Slumping Futures Spike After ECB Nearly Doubles Emergency QE Program

When even Bloomberg has articles such as this one "A Stock Melt-Up Looks Like the Fed’s Latest Feat of Engineering", you know it was time for the Fed to ease off the overnight ramp gas pedal, and that it was time for the insane rally from the past 2 months to ease a bit. And it did... until the ECB decided to pick up the monetary firehose when at 745am the European Central Bank announced it would nearly double its emergency QE to €1.35 Trillion from €750BN and extend it to at least June 2021, sparking a new bout of buying.

And while U.S. stock index futures slipped on Thursday as a rally fueled by optimism over an economic rebound from a coronavirus-led downturn ran out of steam, the ECB bailed out all those retail momentum daytraders who were about to suffer their first down day in over a week, when it announced a massive expansion to its QE program, which not only send stocks surging, but also pushed the Euro to a nearly three-month high, because in today's banana world printing money is bullish for the currency (and why not, we already showed that easing is deflationary).

Wall Street’s indexes had rallied in the previous few sessions, with the Nasdaq inching closer to a record high on hopes of a rebound from the economic slump and a spate of data that has been less dire than feared. The tech-heavy index was just 1.4% away from overtaking its all-time closing high set in February even though U.S.-China tensions continued to simmer as Hong Kong’s Legislative Council passed a bill that would criminalize disrespect of China’s national anthem on the anniversary of the Tiananmen Square massacre, a move seen as the latest sign of Beijing’s tightening grip on the city.

While Europe's Stoxx 600 dipped in early trading after markets were disappointed by the €130BN German stimulus which largely left out domestic automakers in the cold, it pared all losses from earlier in the session after the ECB's announcement. Stocks in Asia were mixed, with an MSCI benchmark of global equities falling just short of recouping three-quarters of its tumble from a February record.

Earlier in the session, Asian stocks gained, led by consumer staples and health care, after rising in the last session. Most markets in the region were up, with Thailand's SET gaining 2.3% and Australia's S&P/ASX 200 rising 0.8%, while Jakarta Composite dropped 0.5%. Trading volume for MSCI Asia Pacific Index members was 12% above the monthly average for this time of the day. The Topix gained 0.3%, with DLE and ITmedia rising the most. The Shanghai Composite Index retreated 0.1%, with Yongyue Science & Technology and Zhejiang Shengyang Science & Technology posting the biggest slides

With the ECB having pleasantly surprised traders who were looking for a €500BN PEPP expansion, investors will now keep an eye on U.S. employment data that may signal the extent of the damage to jobs, and which will likely print at just under 2.1 million; indicatively on most previous Initial Claims days, the market has soared so there is no reason to expect any different today. As Bloomberg adds, "traders are searching for further tailwinds for risk assets without more evidence that reopening economies can trigger a rebound in corporate earnings", and they are finding all the "evidence" they need in central bank actions.

“We’ve had an over-extension, and a bit of altitude sickness is creeping in,” said Neil Wilson, chief market analyst in London for Markets.com.

And speaking of stimulus, late on Wednesday Chancellor Angela Merkel’s coalition agreed on a sweeping 130 billion-euro package designed to spur short-term consumer spending and get businesses investing again.

In rates, Treasuries are slightly richer across the curve, with yields within 1bp of Wednesday’s closing levels as narrow ranges dating back to start of April broadly hold. Bunds underperform after Germany’s EU130b stimulus package exceeds earlier estimates. Treasury 10-year yields around 0.760%, richer by ~1.5bp on the day; long-end continues to lag slightly with 5s30s and 10s30s mildly steeper. Bunds lag by ~1bp vs. Treasuries, gilts trade broadly in line. As Bloomberg notes, Asia-session demand emerged with 10-year yields in 0.70%-0.75% range, a theme of recent weeks

In FX, the dollar initially halted a five-day losing streak and rose against all its Group-of-10 peers except the franc, however it reversed all gains and then some after the ECB surprised with a larger than expected PEPP expansion, which sent the EURUSD as high as 1.1272, a three-month high. The pound sank after Germany’s ambassador to the EU said there had been no real progress toward a trade deal in its negotiations with the U.K. The Norwegian krone fell for the first time in eight days as oil prices declined and the yen fell to a 2-month low on the back of the stronger dollar.

