With equities having long ago stopped reflecting fundamentals, and certainly the Eurozone's ever more dire newsflow where any day could be Greece's last in the doomed monetary union, it was up to gold to reflect that headlines out of Athens are going from bad to worse, with Bloomberg reporting that not only are Greek banks running low on collateral [32], both for ELA and any other purposes, that Greece would have no choice but to leave the Euro upon a default and that, as reported previously, Greece would not have made its May 12 payment [33]had it not been for using the IMF's own reserves as a source of funding [34]and that the IMF now sees June 5 as Greece's ever more fluid D-day [35]. As a result gold jumped above $1230 overnight, a level last seen in February even as the Dollar index was higher by 0.5% at last check thanks to a drop in the EUR and the JPY.
Over in commodities, Brent has extended gains into 2nd day amid heightened geopolitical tensions across Middle East, including resumption of Saudi-led air-strikes against Yemen Houthi because nobody could have possibly foreseen the "Ukrainization" of that particular ceasefire. Saudi air strikes in Yemen fall under rules of engagement, Houthi rebels moved missile launchers to border, says U.S. Sec. of State John Kerry. "Under the rules of engagement, it was always understood that, if there were proactive moves by one side or the other, then that would be in violation of the cease-fire agreement.” says Kerry. Also of note: the previously noted Iranian aid ship is approaching Yemen’s coastline, raising the risk of a showdown with the Saudi-led military coalition that’s blockading Yemeni ports, battling Houthi rebels. Iran’s navy has vowed to protect vessel, the government said it won’t allow any nation involved in Yemen war to inspect cargo.
Looking at stocks, Asian equity markets trade mixed following Friday’s lacklustre Wall Street close, with IPO buying overshadowing demand for equities in the region, as BHP Billiton (-6.2%) declined the most since 2008 after spinoff South32’s debut, which pressured the ASX 200 (-1.33%). The Nikkei 225 (+0.8%) rose amid JPY weakness and also further bolstered by strong earnings. Shanghai Comp (+0.6%) opened negative as several IPO’s drained liquidity in the market to hit limit up. However, some of these losses were paired after Chinese Property Prices showed declines in fewer cities than prior.
The first European session of the week has kicked off with major equities indices in positive territory, with the exception the FTSE MIB which underperforms after a number of Co.’s trade Ex-div, taking 385 points off the index. Elsewhere, Greek assets have seen some softness today (ASE: -2.6%), with Greek 2y yields up +168bps, 4y yields +130bps and 10y +26bps after a leaked IMF memo over the weekend suggested Greece will not be able to make their June 5th IMF payment unless an aid package is reached.
The only Treasury supply to be aware of this week is a USD 13bln 10yr TIPS auction due on Thursday the 21st. Meanwhile, the recent run of large corporate issuance is set to continue with analysts at IFR estimating a potential USD 25bln to USD 30bln, which would tip the volume in May well over the USD 100bln mark. Keep in mind, that the slate will also be front loaded in the week given the FOMC minutes on Wednesday and that earlier close on Friday for Memorial Day on the 25th
The dampened Greek sentiment has also weighed on EUR/USD with the pair falling around 60 pips after European participants came to their desks today, contributing to the USD-index strengthening 0.5% on the day following last week’s greenback weakness. This comes alongside comments from Fed's Evans stating that if the Fed are confident in the strength of the economy, there is a possibility that rates could still rise at the June meeting.
Elsewhere, antipodean currencies have weakened today with NZD coming under pressure after the government’s announcement of tighter tax rules for residential properties, which follows on from the RBNZ’s plans to conduct lending restrictions on Auckland housing, while AUD/USD fell following comments from RBA Deputy Governor Lowe stating that scope remains for the RBA to cut rates.
In the commodity sector, gold printed fresh highs heading into the European open to reach its highest levels since Feb 17th, breaking above the 50% Fib from Jan high to March low at USD 1225.27 and consolidating a break above the 200DMA seen last week. The energy complex has also seen upside today with both WTI and Brent in positive territory, this comes after last week saw the former print its 6th consecutive week of gains, the longest such record in the US benchmark crude in history. Today’s strength in energy has been attributed to the ongoing conflict in Yemen after the cease-fire reportedly ended with no further agreements being announced.
