It has gotten to where just the lack of a rout in Bunds or any other government issue is enough to activate the "bullish" outside stop hunting algo, which is probably why ES has jumped overnight in another illiquid, newsless session. Curiously, Bunds shave not sold off even though the EUR has jumped sharply by almost 100 pips overnight to a 3 month high also on no news (with some amusing acrobatics by the USDJPY alongside) traditionally a bearish indicator for the Dax and thus the S&P. Perhaps the algos are just late, or maybe the "weak dollar is good for stocks" thesis has been activated, but in any event this morning's ramp higher in the ES will continue until all upside stops are hunted down by Virtu and crushed mercilessly.
A look at markets: in Asia the Nikkei 225 (-1.00%) was weighed on by a raft of soft earnings and JPY strength. Chinese markets fluctuated between gains and losses as participants counterbalance the latest slew of disappointing Chinese data with expectations for additional easing. JGB’s shrugged off earlier weakness to trade up by 4 ticks after finding support at the key 146.50 level, despite a poor 30-year government bond auction, which saw the lowest b/c since February.
Overall, price action for equities this morning has been driven by currency fluctuations with stocks in Europe pulling away from their worst levels in tandem with the EUR. On a sector specific basis, energy names are the notable underperformers in the wake of yesterday’s DoE-inspired slide in oil prices with equity newsflow otherwise relatively light. From a fixed income perspective, Bunds have drifted higher since the open in a partial pull-back of yesterday’s heavy losses with the German curve now at its steepest level in 5 month.
EUR started the session on the front-foot amid no new fundamental catalyst with the move to the upside aided by the USD-index breaking below the Feb low seen at 95.25, leading EUR/USD to trade at 3-month highs. Although there has been no new standout news today it has been part of a broader trend seen over the past few weeks with focus on the disappointing data releases from the US compared to those of the Eurozone. European yields continue to underpin the EUR. Despite Bunds paring some of yesterday's losses, German paper this week has once again added to the heavy losses seen since April 29th. Comments from Greece appear to be more promising with the Greek Fin. Min. Varoufakis this morning acknowledging that Greece has drawn a common line regarding many issues with their creditors.
WTI and Brent crude futures trade modestly lower following the increase in US oil production and a build in east coast inventories, despite a wider than expected draw-down in yesterday’s DoE crude inventory data. Spot gold has seen subdued trade, remaining near 5 week highs, holding onto most of yesterday’s gains following poor US retail sales data. Copper saw mild weakness overnight following further disappointing data from China after aggregate financing and new yuan loans missed expectations, while Dalian iron ore futures declined by over 3% as weakening demand from Chinese steel mills pressured prices.
In summary: European shares little changed having risen from intraday lows with the basic resources and autos sectors underperforming and personal & household, insurance outperforming. Greece wants agreement with creditors by end-May, Varoufakis says. Markets closed today include Austria, Denmark, Finland, Norway, Sweden, Switzerland. The Dutch and U.K. markets are the worst-performing larger bourses. The euro is stronger against the dollar. Irish 10yr bond yields fall; U.S. yields decline. Commodities gain, with nickel, zinc underperforming and silver outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, PPI due later.
Market Wrap
- S&P 500 futures up 0.4% to 2103.2
- Stoxx 600 little changed at 395.5
- US 10Yr yield down 4bps to 2.25%
- German 10Yr yield down 1bps to 0.72%
- MSCI Asia Pacific down 0.4% to 152.1
- Gold spot up 0.2% to $1217.5/oz
- Eurostoxx 50 +0.1%, FTSE 100 -0%, CAC 40 +0.1%, DAX +0.1%, IBEX +0.2%, FTSEMIB +0.4%, SMI closed
- Asian stocks fall with the Kospi outperforming and the Nikkei underperforming.
- MSCI Asia Pacific down 0.4% to 152.1, Nikkei 225 down 1%, Hang Seng up 0.1%, Kospi up 0.3%, Shanghai Composite up 0.1%, ASX down 0.3%, Sensex down 0.2%
- Euro up 0.5% to $1.1411
- Dollar Index down 0.31% to 93.33
- Italian 10Yr yield up 0bps to 1.89%
- Spanish 10Yr yield down 1bps to 1.88%
- French 10Yr yield down 1bps to 0.99%
- S&P GSCI Index up 0.2% to 452.6
- Brent Futures up 0.4% to $67.1/bbl, WTI Futures up 0% to $60.5/bbl
- LME 3m Copper up 0.1% to $6409.5/MT
- LME 3m Nickel down 0.8% to $13940/MT
- Wheat futures up 0.5% to 483.8 USd/bu
Bulletin Headline Summary from Bloomberg and RasnSquawk
- EUR trades at its highest level against the USD for three months amid no new fundamental catalyst
- Things are otherwise quiet in Europe with equities tracking movements in FX markets
- Looking ahead, today sees US PPI, Weekly Jobs Data and the US USD 16bln 30yr Auction
- Treasuries gain as long end pares losses seen in U.S. trading late yesterday after Qualcomm priced its $10b 8-part debut issue; quarterly refunding concludes today with $16b 30Y bonds, WI 3.04%, highest since Nov., after 2.597% in April.