In commodities,  West Texas oil declined from a three-month high as OPEC+ unity was threatened by a long-running feud and U.S. data cast doubt on the strength of the demand recovery. Gold was slightly higher at $1,707 per oz.

Expected data include jobless claims and trade balance. Broadcom and Gap are among companies reporting earnings

Market Snapshot

  • S&P 500 futures down 0.3% to 3,107.75
  • STOXX Europe 600 down 0.5% to 367.23
  • MXAP up 0.2% to 157.51
  • MXAPJ up 0.4% to 506.96
  • Nikkei up 0.4% to 22,695.74
  • Topix up 0.3% to 1,603.82
  • Hang Seng Index up 0.2% to 24,366.30
  • Shanghai Composite down 0.1% to 2,919.25
  • Sensex down 0.3% to 34,005.85
  • Australia S&P/ASX 200 up 0.9% to 5,991.82
  • Kospi up 0.2% to 2,151.18
  • German 10Y yield rose 0.6 bps to -0.348%
  • Euro down 0.3% to $1.1200
  • Italian 10Y yield rose 5.2 bps to 1.382%
  • Spanish 10Y yield rose 4.0 bps to 0.65%
  • Brent futures down 1.7% to $39.13/bbl
  • Gold spot up 0.3% to $1,704.33
  • U.S. Dollar Index up 0.3% to 97.60

Top Overnight News

  • German Chancellor Angela Merkel’s coalition agreed on a sweeping 130 billion-euro ($145 billion) stimulus package designed to spur short-term consumer spending and get businesses investing again
  • The U.K. is heading for a damaging showdown with China as it takes on Beijing over Hong Kong and Huawei Technologies Co.
  • Officials in Germany, France, Italy and Spain are closely monitoring contagion data to see if looser controls are backfiring. That appears not to be the case, even if there have been some outbreaks connected to slaughterhouses
  • Bond yields in Europe’s safest and riskiest markets are converging as the region’s central bank and governments ramp up policy stimulus to counter a recession caused by the coronavirus
  • French Budget minister Gerald Darmanin says the budget deficit will rise to 11.4% of economic output in 2020

Asian stocks were mostly higher as the region partially upheld the firm handover from Wall St where sentiment was underpinned by recovery hopes and encouraging data after ISM Non-Manufacturing PMI topped estimates and ADP employment numbers showed a much narrower than feared drop ahead of Friday’s NFP release. ASX 200 (+0.8%) was lifted by broad sector gains aside from commodity related stocks, in particular gold miners after the precious metal briefly slipped below the USD 1700/oz focal point, while Nikkei 225 (+0.4%) was underpinned by the favourable currency moves but with gains momentarily reversed amid fears of a second virus wave in Tokyo after a jump in cases recently prompted an alert and with officials said to consider flagging the city as an area where coronavirus is increasing. Hang Seng (+0.2%) and Shanghai Comp. (-0.1%) were mixed with mainland China the laggard following another substantial liquidity drain and as trade tensions remained in the spotlight with the US to designate additional Chinese media outlets as foreign missions and announced a ban on Chinese airline flights to the US in response to China refusing to allow US airlines to resume passenger service, although Beijing has since changed its tune regarding this. Furthermore, it was also reported that Chinese state-controlled companies cancelled some shipments from US farm exporters including livestock feed, corn, pork, cotton and have postponed some meat imports. Finally, 10yr JGBs declined at the open after the sell-off seen in USTs and which saw the benchmark 20yr JGB yield at its highest level in more than a year, while prices were also pressured after all metrics of the 30yr JGB auction pointed to a weaker result.

