S&P futures rebounded from an overnight selloff, and are back at Monday's highs as European stocks rose on Tuesday despite a selloff in Asia as dip-buyers overwhelmed concerns about a "second wave" in China which is set to test all 11 million Wuhan residents and a up-tick in coronavirus infections in several nations as well as a deterioration in sentiment between the US and China, which overnight announced it would also ban a third of Australian beef imports. Oil advanced even as the June prompt WTI contract approaches its delivery date. Why the burst of optimism? Traders are looking at the Fed which today is expected to start buying various corporate bond ETFs like LQD and JNK.
Equity futures fell after the Trump administration ordered on Monday night to block investments in Chinese equities by a government retirement fund, but they recovered through the early morning session as European equity indexes clawed back opening losses with the Stoxx 600 Index rising as gains for communications and healthcare shares offset declines for the real estate and travel sectors. The FTSE MIB outperforms peers with local banks gaining over 1%. Sector-wise, telecoms, retailers and healthcare names counterbalance losses in real estate and travel with most indexes trading either side of flat.
Earlier in the session, Asian stocks fell, led by energy and materials, after rising in the last session. Most markets in the region were down, with India's S&P BSE Sensex Index dropping 1.6% and Hong Kong's Hang Seng Index falling 1.4%, while Thailand's SET gained 0.9%. The Topix declined 0.3%, with Maruwa Unyu Kikan and SUNNY SIDE UP falling the most. The Shanghai Composite Index retreated 0.1%, with Shanxi Guoxin Energy and Hubei Mailyard Share posting the biggest slides, despite a sharp drop in Chinese CPI and PPI, both of which unlocked further PBOC rate cuts in the coming weeks.
Unlike Europe and the US, Asia took its cue from an apparent second wave of infections after Wuhan, where the pandemic began, reported its first new infections since the Chinese city ended its lockdown last month. South Korea reported a flare-up in virus cases. Russia had a record number of new cases in one day. Germany recorded the first increase in new coronavirus infections in four days as it gradually relaxes restrictions.
"The increased risk from U.S./China trade relations and the data from countries at the leading edge of the virus spread are a real fly in the ointment for investors hungrily eying a rapid return to economic normality to justify their long risk exposure," said James Athey, investment director at Aberdeen Standard.
Global stocks have recovered half of their plunge after hitting a March low, but the sustainability of the rally remains in question amid poor economic data and company earnings and as countries begin to unwind lockdowns that froze economic activity, according to Bloomberg. As we first reported over the weekend, Goldman warned that investors have gotten ahead of themselves and the S&P 500 Index could drop almost 20% in the next three months.
In rates, the yield curves bull flatten after a muted start; Gilts outperform Bunds, underpinned by record orders at today’s 10y syndicated offering and dovish comments from BOE’s Broadbent. Treasuries are sidelined around Monday’s lows ahead of today’s $32 billion 10y note auction. Peripheral spreads tighten modestly to core across the curve. Five Fed speakers starting at 9am New York time may increase the pushback on negative interest rates. As a second reminder, the Fed begins its corporate-debt ETF buying spree in three stages.
In FX, dollar gives back most of Asia’s gains. NOK and SEK outperform G-10 peers, AUD pares most overnight losses. Crude futures lack directional conviction: July WTI remains $25.50, Brent is rejected near $30. Spot gold grinds higher having regained $1,700/oz during Asian trade. LME aluminum leads modest losses in base metals
In FX, the Bloomberg Dollar Spot Index pared most early gains amid waning haven demand as European stocks swung between losses and gains and U.S. futures recouped all losses. The dollar fell against most Group-of-10 peers as markets shrugged off worries over worsening trade relations between China and other nations and a flare-up of virus cases in Wuhan. BBDXY is still broadly stuck in a 1,240/1,260 range, and BMO "would argue against major adjustments to FX exposures until the price breaks through one of those levels convincingly."
The euro climbed against the dollar as regional stock markets rebounded; yields on European core and semi-core government bonds edged higher, while those in Italy, Spain and Portugal inched lower. Three-month Euribor ended a three-day rising streak on Monday. Funding costs are coming down thanks to the cooling of Italian bond spreads, which spiked after the constitutional court threw doubt on the ECB’s pandemic emergency purchase program (PEPP). The Australian dollar fell against most G-10 peers after business conditions deteriorated and China suspended imports of meat from four abattoirs in the South Pacific nation; the news provided the yen with some further tailwind, which rose for the first time in four days against the greenback.
