China Soars 7% Off The Lows, Global Stocks Continue Rising On Ongoing "Greek Deal Optimism"

Before taking a look at Europe, an update on China. Just a few short hours ago [36], when looking at the bursting of the Chinese bubble where stocks were down between 3% and 5% across the board in the first post-holiday trading session after the worst week in 7 years, we said that "without assistance (levitation) from the same PBOC that just clamped down on liquidity, the China bubble has burst." And then as if by request, minutes later we got, drumroll, levitation and the stickiest stick-save by the PBOC seen in months, when the Shanghai Composite staged an unprecedented 7% surge from the lows to close 2.2% higher after tumbling as much as 5% earlier in the session. And just like that, faith in the "wealth effect" is preserved.

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Then looking at Europe, while there has been a flurry of macroeconomic data, with the composite PMI storming to 54.1, above the 53.5 estimate, and up from 53.6 in May, the highest since May 2011, it was Greece that was on everyone's mind once again, why? Because as yesterday's huge "risk on" rally was reminiscent of 2011/12, suggesting any failure to strike a deal will see equally sizable moves again, RBC analysts write in client note adding that "anyone who thought the Greek situation was irrelevant for the broader market was proven wrong."

As a reminder, as reported late yesterday, after months of contentuous negotiations in which the Tsipras cabinet had sworn it would not budge on "red lines" that is precisely what it did and conceded to an extension of the existing bailout, handing victory to the Troika whose "forced bank run" strategy finally worked as markets refused to react to any threat of Greek contagion and thereby took away all leverage from the Greek negotiating team.

However, while Greece has been given 48 hours in which to finalize a deal, it will not come easy and now the biggest hurdle is passing the latest proposal through Greek government. According to Reuters [38], "Greek lawmakers reacted angrily on Tuesday to concessions Athens offered in debt talks and parliament's deputy speaker warned the proposals would struggle to win approval, puncturing optimism that a deal to lift Greece out of crisis might be quickly sealed."

"I believe that this program as we see it ... is difficult to pass by us," Deputy parliament speaker and Syriza lawmaker Alexis Mitropoulos told Greek Mega TV on a morning news show.

If parliament does fail to back the latest offer, which included higher taxes and welfare changes and steps to curtail early retirement, Tsipras might be forced to call a snap election or a referendum that would prolong the uncertainty.

Which would naturally be great news for stocks, as they can keep climbing the wall of Greek "imminent deal" uncertainty. Already today we can see that some confidence in a Greek resolution, in addition to strong European economic news, has led paradoxically to a tumble in the EUR and a surge in the USD, with the EURUSD plunging over 1% at last check to as low as 1.1220, as carry trades are reset. Indeed, in yet another curious paradox, a Greek deal is now EUR-negative while continued fears of a Greek impasse are favorable for the common currency but not due to speculation of a stronger Eurozone ex-Greece but as a result of unwinding EUR-funded risk trades.

And speaking of good economic news, here is a quick summary of the June Euro area flash PMI from Goldman:

The Euro area flash composite PMI edged up 0.5pt to 54.1 in June, against consensus expectations of a marginal decline and stronger than our expectation of a smaller gain (Cons: 53.5, GS: 53.8). Both the manufacturing and services PMIs surprised to the upside, posting robust gains in June. At the country level, the French composite PMI posted another strong outturn in June, while the German composite PMI rebounded, unwinding part of last month's decline. The Euro area Q2 average of 53.9 is 0.6pt above the Q1 average and indicative of +0.5%qoq growth.

 

The breakdown of the June flash PMI release was mixed. Within the manufacturing PMI, new orders and stocks fell by 0.2pt and 0.4pt respectively, leading to a 0.2pt increase in the stock-order difference. Among other subcomponents of the manufacturing PMI, output and employment edged up moderately (+0.2pt to 53.5 and +0.4pt to 51.0, respectively). For services, the forward-looking subcomponents (which are not part of the headline services PMI figure) showed 'incoming new business' falling but remaining robust at (-0.5pt to 53.3). 'Business expectations' fell somewhat, but remains strong (-0.7pt to 62.4).

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A closer look at overnight global stock markets, as highlighted above overnight saw a somewhat volatile session in Asia, as market participants were forced to contend with more positive  developments relating to Greece and at the same time fret over the ongoing uncertainty surrounding the crackdown by the PBOC on brokerage liquidity. Of note, Shanghai Comp returned from its break to extend on its steepest weekly loss in 7-years, before recovering as EU market participants returned to their desks, amid the latest HSBC manufacturing PMI figures (49.6 vs. Exp. 46.4) which was in contractionary territory for a 4th consecutive month, while the Chinext has entered bear market  territory having fallen 20% from its June 3rd record high.

