"The disconnect between what the average person sees happening in the world and what they see happening in the financial markets is getting wider and wider,"
- Marshall Gittler, head of investment research at BDSwiss, wrote in a note to clients.
What rioting, what 40 million unemployed, what second wave? The MSCI All Country World Index has risen for 8 days in a row, a testament to the fact that not only retail investors but global markets now view stocks as a risk free asset, assuring that the next bursting of the bubble will be unforgettable, prompting even Bill Dudley to say on BBG TV that "some Fed intervention has created a bit of moral hazard." That's right Bill, and it may have something to do with the fact that overnight America burned for an 8th consecutive day in nationwide riots as tens of thousands of people defied U.S. curfews to take to the streets.
Anyway, until the next crash all one can do is buy, confident that central banks will always be there to step in and bail everyone out, and sure enough world shares hit three-month highs on Wednesday and the dollar fell for the sixth day on the usual narrative of "hope" and "optimism" for more monetary stimulus and the global economic reopening, while ignoring the worst civil unrest in the United States in 50 years as well as rising COVID-19 tolls.
The MSCI world equity index, which tracks shares in 49 countries, rose to its highest since March 6, having gained throughout the Asian session. The index is down 7% year-to-date, after pandemic lockdowns that have pushed many economies into contraction, but with markets now confident in a V-shaped recovery it's only a few days before stocks turn green for the year.
Futures rose on both the S&P 500 Index and the Nasdaq 100, which closed on Tuesday within 1% of its record high. Micron Technology and Apple climbed in the premarket, helping lift the S&P just shy of 3,100, and now trading at 26x consensus 2021 earnings! Treasuries dropped as did gold, while the dollar index hit its lowest level since early March.
“If I look at the markets, I see a V-shaped recovery,” Mark Mobius, co-founder at Mobius Capital Partners, said on Bloomberg TV. “What we’re hearing from companies around the world is that once the lockdown is over, they’re going to get the customers coming back in droves."
They better, because with the global PE ratio at the highest level since the dot com bubble, risk is priced to absolute perfection.
Meanwhile markets continued to ignore every single risk, including tense U.S.-China relations that may jeopardize the US-China trade deal, as well as violent clashes and looting in American cities.
European shares - which have emerged as the latest focal point for momentum chasers - also advanced, led by insurance and bank subgroups lead gains as they advance 4.1% and 3.2%, respectively. Europe’s Stoxx Europe 600 Index rose as much as 1.5% to a session peak, heading for the highest close since March 6, as renewed risk-on appetite boosts global equity markets.
Asian stocks also gained, led by finance and IT, after rising in the last session. All markets in the region were up, with Singapore's Straits Times Index gaining 2.9% and South Korea's Kospi Index rising 2.9%. Trading volume for MSCI Asia Pacific Index members was 32% above the monthly average for this time of the day. The Topix gained 0.7%, with DLE and W-Scope rising the most. The Shanghai Composite Index was little changed, with Eastern Gold Jade advancing and Danhua Chemical Technology declining the most. In China, Japan and South Korea, where COVID-19 is relatively contained, stock indexes have recovered substantially to be only about 5-6% below this year’s peaks.
There are some signs of recovery in business activity as governments restart their economies, albeit in the knowledge that easing lockdowns too early could trigger a second wave of COVID-19. China's Caixin Service PMI survey showed activity in China recovered to pre-epidemic levels in May, with the index printing at the highest level in a decade.
In rates, the 10Y yield briefly rose above 0.70% - a level many claimed was a CTA selling trigger - but has since dipped back under, confirming again that nobody has any real idea what prompts systematic funds to buy or sell. The Treasury yield curve continued to steepen, partly reflecting the sale of more government debt to finance massive stimulus efforts. The 30-year U.S. Treasuries yield rose to as high as 1.532%, its highest since mid-March, as expectations of central bank policy support kept shorter yields in check; the yield gap between five- and 30-year Treasuries rose to 118 basis points, the highest since early 2017.
