And it started off all so well: the market, blissfully ignoring what we wrote just yesterday in Why The IMF Will Reject The Latest Greek Proposal In Just Two Numbers [31], was in full blown levitation mode overnight when it sent Japanese stocks to their highest close since 1996 (pre dot com) and with the Chinese central bank doing its best to keep levitating local stocks away from the abyss, pushing the SHCOMP up another 2.5%.
European shares opened small in the green, hopeful despite a Greece deal not yet being finalized. The market tried to hold its gains despite an appalling unemployment number in Finland and a blah Ifo report from Germany. These numbers began to weigh, even as the ECB’s QE program is not going to be tapered anytime soon. And then red headlines ran quoting Greece PM Tsipras saying “creditors didn’t accept Greek proposals.” Oops, market immediately got hit, but didn’t panic."
Euro Stoxx 50 went from flat to down 1% and is bouncing. As BBG's Richard Breslow adds, predictably, the market is taking this as a ploy, not an end game. Of course, this is precisely the "Bear Stearns is fine" conventional wisdom that Cramer was spewing days before Bear failed because nobody could fathom how anyone can conceive of a worst case scenario. Only it isn't nobody: we reported before of a Goldman's "Conspiracy Theory" Stunner: A Greek Default Is Precisely What The ECB Wants. [32]
It was Goldman's green light that let Lehman fail. Will it be twice in under a decade?
In any event, safe-haven flows have been observed across the board heading into the North America crossover following the report posted earlier, citing Greek government official who said that Greek PM Tsipras states that Greek proposals have been rejected, which led to weakness in EUR and DAX, with Bunds rising 44 ticks immediately after the news. This comes following earlier reports from an EU official this morning who said that there is still distance between Greece and creditors ahead of today's discussions, with limited progress made yesterday. All this meant that stocks in Europe traded lower since the open, as market participants were forced to contend with mixed reports surrounding Greece which again hinted at divisions between the country and creditors. Press reports pointed out that the IMF and German parliament still share concerns over the latest proposals.
Looking elsewhere, EU vs. UK short-end rates continued to diverge this morning, with Short-Sterling under pressure, this time
driven by hawkish comments by BoE's Weale. The central banker said that the Bank should be ready to hike rates as soon as
August and will likely face a split over views as strong wage data points towards a tightening labour market.
Positive close on Wall Street stemming from further optimism surrounding Greece continued to support stocks in Asia, where the Nikkei-225 (+1.3%) broke above its year-2000 peak and settled at its highest level since 1996. At the same time, the ASX 200 (+0.3%) and Hang Seng (+0.2%) were led by outperformance in the energy names, following broad based strength in energy prices.
After posting its worst performance in the last 3-months, EUR staged a modest rebound, though remained in close proximity to the 1.1200 level, where a large option is said to expire at 3pm BST (NY cut). GBP also benefited from hawkish comments by BoE's Weale and favourable interest differential flows. Consequent USD weakness, with the index up 2.2% since last Thursday supported commodity linked-currencies amid an uptick in oil prices.
WTI and Brent crude futures benefited from a weaker USD, as well as the third consecutive drawdown in API crude oil stockpiles (-3.2mln vs. Prev. -2.9mln), as indicated in the latest report after the closing bell on Wall Street yesterday. Russia continued to flex is military muscle today, with reports indicating that Russian Navy missile cruiser Moskva is in North Atlantic and is in the area to launch Vulkan test missiles. Of note, yesterday it was reported that the Russian Black Sea Fleet's flagship, the Moskva and support ships were headed to the Atlantic. The last time they were there was in 2013.
On the US event calendar today the third revision to Q1 GDP guess and personal consumption are the only eco numbers of note. GDP is expected to improve but remain negative.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Greek PM Tsipras states that Greek proposals have been rejected, according to a Greek government official
- Stocks in Europe lower, as market participants were forced to contend with mixed reports surrounding Greece which again hinted at divisions between the country and creditors.
- EU official stated this morning that there is still distance between Greece and creditors ahead of today's discussions, with limited progress made yesterday.
- Going forward, market participants will get to digest the release of the latest US GDP report (Q1 T), weekly DOE inventories report and the US Treasury will sell USD 35bln in 5y notes.
- Treasury yields drop in overnight trading as Greece’s creditors handed the government revised terms for an agreement on bailout funds as Prime Minister Alexis Tsipras expressed incredulity; week’s auctions continue with $35b 5Y notes, WI yield 1.705% vs. 1.566% last month; last sold at 1.56%.