Stocks traded higher across the board in Europe, as traders welcomed the latest developments out of Greece, as sources suggested that the country is willing to accept the principle of extending the existing bailout. It was also reported that the ECB is said to increase the ELA for Greek banks (by less that EUR 1bln) for the 2nd day in a row and the 4th time over the last week. Furthermore, NY Times journalist reported that Greek bankers see a fall in daily outflows to EUR 400mln and orders for deposit withdrawals haven been removed. As a result, while Greek assets continued to benefit, with the 2y yield down over 100bps, EUR  remained under pressure, amid an influx of carry trade flows as more good news prompted market participants to borrow more EUR for more carry trades which pushes EUR lower.

USD index rose to its highest since 17th June, supported in part by EUR weakness amid an influx of carry trades, but also by the fact that the focus will now likely to shift back on the Fed and whether the Bank does in fact lift rates in Sep/Dec especially since the Bank made it clear that it is monitoring the situation in Greece. At the same time, GBP outperformed EUR, with EUR/GBP trading at its lowest level since 28th May, as GBP favourable interest rate differential flows following hawkish BoE Cunliffe comments.

WTI was unreactive to the latest strength by the USD, as market participants positioned for the latest release of the weekly API inventories release which is due out after the closing bell on Wall Street today. At the same time, gold also traded steady, albeit in minor negative territory on the back of the unwind of safe-haven positions and below the 50DMA line which was broken yesterday.

In summary: European shares remain higher close to intraday highs with the media and telecoms sectors outperforming and basic resources, utilities underperforming. Greece given 48 hours to reach deal. ECB raised limit on emergency funding for Greek banks, person familiar says. Euro-area, German, French PMI data above estimates, as was China Manufacturing PMI data earlier. Euro falls most in almost 2-weeks against dollar, dollar index rises. The French and Dutch markets are the best-performing larger bourses, U.K. the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Greek yields decline. Commodities gain, with silver, zinc underperforming and nickel outperforming. U.S. Markit U.S. manufacturing PMI, FHFA house price index, new home sales, durable goods orders, capital goods orders, Richmond Fed index due later.

Market Wrap

• S&P 500 futures up 0.2% to 2116.1
• Stoxx 600 up 1.2% to 399
• US 10Yr yield little changed at 2.37%
• German 10Yr yield down 1bps to 0.87%
• MSCI Asia Pacific up 1% to 150
• Gold spot down 0.1% to $1184.4/oz
• Euro down 0.94% to $1.1234
• Dollar Index up 0.66% to 94.95
• Italian 10Yr yield down 6bps to 2.09%
• Spanish 10Yr yield down 6bps to 2.05%
• French 10Yr yield down 3bps to 1.22%
• S&P GSCI Index up 0.2% to 434.2
• Brent Futures up 0.2% to $63.5/bbl, WTI Futures down 0.2% to  $60.3/bbl
• LME 3m Copper up 1% to $5709.5/MT
• LME 3m Nickel up 1.4% to $12585/MT
• Wheat futures up 1% to 511.3 USd/bu
• Eurostoxx 50 +1.1%, FTSE 100 +0.2%, CAC 40 +1.2%, DAX +1%, IBEX +0.8%, FTSEMIB +0.7%, SMI +1%
• Asian stocks rise with the Shanghai Composite outperforming and the Sensex underperforming; MSCI Asia Pacific up 1% to 150
• Nikkei 225 up 1.9%, Hang Seng up 0.9%, Kospi up 1.3%, Shanghai Composite up 2.2%, ASX up 1.3%, Sensex up 0.3%
• 10 out of 10 sectors rise with telcos, consumer outperforming and staples, materials underperforming
• Syngenta Open to ‘Serious’ Bid as It Lines Up Investor Talks
• Hillhouse Said to Be in Talks to Buy Uber Convertible Bonds
• Alibaba, Ant Invest $1 Billion in China Local Services Venture

