For once, Mario Draghi was right.
A day after the European central bank head warned of a spike in volatility, volatility did just that. Only it wasn't just the German Bund, which as we previously noted suffered its biggest two day drop since the 1990s - this time it was China, whose Shenzhen index is where Bill Gross said in a tweet [45] would be the next "short of a lifetime (not just yet [45])".
And sure enough, just a few hours later, the Shenzhen suffered its biggest crash in more than two years, plunging 6.2%, with the Shanghai Composite also tumbling 5.35%. The catalyst: much as Gross would like to take credit wasn't the Bond King in absentia, but a local broker, Golden Sun, which announced [46]shortly after the start of trading that it would suspend margin purchases [47]of shares on Shenzhen's startup board, ChiNext. A drop, incidentally, which brought the YTD gain on the ChinExt to just over 100%.
Promptly the concerns about a long-overdue market crash emerged: “The market has seen strong gains and sentiment is turning cautious with investors worrying if the index will repeat the correction seen years ago,” Shenwan Hongyuan analyst Qian Qimin told Bloomberg "It’s a market built purely on sentiment, and once that sentiment changes, people will follow suit to take profit. Bocom's Hong Hao added that "Once the selling starts, it will ripple through the market especially in a highly leveraged environment."
And then, just as suddenly as the selling started, it stopped. Not only did it stop, but a furious wave of buying in the closing hours wiped out the entire 6% loss, and the Shenzhen closed barely unchanged, down just 0.6%. The move on the Composite was even more unprecedented: following the 5.35% slump, the exchange actually closed up 0.8%, with bubble mania volatility reminiscent of what happened to bitcoin at its peak.
Then Europe opened, and as if continuing on the negative sentiment (not the late BTFD surge) German Bunds resumed their crash with European stocks and US equity futures all falling sharply. In fact, as the chart below shows, the Bund rose within 1 basis point of the critical 1.00% level before modestly retracing some of the major losses. The ongoing slide in Bunds has dragged both European peripheral and US Treasurys lower, with the 10Y yield rising as high as 2.42%, the highest since October.
[48]
It wasn't just China that led to the overnight volatility: it was also Greece, whose prime minister rejected Europe's "best and final" proposal, preserving the hope for a deal in the next few days on terms more agreeable to Athens even though the Troika has made it quite clear such a deal won't come. As for today's payment to the IMF, he added "don't worry. [49]"
In any event, it was once again all about Bund, where SocGen noted moments ago that "Bund buyers are few and far between" adding "even investors who are long-term bulls seem to be short-term bears, with many looking for better levels before stepping in and adding to longs. Many are still very long, which isn’t helping."
This has been a continuation of the recent sell-off seen in fixed income products over the past month with Bunds down over 1000 ticks from their best levels this year. This move was extended yesterday by comments from ECB's Draghi who said that there could be more volatility to come and they are willing to look through this. In terms of this morning, German bonds have been subject to a significant bout of CTA selling which has subsequently seen a substantial course of bear-steepening in the German curve.
From an equity stand-point, stocks in Europe are also lower this morning after the DAX opened below its 100DMA and has
continued to drift lower since the open. Additionally, strength seen in the EUR has weighed heavily on German exporters with BMW (-2%) and Daimler (-2.4%) both lower. Furthermore, a lack of progress in discussions between Greece and their European counterparts has also erased some of the optimism heading into discussions, this has also been coupled with some talk doing the round about a dramatic rise in ATM withdrawals in Greece over the past week and comments from the Greek deputy shipping minister who said he could not accept current reform proposals. On a sector specific basis, utilities underperform in the wake of the unfavourable German nuclear tax ruling, while the CAC is the laggard index with losses of 2%.
At last check ,US equity futures were down 0.7% on heavier than usual volume, although should volume trickle down as it usually does during the regular session, expect all of the losses which have unwound yesterday's modest gains, to evaporate just like in China.
