If yesterday's laughable lack of volume (helped by the closure of Japan and the UK) coupled with hopes that the end of the buyback blackout period was enough to send stocks surging if only to end with a whimper below all time highs despite what is now looking like three consecutive quarters of Y/Y EPS declines according to Factset, today's ramp will be more difficult for the NY Fed and Citadel to engineer, not least of all due to the headwind of the overnight "incident" by China's stock bubble which saw the Shanghai Composite tumble by 4%, [38]the most since January.
In fact, if volume is anything but abysmal, it may be tough to push stocks higher at all, now that the only signal that matters is: if volume low then buy, if volume high then sell.
[39]
Asian stocks finished the session in the red despite the positive Wall Street close as the S&P 500 extended Friday’s gains, the biggest in more than a month. Shanghai Comp (-4%) was the session’s laggard amid liquidity concerns, with around CNY 2.34trl worth of IPO subscriptions officially opening today, as approved by the CSRC on April 23rd which will divert liquidity away from the stock market into new offerings.
In Europe, in an attempt to accelerate negotiations, the IMF threatened to cut off the lifeline it has been lending to Greece unless European partners write off large volumes of the country's sovereign debt. Consequently, Bunds (+22 ticks) have been supported from the get-go as it continues to retrace last week’s sharp losses, although German 10y yields are still above 0.4% which is the level not seen since the start of ECB QE programme.
Speaking of bonds, USTs have taken a “crushing blow” from European govt bond selloff because of liquidity, not fundamentals, according to Tom di Galoma, head of rates and credit trading at ED&F Man. "The capitulation trade on European debt will soon come to an end and place U.S. Treasuries on more stable footing." The only question is when.
Furthermore, the GR/GE spread is significantly wider than its European counterparts with Greek 10Y bonds wider by 67bps German 10Ys and Greek 2Y yields rose over 100bps.
Of note, Greece are set to pay the IMF EUR 200mln in interest payments tomorrow and a further EUR 780mln on May 12th. In addition, the ECB are holding a non-monetary policy meeting and may discuss the ELA. Meanwhile UST’s are unchanged on the day amid little fundamental news specifically driving US Treasuries.
Despite opening lower European equities (Eurostoxx50 +0.4%) reversed coursed after being lifted by a stellar earnings report from UK banking giant HSBC (-1.9%), although later retraced all of its upside. The UK bank holds a 7% weighting in the FTSE and boasts a GBP125bln market cap. This consequently resulted in European stocks shrugging off negative closes in China due to the CSRS tightening its grip on margin trading and investors booking profits and switch money into a flood of IPOs.
In FX markets, the USD-index (+0.2%) has continued this week’s trend and is firmer against the major pairs, with the EUR exhibiting broad-based weakness and EUR/USD maintaining a downward trend since Friday after finding resistance at its 100DMA at 1.1283. Elsewhere, the RBA cut its Cash Rate Target by 25bps to a record low 2%, as expected. AUD/USD initially came under selling pressure, falling by 65 pips, as the central bank further jawboned the currency. Nonetheless, the weakness was short-lived as the RBA hinted at a future neutral bias, saying that it views inflation consistent with its target over the forthcoming 1-2yrs which strengthened AUD. Moreover, the central bank failed to offer any form of forward guidance on monetary policy, with focus now turning to Friday's quarterly SOMP release.
Heading into the North American open, WTI and Brent crude futures trade in the green with WTI continuing to eye the USD 60/bbl level to the upside. Despite the strength in the USD, prices have been bolstered by ongoing conflict in Libya which has subsequently led to the halting of flows to the nation’s Zeutina port. Meanwhile spot gold (-0.08%) has traded in a relatively tight range in the session so far.