Bulletin Headline Summary from RanSquawk and Bloomberg

• Nearing of a deal to resolve the crisis in Greece prompts traders to resume EUR carry trades, sending EUR/USD to 1-week low, even as stocks in Europe remained buoyed by the latest wave of optimism.
• Hawkish comments by BoE’s Cunliffe send EUR/GBP to its lowest level since 28th May, as UK/GE interest rate differential widens.
• Going forward, the focus will be on the latest release of the US Manufacturing PMIs, US New Home Sales, Durable Goods and API Crude Inventories.
• Treasuries steady in overnight trading amid confidence that Greece will reach agreement with creditors; week’s auctions begin with $26b 2Y notes, WI yield 0.695% vs 0.649% in May; last auction sold at 0.648%.
• Greek PM Tsipras has turned to shoring up support at home for his plan to end a five-month standoff with creditors over aid that risks splitting the euro
• Tsipras has 48 hours to bring a deal with his country’s creditors to the finish line
• European Central Bank increased the cap on emergency liquidity for Greek lenders for the fourth time in less than a week, said a person familiar with the matter
• CLS, which settles more than $5 trillion of currency transactions every day, says it’s readying its systems for potential spasms in trading if Greece leaves the euro
• An index of euro-area factory and services unexpectedly rose to the highest in more than four years this month as growth gained momentum in Germany and France, the bloc’s two largest economies
• Russia surpassed Saudi Arabia to become China’s top crude supplier as the fight for market share in the world’s second-largest oil consumer intensifies
• IMF staff formed a preliminary view that $3b in bonds sold to Russia by Ukraine should be classified as official rather than private debt, a view that Russia shares, according to a person familiar with the matter
• Sovereign 10Y bond yields mixed, with Greece dropping 53bps; Portugal, Italy and Spain yields also lower. Asian, European stocks gain, U.S. equity-index futures gain. Crude oil and gold drop, copper rises

US Event Calendar

• 8:30am: Durable Goods Orders, May, est. -1.0% (prior -0.5%, revised -1%)
  • Durables Ex Transportation, May, est. 0.5% (prior 0.5%, revised -0.2%)
  • Cap Goods Orders Non-def Ex Air, May, est. 0.5% (prior 1%, revised -0.3%)
  • Cap Goods Ship Non-def Ex Air, May, est. 0.5% (prior  0.8%, revised 0.5%)
• 9:00am: FHFA House Price Index m/m, April, est. 0.5% (prior 0.3%)
• 9:45am: Markit US Mfg PMI, Jun preliminary, est. 54.1 (prior 54)
• 10:00am: New Home Sales, May, est. 523k (prior 517k)
  • New Home Sales m/m, May, est. 1.2% (prior 6.8%)
• 10:00am: Richmond Fed Mfg Index, June., est. 4 (prior 1)
• 1:00pm: U.S. to auction $26b 2Y notes

Central Banks

• 8:30am: Fed’s Powell to speak in Washington
• 7:50pm: Bank of Japan issues May meeting minutes

DB's Jim Reid concludes the overnight wrap of yet another bipolar trading session

So with sentiment seemingly swinging towards one of optimism for a deal between Greece and its Creditors being reached this week, risk assets surged yesterday led by Greek equities which rallied +9.00% including a 17% jump for banks, while the Stoxx 600 (+2.25%), S&P 500 (+0.61%), DOW (+0.58%), DAX (+3.81%), CAC (+3.81%), IBEX (+3.87%) and FTSE MIB (+3.47%) all surged higher. There were meaningful moves in credit markets as Crossover ended 30bps tighter and Main finished 8bps tighter. The risk-on sentiment was certainly evident in the bond market where we saw 10y Bund yields widen 13.3bps to 0.882%, while yields in Italy (-12.6bps), Spain (-16.3bps) and Portugal (-24.3bps) all tumbled lower. Unsurprisingly there were some big moves in Greek bonds. 2y yields tightened 450bps, while 10y yields ended 150bps lower – their best day since June 2012.

Although markets initially opened firmer on the news of new proposals being submitted, which were subsequently handed in too late for any deal to be agreed upon before the Summit, the tone appeared to be set by Eurogroup President Dijsselbloem who helped spark a leg up for risk assets when remarking that the proposals were ‘broad and comprehensive’ and a ‘basis to really restart the talks’. Crucially, the package appears to be one of a material change in stance from the Greek government with details including a phasing out of early retirement options, a broad-based increase in VAT rates, cuts in defense spending, increasing corporation taxes for those firms earning more than €500m a year in profits and perhaps most importantly a broad-based increase in pension contributions, amongst others.

The press briefing following the Summit largely echoed comments out of Eurogroup meeting earlier in the day. European Commission President Juncker said that he is ‘convinced’ that an agreement will be reached this week, while EU President Tusk said that Greece’s proposals are a positive step and a result is being aimed for Wednesday evening. German Chancellor Merkel was also conciliatory, although warned that ‘it was also said very clearly that we’re not yet where we need to be’ and that ‘hours of the most intensive deliberations lie ahead of us’. The subject of debt relief for Greece was not played down and will likely remain a key topic after French President Hollande said that ‘it needs to be indicated as a forthcoming step’ although likely discussed as a ‘second step’ while Merkel acknowledged that although this wasn’t discussed in detail ‘it became clear that this question of being able to finance itself must be part of the deal’.