In FX markets, EUR/USD has printed its highest reading in 2 weeks (USD-index -0.6%) with higher yields helping to support EUR, furthermore EUR/USD has also taken out stops through 1.1300 where there was a touted option barrier with the move said to be exacerbated by hedge fund buying. Moves in the EUR have subsequently boosted some of its other major counterparts with EUR/JPY and EUR/GBP at 5 month and 5 week highs respectively.
In the commodity complex, price action has been particularly muted despite the volatility endured in other asset classes with energy prices sitting tight ahead of tomorrow’s OPEC meeting while spot gold and silver failed to extend on their modest uptick seen alongside the European open.
In summary: European shares remain lower, though off intraday lows, with the basic resources and utilities sectors underperforming and tech, telco outperforming. Greek PM rejected proposals that would unlock bailout funds necessary to avert a default. The French and German markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase, reach highest since Sept. Commodities little changed, with nickel, copper underperforming and natural gas outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Challenger job cuts, nonfarm productivity, unit labor costs due later.
Market Wrap:
- S&P 500 futures down 0.6% to 2103.3
- Stoxx 600 down 1.4% to 390.6
- US 10Yr yield up 3bps to 2.4%
- German 10Yr yield up 6bps to 0.94%
- MSCI Asia Pacific down 0.4% to 149.6
- Gold spot down 0.2% to $1182.8/oz
- Eurostoxx 50 -1.5%, FTSE 100 -1.3%, CAC 40 -1.7%, DAX -1.4%, IBEX -1.1%, FTSEMIB -1.2%, SMI -0.8%
- Asian stocks fall with the Shanghai Composite outperforming, after falling as much as 5% earlier, and the ASX underperforming; MSCI Asia Pacific down 0.4% to 149.6
- Nikkei 225 up 0.1%, Hang Seng down 0.4%, Kospi up 0.5%, Shanghai Composite up 0.8%, ASX down 1.4%, Sensex down 0.1%
- Euro up 0.71% to $1.1355
- Dollar Index down 0.71% to 94.79
- Italian 10Yr yield up 3bps to 2.21%
- Spanish 10Yr yield up 4bps to 2.18%
- French 10Yr yield up 6bps to 1.23%
- S&P GSCI Index down 0% to 436.1
- Brent Futures up 0.2% to $63.9/bbl, WTI Futures up 0.3% to $59.8/bbl
- LME 3m Copper down 1% to $5950.5/MT
- LME 3m Nickel down 1.1% to $12855/MT
- Wheat futures down 0.5% to 508.3 USd/bu
Bulletin headline summary:
- A failed attempt by the German 10yr to breach the 1.00% yield level to the upside acts as a source of support for
European asset classes - Sentiment for equities have been soured by a lack of progress in Greek negotiations and the broadly stronger
EUR with the CAC lower by almost 2% - Looking ahead, today sees the release of the weekly jobs data from the US, BoE rate decision, as well as potential comments from ECB’s Knot and Fed’s Tarullo.
- Treasuries fall for a fourth day, 10Y yield rises to 2.423%, highest since October, as EGB rout continues; German bund yield approaching 1% level, up from record low 0.049% on April 17.