In commodities, oil rebounded, with Brent trading back over $30, even as Goldman's Jeff Currie, global head of commodities research, said Brent is likely to remain in the $30/bbl range in 3Q and rise to $40 range in 4Q as storage draws down.
In terms of the day ahead, the main data highlight will be the April CPI survey in the US. The consensus expects a -0.8% mom headline reading and -0.2% core print, which would be the lowest monthly core print since 1961. If that latter proves correct then that could see the annual core rate decline to +1.7% yoy from +2.1%, the lowest since 2017. Other data due out today includes the April NFIB small business optimism reading, April monthly budget statement and Q1 mortgage delinquencies and foreclosures. In Europe the only data scheduled is the April Bank of France industry sentiment print. Away from the data it’s a busy day for Fedspeak with Bullard, Kashkari, Harker, Quarles and Mester all due to speak. The ECB’s Stournaras is also due to speak on the implications of the German Constitutional Court’s decision. Earnings include Allianz, Duke and Vodafone. Duke Energy and Ingersoll Rand are among companies reporting earnings.
- S&P 500 futures down 0.2% to 2,916.00
- STOXX Europe 600 up 0.2% to 340.51
- MXAP down 0.7% to 146.50
- MXAPJ down 0.9% to 471.11
- Nikkei down 0.1% to 20,366.48
- Topix down 0.3% to 1,476.72
- Hang Seng Index down 1.5% to 24,245.68
- Shanghai Composite down 0.1% to 2,891.56
- Sensex down 1.5% to 31,095.29
- Australia S&P/ASX 200 down 1.1% to 5,403.05
- Kospi down 0.7% to 1,922.17
- Brent futures up 1.4% to $30.04/bbl
- Gold spot up 0.4% to $1,704.46
- U.S. Dollar Index down 0.1% to 100.12
- German 10Y yield rose 1.7 bps to -0.495%
- Euro up 0.1% to $1.0819
- Italian 10Y yield rose 3.3 bps to 1.704%
- Spanish 10Y yield fell 1.0 bps to 0.804%
Top Overnight News from Bloomberg
- Wuhan has ordered officials to test its entire population of 11 million people after the central Chinese city where the coronavirus pandemic began reported new infections for the first time since its lockdown was lifted
- The Trump administration moved on Monday night to block investments in Chinese stocks by a government retirement savings fund
- The U.K.’s first ever 10-year syndicated bond offering attracted record demand, with bids reaching 50 billion pounds ($62 billion), surpassing the previous record by about 12 billion pounds
- The Bank of England may need to ease policy further as officials stand ready to do what is needed to prop up inflation, according to Deputy Governor Ben Broadbent.
- French economic activity improved only slightly in the later stages of the virus lockdown and won’t snap back to normal levels in May despite the lifting of many restrictions, a Bank of France survey showed
- Pimco’s third-party investors pulled 43 billion euros ($46 billion) in the first quarter, Allianz said Tuesday. That’s the most since the first quarter of 2015, when clients withdrew 68.3 billion euros in the wake of co-founder Bill Gross’s surprise departure
- Australian business conditions deteriorated further in April, weakening across the trading, profitability and employment segments as large tracts of the economy were shuttered to contain the coronavirus
Asian equity markets traded cautiously following the indecisive performance of their Wall St peers as US-China trade concerns resurfaced with President Trump later noting he was not interested in renegotiating the phase on deal after earlier reports suggested that China could opt for a renegotiation. ASX 200 (-1.1%) suffered broad losses amid weak business confidence and as escalating tensions with China added to the glum after Australia’s largest trading partner imposed an import ban on 4 Australian abattoirs which some viewed to be retaliation for PM Morrison’s calls for an independent inquiry to the coronavirus outbreak. Nikkei 225 (-0.1%) was subdued by unfavourable currency flows and with focus on earnings releases including Toyota which was pressured after it failed to provide net guidance due to the virus and saw a slump in its FY operating profits. Hang Seng (-1.5%) and Shanghai Comp. (-0.1%) were also lacklustre due to the increased trade concerns surrounding China but with downside in the mainland cushioned by recent stronger than expected lending data. Finally, 10yr JGBs were marginally higher after prices found support around 152.15 and amid the cautious tone in stocks, while the gains also coincided with a rebound in T-notes from the losses in the prior session that were partly triggered by heavy supply and following mostly better received 10yr JGB auction.