- China’s central bank told lenders to hold off from raising deposit rates that officially became available from May 11, according to people familiar with the matter
- Greek Finance Minister Yanis Varoufakis said access to the ECB’s QE program would have been “especially positive” for Greece; nation was excluded as PM Tsipras fought with creditors over bailout terms
- Greek debt isn’t sustainable, must be “redesigned”; Greece isn’t asking for a haircut, Varoufakis said at event in Athens
- Obama is spending much of two days trying to reassure apprehensive Persian Gulf allies that his strategy of negotiating with Iran and defusing myriad regional conflicts won’t leave them vulnerable
- UBS Group AG faces the prospect of making a guilty plea that would require it, along with four other giant global banks, to seek U.S. regulators’ permission to keep managing Americans’ money
- Sovereign bond yields mostly lower. Asian stocks mostly higher, European stocks, U.S. equity-index futures decline. Crude oil higher, gold little changed, gold, copper higher
US Event Calendar
- 8:30am: PPI Final Demand m/m, April, est. 0.1% (prior 0.2%)
- PPI Ex Food and Energy m/m, April, est. 0.1% (prior 0.2%)
- PPI Ex Food, Energy, Trade m/m, April, est. 0.1% (prior 0.2%)
- PPI Final Demand y/y, April, est. -0.8% (prior -0.8%)
- PPI Ex-Food and Energy y/y, April, est. 1.1% (prior 0.9%)
- PPI PPI Ex Food, Energy, Trade y/y, April est. 0.8% (prior 0.8%)
- 8:30am: Initial Jobless Claims, May 9, est. 273k (prior 265k)
- Continuing Claims, May 2, est. 2.232m (prior 2.228m)
- 9:45am: Bloomberg Consumer Comfort, May 10 (prior 43.7)
- 10:00am: Factory Orders, benchmark revisions
- 1:00pm: U.S. to sell $16b 30Y bonds
DB's Jim Reid concludes the overnight recap
After what was turning out to be a relatively calm session and better day in bonds for the most part yesterday, another Bund-led selloff late in the European session sparked a tide of rising yields once more in global bond markets. Having opened at 0.675%, 10y Bunds traded as low as 0.597% intraday, before then selling off into the US session and eventually closing 4.9bps higher in yield on the day at 0.722% with the high to low intraday range at 13.6bps. It was a similar story in US Treasuries. The 10y benchmark started the European session at 2.250%, struck an intraday low of 2.189% before then closing 4.4bps higher on the day at 2.293%. The intraday move of 11bps no less impressive. The messy day in rates and sell off in Bunds was made all the more confusing by softer than expected US retail sales data, softish German Q1 GDP and supportive Treasury and Bund auctions.
We’ll touch on these shortly in more detail, but looking at the follow up in markets in Asia this morning, bonds are softer generally across the region once again, led by 10y Australia (+5.9bps) bonds while similar maturity yields in Japan (+0.5bps), Hong Kong (+3.0bps) and Singapore (+4.1bps) are also higher. Treasuries are more or less unchanged. It’s a bit more mixed in equity markets meanwhile with the Nikkei (-0.86%) and ASX (-0.71%) both declining, while the Hang Seng (+0.30%), Shanghai Comp (+0.26%) and Kospi (+0.14%) are higher.
Although both the S&P 500 (-0.03%) and Dow (-0.04%) closed more or less flat yesterday, equity markets chopped around for the most part too with the S&P 500 in particular trading between positive and negative territory 19 times during the day. It was a weak day for the Dollar with the DXY (-0.97%) selling off with the move higher in rates. Gold (+1.83%) had one of its better days for a while closing at $1215/oz and the highest level since February 16th, while Brent (-0.07%) and WTI (-0.41%) pared earlier intraday gains into the close.