Top Asian News

  • Tokyo Virus Cases on Uptrend as Double-Digit Rise Continues
  • Li’s Support for Street Vendors Spurs China Stock Market Frenzy
  • Tsinghua Holdings Yuan Bond Due 2022 Drops Most in Six Months
  • Singapore Sees Higher Community Virus Cases After Partial Reopen

European equities trade with modest losses [Euro Stoxx 50 -0.7%] – with some touting potential profit-taking ahead of key risk events including the ECB’s latest policy decision later today (full preview available on the Research Suite). At the same time, tomorrow’s NFP could also prove to be another dire reading. Macro-news flow has remained light early-doors, although reports suggested US Department of Transport ordered to ban Chinese passenger airlines from flights to the US from June 16th in response to China refusing to allow US airlines to resume passenger service, whilst China's Agricultural Ministry confirmed they are continuing to purchase US soybeans, which followed reports Chinese state-controlled companies reportedly cancelled some shipments from US farm exporters. Back to Europe, sectors are mostly negative with cyclicals largely lagging defensives – suggesting more of a risk-averse mood. The sectorial breakdown adds little colour to the current state of play, although its seemingly a mirror image of yesterday’s performance – possibly implying consolidation. In terms of movers and shakers, German auto names are pressured (Daimler -4%, BMW -1.9%, Volkswagen -1.8%) after the German relief package failed to include incentives to purchase petrol and diesel vehicles. Meanwhile, LVMH (-1.5%) drifted lower after the open after the group confirmed source reports that it is backing away from the Tiffany (-0.7% pre-mkt) deal for now. On the flip side, AstraZeneca (+1.8%) holds onto gains as the Trump admin selected the Co’s COVID-19 vaccine as a candidate finalist.

Top European News

  • ECB Told to Be Bold With More Cash for Recovery: Decision Guide
  • Rolls-Royce Plans 3,000 U.K. Job Cuts as Aviation Contracts
  • Mass Mink Cull Ordered on Dutch Farms to Stem Coronavirus Spread
  • Remy Cointreau Jumps on Upped 1Q Guidance, FY20 Earnings Beat

In FX, a quirk of fate perhaps or simply coincidental, but a broad and firmer Dollar recovery from recent lows amidst some signs of sated risk appetite has culminated in Eur/Usd, Usd/Jpy, Cable, Usd/Chf, Aud/Usd, Nzd/Usd and Usd/Cad all close to big figures, at 1.1200, 109.00, 1.2500, 0.9600, 0.6900, 0.6400 and 1.3500 respectively. Meanwhile, the DXY has pared more losses from a minor new base at 97.180 on Wednesday to trade nearer the top of a 97.638-314 range awaiting final pre-NFP employment signals via Challenger layoffs and initial claims, though latter not the survey week for Friday’s BLS report. Back to the other major currencies, Germany’s bigger than expected Eur130 bn fiscal package gave the Euro enough momentum to breach Fib resistance at 1.1237, but not the amount required sustain 1.1250+ levels, and decent option expiry interest may now keep the headline pair in check ahead of the ECB policy meeting, if not the NY cut given 1 bn rolling off between 1.1245-50 and 1.4 bn just above 1.1200 and yesterday’s 1.1190 low from 1.1205 to 1.1215. However, the ECB event and Lagarde presser will be pivotal with focus on more PEPP stimulus or a pause until September, with the market split over the 2 main potential outcomes – for a full preview see the Newsquawk Research Suite. Elsewhere, the Yen is still eyeing broad risk sentiment, Greenback moves and US Treasury yields/spreads for direction, but also Japanese budget supplements to counter COVID-19 with the latest injection said to be equivalent to 2% in terms of real GDP. Technically, 109.38 (April 6 lower high) has not seriously been tested, but pull-backs could be limited following the rally through key chart levels on the way up and beyond 109.00. Turning to the Pound, stops were tripped at 1.2525 after a fade ahead of 1.2600 and the midweek 1.2615 peak pulled Sterling back below the 100 DMA (1.2564) against the backdrop of rising no deal Brexit prospects assuming no breakthrough in trade talks or an extension to the transition period, while the Franc is firmer despite deflationary Swiss CPI data, as Eur/Chf retreats towards 1.0750 from over 1.0800 yesterday. Down under, the Kiwi is holding up better than its Antipodean neighbour as Aud/Nzd hovers around 1.0750 and the Aussie digests somewhat mixed macro news in the form of weak retail sales vs a wider than forecast trade surplus. Last, but not least, the Loonie is still reflecting on a relatively encouraging if not quite upbeat assessment and outlook from the BoC in the run up to Canadian trade data and a speech from Gravelle later.