Top Asian News
- Wuhan to Test Whole City of 11 Million as New Cases Emerge
- Japan Borrowing Costs Drop as BOJ Boosts Company Bond Buys
- NBA China Names Veteran CEO as League Still Faces Broadcast Ban
- Popeyes Enters China Market in Hope That Virus Fear Is Passing
Mixed trade across the European equity sphere thus far [Euro Stoxx 50 +0.1%] as the downbeat sentiment from the APAC session somewhat waned as European trade went underway. Italy’s FTSE MIB (+0.7%) outperforms the region as banks continue to feel tailwinds from yesterday’s reports that Italy’s Gov’t is said to be mulling state guarantees for up to EUR 15bln of bonds issued by banks. Sectors are mixed, but defensives broadly outperform cyclicals; with the breakdown painting a similar picture. Telecom names stand as the marked outperformer as earnings from giant Vodafone (+8.1%) bolster the sector. Vodafone’s stellar FY prelim results see a YY rise across group revenue, adj. EBITDA, and operating profit, whilst Q4 organic services revenue topped forecasts and FY guidance for Adj. EBIT and Capex were raised on account of its UK assets merger with Liberty Global. Peers Orange (+1.2%) and Telecom Italia (+2.2%) rise in tandem, albeit gains are less pronounced in BT (+0.2%) shares amid its direct competitor's solid results. The sector also sees tailwinds from ProseibenSat (+11.5%) whose shares were propelled to the top of the Stoxx 600 after KKR acquired ~5.2% stake in the Co, with 3.21% in shares and 2.0% through financial instruments. KKR believes that the Co. is undervalued. Turning to other movers; Thyssenkrupp (-9.0%) holds onto post-earning losses on the back of deteriorating Q2 net, deeper negative EPS, and debt almost doubling YY. The Co. also said it cannot rule out Q3 loss of up to EUR 1bln. Similarly – Land Securities (-14.5%), Engie (-3.8%), and Allianz (-2.8%) trade firmly into negative territory post-earnings.
Top European News
- Europe’s Banks Split on Economy as Virus Sparks Bad-Loan Jump
- French Economy Shows the Post-Lockdown Recovery Will Be Slow
- Johnson’s Virus Strategy Hardens Divisions in Fractious Britain
- German New Coronavirus Cases Rise for First Time in Four Days
In FX, already strained relations between Australia and China over the cause of COVID-19 have been compounded further by Beijing extending its ban on barley to meat from 4 of the former’s major exporters, with Aud/Usd extending its reversal from recent highs to sub-0.6450 at one stage overnight and Aud/Nzd pivoting 1.0650, as Nzd/Usd meanders between 0.6093-43 ahead of tomorrow’s RBNZ policy meeting. Note also, mixed survey news for the Aussie to digest via NAB’s April business survey as sentiment improved, but conditions deteriorated further awaiting Thursday’s labour data.
- GBP/EUR/CHF - The Pound is looking precarious again across the board, and perhaps the mere mention of negative UK rates from BoE’s Broadbent may have rattled a few longs with Cable just maintaining 1.2300+ status and Eur/Gbp hovering a few pips below 0.8800 even though the single currency has retreated against the Dollar around the 1.0800 handle where more decent option expiries reside (1.4 bn from the round number to 1.0805). Moreover, the Euro continues to unwind recovery gains vs the Franc towards 1.0500, while Usd/Chf drifts back from 0.9750 to eye 0.9700 again as the Greenback loses momentum in general. Indeed, the DXY has topped out within a 100.440-020 range despite more Fed push backs on NIRP before FOMC chair Powell speaks on Wednesday and CPI in the iterim.
- JPY/CAD - Both rangy and narrowly mixed against the Buck, with the Yen paring some losses either side of 107.50 and Loonie bouncing to within a whisker of 1.4000 from 1.4060+ against the backdrop of mildly firm crude prices in the run up to Canada’s leading index for April due at the same time as US NFIB.