Back to the data, as mentioned US retail sales disappointed on the whole yesterday. The headline April reading of 0.0% mom was below market expectations of +0.2% and was down from +1.1% last month. The ex auto component also disappointed with the +0.1% mom print below expectations of +0.5% expected (and down from +0.7% last month). Meanwhile the retail control component, which is the key input into goods spending in the GDP accounts was flat compared to +0.5% in March and also a miss versus market expectations of +0.5%. Following the numbers the Atlanta Fed GDPNow model lowered its forecast for Q2 growth to +0.7% SAAR from +0.8% previously. As well as yesterday’s retail sales data, April import price index (-0.3% vs. +0.3% expected) and March business inventories (+0.1% mom vs. +0.2% expected) also surprised to the downside. With a downward revision to the February reading in the latter too, our colleagues in the US suggest that Q1 real GDP will now be worse than estimated. They have lowered their forecast further for the second snapshot of Q1 GDP to -1.0% from -0.8% previously with the reading due on the 29th of this month.
The move in Bond markets yesterday was also a surprise given the bond auction results. Yesterday’s 10y Treasury auction had a bid-to-cover ratio of 2.72, the highest since the December 2014 auction. The auction also attracted a substantial amount of indirect bidders (including foreign central banks) who accounted for 60.2% of the notes bought, significantly higher than the 50.9% of the average of the last ten auctions. Interestingly however, primary dealers were allocated just 18.9% making it the second lowest allocation to primary dealers on record. It’ll be interesting to see what demand is like for today’s 30y Treasury auction and whether or not we see any demand momentum after yesterday’s auction. Yesterday we also got a 10y Bund auction, with a bid-to-cover ratio of 1.3x which was down on the 1.5x, 2.4x and 1.4x ratios that we’ve had so far this year, but still a signal of decent investor appetite.
As well as the move higher in Bund yields yesterday, yields in the periphery ended 4-6bps higher while other core European markets followed the lead as Netherlands (+3.6bps), France (+2.7bps) and Switzerland (+2.9bps) 10y yields closed up. Meanwhile European equity markets reversed earlier gains to close lower on the day as the volatility in bond markets appeared to sap some risk appetite. The Stoxx 600 (-0.16%), DAX (-1.05%) and CAC (-0.26%) all finished lower at the close, although peripheral European bourses held in slightly firmer (IBEX +0.02%, FTSE MIB +0.46%).
There was plenty of data out of Europe yesterday for the market to digest. Q1 Euro area GDP of +0.4% qoq was in line with expectations and the print for quarter was the joint-highest since Q1 2011. It was interesting to see the breakdown on a more regional basis however with core countries largely disappointing and non and semi-core producing better than expected readings. Germany (+0.3% qoq vs. +0.5% expected) and Netherlands (+0.4% qoq vs. +0.5% expected) disappointed while on the flip side, previously reported Spain (+0.9% qoq vs. +0.8% expected) as well as Italy (+0.3% qoq vs. +0.2% expected), France (+0.6% qoq vs. +0.4% expected) and Greece (-0.2% qoq vs. -0.5% expected) surprised to the upside. DB’s Oliver Rakau noted that the disappointing Q1 GDP print for Germany will likely reinforce doubts on German growth prospects which had surfaced lately following disappointing data out of German industry. He notes that there are moderate downside risks to his 2.0% 2015 GDP forecast given the weak start. Away from the GDP prints, the final April CPI reading for Germany was revised up slightly to +0.5% yoy from +0.4% previously while Euro area industrial production disappointed (-0.3% mom vs. 0.0% expected) for March.
We also got the monthly batch of employment data out of the UK yesterday which was largely supportive on the whole. The unemployment rate declined one-tenth of a percent as expected to 5.5% while average hourly earnings ticked up to +1.9% yoy (vs. +1.7% expected). The release of the latest Bank of England inflation report also attracted some interest yesterday. In the report, the Bank lowered growth expectations from 2.9% for both 2015 and 2016 to 2.5% and 2.7% respectively. The end period forecast for inflation was little changed, however, at just above the 2% target. DB’s George Buckley noted that the report did little to alter his timeline for a first rate hike. George noted that the BoE believes that spare capacity is currently around 0.5% of GDP and this will be fully eroded over the coming year as weak supply growth is overtaken by demand. As a result, rate increases encompassed in market pricing would be sufficient according to BoE forecasts, to leave the inflation profile similar to what was expected by the MPC three months ago. However, the market rate assumptions used by the BoE this time were higher than the February report, now showing a rate hike around the middle of next year. Given that this rate profile is insufficient to keep inflation below 2% by the end of the forecast horizon, George is comfortable reiterating his view of a first hike a little earlier that this – in May of next year.
In terms of today’s calendar, there’ll be something of a breather in Europe this morning with no data releases due. Over in the US meanwhile, the April PPI print is due along with more employment data in initial jobless.