The Fed's "administered market" just refuses to stop.
Global stocks and S&P futures rose to three-month highs as central banks looted shorts and as investors looked past the worst social unrest in decades and the risk of a second round of corona virus infections, to signs on even more fiscal and monetary stimulus propping up what BofA called "fake markets." The dollar fell for a fourth straight day, and yields rose.
S&P 500 futures surged alongside European stocks after initially dropping in the wake of President Donald Trump’s vow to deploy large numbers of troops if cities and states don’t act to contain violence from the ongoing riots, and reports China had ordered U.S. soybean purchases to be halted but Europe got the bulls back on track.
The European STOXX 600 index jumped over 1% to a fresh 12-week high as German Chancellor Angela Merkel sought to thrash out a second package to help the country’s economy. Germany’s DAX surged nearly 3% on news Lufthansa’s board had approved its government bailout and as Volkswagen and BMW shares rose as much as 7% at the prospect of a 5 billion- euro government-funded scheme to boost sales. Deutsche Lufthansa AG surged after the airline overcame most of the barriers to receiving a 9 billion euro ($10 billion) bailout from the government.
“In a way, it is remarkable that the market remains in this positive mood,” said Elwin de Groot, head of macro strategy at Rabobank. "Even with these rising protests in the U.S. and the situation in Hong Kong at the moment, the market is pushing on and seeing room for optimism."
Asian stocks also gained, led by finance and industrials, after rising in the last session. Trading volume for MSCI Asia Pacific Index members was 27% above the monthly average for this time of the day. Japan’s Nikkei rose 1.2% to its highest since late February in Asia and the Topix gained 1.2%, with Sysoft and DLE rising the most. The Shanghai Composite Index rose 0.2%, with Silvery Dragon and Beijing Jingyuntong Tech posting the biggest advances. Markets in Seoul, Taipei and Hong Kong also gained.
"This optimistic read for risk can only persist if measures like orders and employment continue to improve month to month,” said Alan Ruskin, chief international strategist at Deutsche Bank. "Early setbacks would be a very poor sign, but are not expected in the period immediately following the end of lockdowns."
World stock markets have rallied nearly 36% from March lows on hopes for a swift recovery from a pandemic that has killed nearly 375,000 people and crushed global growth as countries shut down to try and slow the virus’ spread. May Purchasing Managers Index data pointed to a fragile but encouraging recovery in global manufacturing, raising hopes that the worst is over.
The rally has come despite a slew of risks still on the horizon, including tense U.S.-China relations that may jeopardize a hard-won trade deal. The increasingly violent demonstrations across U.S. cities are another worry traders appear to be taking in stride.
"The main focus once again appears on the longer-term prospects of the easing of lockdowns across the world, though if the violence on U.S. streets continues for much longer, U.S. investors might have to cope with a lockdown of a different kind, imposed by the National Guard,” said Michael Hewson, an analyst at CMC Markets.
Bunds traded mixed amid a modest rise in the front end of the curve and an decline in the long end; ECB’s PEPP breakdown is due later Tuesday.
In FX, the Bloomberg Dollar index fell a fourth consecutive day and was at multi-month lows against most major currencies following a 5% drop for its main index in recent weeks. The euro got as high as $1.1160 on Tuesday, Britain’s pound topped $1.2530 for the first time in over a month and the Canadian and Australian dollars both rose around 0.4% as commodity markets continued their recoveries.
The Australian dollar held near a four-month high after the central bank left rates unchanged and indicated the impact from the coronavirus may not be quite as bad as earlier expected. The euro neared 1.12 against the dollar as equity markets rallied; The pound advanced to a month high following a report the U.K. may be willing compromise with the European Union in trade negotiations that resume on Tuesday. New Zealand dollar hovered around an almost 2-month high versus the greenback; the nation could remove most of its remaining restrictions on people and businesses as soon as next week after successfully wiping out the coronavirus. Oil edged higher toward $36 a barrel as the market waited to see if OPEC and its allies will extend record production curbs. The yen was sold in response to gains in Japanese stocks as the currency remains vulnerable to any increase in risk-on sentiment.
In commodities, Brent rose another 2% to just over $39 a barrel as traders expected major producers to extend output cuts at an OPEC+ meeting later in the week. U.S. crude was up 1% at $35.86 a barrel. Copper prices were at their highest in nearly three months on signs that demand from top metals consumer China was recovering. Stockpiles dropped at the fastest pace last week since September 2017, data showed. Aluminum producer Rusal said its customers were gradually returning after a major slump in April.