- Greek PM Tsipras told his government that creditors haven’t accepted the country’s proposals to unlock needed aid
- Following U.S. federal probe that ended last month with guilty pleas and $6 billion in fines regarding currency trades, the Justice Department unit behind those prosecutions is turning its sights on the $12.7 trillion U.S. Treasury market
- The debt load of U.S. states declined in 2014 for the first time in almost three decades and probably won’t rebound this year, showing lawmakers are still reluctant to borrow even six years after the recession
- China is proposing to scrap 75% loan-to-deposit ratio cap, according to statement on State Council’s website
- QE shows signs of backfiring as investors obsess over market depth, the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher
- The exemption of some ABS from the toughest capital rules will promote the creation of simpler securitizations and attract more investors, according to the Bank of England
- Sovereign 10Y bond yields mixed, with Greece rising 10bps; Portugal, Italy and Spain yields also slightly higher. Asian, European stocks mixed, U.S. equity-index futures drop. Crude oil and gold rise, copper drops
US Event Calendar
- 7am: MBA Mortgage Applications, June 19 (prior -5.5%)
- 8:30am: Revised GDP, 1Q, est. -0.2% (prior -0.7%)
- Personal Consumption, 1Q, est. 1.9% (prior 1.8%)
- GDP Price Index, 1Q, est. -0.1% (prior -0.1%)
- Core PCE, 1Q, est 0.8% (prior 0.8%)
- 1pm: U.S. to auction $35b 5Y notes
The remainder of the overnight news as summarized by DB's Jim Reid
Renewed optimism for a Greece deal being made today continued to be the dominant driver for markets again yesterday as European equities moved higher to mark the largest four-day gain since January. Indeed, the Stoxx 600 rose +1.16% to cap a +3.9% move since last Wednesday’s close now. Gains were led again in Greece where the equity market finished +6.11% (including a 9% rally for banks) with the index there now 17% off the 3-year lows of last Wednesday. The DAX (+0.72%) and CAC (+1.18%) also firmed further, while the FTSE MIB and IBEX were +0.35% and +0.30% respectively. 10y Bunds bounced around over most of the session before ending 1.2bps tighter at 0.870%. It was a bit more muted in US equity markets with the S&P 500 (+0.06%) and Dow (+0.13%) a tad higher although a combination of hawkish Fed comments and mixed data, which we’ll touch on shortly, appeared to play a part.
So the focus today will turn to the Eurogroup meeting of finance ministers at 6.00pm GMT tonight. Hopes beforehand are for a Staff Level Agreement to have been reached between Greece and the Creditors with the agreement then signed off in the meeting. There did appear to be some jitters in markets yesterday after German press Suddeutsche Zeitung reported that the IMF believes that the European Commission is being too soft on Greece and that some European officials accused the Fund of not wanting a deal, although this seemed to somewhat go against comments from the IMF Chief Lagarde who told her board that she is optimistic of a deal being done this week.
Ahead of tonight’s Eurogroup, Greek PM Tsipras is due to meet with the ECB’s Draghi, EC’s Juncker and IMF’s Lagarde in a likely bid to overcome the last remaining hurdles. It seems that the gaps are now relatively small given the substantial u-turn made by Tsipras and this has become somewhat evident in the domestic political situation as tensions in the Syriza partly appear to be showing signs of flaring. This becomes increasingly more important after we learned that German parliament will not approve any deal until approval is first passed through Greek parliament, adding another layer of pressure ahead of the IMF repayments at the end of the month. Yesterday we heard Syriza lawmaker Kodelas saying that ‘personally, I cannot support such an agreement that is contrary to our election promises’, before going on to say that ‘I do not care about the consequences of my decision’. This was echoed by another Syriza party member, Sotiriou, who said the proposals ‘cannot be supported’. In yesterday’s EMR we highlighted DB’s George Saravelos’ outlook on the likely messy domestic political situation where by Tsipras will need to rely on opposition votes in order to pass and in turn lead to a change in coalition. The danger however lies in his own party for now, with the threat of a referendum in the case of approval not being gained. It’s highly likely that this will have implications for the June 30th IMF payments, with the threat of non-payment ultimately determined by the ECB’s opinion of whether or not there is enough agreement in place to warrant a raising of the T-bill cap to fund the IMF obligations.