Germany’s ten-year government bond yield rose to its highest since mid-April as the global risk-on mood saw demand for safer debt decline, slipping back slightly to -0.386% by 0825 GMT. The European Central Bank is expected to ramp up stimulative bond purchases when it meets on Thursday.
In FX, broader economic optimism supported risk-sensitive currencies and pushed down the dollar, which hit a three-month low against a basket of comparable currencies. The euro which rose above $1.12 for the first time in 11 weeks in early London trading as data showed the region’s economic activity increased in May to the highest in three months after an easing of lockdown restrictions, is on track for a seven-day winning streak against the dollar - its longest streak since December 2013. The safe-haven Japanese yen hit a two-month low of 108.85 to the dollar before bouncing back to around 108.79 per dollar.
"In a scenario where there’s no meaningful recurrence of the virus, and progress is made on treatments and vaccines, we expect the U.S. dollar’s weakness to continue," said Mark Haefele, CIO at UBS Global Wealth Management. And if there is a recurrence, Mark probably expects the Fed to inject another several trillion, which would also force the dollar lower.
Oil initially rose on Wednesday, with Brent above $40 for the first time since March, as optimism mounted that major producers will extend output cuts and a recovery from the pandemic will spur demand for fuel. However, crude failed to sustain the rally above $40 after Bloomberg reported that a meeting between OPEC and its allies is unlikely to happen this week over issues of cheating. Spot gold fell 0.5% to around $1,717 per ounce.
- S&P 500 futures up 0.4% to 3,090.50
- STOXX Europe 600 up 1.2% to 364.03
- MXAP up 1.3% to 156.86
- MXAPJ up 1.7% to 503.62
- Nikkei up 1.3% to 22,613.76
- Topix up 0.7% to 1,599.08
- Hang Seng Index up 1.4% to 24,325.62
- Shanghai Composite up 0.07% to 2,923.37
- Sensex up 1.5% to 34,322.28
- Australia S&P/ASX 200 up 1.8% to 5,941.60
- Kospi up 2.9% to 2,147.00
- German 10Y yield rose 3.1 bps to -0.384%
- Euro up 0.4% to $1.1212
- Brent Futures up 1.5% to $40.16/bbl
- Italian 10Y yield rose 1.3 bps to 1.329%
- Spanish 10Y yield rose 1.5 bps to 0.573%
- Brent Futures up 1.5% to $40.16/bbl
- Gold spot down 0.6% to $1,717.53
- U.S. Dollar Index down 0.3% to 97.42
Top Overnight News from Bloomberg
- Anything less than a widely anticipated increase to the ECB’s bond buying program on Thursday could trigger a market shock reminiscent of the one in March when President Christine Lagarde inadvertently suggested that she might not act to calm peripheral bond markets
- A gauge of economic activity in the 19- nation euro region rose in May to highest in three months after an easing of lockdown restrictions allowed companies and shops to resume business. Yet the measure continues to signal a sharp contraction in both manufacturing and services, according to a report by IHS Markit
- The EU will try to convince Prime Minister Boris Johnson to forge a compromise later this month in an attempt to stop the U.K. from breaking away from the bloc without a trade deal
- Australia’s almost 29-year recession-free run has come to a close, ending the developed world’s longest uninterrupted economic growth streak. Gross domestic product declined 0.3% in the first three months of the year, government data showed Wednesday, and that downturn is set to deepen in the current quarter
Asian equity markets traded higher across the board as the region took impetus from the energy-led gains on Wall St. where participants looked through the US-China tensions and civilian unrest stateside, while participants also digested encouraging Chinese PMI data. ASX 200 (+1.8%) was positive with top-weighted financials front running the advances and with the sector tracked closely by firm gains in energy amid a continued rebound in oil prices. Nikkei 225 (+1.3%) was firmer as exporters benefitted from currency effects and the KOSPI (+2.9%) was bolstered on stimulus efforts after South Korea announced a KRW 35.3tln third supplementary budget. Hang Seng (+1.4%) and Shanghai Comp. (U/C) largely conformed to the upbeat tone after Chinese Caixin Services and Composite PMIs printed their largest expansions in nearly a decade, but with gains limited by ongoing tensions and after a CNY 120bln liquidity drain. Finally, 10yr JGBs declined as the gains across stocks sapped demand for safe haven assets and amid spill over selling from USTs, while the BoJ’s presence in the market failed to support prices as the central bank reduced its purchases of 3yr-5yr maturities to JPY 320bln from JPY 350bln.