“This is real demand. Domestic investment is booming，especially in infrastructure. Supply and transport slowdowns from South America are also supporting prices,” said a copper trader in China.
Looking ahead, some of the key events coming up include the ECB which is expected to top up its rescue program with an additional 500 billion euros of asset purchases at a meeting on Thursday. Anything less than an expansion would be a big shock, Bloomberg Economics said. On Friday, the U.S. labor market report on Friday will probably show American unemployment soared to 19.6% in May, the worst since the Great Depression.
There is no major economic reports today, CrowdStrike and Zoom Video are among companies reporting earnings.
- S&P 500 futures up 0.3% to 3,064.50
- STOXX Europe 600 up 1.5% to 359.32
- MXAP up 1% to 154.77
- MXAPJ up 0.9% to 492.78
- Nikkei up 1.2% to 22,325.61
- Topix up 1.2% to 1,587.68
- Hang Seng Index up 1.1% to 23,995.94
- Shanghai Composite up 0.2% to 2,921.40
- Sensex up 1.5% to 33,802.34
- Australia S&P/ASX 200 up 0.3% to 5,835.09
- Kospi up 1.1% to 2,087.19
- German 10Y yield fell 1.7 bps to -0.419%
- Euro up 0.3% to $1.1165
- Italian 10Y yield rose 1.1 bps to 1.316%
- Spanish 10Y yield fell 2.4 bps to 0.553%
- Brent futures up 2.1% to $39.11/bbl
- Gold spot up 0.1% to $1,741.77
- U.S. Dollar Index down 0.3% to 97.57
Top Overnight News from Bloomberg
- President Donald Trump threatened to deploy the U.S. military to end “riots and lawlessness” across the country in a Rose Garden address punctuated by the sound of explosions as federal officers dispersed peaceful demonstrators just outside the White House gates
- Boris Johnson plans to re-set his government’s agenda with a major speech and a financial statement to prepare the U.K. for the new reality after the coronavirus pandemic. Amid forecasts of the worst recession in 300 years, Chancellor of the Exchequer Rishi Sunak is drawing up options to bolster the economy after the government withdraws its vast package of financial support in the months ahead, according to people familiar with the matter
- New York Governor Andrew Cuomo warned that mass protests against police violence risked accelerating the spread of coronavirus and could undo weeks of social- distancing efforts. The state imposed an overnight curfew Monday even as deaths there fell to their lowest daily level since March. Gilead Sciences Inc.’s treatment remdesivir showed only a limited benefit in a large trial
- Oil traded without direction for a second day as the market waited to see if OPEC and its allies will extend record production curbs
- German Chancellor Angela Merkel will seek to broker a compromise Tuesday on a second stimulus package to help Europe’s biggest economy recover from the deep recession caused by the coronavirus
- Amid forecasts of the worst recession in 300 years, the U.K. Chancellor of the Exchequer Rishi Sunak is drawing up options to bolster the economy after the government withdraws its vast package of financial support in the months ahead, according to people familiar with the matter
- U.K. house prices fell 1.7% m/m in May, the most in more than a decade as the coronavius lockdown shuttered the housing market, according to Nationwide Building Society
- France’s Finance Minister Bruno Le Maire said the economy will shrink 11% this year, more than the 8% previously predicted, and that it means France must continue with emergency support and pro-business reforms, and not raise taxes that could choke off growth
Asian equity markets traded with cautious gains following the positive performance on Wall St but with upside limited after US President Trump’s announcement that he will deploy military forces in response to the riots which triggered a mild pull-back in US equity futures. ASX 200 (+0.3%) and Nikkei 225 (+1.2%) were positive but with the gains in Australia capped by weakness in mining names and amid a largely uneventful RBA rate decision where the central bank kept rates unchanged and provided no major fireworks as expected, while Japanese exporters were bolstered by recent favourable currency flows. KOSPI (+1.1%) was also underpinned despite the weak Final Q1 GDP data which was revised higher from the preliminary reading but still showed the worst contraction since 2008 with Q/Q at -1.3%, although notable strength was seen in the top shipbuilders after Qatar Petroleum signed a KRW 23.6tln agreement with Daewoo Shipbuilding, Hyundai Heavy Industries and Samsung Heavy Industries for more than 100 ships. Elsewhere, Hang Seng (+1.1%) and Shanghai Comp. (+0.2%) were mixed with the mainland indecisive after the PBoC liquidity drain and due to ongoing US-China tensions, although it was also reported that the PBoC will purchase some bank loans issued to small firms in an effort to bolster lending, which it expects could spur about CNY 1tln of new unsecured loans. Finally, 10yr JGBs were initially marginally higher after a rebound off support near 152.00 and amid a similar recovery observed in T-notes from the prior session’s bear steepening and Amazon’s USD 10bln offering where the order book rose to above USD 30bln, although weaker results from the 10yr JGB auction later hampered prices.