- UST selloff “purely a liquidity-driven event” spurred by EGBs; “however nothing fundamentally has changed,” with government regulation to blame for thin balance sheets, lack of risk-takers, ED&F Man head of U.S. rates Tom DiGaloma writes
- Greek PM Tsipras will convene his inner circle to plot the next move in the standoff with international creditors after a round of top-level talks failed to yield a breakthrough
- After meeting with Juncker and Dijsselbloem in Brussels, Tsipras stuck to his position that any basis for an accord must be a Greek proposal
- The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda
- Discussions at this week’s OPEC summit are mostly about pumping more oil, with Iraq to increase exports this month and Iran urging group to make room for more output when sanctions recede
- China’s benchmark stock index erased losses after tumbling as much as 5.4% on news a brokerage suspended margin financing for investors in smaller companies
- Sovereign 10Y bond yields surge. Asian stocks mostly lower, European stocks plunge, U.S. equity-index futures drop. Crude oil higher, copper and gold lower
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, May (prior 52.8%)
- 8:30am: Non-farm Productivity, 1Q final, -3.0% (prior -1.9%); Unit Labor Costs, 1Q final, est. 6.1% (prior 5%)
- 8:30am: Initial Jobless Claims, May 30, est. 278k (prior 282k); Continuing Claims, May 23, est. 2.207m, (prior 2.222m)
- 9:45am: Bloomberg Consumer Comfort, May 31 (prior 40.9)
DB's Jim Reid completes the overnight market summary
The recent rising yield environment has so far had limited impact on credit, especially HY. However yesterday saw another test with Bunds (as already highlighted) hitting YTD yield highs having climbed +16.8bps. That's +39.6bp this week alone. Yesterday's move seemed to be triggered by Draghi's press conference where he warned investors to expect more fixed income volatility dashing hopes that he would try to calm markets after the recent bond wobbles. He also exuded confidence that QE was working in increasing growth and inflation but that it still required full implementation of QE to achieve their objectives. He did say they could if anything do more if financial/economic conditions tightened. There was also an unsurprising upgrade to inflation forecasts for this year to +0.3% (from 0.0%), while 2016 and 2017 forecasts were kept at 1.5% and 1.8% respectively. Growth is expected to be 1.5% in 2015, before rising to 1.9% in 2016 and 2% in 2017 (a -0.1% mechanical revision versus previous forecasts).
The lurch higher in yields yesterday was also notable with the 4y Bund trading back in positive territory (+0.02%) for the first time since early December. There were similar moves for other core European bond markets yesterday. 10y yields in Netherlands (+15.7bps), Sweden (+15.8bps) and France (+14.7bps), amongst others, took a steep leg higher. Peripherals were very much the laggard yesterday as 10y yields in Spain, Italy and Portugal closed just +5.3bps, +5.3bps and +3.1bps higher, although that may have more to do with the move in Greek yields as the 10y in particular ended 62bps tighter as confidence mounted that we might be one step closer to a resolution. The Euro rose for a second consecutive session, ending 1.11% higher, while equity markets were fairly mixed on the whole with the Stoxx 600 (-0.13%) modestly lower and the DAX (+0.80%) and CAC (+0.59%) higher.
Data flow in Europe yesterday largely played second fiddle to the Draghi comments. However there were some positive signs to take after the final services PMI reading for May in the Euro area was revised up 0.5pts to 53.8. As a result the composite was revised up 0.2pts to 53.6. The gains were led by France where the composite was revised up 1pt to 52, while in Germany the composite fell 0.2pts to 52.6. Elsewhere, Euro area retail sales for April were above market (+0.7% mom vs. +0.6% expected), helping push the annualized rate to +2.2% yoy from +1.7% previously. Unemployment for the region fell one-tenth of a percent to 11.1%. In the UK there was a sharp fall in the services PMI for May, dropping 3pts to 56.5. That dragged the composite down 2.6pts to 55.8.
Along with the bond market, Greece dominated headlines once again last night. Following a meeting in Brussels with the EC’s Juncker and Dutch Finance Minister Dijsselbloem late last night, Greek PM Tsipras was noted as saying that the two sides were ‘very close’ on primary surplus targets and that there was a ‘constructive’ will from the European Commission to reach a common understanding. The bad news however, was that Tsipras also acknowledged that differences still remain, particular around pension reforms. The PM was quoted as saying that ‘the realistic proposals on the table are the proposals of the Greek government’ and that we can’t make the same mistakes as in the past. With talks set to continue today, focus will turn to Friday’s IMF repayment. Last night’s comments from Tsipras - when questioned by reporters about whether or not Greece will make Friday’s obligation - will fuel hope that the payment will be made after the PM said not to worry about it and that Greece had also already repaid billions to the fund. These contradict earlier comments from a Syriza spokesman on Greek TV who said that ‘if there is no prospect of a deal by Friday, we will not pay’. Prior to last night’s headlines, DB’s George Saravelos published his latest update trying to make sense of the fast moving developments. He concluded that a Greek government decision on whether to accept an agreement with European creditors is inevitable over the next two weeks, but that disbursements are unlikely until the noisy political process has materialized. He notes that an agreement would be a major step forward, but the domestic political risks around the ultimate resolution would follow.
