With the Greek IMF payment just 48 hours away, and Europe having submitted its best and final offer to Greece in a battle of "deal proposals", today Greek PM Tsipras will meet with European Commission President Juncker to discuss the recently submitted reform proposals by the Greek premier. However, a Greek government spokesman says that Greek PM Tsipras will not meet Eurogroup's Dijsselbloem despite several reports suggesting that they would do so later today. Last night it was reported that the EU, ECB, IMF agreed on terms for a cash-for-reform plan to be presented to Greece. However, a senior EU official has said that they are concerned that the stringent measures of the proposal could be met with rejection by Greece.
As a result, European markets, which have been following the Greek drama closely, are mixed, as are US equity futures. Price action in Europe thus far has taken place in a considerably more confined range than in recent days with participants pausing for breath ahead of upcoming key risk events. Equities currently trade with no sustained direction with a modest bout of underperformance in the FTSE 100 with miners leading the way lower for the index amid softness in metals markets.
More importantly in the European bond market after yesterday's latest historic one-day rout, Bunds have managed to temporarily halt their recent decline after trading relatively sideways as attention turns towards the upcoming ECB press conference.
Indeed, it is not only Greece on the calendar today but so is the ECB's monthly press conference. According to SocGen, with deflation fears largely averted, expect no policy action from Mario Draghi in just over two hours and only small adjustments to staff projections. Most of the interesting points are likely to emerge during the press conference (in which reporters will be screened far more carefully this time), with questions focused on the solvency of Greek banks (especially in case of the potential impairment of Greek public debt), the ECB's communication policy (following the recent Cœuré incident), reasons for the bond sell-off, the inflation outllok, coming after the higher than expected May printings, and possibly views on exit strategies for the ECB.
In FX markets, the main mover this morning has been GBP, with GBP/USD falling over a point in the wake of the latest Service PMI number from the UK which fell way short of expectations (56.5 vs. Exp. 59.2). Elsewhere, AUD has held onto its
gains on the back of a stellar Australian Q1 GDP report, which showed the fast growth pace in a year (GDP SA (Q1) Q/Q 0.9% vs. Exp. 0.7% (Prev. 0.5%). EUR/USD currently trades relatively unchanged as participants await any response by either Greece or their European counterparts on the latest set of proposals.
In the commodity complex, WTI and Brent crude futures have continued to drift lower after breaking below the USD 61/bbl level with the latest API crude oil inventories pointed to a second consecutive build in oil stockpiles (+1.8mln vs. Prev. +1.268mln). Furthermore, according to a senior OPEC delegate, the cartel are in agreement to maintain their current production target at Friday’s meeting. According to Bloomberg, OPEC touted prospect of raising their production in future months, years. Prices started the day lower after API yday reported crude inventory increase.
In metals markets, both spot gold and silver have seen a modest pullback of yesterday’s steep gains in the wake of the weaker USD.
In summary: European shares remain mixed with the retail and personal & household sectors outperforming and basic resources, oil & gas underperforming. Greek PM heads to Brussels to hear details for final proposal from creditors. Euro-zone May services, composite PMI ahead of estimates as was French, German services PMI; U.K., Spain, Italy services PMI below ests. OECD cuts global growth forecast. The German and Swiss markets are the best-performing larger bourses, Italian the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Italian yields decline. Commodities decline, with Brent crude, WTI crude underperforming and zinc outperforming. U.S. ISM non-manufacturing, trade balance, mortgage applications, ADP employment change, Markit U.S. composite PMI, Markit U.S. services PMI due later.
Market Wrap
- S&P 500 futures up 0.2% to 2111
- Stoxx 600 up 0.1% to 396.9
- US 10Yr yield up 1bps to 2.27%
- German 10Yr yield up 0bps to 0.72%
- MSCI Asia Pacific down 0.3% to 150.1
- Gold spot down 0.4% to $1188.7/oz
- Eurostoxx 50 +0.3%, FTSE 100 -0%, CAC 40 +0.2%, DAX +0.4%, IBEX -0.2%, FTSEMIB -0.3%, SMI +0.4%
- Asian stocks fall with the Hang Seng outperforming and the Sensex underperforming; MSCI Asia Pacific down 0.3% to 150.1
- Nikkei 225 down 0.3%, Hang Seng up 0.7%, Kospi down 0.7%, Shanghai Composite down 0%, ASX down 0.9%, Sensex down 1.1%
- Euro down 0.26% to $1.1122
- Dollar Index up 0.38% to 96.2
- Italian 10Yr yield down 11bps to 2.01%
- Spanish 10Yr yield down 11bps to 1.98%
- French 10Yr yield down 2bps to 1%
- S&P GSCI Index down 1.4% to 437.3
- Brent Futures down 2.3% to $64/bbl, WTI Futures down 2.2% to $59.9/bbl
- LME 3m Copper down 0.5% to $6010/MT
- LME 3m Nickel down 1% to $12920/MT
- Wheat futures down 0.2% to 511.5 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- Price action in Europe has been relatively muted thus far compared to recent sessions as participants await
upcoming key risk events - GBP leads the way lower for FX markets following weak services PMI, while EUR is steady ahead of potential
updates surrounding Greece - Looking ahead, today sees the release of US Services PMI, ECB Rate Decision, US ADP Employment Change,
Trade Balance, ISM Non-Manf., DoE Crude Inventories - Treasuries decline, 10Y yield near YTD closing high as markets wait for Greece developments; ADP Employment for May due today, est. +200k with payrolls due on Friday, est. +227k.
