy day for data over in the US where we will get July personal income and spending (expected at +0.3% and +0.2%), July’s PCE Core and deflator reads (both expected at +0.1% MoM) and the Chicago August PMI (expected to rise to 56.5) and U.Mich August confidence read (expected in at 80).