In summary: European shares remain mixed, close to intraday lows, with the banks and utilities sectors underperforming and autos, basic resources outperforming. Dollar snaps 4-day losing streak, most European bonds resume declines. The Italian and Dutch markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Italian 10yr bond yields rise; Spanish yields increase. Commodities little changed, with nickel, natural gas underperforming and silver outperforming. U.S. NAHB housing market index due later.
Market Wrap:
- S&P 500 futures down 0.1% to 2116.5
- Stoxx 600 down 0.1% to 396
- US 10Yr yield up 2bps to 2.17%
- German 10Yr yield up 4bps to 0.66%
- MSCI Asia Pacific up 0.1% to 153.5
- Gold spot up 0.5% to $1230.5/oz
- 4 out of 19 Stoxx 600 sectors rise; autos, basic resources outperform, banks, utilities underperform
- 42.2% of Stoxx 600 members gain, 55.2% decline
- Eurostoxx 50 -0.3%, FTSE 100 little changed, CAC 40 -0.4%, DAX +0.4%, IBEX -0.4%, FTSEMIB -1.5%, SMI +0.5%
- Asian stocks rise with the Sensex outperforming and the ASX underperforming.
- MSCI Asia Pacific up 0.1% to 153.5
- Nikkei 225 up 0.8%, Hang Seng down 0.8%, Kospi up 0.3%, Shanghai Composite down 0.6%, ASX down 1.3%, Sensex up 1.3%
- Euro down 0.45% to $1.14
- Dollar Index up 0.48% to 93.58
- Italian 10Yr yield up 11bps to 1.88%
- Spanish 10Yr yield up 10bps to 1.83%
- French 10Yr yield up 4bps to 0.95%
- S&P GSCI Index up 0.1% to 451
- Brent Futures little changed at $66.8/bbl, WTI Futures up 0.5% to $60/bbl
- LME 3m Copper down 0.4% to $6387.5/MT
- LME 3m Nickel down 0.7% to $13885/MT
- Wheat futures up 1.2% to 517.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- A leaked IMF memo over the weekend suggested Greece will not be able to make their June 5th IMF payment unless an aid package is reached
- The dampened Greek sentiment has also weighed on EUR/USD with the pair falling around 60 pips after European participants came to their desks today, contributing to the USD-index strengthening 0.5% on the day
- WTI and Brent crude futures both reside in positive territory, bolstered by the ongoing conflict in Yemen after the cease-fire reportedly ended with no further agreements being announced
- Treasuries decline led by long maturities as EGB selloff resumes, led by Italy and Spain; data calender light today, Fed minutes due Wednesday before long holiday weekend.