  • SCANDI/EM - The Swedish Krona is underperforming on the back of a steep decline in new orders, as Eur/Sek rebounds further from sub-10.4000, but Eur/Nok has recoiled from an oil-induced spike even though latest reports suggests no OPEC+ meeting this week and crude prices remain off their recovery peaks. On the EM front, widespread depreciation or retracement in line with the less bullish risk tone and Dollar reprieve, as the Rand and Rouble reverse back below 17.0000 and 69.0000 handles respectively.

In commodities, WTI and Brent futures remain subdued in European trade as traders are no closer to clarity on an OPEC+ meeting date – with conflicting sources noting a meeting in late June, whilst others highlight the possibility of a meeting today. Either way reports yesterday posited that Saudi and Russia have agreed to extend current curbs for an extra month – albeit the two nations want compliance among other states, with Iraq and Nigeria letting down the group after complying only 42% and 33% respectively. Reports early-morning also touted a potential delay to the July Official Selling Price (OSP) release until at least Sunday – possibly alluding to a meeting before then based on history and assuming no further delay, with sources also noting the possibility of a meeting this week if non-complying countries pledge to improve compliance. However, reports via journalist Reza Zandi notes the OPEC+ meeting is unlikely to be held today amid complicated negotiations for compliance, "As of now, the next meeting is scheduled for 9-10 June, as scheduled previously". Meanwhile, Russian Energy Minister Novak emerged on the wires, again with little clarity in regard to a meeting date, but stated that Russia is in talks with the US on the oil market – but does not expect US regulators to import production curbs. WTI July futures trade sub-USD 37/bbl and Brent August remains sub-USD 40/bbl, both off worst levels of USD 36.40/bbl and USD 39.03/bbl respectively. Elsewhere, spot gold was relatively flat on either side of 1700/oz amid light news flow and heading into the ECB monetary policy decision, but picked up in recent trade to trade closer to 1710/oz. Copper prices have retreated after failing to sustain prices above USD 2.5/lb as the red metal tracks sentiment and the brewing US-Sino tensions in the background.

US Event Calendar

  • 8:30am: Trade Balance, est. $49.2b deficit, prior $44.4b deficit
  • 8:30am: Nonfarm Productivity, est. -2.7%, prior -2.5%; Unit Labor Costs, est. 5.0%, prior 4.8%
  • 8:30am: Initial Jobless Claims, est. 1.84m, prior 2.12m; Continuing Claims, est. 20m, prior 21.1m
  • 9:45am: Bloomberg Consumer Comfort, prior 35.5

DB's Jim Reid concludes the overnight wrap

After one day of rain during a 10 week lockdown where my wife has single handedly planted well over a 100 new plants, shrubs and hedges, yesterday we spent every hour (between bouts of incredibly hard work) checking the latest percentage probability of rain in our area as my wife has got fed up of constant watering and there was finally a promise of rain. The probability was between 40-80% for every hour between 7am and 7pm. In the end we got probably about 5 drops. Nice to find something that makes a strategist feel good about his forecasts. Meanwhile the rain dance in the Reid household continues. Although it does pause when a game of golf is around the corner.

Perhaps all-time equity market highs are around the corner too as the relentless rally continues. Talking of forecasts it was interesting to look back on the EMR from 20th April (in what feels a lifetime ago) where we wrote the following “…. when central banks have so far pumped in an annualised $23.4 trillion into the financial system you can see how it’s hard to get a feel for where markets can go. Clearly they won’t keep up that pace of liquidity injections unless economies fall even further but could you really have a situation in 1-2 months’ time where economies are still struggling to fully open and yet equity markets are back at record highs? I don’t think so but you couldn’t rule it out given the ginormous liquidity injections. Crazy times and we haven’t even mentioned the government injections.”