Bulletin headline summary from Bloomberg and RanSquawk
- Strong earnings from HSBC offer support to European equities shrugging off the negative closures in Asia
- Greek concerns weigh on the EUR and help Bunds (+16 ticks) retrace some of its recent correction
- Looking ahead sees the release of US Trade Balance, Service PMI, ISM Non-Manf. Composite, API crude oil inventories, New Zealand Employment Change, Milk Dairy Trade Auction, BoC Deputy Governor Wilkins and notable large cap earnings from Disney and DirecTV
- Treasuries steady overnight, 30Y yields retreat from highest since December as EGBs stabilize; focus on Friday’s nonfarm payrolls report, est. +230k, unemployment rate to 5.4%.
- “The Treasury market has taken a crushing blow from the European government bond sell-off due to liquidity rather than fundamentals. The capitulation trade on European debt will soon come to end and place US Treasuries on more stable footing,” ED&F Man head of U.S. rates Tom di Galoma writes
- European Commission said that impasse over Greece’s fiscal crisis is strangling the economy, a forecast that will make it harder to meet bailout goals as talks to ease its liquidity squeeze drag on
- IMF has warned eurozone creditors that it may cut off support to Greece unless European lenders write off “significant” amount of its sovereign debt, FT reported yesterday
- Australia cut interest rates to a fresh record low and said there are signs of improving household spending, sending the currency and bond yields higher as markets bet policy makers won’t ease further
- Two years of client withdrawals at Pimco’s Total Return Fund have cost it the title of the world’s biggest bond mutual fund, which now belongs to Vanguard’s Total Bond Market Index Fund
- DoubleLine Capital’s Jeffrey Gundlach sees the same investment potential in the municipal debt of Puerto Rico as he did in mortgage markets in 2008 -- so he’s buying
- Texas and other states suing to overturn Obama’s immigration initiative asked an appeals court to keep in place a judge’s order blocking the program until a final decision on whether it’s legal
- Sovereign bond yields mixed. Asian stocks mostly lower, European stocks gain; U.S. equity-index futures fall. Crude oil and copper higher, gold unchanged
US Event Calendar
- 8:30am: Trade Balance, March, est. -$40.1b (prior - $35.4b)
- 9:45am: Markit US Composite PMI, April final (prior 57.4)
- Markit US Services PMI, April final, est. 57.8 (prior 57.8)
- 10:00am: IBD/TIPP Economic Optimism, May, est. 50.3 (prior 51.3)
- 10:00am: ISM Non-Mfg Composite, April, est. 56.2 (prior 56.5
DB's Jim Reid concludes the overnight recap
If we carry on the recent price action by the time we get to next month's conference we may have to encourage core European Government bond treasurers to speak as yields continue to go higher and higher. Yesterday saw another +8.4bp added to 10 year bunds after Friday's holiday with 30yr Bund yields +10.9bps higher at 0.994% - back to levels not seen since early March. It wasn’t just Bunds which finished weaker. Both developed and peripheral markets sold-off as 10yr yields in France (+8.0bps), Netherlands, (+8.8bps), Switzerland (+3.7bps), Spain (+4.8bps), Italy (+3.4bps) and Portugal (+1.9bps) all closed wider. Greece was the lone outperformer as the 10yr yield finished 9.4bps tighter. It was a better day for European equity investors however as the Stoxx 600 (+0.55%), DAX (+1.44%) and CAC (+0.70%) all closed higher.
The S&P 500 (+0.29%) and Dow (+0.26%) both also closed higher after better than expected macro data and constructive earnings reports helped support a better tone. On the latter, results from Berkshire Hathaway (post Friday close), Comcast and Cablevision in particular beat on both the earnings and revenue front while Anadarko Petroleum (after market close) became the latest oil company to fall victim to the downturn in prices, reporting its biggest quarterly loss in more than a decade, lowering capex further and reporting an eye-watering $3.7bn write-down on a single field in Utah.
Markets in Asia this morning are generally weaker with the Hang Seng (-1.00%) and Shanghai Comp (-1.84%) in particular trading lower. Equity markets in Japan are still closed while credit is largely unchanged. The main news this morning is in Australia where the RBA has cut rates by 25bps to 2% as expected, with the central bank commenting that further Aussie Dollar depreciation seems likely and necessary. The Aussie Dollar has been volatile post the move, immediately declining -0.5% before then recovering and now trading +0.5% higher on the day.