- Greek banks are running short on the collateral they need to stay alive, a crisis that could help force PM Tsipras’s hand after weeks of brinkmanship with creditors
- Greece probably has no choice but to leave the euro if it defaults as it would likely be unable to source the funds needed to recapitalize its banks, according to Commerzbank chief economist Joerg Kraemer
- Greece’s standoff with creditors is threatening the surge in tourism that helped drag the country out of a six-year slump in 2014, with particular slowdown in bookings from Germany
- The new China-led Asian infrastructure bank is considering giving senior staff more power over loan approval than at existing multilateral lenders to speed up the decision process, officials familiar with the talks said
- The rally in crude prices may not last as U.S. shale output remains robust, according to Malaysia’s state oil company; “It will take many years until we see oil prices anywhere near the $100 mark,” Petronas CEO Wan Zulkiflee Wan Ariffin at a conference in Kuala Lumpur
- BOJ economist Eiji Maeda sees no need for policy adjustment, says inflation expectations haven’t fallen in Japan, despite recent CPI data
- EU governments are set to take a first step toward combating the smuggling of refugees from Libya by beefing up patrols and intelligence gathering in the Mediterranean Sea
- Islamic State took control of Ramadi, the capital of Iraq’s largest province, after overrunning security and tribal forces just as the government prepared to send Shiite Muslim militias into the battle
- An Iranian aid ship is approaching Yemen’s coastline, raising the risk of a showdown with the Saudi-led military coalition blockading Yemeni ports as it battles the country’s Shiite Houthi rebels
- Sovereign bond yields mixed, with peripheral Europe higher; Greece 10Y +62bps. Asian stocks mixed, European stocks, U.S. equity-index futures lower. Crude oil, gold gain; copper falls
US Event Calendar
- 10:00am: NAHB Housing Market Index, May, est. 57 (prior 56)
DB's Jim Reid concludes the remaining news from the weekend and overnight
It’s not infeasible that the US economy will have shrunk in H1 2015. This is perhaps not the most likely scenario but with Q1 likely to be revised down to around -1.0% and with Atlanta Fed GDPNow forecasting +0.7% for Q2 then it’s a distinct possibility. The street is still around 2.5% for Q2 but we probably need some decent hard data soon to justify it. As you'll see in the week ahead, after the usual quiet post payroll data week, we'll have more data over the next few days to gauge the recovery including April's building permits and housing starts tomorrow.
Elsewhere our European economists think that the upward trend in consensus forecasts for the EU economy in 2015 – now at 1.5% yoy – will not continue. Their SIREN-Surprise indicator turned negative in mid-April and SIREN-Momentum weakened slightly along with declining global growth expectations. One can only wonder how much global bond yields would have spiked over the last month if the data had actually been strong. Having said that the recent rise in Oil has perhaps convinced investors that the lows in inflation may not be far away. This week sees UK, Europe (both Tues) and US inflation numbers (Fri) which will be closely watched.
As we know the softer data across different regions has led to a new Chinese stimulus round, should ensure that the ECB go deep into their planned QE timetable and that the Fed takes a June hike completely off the table. We'll have a few more clues from the last FOMC minutes released on Wednesday but it’s difficult to see them deviating much from their recent message of preparing the markets for rate hikes but only when the data goes the way they expect it to. So overall it’s still a fragile financial system and global economy in our opinion but the plates are still being spun with ample central bank liquidity so one can't under-estimate the impact of this on asset prices.
One thing that is starting to come to a head is Greece. With an EU leaders summit in Riga scheduled for Thursday and Friday, we should have a good idea of where current negotiations stand by the end of the week. Talks may well pick up in pace over the next few days with a spokesman for the Syriza party saying on Greek TV (Mega) that ‘we’re striving for a mutually beneficial agreement by Friday’ while pushing the party line that ‘our mandate from the Greek people is to reach an agreement where we stay in the euro area without harsh austerity measures’. Comments from the ECB’s Mersch saying that ‘we are in an endgame’ and that the situation is ‘not tenable’ will only add to the pressure while German Economy Minister Gabriel has once again reiterated that a third aid package for Greece is only possible if reforms are implemented.
One other factor that will likely add pressure to accelerate negotiations this week is the news over the weekend that Greece came close to being unable to pay the May 12th IMF repayment. According to Greek press Ekathimerini, PM Tsipras sent a letter on May 8th to the IMF’s Lagarde saying that the Greek government would not be able to repay the €750m unless the ECB allowed for Greece to issue more T-Bills. In the end, the government decided that it would only be able to repay after it emerged that Greece could use €650m of Special Drawing Rights issued by the IMF (and in turn exhaust their reserves). Since this, another memo sent by the IMF and reported by the UK’s Channel 4 on Saturday has suggested that Greece will be unable to make the IMF payment due June 5th unless a release of funds is achieved (this marks the next significant payment date).