Top Asian News
- Hong Kong Stocks Erase Selloff Sparked by National Security Law
- BlackRock Overweight Asia Stocks, Credit on View Disaster Missed
- Singapore Stocks Set to Enter Bull Market, Among Last in Asia
- Australia Economy Contracts as End to Recession-Free Run Looms
European equities continue to edge higher in mid-week trade [Euro Stoxx 50 +2.0%] in a continuation of gains seen yesterday as sentiment remains on an upward trajectory despite a number of looming uncertainties, including the risk of a second coronavirus wave, US and China trade war and flaring riots across Western economies (alongside Hong Kong). Sectors remain in a sea of green with cyclicals outpacing defensives – signaling risk appetite. Energy and Financials outperform amid favourable price action in the energy and bond complexes. The breakdown paints a similar picture with Insurance and Banks topping the charts and healthcare the laggard. Chip names are seeing broad-based gains amid the risk appetite and the upbeat sectorial performance State-side. In terms of individual movers and shakers, Hammerson (+20.5%) is the top Stoxx 600 gainer with reports noting that hedge funds scramble to cover short positions. Tui (+8.3%) is among the winners after reaching an agreement with Boeing to resolve the 737 MAX grounding impacts but financials details have not been disclosed. Tui said the agreement will strengthen its liquidity. Furthermore, the group is to commence its summer flight plan on June 17th following Germany lifting its travel warning – a move supporting the likes of Lufthansa (+5.0%) despite reporting dismal earnings as expected. Renault (+8.0%) holds onto upside seen at the open after finalising the EUR 5bln credit line with the French State – which is not contingent on major compromises. BASF (+4.8%) continues to gain ground amid positive broker moves at Jefferies and Pareto Securities. On the flip side, Iliad (-1.9%) failed to recover from a downgrade at Morgan Stanley.
Top European News
- Vestager Weighs New Powers to Take on Tech Giants, China M&A
- U.K. Services Slump Moderates in May on Lighter Lockdown
- Italy Racks Up Record Bond Orders a Day Before ECB’s Decision
- Wirecard Is Said to Add SoftBank Partner to Supervisory Board
In FX, the Buck has not stopped falling, but the DXY is off worst levels within a 97.283-610 range as selling abates. However, risk-on sentiment remains prevalent to the detriment of the Greenback and other safe-havens as attention turns to latest pre-NFP proxies in the form of ADP and jobs components in the services PMI and non-manufacturing ISM, while the index and Dollar in general are still deeply entrenched in bearish trends following heavy selling for month end rebalancing and the ongoing US riots that are hampering efforts to re-open from COVID-19 lockdown.
- EUR/GBP/NZD/NOK - All vying for top spot in the major rankings, partly on the aforementioned Usd weakness, but also amidst more encouraging signs of economic recovery via EU services and composite PMIs, though the Euro has faded into key resistance at 1.1237 against the backdrop of hefty option expiry interest between 1.1210-20 in 2 bn, and with a further 1.3 bn sitting below 1.1200 at 1.1180-75. Similarly, Cable waned just above 1.2600 and is now hovering under the big figure in wake of reports that BoE Governor Bailey has advised UK banks to step up preparations for a no deal Brexit, with Eur/Gbp back above 0.8900 in response. Meanwhile, the tables have turned down under, as the Kiwi unwinds more post-RBA underperformance relative to its Antipodean peer through 1.0800 and Nzd/Usd maintains more momentum around 0.6400 than AUD/Usd that has reversed more sharply after approaching 0.7000 following significantly better and firmly back above 50.0 Caixin Chinese services and composite PMIs rather than bang in line Aussie GDP data overnight. Elsewhere, the Norwegian Krona continues its winning streak and is inching closer to 10.6000 vs the Euro, in contrast to the Swedish Crown that has pared back somewhat from a brief 10.4000+ break on the back of a slightly firmer services PMI, with Eur/SEK now hovering around 10.4300.