Back to markets, the significance of the moves in Europe weighed on US Treasuries once more as we saw the benchmark 10y yield close +10.2bps higher at 2.365%, a +24.3bps move this week already with the yield now the highest since November 12th. The S&P 500 (+0.21%) shrugged off weakness in utility stocks as the move higher in rates saw a bid for financials in particular. With the influence of a stronger Euro, the DXY ended 0.50% lower although had firmed in the lead up to Draghi's press conference following the early afternoon data releases, with the latest trade balance and ADP print in particular helping find some support.
Just on this, yesterday’s ADP employment report for May will likely lift hopes for a solid payrolls print tomorrow after the 201k reading (which was more or less in line with expectations of 200k) rose 36k from April. The print actually marked the first monthly increase since November last year. April’s trade balance meanwhile showed the deficit shrinking to $40.9bn (versus $44bn expected) from a revised $50.6bn last month, reversing the West Coast ports inspired effect of last month. Having made a significant downward impact to Q1 GDP, yesterdays data meant we saw the Atlanta Fed GDPNow model upgrade their Q2 GDP forecasts to 1.1%, from 0.8% just a couple of days ago. There was some disappointment in the ISM non-manufacturing reading meanwhile, with the 55.7 reading falling 2.1pts from May and coming in well below market expectations of 57.0. The reading was actually the lowest in 13 months as new orders, employment and business activity components all declined. Lastly there was a modest downgrade to the May services PMI (down 0.2pts to 56.2), resulting in the composite falling a tad to 56.0 (from 56.1 in April).
The focus of yesterday’s Fedspeak was on Chicago Fed President Evans who said that the hurdle for increasing rates is ‘pretty high’ currently and that ‘we need to get demand moving up more strongly’. Speaking after the closing bell, the St Louis Fed President Bullard (non-voter) said that recent soft data has made it appropriate for the market to move back the likely date of policy firming. Bullard went on to say that the weakness in Q1 was likely transient however and that we should get stronger data later this year to enable the normalization process to begin.
Just wrapping up the news-flow in the US yesterday, the Fed’s Beige Book showed that the US economy is experiencing ‘moderate’ to ‘modest’ growth in seven of the twelve Fed districts, with the remainder showing ‘mixed’ to ‘slight’ growth signals.
Before we look at today’s calendar, Asian bond markets are adding to the global rout with 10y yields in Australia (+11.6ps), Japan (+4.0bps), Indonesia (+6.4bps) and Singapore (+3.7bps) all higher. 10y Treasuries are another 0.5bps wider this morning. There’s been a sharp turnaround in equity markets meanwhile with the Shanghai Comp and CSI 300 -1.78% and -1.74% respectively, the bulk of the falls appearing to come in the last ten minutes before we go to print although it’s not entirely clear what’s caused the sell-off. Elsewhere, the Hang Seng (-1.39%) has followed the China losses, while the Nikkei (+0.24%) and Kospi (+0.31%) are both trading higher.
Onto today’s calendar now, French employment data is the early release this morning before we get the BoE meeting around midday. This afternoon in the US we’ve got more employment indicators with Challenger job cuts for May and the latest weekly initial jobless claims data. The final Q1 unit labour costs and nonfarm productivity round off the releases today. The Fed’s Tarullo will be the latest Fed official to speak.