- SCANDI/EM - In contrast to yesterday’s inflation beats, Norwegian GDP was weak and accompanied by significant upward revisions to 2020 deficit and spending forecasts, but the Nok has reversed initial or knee-jerk declines to around 11.1850 alongside the Sek to resume uptrends vs the Eur. Similarly, no sign of a turnaround Tuesday for the Try as it stages an encouraging effort to sustain retracement from record lows vs the Usd and almost revisited the 7.0000 mark.
In commodities, WTI and Brent futures eked mild gains early doors and extended on gains after a relatively contained APAC session after participants digested over-compliance from Saudi, Kuwait, and UAE. News-flow has once again been light for the complex throughout the first half of European trade, although participants will be eyeing the US-Sino trade saga after China released a second list of tariff waivers for US goods. Traders will also be eyeing airlines’ revised schedules to gauge the demand on that front, with Ryanair today stating that it plans to restore some 40% of scheduled flights from July 1st. Elsewhere, Saudi Aramco reported its earnings – although more stock-specific and backward-looking, the group expects demand decline and oil prices to weigh on FY20 earnings. WTI June towards the top of today’s USD 24.22-25.35/bbl band whilst Brent July sees itself between a USD 29.62-30.40/bbl intraday parameter. Spot gold meanwhile derives its price action from the Dollar index – the yellow metal fluctuates on either side of USD 1700/oz. Copper prices track stocks and sentiment lower, although the red metal resides firmly north of USD 2.30/lb
US Event Calendar
- 6am: NFIB Small Business Optimism, est. 83, prior 96.4
- 8:30am: US CPI YoY, est. 0.4%, prior 1.5%; 8:30am: US CPI Ex Food and Energy YoY, est. 1.7%, prior 2.1%
- 8:30am: US CPI MoM, est. -0.8%, prior -0.4%; 8:30am: US CPI Ex Food and Energy MoM, est. -0.2%, prior -0.1%
- 8:30am: Real Avg Hourly Earning YoY, prior 1.6%; 8:30am: Real Avg Weekly Earnings YoY, prior 0.7%
- 2pm: Monthly Budget Statement, est. $737.0b deficit, prior $160.3b
DB's Jim Reid concludes the overnight wrap
Forgive my selfishness but the question on when I could play golf again was high on my agenda after the U.K. adjustment to lockdown rules on Sunday night. Initially it seemed you could only play on your own as of tomorrow or with a member of your family. However just as I’d filed an adoption form to adopt a mate of mine from my golf club into my family, clarification came through that you can play with one member not in your household assuming that you social distance. Sadly I’ve got a late VC meeting tomorrow night on the day of the great reopening but it’s nice to now have to reengage with my weekly negotiating night with my wife as to when I’m allowed to play the following weekend. I’ve missed this great game of horse trading and accepting my weekly forfeits over the last two months.
I must admit in the two months of this crisis yesterday was perhaps the first day I could have sneaked out early to the golf course and not missed anything. In what was a fairly uninspiring day for markets the only news-flow we had to feed off were the various developments around countries re-opening, earnings, some new oil news, and also further debate around the German constitutional court decision last week. The end result was the S&P 500 basically being unchanged at +0.02%. However, the NASDAQ rose +0.78% as the index got a boost from Amazon, Apple and NVIDA in particular. The index is now up a fairly incredible (given what markets have been through in the last two months) +2.45% YTD which for context compares to a still impressive -9.30% decline for the S&P 500 and -18.31% for the STOXX 600 (following a -0.40% decline yesterday).
In terms of bonds, 10y Treasuries and European yields were broadly 2-4bps higher as some chatter about government supply pushed yields up a bit and there was also more expectation that tomorrow night Fed Chair Powell will further push back against negative rates being a desirable option in the US. Last night two Fed presidents, Evans and Bostic, spoke out against such a policy move anytime soon.
In credit HY spreads ended 1bp tighter in the US and -11bps tighter in Europe. Meanwhile in commodities WTI finished -2.43% and Brent -4.33% after an initial rally on reports that Saudi Arabia had announced a surprise move to cut output to the lowest in 18 years by next month. Oil was not able to rally on what was good news on the surface due in part to concerns on whether the largest oil producer in the world could turn around such a volume swing in a short window. There also remains worries that the cut is further proof that global demand is going to be poor for longer than markets may have been pricing.