- CAD/CHF/JPY - The relative G10 laggards, as the Loonie treads cautiously either side of 1.3500 pre-BoC and the first policy meeting under the helm of new Governor Macklem that could see corporate QE increased – check our headline feed at 10.30BST for a full preview of the event. Usd/Cad has marginally extended to the upside in recent trade (to 1.3541 from 1.3480 at one stage) as crude prices retreat on reports that OPEC+ may not meet this week (tomorrow has been widely touted) due to disputes over claims of compliance cheating, but the extremes are expected to reach circa 100 pips depending on BoC actions, guidance and/or the tone of the accompanying statement, according to break-even implied volatility via options. Meanwhile, the Franc is weaker again, with Usd/Chf up to 0.9636 and Eur/Chf touching 1.0800 after worse than forecast Swiss Q1 GDP, and as the cross breached the 200 DMA (1.0770) before surpassing the next line of resistance at 1.0788 (January 22 peak). In the same vein, Usd/Jpy has maintained bullish impetus having cleared several upside chart hurdles on Tuesday, but the Yen has found some support into 109.00.
- EM - The Lira is deflated despite more extensive/expansive efforts by Turkey’s Trade Minister to forge FX swap lines, while CPI halted a 2 month sequence of declines with a sharp rebound in May, as the country takes more action to curb Try speculation via a 15% tax on hedge funds that hold 80% in FX-based assets.
In commodities, WTI and Brent futures initially saw a session of gains before the complex was knocked off course by reports that OPEC+ meetings are said to be in doubt due to haggling over oil-quota cheating. The reports noted that OPEC will not meet on June 4th unless nations comply with cuts, whilst the June 10th meeting is also contingent on compliance. Energy Intelligence estimated that OPEC+ achieved an 86% May compliance rate with the production cuts of 9.7mln. Traders expected the producers to extend current cuts of around 10mln BPD for a further 1-3 months, reports noted Saudi and Russia are haggling over extension timeframes, with the latter opting for one month – albeit Saudi Arabia and Russia reportedly agreed on a preliminary 1-month extension on existing OPEC+ oil cuts, according to sources. As a reminder, sources note that Russian oil producers are hesitant to extend current cuts as they posit that the market could re-balance itself as soon as June/July. Elsewhere, yesterday’s Private Inventory report last night also provided underlying support late doors after printing a surprise draw of 500k barrels. Exp. build of 3mln barrels, whilst Cushing inventories also declined by some 2.2mln barrels. Brent August printed a ceiling at around USD 40.50/bbl before briefly retreating sub-39/bbl, whilst WTI July topped USD 38/bbl in APAC trade prior to the OPEC-induced selloff to USD 36.50/bbl. Elsewhere, spot gold trickles lower but remains north of USD 1700/oz (vs. high USD 1730/oz) as stocks hold onto gains and the DXY drifts off loses. Copper meanwhile reclaimed the USD 2.50/lb handle following better-than-forecast Chinese PMIs, but gains remain limited with the US-Sino trade war still in play.