- Greek PM Tsipras will be told the details of a final proposal from creditors to break a stalemate over a financial lifeline as his country runs out of options to avert a default
- German officials, who spoke on condition of anonymity, said their government was skeptical that a deal can be struck before the G-7 summit in Bavaria on June 7
- ECB to announce its interest-rate decision at 7:45am New York time, with Draghi press conference 45 minutes later amid tighter security after a protester disrupted the last such event in April
- U.K. services expanded at the slowest pace in five months in May, according to a Markit index of business activity; a separate report showed euro-area services also slowed
- The PBOC, which has failed to bring down long-term borrowing costs amid a focus on influencing seven-day borrowing costs, is now seen to be shifting its attention to lending facilities ranging from three months to five years
- The OECD cut its global growth forecast, saying investment is lagging and risks including a possible Greek default are hurting confidence
- Sovereign 10Y bond yields mixed. Asian stocks lower, European stocks mixed, U.S. equity-index futures decline. Crude oil, copper and gold lower
US Event Calendar
- 7:00am: MBA Mortgage Applications, May 29 (prior -1.6%)
- 8:15am: ADP Employment Change, May, est. 200k (prior 169k)
- 8:30am: Trade Balance, April, est. -$44b (prior -$51.4b)
- 9:45am: Markit US Composite PMI, May final (prior 56.1); Services PMI, May final, est. 56.4 (prior 56.4)
- 10:00am: ISM Non-Mfg Composite, May, est. 57 (prior 57.8)
Central Banks
- 7:45am: ECB main refinancing rate, est. 0.05% (prior 0.05%)
- 8:30am: ECB’s Draghi holds news conference in Frankfurt
- 2:00pm: Federal Reserve releases Beige Book
- 2:15pm: Fed’s Evans speaks in Chicago
- 5:00pm: Fed’s Bullard speaks in St. Louis
- 8:00pm: Bank of Japan’s Kuroda speaks
DB's Jim Reid concludes the overnight recap
If we carry on this week's Government bond sell-off then next year we'll be inviting Government borrowers to our HY conference. Indeed yesterday Craig led the EMR on the topic of Monday's bond market sell-off but the reality is that the last 24 hours has seen even sharper global moves led by Bunds after a higher than expected European inflation print which overshadowed mixed US data. Indeed, following a beat at both the headline (+0.3% yoy vs. +0.2% expected) and core (+0.9% yoy vs. +0.7% expected) - the latter in particular up from +0.6% in April and at the highest level since August last year - 10y Bunds yields soared +17.3bps higher in yield to eventually close at 0.712% and only just off the highs of around 3 weeks ago. 4y Bunds closed 5.3bps higher meanwhile at -0.038%, taking them back towards positive territory for the first time since mid-December. The move in the 10y yesterday was in fact bigger than any during the sell-off through end-April to mid-May and culminated in the largest one-day move higher in yield since August 2012. The inflation data is probably enough to ease any lingering deflationary concerns, but it’s unlikely to be sufficient to force the ECB into any QE tapering . Today’s ECB meeting may well shed some more light on Draghi’s current thinking but we expect him to stick to his guns (whilst potentially going into more detail on the front-loading of asset purchases) in the press conference this afternoon.
As well as the move higher in Bunds, 10y yields in France (+16.0bps), Sweden (+13.0bps) and Netherlands (+16.9bps) all saw similar moves higher in yield, while in the periphery Spain, Italy and Portugal ended +11.8bps, +14.7bps and +10.5bps higher respectively. The data, along with some headlines out of Greece that Creditors are set to present Greece with a reforms proposal, helped the Euro rally +2.05% against the Dollar, the biggest uptick in 10 weeks.
The moves in European bonds appeared to filter through into the Treasury market as the 10y benchmark in particular closed +8.3bps higher in yield despite some soft data and relatively dovish comments from the Fed’s Brainard. On the data front, the ISM NY for May declined 4.1bps to 54.0 (vs. 58.0 expected) while the June reading for the IBD/TIPP economic optimism index was also a miss (48.1 vs. 49.8 expected). Softer than expected factory orders also attracted some attention as the -0.4% mom reading for April came in lower than the -0.1% expected. The ex-transportation print remained unchanged for the month. Vehicle sales made for slightly better reading later in the afternoon however with the 17.7m SAAR print up from 16.5m last month.