In terms of the data yesterday, markets appeared to be buoyed by a better than expected factory orders print (+2.1% vs. +2.0% expected), while the ISM NY print for April bounced 8.1pts to 58.1. Treasuries were better offered yesterday and extended their recent decline with the 10y and 30y part of the curve finishing +3bps and +4.9bps wider on the day. The 30y yield is in fact now at its highest yield (2.877%) since December 8th last year although Fed Funds contracts were little changed with the Dec15, Dec16 and Dec17 contracts 0bps, -0.1bps and -0.1bps respectively.
Comments from the Chicago Fed’s Evans yesterday lent support to the doves camp after the more hawkish comments from Williams and Mester on Friday. Despite tending to believe that most of what we saw in the first quarter was transitory, Evans noted that ‘I see significant risks, but few benefits, to increasing rates prematurely’, focusing on the need for more wage growth in particular to support a change in his view to lifting rates sooner. Meanwhile San Francisco Fed President Williams reiterated his views on Friday saying that he is optimistic over the US economy and that ‘we’re finally coming into the light at the end of the proverbial tunnel’.
In Europe the final April manufacturing PMI readings were mixed. The Euro-area print was revised up one-tenth of a point to 52, while regionally we saw Germany (+0.2pts to 52) revised up but the France reading (-0.4pts to 48) revised down. Elsewhere, the Italian reading was revised up 0.5pts to 53.8 and the Spanish reading was revised down modestly (-0.1pts to 54.2). Finally the Sentix investor confidence reading for the Euro area came in higher than expected (19.6 vs. 19.1 expected).
Away from the data, Greek headlines yesterday were focused on an article published in the FT which suggested that the IMF may cut off its support to Greece unless European lenders write down significant amounts of its sovereign debt. The article suggests that the IMF may hold back its portion (around half) of the €7.2bn tranche of bailout aid that Greece is in talks over. The article does appear to be somewhat backdated however, with the note referring to data arising from the eurozone finance ministers meeting in Riga last month which showed Greece would post a primary deficit of up to 1.5% of GDP, well below the 3% primary surplus target. More importantly however, a Reuters article yesterday reported that the ECB is unlikely to change the collateral policy this week and emergency liquidity assistance is set to be extended for another week. The article probably helps support some of the better performance in Greek assets as well as the moves wider in core rates after earlier worries that an increase to haircuts on Greek collateral was a possibility this week.
With negotiations between Greece and its creditors continuing today, Deputy Finance Minister Dragasakis is due to meet with Draghi today in Frankfurt while Finance Minister Varoufakis is due to meet French Finance Minister Sapin in Paris.
Wrapping up yesterday’s news, the Fed’s quarterly bank loan survey showed little change in lending standards for loans in the commercial and industrial sector and little change in demand for these loans. There were however some reports of easing on lending terms for a number of types of residential mortgages while demand for autos and credit cards rose. Perhaps more interestingly, there was also a special question on exposure to loans offered in the oil and natural gas drilling or extraction sector. The report commented that banks are expecting more delinquencies and charge-offs from the sector over the remainder of the year, however the report also noted that ‘exposures were small, and that they were undertaking a number of actions to mitigate the risk of loan losses’. The report showed the institutions are taking measures to protect themselves, ‘including restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral, tightening underwriting policies on new loans or lines of credit, and enforcing material adverse change clauses or other covenants’.
Looking ahead to today’s calendar now, the European Commission economic forecasts will likely be closely watched this morning, while data wise its fairly quiet in the European timezone with just Euro-area PPI expected. It’s busier in the US this afternoon however with trade data, the final April composite and services PMI’s, the IBD/TIPP economic optimism survey and also the ISM non-manufacturing reading all expected today.