US Event Calendar
- 8:15am: ADP Employment Change, est. -9m, prior -20.2m
- 9:45am: Markit US Services PMI, est. 37.3, prior 36.9; Markit US Composite PMI, prior 36.4
- 10am: ISM Non-Manufacturing Index, est. 44.4, prior 41.8
- 10am: Durable Goods Orders, est. -17.2%, prior -17.2%
- 10am: Cap Goods Ship Nondef Ex Air, prior -5.4%
- 10am: Durables Ex Transportation, est. -7.4%, prior -7.4%
- 10am: Cap Goods Orders Nondef Ex Air, est. -5.8%, prior -5.8%
- 10am: Factory Orders, est. -13.4%, prior -10.3%; Factory Orders Ex Trans, prior -3.7%
DB's Jim Reid concludes the overnight wrap
After going back to school on Monday my daughter completed her first ever full day at nursery yesterday in preparation for full school on September. She came back utterly exhausted and after what is usually an hour ritual to get her to bed every night - including why this and why that questions ad nauseam - last night was the first time where she shooed us away and wanted to go to sleep within 5 minutes of bed preparations. I’m hoping that this will now last every day until she’s 18 and also that we can start sending the twins to nursery ahead of schedule. Wishful thinking on both front I fear.
At the moment nothing seems to tire this equity market rally as just as the winners of the last two months were running out of steam (as we discussed at length yesterday), along come the laggards to the party. This mostly manifested itself yesterday in an out-performance for Europe (more value heavy over growth) ahead of the ECB meeting tomorrow. The Stoxx 600 was up +1.57% driven by the DAX (+3.75%) as it caught up from a holiday the previous day. However the IBEX (+2.59%), FTSE-MIB (+2.42%) and the CAC 40 (+2.02%) also saw large rallies. 17 of 19 sectors were higher in the STOXX 600, with Insurance (+4.07%), Real Estate (+3.92%), and Auto (+3.82%) companies leading the way.
This comes as many expect the ECB to announce an expansion in their stimulus programmes tomorrow. Our European economists here at DB are expecting that they’ll be announcing a doubling of the Pandemic Emergency Purchase Programme (PEPP) to €1.5tn and extend the minimum net asset purchase period until mid-2021. As we discussed yesterday MNI reports suggest some on the committee are not ready to do this so there is room for disappointment tomorrow.
Our colleague Ioannis Sokos published a report yesterday looking at the granular data regarding the ECB’s PEPP purchases, see it here. While it was already clear that the ECB deviated from capital keys in its PSPP programme both in March and April, this was not seen in the PEPP data though which is strange as the latter was set up to do this with the former not. The PEPP data shows allocations much closer to the ECB capital keys, with Italy benefiting the most from positive deviations from capital keys but only by +4.7% compared to roughly +20% in the PSPP in March and April. On the other hand, Germany's share in PEPP was roughly in line with its capital key versus more than a -20% negative deviation in PSPP in March and April. All explanations welcome as to these quirks. Meanwhile staying with Germany, the discussions about a further fiscal stimulus continued between the two governing coalition partners though no agreement has been reached, with the two sides set to continue negotiating today.
By the close of play yesterday the S&P 500 lagged Europe, but was still up a further +0.82% helped by a half per cent climb in the last 15 minutes of trading. Interestingly after the US completed the global manufacturing PMI/ISM data series yesterday we have updated our regression of these vs. the YoY change in equity markets. They may be a bit meaningless at the moment given the diffusion nature of these indices but in doing the exercise you realise that many major equity markets are actually up over the last 12 months or only marginally down. The S&P is leading the way at +12% with the DAX at +3%. The Stoxx 600 is -3% and arguably the most impressive is Italy at ‘only’ -4%. Spain (-18%) and the UK (-13%) are the laggards on this measure. Given where PMIs are, markets are anywhere from 33% and 25% above where they should be for Germany and the US to only 4% too high for the UK with Spain, France and Italy in the 10-20% too high range. As we said they could be seen as meaningless at the moment or they could also highlight just how much liquidity has decoupled markets from their fundamentals. Probably a bit of both.
Back to the US yesterday, Energy stocks led the rally (+2.65%), supported by higher oil prices as WTI rose +3.87% to $36.81/bbl, which was also its highest level since investors began to price in the pandemic’s impact. That move came as Bloomberg reported yesterday that the OPEC+ group were moving closer towards a compromise on extending production cuts, with their article saying that Russia and some other nations were in favour of a one-month extension.