I’ve thought a lot about the themes of this paragraph for the last 6-7 weeks and the only part of this that I now regret are the words “I don’t think so”. The rally has indeed been faster than surely anyone could have imagined but it was starting to be clear in late March and April that we were dealing with levels of stimulus that were going to be almost exponential relative to anything seen before in history. As you know we are still having a big debate here at DB as to whether this crisis is going to be deflationary or inflationary. I still think inflationary, but the case for both are laid out in Konzept here. Interestingly Oli Harvey, who is on the inflationary side, put out an interesting piece earlier this week (link here ) that looked at UK April money supply data for the UK and which showed another significant rise in aggregate money balances, even as households delevered. This is massively different from 2009. After a record rise in March, the April increase was the second largest on record. Oli ascribes the rise in household deposits to expansionary fiscal policy, as well as corporate borrowing to fund labour compensation. Should money creation continue at this pace, given the dramatic fall in real GDP, the effects should be inflationary in the medium to long-run. This may ultimately depend on whether fiscal policy continues to be expansionary though and that could be the key to resolving this debate. My view is that it’s going to be very difficult to push the fiscal genie back in the bottle in the months, quarters and years ahead.

Back to yesterday and risk assets advanced to new post-pandemic highs yesterday as the levels of risk appetite in markets appeared almost insatiable. The S&P 500 breached the 3100 barrier yesterday with a +1.36% advance, as bank stocks (+5.21%) led the way amidst a sharp rise in bond yields. That’s the 4th consecutive advance for the S&P, which is the first time that’s happened since early February. It’s is only now -7.78% from the all-time highs in February. Tech stocks lagged again yesterday, with the NASDAQ up by “just” +0.78%. But even that still left the index only -1.37% down from its all-time high back in February. Meanwhile volatility continued to decline, with the VIX index down a further -1.18pts to 25.7pts, its lowest level since late February. Bloomberg’s index of US financial conditions eased to its most accommodative level since late February too.

As with the day before, Europe was where the even bigger moves were, with the STOXX 600 up +2.54%. That comes ahead of today’s ECB meeting, where investors are hoping that the central bank will add further monetary stimulus, which alongside the switch back into value over growth has perhaps been helping to support the rally over recent days. In terms of what to expect, our European economists write in their preview (link here) that they expect that the €750bn Pandemic Emergency Purchase Programme announced in March will be doubled in size to €1.5tn and extended to mid-2021. The MNI story earlier in the week that suggested that some of the committee are not ready to rubber stamp the expansion hasn’t dampened expectations, but the ECB do have a habit of saving their largest responses to when the market is screaming out for it not when there is a big rally ongoing.

However our economists also expect large downward revisions to the staff forecast which may give them cover to act further, with President Lagarde having already indicated that their forecast is between the “middle” and the “severe” scenarios the ECB had previously discussed, implying GDP growth this year between -8% and -12%. The other interesting aspect to watch out for today will be how Lagarde responds to questions on the German constitutional court ruling, which challenged the ECB’s previous public sector purchase programme in a court ruling last month.

Speaking of further stimulus, last night Chancellor Merkel’s ruling coalition struck a deal on another German fiscal stimulus package after multiple days of negotiations. The euro jumped to a 12 week high on the announcement before settling at up +0.56% for the day, the 7th straight session higher for the currency. German equities may have been anticipating the approval of further funds with the DAX rallying +3.88% yesterday, one of the best performing equity indices in Europe. The plan calls for roughly €130bn in measures including a time-limited value-added tax cut worth €20bn, investments in digitization and electric vehicles, and a €300 per child one-off payment to families. Hard-hit businesses in sectors like tourism and hospitality will receive €25bn from the new plan, while the government will also help support localities that have struggled given the lack of business tax dollars.