Top Asian News
- Abu Dhabi Said to Near Pipeline Deal With GIP-Backed Group
- Bain Capital, Cyrus Emerge as Final Virgin Australia Suitors
- ‘New Era’ for China-Japan Ties Dissipates Over Trump-Xi Fight
Europe stocks continue to plough higher [Euro Stoxx 50 +3.6%] as the region built on the positive APAC handover, and with sentiment somewhat underpinned by the Foreign Ministry stating that they have no information regarding the US soybean halt leaked by sources yesterday. Europe sees more noticeable gains now that the DAX (+3.9%) joins the fray following a long weekend, and with US riots somewhat hampering gains in US futures. Cash bourses have tested several key levels, with DAX briefly breaching 12k, FTSE 100 topping 6200, Euro Stoxx 50 trading above 3150 and IBEX rising above 7400 in a fleeting move. German specifically, awaits updates from Chancellor Merkel this afternoon who is looking to agree a compromise around a second stimulus package. Sectors are mostly in the green with cyclicals heavily outpacing defensives. Energy outperforms whilst Healthcare and Consumer Staples lag. The breakdown also sees risky sectors topping the charts with Auto, Insurance, Banks and Oil & Gas among the top performers. Meanwhile, Travel & Leisure descended from its earlier top spot but remains in firm positive territory. In terms of individual movers, Lufthansa (+5.8%) opened higher by almost 9% amid the Co’s board approving revised terms for their EUR 9bln bailout. Bayer (+5.0%) remains supported this morning with the Co’s Glyphosate dispute progressing to the next phase today, with the first hearing before the Court of Appeals to occur today in San Francisco at 17:00BST. Elsewhere, Airbus (+5.1%), Safran (+3.6%), Thales (+2.2%) all glean support from an anticipated support package for the French aeronautical sector.
Top European News
- Merkel Lines Up as Much as 100 Billion Euros More in Stimulus
- France Says Virus Recession Will Be Deeper Than Expected
- World’s Biggest Jewelry Firm Moves to Recycled Gold, Silver
- Boris Johnson Revamps Agenda for Worst Recession in 300 Years
In FX, AUD/GBP/NZD - The Aussie has now extended its rally to fresh multi-month highs in wake of the RBA’s latest policy meeting that reaffirmed wait-and-see guidance and was accompanied by a less downbeat economic outlook based on some sectors re-opening from COVID-19 lockdown sooner than previously envisaged. Moreover, the Q1 current account surplus beat consensus and net export contribution firmer than forecast, suggesting an upside bias for Wednesday’s GDP data and all helping to lift Aud/Usd through 0.6865, while Aud/Nzd has rebounded over 1.0800 again and towards 1.0875 amidst various offers in Nzd/Usd just above 0.6300. Note also, the Kiwi has been hampered by a bigger than expected decline in NZ Q1 terms of trade and further, albeit less pronounced weakness in building consents. Conversely, the Pound continues to claw back May’s largely seasonal losses with Cable now above 1.2550 and testing the 200 DMA (1.2571 vs 1.2575 at best thus far), but Eur/Gbp retreating further from yesterday’s 0.9000+ peaks to sub-0.8900 at one stage on the back of some positive reports indicating leeway on the UK side of the Brexit divide on fishing and the level playing field if the EU softens its stance on regulatory alignment and fishery access.
- EUR/CAD/DXY - The Euro and Loonie are taking advantage of deeper US Dollar depreciation, as the index clearly breaches Fib support (97.837), the psychological 97.500 level and the next downside chart target at 97.446 (March 16 low) before finding a few underlying bids ahead of 97.400. In contrast, Eur/Usd has now overcome resistance between 1.1163-67 and eyeing 1.1200, while Usd/Cad is testing 1.3500 with some assistance from crude climbing on OPEC+ output cut extension momentum, though oil prices paring back from circa Usd36.50 and Usd39.50 for WTI and Brent respectively on talk that Russia and other producers prefer 1 month on top of the current 2 that expires at the end of June.