Ahead of today’s meetings, equity markets in Asia are trading with a positive tone as we go to print. The Hang Seng (+0.13%), Kospi (+0.06%) and ASX (+0.30%) are all up, while the Nikkei (+0.54%) has just moved to its highest level since 1996. In China the Shanghai Comp (+0.91%) and Shenzhen (+0.51%) have also risen. Having traded some 2.5% down when we went to print yesterday, China equities completed the seemingly recurring theme of then completely reversing course to eventually finish up around 2% yesterday, so there’s every chance that these levels are outdated by the time they hit your inbox. Just on China, the Westpac consumer sentiment indicator for the region rose 1.2pts this morning to 112.3, a three-month high.
Away from Greece yesterday, it was a case of rising yields in the Treasury market again with the benchmark 10y rising 3.6bps to 2.410% and closing back above the pre-FOMC levels of last week. Some hawkish comments from the Fed’s Powell who said that ‘my own forecast calls for liftoff in September and for an additional increase in December’ appeared to help spark some of move higher, although he noted that a move in September was likely to be a 50-50 chance. The comments also helped support a strong day for the Dollar, with the Dollar index ending +1.17%.
It was a relatively mixed batch of data out of the US yesterday. Durable goods orders for May in particular disappointed after falling 1.8% mom (vs. -1.0% expected). Core capex orders also disappointed after the +0.4% mom print missed expectations of +0.5% while the April reading was revised down to -0.3% mom after an initial +1.0% gain. Core capex shipment orders (+0.3% mom vs. +0.5% expected) demonstrated a similar trend. There was, however, some more positive news out of the housing sector where May new home sales rose +2.2% mom (vs. +1.2% expected), helping lift the annualized rate to 546k and the most in over seven years. Elsewhere, there were some mixed readings on the manufacturing front where the flash June PMI fell 0.6pts to 53.4 (vs. 54.1 expected), while the Richmond Fed manufacturing index rose 5pts to 6 (vs. 4 expected). Finally, the FHFA house price index printed below market for April (+0.3% mom vs. +0.5% expected). Meanwhile, following on from Monday’s existing home sales data, the Atlanta Fed upgraded their GDPNow model forecast for Q2 growth to 2.0% (from 1.9%). With that, the upward revision now puts the model at more or less the bottom end of the range of the current market forecasts (2.0% to 3.7%).
Moving on, yesterday we also saw DB’s Joe Lavorgna highlight that with the weak wage and price trends that we are currently seeing in the US, the risk right now is that the Fed may look to hold off on raising rates until next year. Joe examined the relationship between the unemployment rate and inflationary wage trends over three business cycles: 1982 to 1990, 1991 to 2000 and 2001 to 2007. Joe noted that during the 1980s cycle, average hourly earnings growth surpassed 3% - the minimum rate the Fed believes is necessary to push inflation back toward 2% - when the unemployment rate was 5.5%. The pattern was the same in the long 1990s cycle, as the 3% ceiling was breached once the unemployment rate fell to 5.5%. But in the last business cycle, it was not until the unemployment rate fell to 5% that the growth in average hourly earnings surpassed 3%. Currently, wage gains are very modest, as average hourly earnings are expanding only at 2% yoy. Joe believes that this means policymakers believe that they have time before lifting rates because they do not expect unemployment to get back to 5% until the end of 2016 and so therefore supporting an argument of delaying liftoff. A soft core PCE deflator only muddles this view. An interesting relationship we think worth highlighting.
Wrapping up, data flow and specifically the PMI indicators were largely supportive in Europe yesterday. Indeed, the Euro area flash June composite reading of 54.1 was up 0.5pts from May and ahead of expectations of 53.5.
This was supported by both a +0.3pts rise for the manufacturing (52.5 vs. 52.2 expected) and +0.6pts rise for the services reading (54.4 vs. 53.8 expected). Regionally, there were improvements in the composite readings for both Germany (+1.4pts to 54.0; expected 52.7) and France (+1.4pts to 53.4; 52.0 expected). DB’s Marco Stringa noted that the synthetic non-core composite index suggests a less rosy picture for non-core countries (Italy, Spain and Ireland) with a 0.6pt fall. The data continues to support the ECB’s cautious approach and suggests little reason to change the current pace of QE purchases. Elsewhere on the data front, French business (97 vs. 98 expected) and manufacturing (100 vs. 103 expected) confidence indicators were slightly below market.
Looking at the day ahead, the German IFO survey for June will likely attract most of the market attention this morning while the final reading for French Q1 GDP is also expected. Over in the US this afternoon there will be some attention on the third reading for Q1 GDP (market currently looking for an upward revision to -0.2% while our US colleagues have a slightly more bullish 0.0% forecast) as well as the Core PCE print. Of course, Greece events will remain front and centre ahead of the Eurogroup meeting tonight.