So the developments have clearly been rapid, however the next few days look set to decide the fate of this saga. A Eurogroup meeting has been scheduled for Wednesday evening with Tusk saying that the hope is that results can be achieved to be presented on Thursday morning which we assume to be at the two-day EU Leaders Summit. DB’s resident expert George Saravelos looked ahead to what will very quickly be the focus of attention in the event of further progress this week, this being the Greek domestic political situation. In order for disbursements to be released to Greece ahead of the IMF payments due at the end of the month, Greece will require domestic parliamentary approval. George notes that it is likely Tsipras would first attempt to obtain approval from the Syriza party’s 200 strong Central Committee before bringing an agreement to parliament. In the event of failure at the party level, a referendum would likely be called, while in the event of party approval, a vote would be likely taken to the parliamentary floor which could take two days to a week. George notes that it will remain a major challenge to pass an agreement through parliament with local press reports suggesting 10-40 Syriza MP’s are likely to dissent (government has an 11 MP majority) while the Independent Greeks junior coalition party has suggested the possibility of withdrawing from government. How the political process plays out largely depends on the number of MP’s the current government loses. George believes a loss of less than thirty parliamentarians may force a change in coalition to include the two small moderate parties in parliament (PASOK and the River) jointly controlling 30 MPs. More substantial losses requiring the support of major opposition party New Democracy would open up the possibility of broader changes to the government, a referendum or an early general election. The domestic political situation ultimately would determine the how quickly any disbursement gets released and what this means for the June 30th payments. So a crucial few days ahead.

The rally has extended into Asia this morning where equity markets are generally higher across the board. Indeed, the Nikkei (+1.62%), Hang Seng (+0.35%), Kospi (+1.24%) and ASX (+1.25%) are all up as we go to print. Markets in China are proving to be the exception where bourses have resumed their volatile streak after returning from holidays. Having initially bounced between gains and losses, the Shanghai Comp (-2.44%) and Shenzen (-3.25%) have tumbled, seemingly supported by reports that margin positions on the Shanghai Comp fell for the first time in a month on Friday as valuation concerns and IPO activity continue to weigh on the market. This has also come after a slightly better than expected HSBC flash manufacturing PMI for June (49.6 vs. 49.4 expected). Although still low, the reading is up on both May (49.2) and April (48.9) and matches the level at March, perhaps indicating some signs of stabilization. We also got the flash manufacturing PMI out of Japan which made for slightly more subdued reading (49.9 vs. 50.5 expected), matching April’s 11-month low. Elsewhere, bond markets are anywhere from 3-9bps wider this morning, while S&P 500 futures are pointing towards a +03% gain.

With yesterday’s rally in risk assets, it wasn’t a good day to be long Treasuries as the benchmark 10y yield moved 11.5bps higher to 2.373% (and has moved another basis point wider this morning) and in turn wiping out the bulk of last week’s move tighter. Data yesterday probably helped support at the margin as May existing home sales rose +5.1% mom (vs. +4.4% expected), taking the annualized rate to 5.35m which was the highest level since November 2009. The details appeared to show signs of a strengthening housing recovery with first time buyers making up 32% of purchases in the month, the highest share since September 2012. The other data release yesterday was the Chicago Fed national activity index which showed a slight miss versus consensus (-0.17 vs. +0.12 expected). Despite the moves in rates and equities, the Dollar index was just +0.26% on the day. Gold weakened however, dropping 1.19% while oil markets ended a touch firmer with WTI and Brent +0.68% and +0.51% respectively after a volatile session.

With the focus for markets on Greece, news flow was fairly thin elsewhere. Bloomberg reported that EU governments have extended trade and investment sanctions against Russia by a further six months in a bid to keep the pressure on the Kremlin and meet its Minsk obligations after Russia had agreed to help enforce the cease-fire between pro-Kremlin separatists and the Ukrainian government. Elsewhere and wrapping up yesterday’s data, Euro area consumer confidence for June for was a touch ahead of expectations at -5.6 (vs. -5.8 expected).

Looking at today’s calendar now, we’ve got more flash PMI’s due this morning in Europe when we get the manufacturing, services and composite readings for the Euro area as well as in Germany and France. We’ll also get business and manufacturing confidence indicators out of France this morning, while in the UK we’re expecting the CBI Industrial Trends survey. Greece headlines will of course remain front and centre in the meantime. Over in the US this afternoon, there will be plenty of focus on the May durable goods and capital goods reports in the context of Q2 growth. We get more housing data with new home sales expected and the FHFA house price index, while the flash manufacturing PMI for June and Richmond Fed manufacturing index are also due. It’ll be worth keeping an eye on the Fed’s Powell speaking on monetary policy and the economic outlook too.