- CHF/JPY/SEK - Relative G10 underperformers or laggards, as the Franc retreats below 0.9600 vs the Buck and under 1.0750 against the Euro after a sharp fall in Swiss retail sales, modest recovery in the manufacturing PMI and fairly tame rises in weekly sight deposits. Similarly, the Yen has reversed from 107.50+ to within a whisker of Monday’s 107.85 low amidst a broad recovery in risk sentiment after China denied knowledge of any suspension of soy purchases from the US under the terms of the Phase 1 trade deal, while the Swedish Crown has faded into 10.4190 vs the Euro following a downbeat NIER business survey.
- NOK/EM - The Norwegian Krona is outpacing its Scandi and Eurozone counterparts due to the aforementioned buoyancy in oil and with the manufacturing PMI not far from the key 50.0 level, while EM currencies are firmer across the board on a combination of renewed risk appetite and the ongoing Greenback weakness noted above.
In commodities, WTI and Brent futures extend on gains amid the broader risk appetite coupled with USD softness heading into the OPEC+ confab, albeit a date and timing are yet to be confirmed. Participants will be eyeing whether OPEC continues its current deal of tapering cuts from July or extend this. Saudi is reportedly vying for current cuts of around 10mln BPD to be extended to year-end, while Russia is opting for a one-month extension to the existing curbs, according to sources. Many believe that middle ground is likely to be found between the two nations at the next meeting. Some also advise on keeping US influence on the radar, given how the US President and oil-state Republicans welcomed Saudi’s over compliance. “We do not entirely rule out that OPEC+ could extend the 9.7 mb/d cut for the duration of 2020, especially if President Trump makes the specific ask and offers sufficient inducements”, RBC writes. WTI July eyes USD 36.50/bbl (vs. low 35.28/bbl) whilst the Brent August takes aim at USD 40.0/bbl, having printed a base at 38.26/bbl. Elsewhere spot gold does not see much action despite the DXY’s continuing decline amid fighting forces with investors shifting to riskier assets whilst a weaker USD keeps the yellow metal buoyed around USD 1740/oz. In terms of base metals, copper tracks stocks higher with participants also noting that focus for the metals remain on the demand prospect from reopening economies.
US Event Calendar
- Wards Total Vehicle Sales, est. 11.1m, prior 8.58m
DB's Jim Reid concludes the overnight wrap
In spite of what was some generally negative newsflow yesterday, global markets continued to climb as hopes for further economic recovery gathered more momentum. Indeed, by the end of the session, the S&P 500 was up a further +0.38% at its highest level since the pandemic hit, while the NASDAQ was up +0.66%, a move that left the tech index less than 3% off its all-time closing high back in February. Similar to last week, some industries that underperformed early in the pandemic were the top performing industries in the S&P 500 with Autos up +3.25%, Real Estate up +2.10% and Banks up +1.96%. This comes as some higher-growth industries like Pharmaceutical Biotech (-1.51%) and Semiconductors (-1.16%) lagged on the day.
This is a continuation of the rotation out of “growth” stocks and into more “value” oriented securities that we saw last week. Our Head of Asset Allocation, Binky Chadha, highlighted this in a report last week looking at the strength of the mega-cap growth stocks through the last two months. These 10 Mega-cap growth stocks (MCG) make up 27% of the S&P 500’s market cap and have surpassed their pre-Covid-19 peak. MCG stocks are those with a market cap over $150bn today and returning more than 20%+ annually for the last 5+ years. They are Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Netflix, Nvidia and Adobe. Year-to-date MCG stocks are up roughly 15% through the end of last week, compared to the S&P 500 ex-MCG which is down around 15% and had been range-bound since mid-April before a small pick up last week. Meanwhile, the large cap growth stocks continued rallying during that period, having also outperformed on the way down (-26% compared with - 36% for the rest). These ten stocks that have buoyed the S&P 500 have benefitted from the pandemic as we’ve seen accelerating trends towards e-commerce, cloud migration, digital payments and online content production. However Binky has moved from an implicitly overweight position on MCG in his sector allocations, to neutral as the valuations are now fully pricing the upside. Specifically he has moved Tech from overweight to neutral, while also increasing exposure to cyclical growth by moving the Financials, Industrials, and Energy sectors to overweight. See the full piece here.