So with an end game appearing to creep closer now, any disbursement of funds will be unlikely unless a Staff Level Agreement and some sort of implementation of an agreement through Greek parliament is achieved. As it stands, a referendum is a very real possibility with this having now also been mentioned by both Greece and its creditors. As DB’s Mark Wall noted, the ECB may well be flexible if Greece runs out of time and there is goodwill, however the ECB is likely to be strict unless Greece shows greater willingness to compromise. The outcome paths still remain fairly complicated with a range of scenarios still in play. If Greece shows enough goodwill and progress, then we still consider an agreement that avoids capital controls the most likely. In the meantime though, expect headlines to persist in the run up to the summit at the end of the week.
Moving on, with the exception of the Nikkei (+0.64%) most major bourses are off to a softer start in Asia this morning. The Hang Seng (-0.74%), CSI 300 (-0.18%) and ASX (-0.88%) in particular are trading lower as we type while bond markets in the region are largely following the lead from the US on Friday and trading around 1-4bps tighter. The Dollar has pared back some of Friday’s losses however with the DXY +0.26%.
Touching on China briefly, despite the disappointing data of late in the region and the expectation that more stimulus will be needed to help support the economy, our colleagues in China published a report on Friday looking at comprehensive financial liberalization reforms and the impact this may have on the financial markets there. They argue that new reforms over the next 18 months will likely bring many positive surprises to the market which, if successful, will ‘substantially boost China’s productivity growth and economic potential for years to come’. The attached article takes a look at both the reforms that have been put in place so far and also a comprehensive outlook at what we could expect in the future.
Recapping markets on Friday, a host of disappointing US data points helped drag both yields and the Dollar lower. In terms of price action, 10y (-8.8bps) and 30y (-12.1bps) Treasury yields in particular fell for the second consecutive day to close at 2.143% and 2.930% respectively. The Dollar made it four consecutive days of declines meanwhile with the DXY dropping 0.34% and extending recent four month lows. Equity markets were fairly muted for the most part however, eventually finishing modestly up on the day with the S&P 500 (+0.08%) extending its recent record high.
Friday’s economic data did little to help fulfill confidence of a meaningful bounce back for Q2 so far. The preliminary May University of Michigan consumer sentiment reading dropped 7.3pts to 88.6 and came in well below expectations of 95.9. There were similar falls for both the current conditions (99.8 from 107.0) and expectations (81.5 from 88.8) components although both 1y (2.9% from 2.6%) and 5-10y (2.8% from 2.6%) inflation expectations firmed slightly from last month, likely supported by the recent rise in oil prices. Elsewhere, there was similar disappointment for the NY Fed’s manufacturing index (3.09 vs. 5.00 expected) although the index did bounce from -1.19 last month. The April industrial (-0.3% mom vs. 0.0%) and manufacturing (0.0% mom vs. +0.2% expected) production readings softened, while capacity utilization (78.2% vs. 78.3% expected) fell 0.4% versus last month and lower than expected.
Over in Europe on Friday, with little in the way of data, equity markets pared some earlier gains to close lower on the day. The Stoxx 600 (-0.39%), DAX (-0.98%) and CAC (-0.71%) in particular declining as energy stocks dragged most bourses lower following a 2% fall in oil. WTI (-0.32%) and Brent (+0.16%) did eventually recover through the US session however to close at $59.69/bbl and $66.81/bbl respectively. The focus was once again on the bond market in Europe however as yields declined for the second consecutive day. Indeed, 10y Bunds fell -7.8bps to 0.622%. Despite yields rising for a fourth consecutive week, the +7.7bps move higher in yields last week in Bunds was lower than the previous three weeks (+17.4bps, +21.8bps, +7.8bps) and was helped by the bounce back on Thursday and Friday. There were similar moves in other core European bond markets on Friday while in the periphery, Spain (-10.7bps), Italy (-8.5bps) and Portugal (-11.1bps) generally outperformed. Greece was the notable underperformer on Friday, as 10y yields rose 20.7bps (to 10.423%) and Greek equities declined 2.57%.
As well as his comments regarding Greece, the ECB’s Mersch also reiterated earlier comments in the week from Draghi that the ECB is so far satisfied with the effects that QE is having and that there are no plans from the central bank to end the programme early or to alter the current trajectory of €60bn of purchases a month.