The Fed’s Brainard offered a slightly dovish tone yesterday, saying that ‘it would be difficult, based on the data available today, to dismiss the possibility of a more significant drag on the economy that anticipated from foreign crosscurrents’. She did go on to say that although a case for liftoff may not be immediate, ‘it is coming into view’ and that there is value in ‘watchful waiting’. Despite the soft data and relatively dovish Fedspeak, Fed Funds expectations rose for a second consecutive day with the Dec16 and Dec17 contracts +1bp and +5bps respectively. There was no change in the Dec15 contract.
The Greece saga rumbles on in the background meanwhile. It was the various headlines announcing that Greece’s Creditors have drafted a list of proposals which they are set to present to Greece today that marked an important development, seemingly putting the ball firmly in Greece’s court. A senior EU official was quoted as saying that the draft ‘covers all key policy areas and reflects the discussions of recent weeks’. The list is set to be discussed with PM Tsipras today who is due to meet EC President Juncker in Brussels this evening. The move countered the news that Greece had submitted its own list to European leaders prior to their meeting in Berlin on Monday night, which according to Greek press Ekathimerini quoted sources as saying that the proposal was too vague and lacking detail. Tsipras had been noted as saying that ‘Greece is the one that submits the plan’ in comments yesterday and that ‘this is our main, non-negotiable position’. Dutch Finance Minister Dijsselbloem was typically more defiant however, saying that ‘there is a misunderstanding that we should meet halfway’. The hope now will be for a political deal to be reached by Friday which in turn will allow a comprehensive staff-level agreement to be finalised in the coming weeks. In the mean time however, there still remains the risk of non-payment of the IMF loan due Friday with a Greek government official saying that Athens would only make the payment if there was an agreement with creditors. Greek 10y yields closed 9bps tighter yesterday, although Greek equities declined 2.47%.
Bond markets in Asia this morning appear to be following much of the lead from Europe yesterday with 10y yields in Australia (+15.1bps), Japan (+1.9bps), South Korea (+5.0bps) and Singapore (+5.7bps) all climbing higher. It’s more of a mixed picture in equity markets this morning however where the Hang Seng (+0.74%) has firmed, while the Nikkei (-0.33%), Shanghai Comp (-1.02%) and ASX (-0.96%) have dropped. Data wise, there were some positive indicators out of China where the official May services PMI reading rose 0.6pts to 53.5, the fourth consecutive monthly increase and highest level since December. That, combined with the manufacturing reading earlier this week means the composite has still fallen slightly to 51.2 (from 51.3). Over in Japan meanwhile, the services PMI print has risen 0.2pts to 51.5, meaning the composite has now increased to 51.6, from 50.7 in April. In Australia, the AUD (+0.3%) has extended gains for a second consecutive day meanwhile after a higher than expected Q1 GDP reading (+2.3% yoy vs. +2.1% expected) for the region.
Back to China quickly, yesterday our China Chief Economist Zhiwei Zhang noted that the PBoC once again loosened policy further, this time through its lending facility by offering at least Rmb 1tn of pledged supplementary lending (PSL) to China Development Bank. Despite the move, Zhiwei continues to expect another interest rate cut in June and another in Q3, as well as a RRR cut in Q3.
Running over the remainder of market moves yesterday, the move higher in bond yields helped support a weakening of utility stocks in the US which in turn sent the S&P 500 (-0.10%) and Dow (-0.16%) lower. The softer data encouraged a weak day for the Dollar as the DXY ended 1.52% lower, although in reality this was largely dictated by the rally in the Euro. In Europe there was a similar weakness in equity markets as the Stoxx 600 (-1.03%), DAX (-0.94%) and CAC (-0.41%) all declined. Credit markets were more resilient however as Crossover ended 6bps tighter. In terms of the remaining data flow in Europe, April’s Euro area PPI was softer than expected (-0.1% mom vs. +0.1% expected) while there was no change in German unemployment, coming in as expected at 6.4%. UK mortgage approvals (68.1k vs. 63.5k expected) and net consumer credit (1.2bn vs. 1.0bn) were above consensus.
Looking at today’s’ calendar now, we get more PMI releases in Europe where we get the final May services and composite readings for the Euro-area as well as regionally. Euro area unemployment data and retail sales will also be due while we also get the OECD economic outlook and of course the ECB meeting and associated press conference from Draghi in the early afternoon. In terms of data in the US this afternoon, we’ll also see the final PMI services and composite prints along with the ISM non-manufacturing, April trade balance (important for Q2 GDP) and the ADP employment change reading (which will be an important precursor ahead of payrolls on Friday). The Fed is also due to release the Beige Book this afternoon while the Fed’s Evans is due to speak.