Back to markets and Europe out-performed yesterday even as a number of countries including Germany were closed. The FTSE 100 (+1.48%) and the CAC 40 (+1.43%) managed to start the month with strong performances. Interestingly the pound gained +1.26% against the dollar, its best day since the 27 March. Along similar lines 10yr Gilt yields rose +4.7bps to 0.23%, the largest one day rise since early April. Sterling has now risen in 5 of the previous 6 sessions, and is nearly at 4 week highs ahead of another round of Brexit negotiations today between the UK and the EU on their future relationship. The rally coincided with news that PM Johnson is going to unveil a major fiscal event in the coming weeks. So maybe markets liked the potential growth element of what that might mean rather than how it might be paid for.
A quick check on markets this morning shows the Nikkei (+1.09%), Hang Seng (+0.38%) and Kospi (+0.75%) all up while bourses in China are flattish. Futures on the S&P 500 are down -0.54% however after President Trump called on governors and mayors to “dominate the streets” and announced that he was sending thousands of heavily armed military personnel into the nation’s capital to quell the unrest.
In other overnight news, Bloomberg reported that the OPEC+ is likely to discuss a short extension of their production cuts to maintain record output curbs for an extra one to three months, a proposal favoured by Saudi Arabia and its Gulf allies. However, the delegates are still wrangling to settle on a new date for meeting after the idea of bringing forward the meeting by a few days to June 4 was first floated. WTI oil prices are trading up +0.51% this morning at $35.62. Meanwhile, the PBOC said overnight that it will temporarily purchase loans made to small businesses from some local banks, a new policy to aimed boost the supply of lending to the real economy.
Back to yesterday, and as markets continued to rally it was interesting that Gilead fell -3.43% as they announced results from a Phase 3 trial of remdesivir for patients with moderate Covid-19. While they found that patients in the 5-day treatment group “were 65 per cent more likely to have clinical improvement at Day 11 compared with those in the standard care group”, it was also the case that the group receiving the 10-day treatment course didn’t see a statistically significant improvement.
The other story in the background in recent days has been the increase in tensions between the US and China, and yesterday Bloomberg reported that Chinese government officials had told state-owned traders Cofco and Sinograin to stop their purchases of some US farm goods as China took stock of the current escalation in tensions. The decision certainly raises questions as to the fate of the Phase One trade deal between the two, which was only signed in January, and follows President Trump’s criticisms of China on Friday. Speaking of trade, it is worth highlighting that the US trade representative Robert Lighthizer is scheduled to speak on Thursday June 4 at the Economic Club of New York (2pm to 2:45pm). The topic is "next steps and potential outcomes for trade talks around the world in the midst of the Coronavirus pandemic". So one to watch.
Elsewhere in Europe, we got two notable reports from MNI. The first was on this week’s ECB meeting, where they reported sources who said that many members of the Governing Council would oppose adding to their €750bn Pandemic Emergency Purchase Programme. There seemed to be an acknowledgement that it would eventually get extended, but a senior Eurosystem official said that doing so just 3 months into a programme due to last for 9 would appear “a little bit panicky”. The other report was on the European Commission’s proposal for a €750bn recovery fund, which said that the so-called “Frugal Four” member states (Austria, Denmark, the Netherlands and Sweden) would issue a list of their objections in the coming days. The plan would need to be decided by unanimity, so these states clearly have a potential role to play here.
Against this backdrop sovereign debt sold off across Europe, with yields on 10yr bunds climbing +4.5 bps to close at around -0.40% for the first time since mid-April. It was a milder move for US Treasuries, with 10yr yields rising by +0.7bps to 0.659%. Even with the MNI stories there was a further narrowing in peripheral spreads, with those on 10yr Italian and Spanish debt tightening by -3.5bps and -3.1bps respectively.
What might have encouraged optimism yesterday were the manufacturing PMI numbers, which showed some improvement from the dire numbers back in April. The overall number for the Euro Area was revised down a tenth from the flash reading to 39.5, but this was still up from the 33.4 reading back in April. In addition, all the other European countries reporting showed an improvement into May. Rather surprisingly, the strongest European reading was actually in Italy, where the PMI rose to 45.4 (vs. 36.8 expected). Nevertheless, it’s worth bearing in mind that 45.4 is still below the 50-mark that separates expansion from contraction, so we shouldn’t get too excited yet. It was also the country that had the worst starting point. We also saw the ISM manufacturing number from the US yesterday, which rose to 43.1 in May, up from 41.5 in April. However, as with the PMIs this is still pretty bad in absolute terms, even if it’s an improvement from April.
It’s a pretty quiet schedule over the day ahead, with much of the attention on the aforementioned Brexit talks. Data includes UK mortgage approvals and consumer credit for April.