A quick check on markets overnight shows that bourses in Asia might finally be pausing for breath. Indeed despite there being no new newsflow to highlight, the Nikkei (-0.13%), Hang Seng (-0.11%) and Shanghai Comp (-0.21%) have all erased earlier gains to trade slightly lower while the Kospi (+0.23%) and ASX (+0.62%) have also retreated from earlier highs. Futures on the S&P 500 are also down -0.24% this morning while WTI oil is down -2.15% to $36.49. In FX, the US dollar index is up +0.18%. Spot gold prices are also up +0.24%.

In other news, the US Senate cleared changes to the Paycheck Protection Program that will allow small businesses more flexibility in using the rescue loan funds. The bill would extend an eight-week period - when proceeds must be spent for loans to be forgiven - to 24 weeks or until the end of the year, whichever comes first. Businesses would also have as long as five years, instead of two, to repay any money owed on a loan, and they could use a greater percentage of proceeds on rent and other approved non-payroll expenses.

Given the market mood yesterday it was a bad time to be in safe havens. The US dollar fell by -0.41%, down for a 5th straight session to its weakest level in nearly 3 months, while the Japanese yen was the worst-performing G10 currency for a 2nd day running. Gold also tumbled, down -1.62% in its biggest move lower in over 6 weeks, and 10yr Treasury yields were up +6.1bps to 0.746%. It was the largest one day rise in rates since 18 May, and the highest closing level since 14 April. Sovereign debt more broadly sold off, with 10yr bund yields also up +6.1bps to -0.35%, their highest level in nearly 2 months. Interestingly, inflation expectations have also been the beneficiary of the recent rally, with five-year forward five-year inflation swaps in the Euro Area now at 1.02%, their highest level in over 7 weeks. The (all time) low was at 0.72% on March 23rd. The US equivalent is at 1.82% and up from the all-time low of 1.22% on March 12th.

Oil was not an exception to the risk-on sentiment yesterday, even after falling early in the day on headlines that the OPEC+ meeting was in doubt thanks to a dispute over non adherence to oil quotas, with Russia and Saudi Arabia unhappy at others who haven’t stuck to their commitments. This has become increasingly important as the recent rally in oil prices has encouraged US shale producers to restart some production. Brent crude had been trading above $40/bbl prior to the report, but fell back afterwards as investors reacted to the prospect that production cuts might be eased next month in response. While the commodity was down just over -2% following the news, it ground higher throughout the day to finish the session up +0.56% at $39.79.

Turning to the data now, and the story from yesterday’s services and composite PMIs echoed that from Monday’s manufacturing PMIs in showing a recovery from April’s numbers, but remaining well inside contractionary territory (except in China). For the Euro Area, the final composite PMI was revised up to 31.9 (vs. flash 30.5), and was well above April’s 13.6 print, while the readings for France (32.1) and Germany (32.3) were also revised up from the flash reading. This is a positive sign given that the revisions reflect 6 extra days of the survey period relative to the flash PMIs, suggesting that the economic situation is improving as the various countries are gradually reopening. Nevertheless, the 31.9 reading for the Euro Area as a whole is still well below even the lowest point after the GFC, which just shows how far there is still to travel before we return to something like normality again.

The other main release was the ADP employment report for May, which showed a much better-than-expected -2.760m decline (vs. -9m expected), while the extent of the job losses the prior month was also revised lower. That’s a positive signal ahead of tomorrow’s jobs report, which is expected to show a further deterioration in the state of the US labour market. As a reminder, our US economists are predicting a -6.1m decline in nonfarm payrolls, with the unemployment rate rising to 19.1%. It’ll also be worth looking at today’s initial weekly jobless claims, where our economists are expecting a further 1.8m claims. Finally, the ISM’s non-manufacturing index for May also beat yesterday with a 45.4 reading (vs. 44.4 expected), though the employment component came in at just 31.8.

To the day ahead now, and the highlight is expected to be the aforementioned ECB meeting and President Lagarde’s subsequent press conference. Otherwise, we’ll also get data on Euro Area retail sales for April, as well as May’s construction PMIs from Germany and the UK. Over in the US, there’s also the weekly initial jobless claims release, along with April’s trade balance.