Markets in Asia are heading lower this morning with the Nikkei (-0.22%), Hang Seng (-1.78%), Shanghai Comp (-0.59%) and Kospi (-0.84%) all down. The pick-up of COVID-19 cases again in some countries which had reopened like South Korea appears to be the main driver. In FX, the Australian dollar is down -0.51% as China moved to ban some meat imports from the nation while the Japanese yen is trading up +0.23% amidst the risk off. Elsewhere, futures on the S&P 500 are down -0.70% while yields on 10y USTs are down -2.3bps. Spot gold prices are also trading up +0.20% this morning. We have also had China’s April CPI and PPI data overnight with the former printing at +3.3% yoy (vs. +3.7% yoy expected) while, the later fell to -3.1% yoy (vs. -2.5% yoy expected).
In other overnight news, the New York Fed said that it will begin purchases of eligible ETFs under the SMCCF facility from today while adding that the PMCCF will launch “in near future”. The announcement also highlighted that corporate debt buying, including via ETFs, will occur in three stages: a “stabilization” phase, an “ongoing monitoring” phase, and a “reduction in support” phase while also listing an array of metrics that would guide investments, including transaction costs, bid-ask spreads, credit spreads, volatility and “qualitative market color.” Elsewhere, Fox Business has reported overnight that the White House has sent a letter to US Labor Secretary Eugene Scalia stating that the White House does not want the Thrift Savings Plan, which is a federal employee retirement fund, to have money invested in Chinese equities that numbers about $4bn in assets citing “grave concerns with the planned investment on grounds of both investment risk and national security.”
Back to yesterday and specifically the Merkel headlines around the German constitutional court decision. The German Chancellor said that while the court ruling “has great importance” it is also “solvable” if the ECB explains the OMT programme according to a story on Reuters. The comments were supposedly made behind closed doors at a CDU meeting. While we’re on the topic, in a blog published yesterday, DB’s Mark Wall looked at how to solve the PSPP conundrum in the face of the ECB versus the GCC. Mark concludes that this is by far the most serious challenge the ECB has faced with regards to potential legal constraints on its ability of operate the euro area’s single monetary policy. There is a non-negligible risk that the required deft solution evades the protagonists. Yet history tells us that, while the EU never takes the easiest routes to a solution, it tends to get there in the end. Europe in aggregate — and Germany within this — have no incentive not to solve this problem with the PSPP. The only question is how much market doubt and disruption comes first. See Mark’s note here .
As for the latest on the virus, it appears that New York City’s lockdown will likely now continue into June, as the city and the surrounding areas are not likely to meet the released criteria to reopen by May 15 – the earliest possible date for the state as a whole. While here in the UK the details of PM Johnson’s strategy included masks being encouraged but not compulsory, primary schools reopening in phases from June 1 and non-essential retail shops reopening and sporting events resuming behind closed doors from June at the earliest under “Step 2”. The “Step 3” phase is not expected to begin before July 4 and will see hairdressers, beauty salons and hotels potentially reopen albeit with social distancing.
In other news, the only data to flag from yesterday came just after we went to print with China’s credit data for April. The data was broadly better than expected. Aggregate financing of 3.09tn CNY compared to expectations for 2.76tn CNY while new yuan loans came in at 1.7tn CNY. That was down from 2.9tn in March but still ahead of the consensus for 1.3tn CNY.
In terms of the day ahead, the main data highlight will likely come this afternoon when we get the April CPI survey in the US. The consensus expects a -0.8% mom headline reading and -0.2% core print, which would be the lowest monthly core print since 1961. If that latter proves correct then that could see the annual core rate decline to +1.7% yoy from +2.1%, the lowest since 2017. Other data due out today includes the April NFIB small business optimism reading, April monthly budget statement and Q1 mortgage delinquencies and foreclosures. In Europe the only data scheduled is the April Bank of France industry sentiment print. Away from the data it’s a busy day for Fedspeak with Bullard, Kashkari, Harker, Quarles and Mester all due to speak. The ECB’s Stournaras is also due to speak on the implications of the German Constitutional Court’s decision. Earnings include Allianz, Duke and Vodafone.