Unusually by the standards of recent weeks however, tech stocks underperformed yesterday, with the NASDAQ up a lesser +0.59%. This continues to highlight the value-growth rotation we referenced above, with virus-laggards like Energy, Autos (+2.01%), and Materials (+1.76%) leading US equites higher. This also dovetails into DB Binky Chadha’s call that we highlighted yesterday, wherein he expects cyclical companies to outperform as the economy counties to reopen.
This morning markets in Asia are following Wall Street’s lead with the Nikkei (+1.63%), Hang Seng (+1.20%), Kospi (+2.54%) and Shanghai Comp (+0.51%) all up. The Kospi has been boosted by news of the details of a third round of fiscal stimulus. Meanwhile, the US dollar index is trading down -0.27%, marking the fifth continuous day of daily declines while yields on 10y USTs are up +2.3bps to 0.709%. Elsewhere, futures on the S&P 500 are up +0.25% and WTI crude oil prices are up a further +2.01% to $37.55.
Doing little to dampen sentiment was China’s May Caixin services PMI which came in well above expectations at 55.0 (vs. 47.3 expected and 44.4 last month), marking the highest reading since October 2010 and in doing so brought the composite reading to 54.5 (vs. 47.6 last month), the highest since January 2011. In the details for the composite, the new orders component rose to 52.9 from 48.0 in April, the highest since November 2019 and the first >50 reading since January.
Onto virus matters, yesterday saw no new coronavirus deaths in Spain for a second day running, while President Trump also tweeted that “Vaccines are coming along really well. Likewise therapeutics. Moving faster than anticipated. Good news ahead (in many ways)!” On the other hand however, an alert was issued in Tokyo as the city reported its highest number of new infections in over 3 weeks yesterday, with 34 cases reported. While this was over half of the 50 cases reported nationwide yesterday, the relatively small number does not seem like an outlier in our tables included in the pdf. See the pdf for the latest case and fatality numbers from across the globe.
There were also some pretty big moves in foreign exchange markets yesterday, with the US dollar falling for a 4th straight day to its lowest level since mid-March. The moves very much chime with what our FX strategists put in their blueprint last week, which called for selling USD trade-weighted in G10. With investors moving out of safe havens, the two worst-performing currencies yesterday were the Japanese Yen and the Swiss franc. Over in the UK however, sterling hit a one-month high against the US dollar in response to positive reports on Tuesday on the post-Brexit negotiations between the UK and the EU. That said, although The Times said that the UK was ready to compromise, Prime Minister Johnson’s spokesman said that “We’ve always been clear there is no question of splitting the difference on level playing field and fish”, which are two of the most contentious issues in the talks. Overnight, Bloomberg is reporting that the EU will try to convince the UK PM to forge a compromise later this month when he speaks to European Commission President Ursula von der Leyen and EU Council President Charles Michel. The report further added that at the meeting, PM Johnson will be told where the EU could potentially make concessions - as long as the UK takes a similar conciliatory approach which could lead to a deal in the second half of the year.
Fixed income saw some more modest moves yesterday, with 10yr Treasury yields up just +2.6bps to 0.685%. Over in Europe, sovereign debt mostly traded higher, with 10yr bund yields down -1.3bps, but there similarly wasn’t a great deal of movement in either direction, with French OATs (-2.2bps) and Italian BTPs (+1.4bps) not seeing large moves in either direction.
Data was light yesterday. In the U.K. mortgage approvals in April fell to 15.8k (vs. 24.0k expected), which is the lowest number since the series began in 1993, below even their lowest point at the height of the financial crisis in 2008. And net consumer credit fell by -£7.4bn in April (vs. -£4.5bn expected), which is also the largest net repayment since the series began.
To the day ahead now, and the data highlight will be the release of the services and composite PMIs for May from around the world, as well as the ISM non-manufacturing index from the US. Otherwise, we have Italy’s preliminary unemployment rate for April, the Euro Area’s unemployment rate and PPI for April, and in the US there’s the ADP employment report for May and factory orders for April. Finally, there’ll be a monetary policy decision from the Bank of Canada.