Thursday May Be The New Tuesday, But Friday Is Just Friday (For Now)

Thursdays may be the new Tuesdays (if only this week), but so far Fridays are still just Fridays, and no mysterious overnight levitation is here to open the market 0.5% higher. The Nikkei 225 retraced a fraction of Thursday’s losses overnight as the positive close on Wall Street and a dovish interpretation of Hilsenrath’s WSJ piece yesterday allowed the Japanese indices to recover from the worst levels of the week. USD/JPY has pared Thursday’s bounce and trades lower as the Bank of Japan’s minutes showed one member of the board proposing the advantages of limiting the bank’s QQE program to just two years in order to avoid financial imbalances. Overnight in China, as we warned yesterday, the liquidity situation got even worse, when the PBOC's attempt to drain liquidity failed to sell some 30% of the planned 15 billion yuan in 273-day bills (more on this shortly), leaving the banks screaming Uncle and on the verge of a full-blown liquidity crisis: we expect rumors, and news, of more banks failing to roll over overnight liquidity to hit the tape shortly.

The European morning has picked up where the US left off, with global stock futures trading relatively horizontally with the exception of the Italian FTSE-MIB, falling subject to light profit-taking following the late-week rally. Core fixed income markets continue to add to their gains in the wake of Hilsenrath’s QE-affirming article, with peripheral debt also firming; SP/GE and IT/GE yields spreads contract in reaction to Spain’s BBB- affirmation at S&P and Spanish banks’ ECB borrowing figures falling for the ninth consecutive month.  Nokia shares surged higher following reports citing sources that Siemens approached PE firms about possible deal for Nokia Siemens Networks.

Keep an eye on crude: US concluded Syria used chemical weapons against rebels. US President Obama has authorized providing some US arms for Syrian rebels as part of a new package of military support to the opposition. US Senator McCain said the red line has been crossed in Syria and that he hopes Obama will establish Syria no-fly zone. Putin aide says Russia "not yet" discussing sending S-300 missiles to Syria in response to expanded US military support for rebels.

The US calendar rounds off the week with PPI figures for the month of May followed by June’s advanced University of Michigan Confidence Survey. The high freqs will know just how confident the broke US consumers are in the stock market about 2 seconds ahead of everyone else - Reuters' invoice is in the mail.

For the attention challenged, here are the key news events in bulletin format courtesy of Bloomberg:

  • Treasuries rise as JPY extends gains vs USD, touching 94.43 overnight; market focus shifting to next week’s FOMC rate decision and Bernanke press conferece.
  • Recent selloff in Treasuries, credit products, peripheral EU and EM debt driven principally by change in perception of Fed’s reaction function, with tapering of asset purchases and rate increases now expected sooner than previously
  • The Bank of Japan should specify a two-year limit for its  unprecedented monetary easing to help quell bond-market volatility, according to one of the central  bank’s board members in minutes of May 21-22 meeting
  • Japan to resume selling inflation-linked bonds in October, resuming issuance after a five-year hiatus
  • Japan sold JPY2.5t of 5Y notes drew a bid-to-cver of 4.36, the highest since Nov. 13
  • China’s Finance Ministry sold 9.53b yuan of 273-day bills, less than 15b yuan target; the first failed auction in 23 months on a cash squeeze that threatens to exacerbate a slowdown in the world’s second-largest economy
  • Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, according to two people familiar with the matter
  • Bank of England deputy governer Paul Tucker intends to leave, plans to spend time in academia in the U.S.
  • Thousands of technology, finance and manufacturing companies are working closely with U.S. national security agencies, providing sensitive information and in return receiving benefits that include access to classified intelligence, four people familiar with the process said
  • The U.S. will provide small arms and ammunition to the Syrian opposition amid recent battlefield setbacks by rebels and after saying it confirmed that Bashar al-Assad’s forces used chemical weapons in the civil war
  • Sovereign yields mostly lower. Nikket gains 1.9%; Asian and European stock markets rise, U.S. equity index futures decline. WTI crude gains, metals lower

SocGen summarizes the notable macro highlights:

US retail sales were slightly higher than expected, and initial jobless claims were down (their lowest since early May). This helped limit buying pressure on the EUR/USD and slowed the push to sell Treasuries. However, it was not enough to reassure investors completely, as the USD/JPY continued on a downtrend.

Other US economic indicators are being reported today. Focus is likely to be on Industrial Production, and above all, the University of Michigan Confidence Index. Another increase in consumer confidence would lend weight to the scenario of a domestic demand recovery in the US. Will that suffice to bring attention back to US domestic factors and overshadow global risk aversion? Unfortunately, we doubt that investors will commit to new directional positions prior to next week's FOMC.

The current general sell-off shows how much the markets are focusing on the upcoming decisions of the main central banks. Doubtless the central bankers are aware of this. Current uncertainty on the forthcoming monetary policies of the G4's central banks probably needs to be cleared up to stop the haemorrhage and trigger more sustainable trends.

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DB's Jim Reid complete the overnight event recap:

It’s likely the market will increasingly think Bernanke will be relatively dovish in his remarks and this started to resonate yesterday. This got a late boost by the WSJ's Hilsenrath article that suggested that Bernanke will likely press the point next week that the Fed will not raise rates until well after the end of QE. It’s a shift in tone from Hilsenrath’s article in May where he wrote that the Fed had already mapped out a strategy for winding down asset purchases. To be sure, yesterday’s article contained little new information for markets and Hilsenrath was referring more to the Fed’s commitment to keep rates low rather than making reference to its quantitative easing program. But seeing the S&P500 and 10yr UST yields rally 7points and 5bp respectively in the minutes after the article hit newswires is probably a fair reflection of the market’s day-to-day sensitivity to Fed tapering talk that has prevailed since May.

Earlier yesterday, risk assets got a helping hand from some better-than-expected US data flow. Retail sales rose by a better-than-expected 0.6% in May (vs 0.4% expected) following an unrevised +0.1% increase in April. DB's Joe LaVorgna noted that gains were broadbased across a number of categories including motor vehicle sales (+1.8%) which boosted the headline result. Ex-auto retail sales were up a lesser 0.3% vs. unchanged previously. The retail sales result and an in-line business inventories print (+0.3mom) was sufficient for our US economists to leave their current quarter GDP growth forecast unchanged at +2.3%. In terms of jobless data, claims for the week of June 8 fell -12k to 334k (vs 346k consensus) which is the lowest level since the first week of May (328k). Joe points out that next week's claims data take on added significance as they cover the survey period for June nonfarm payrolls.

Back to markets, the S&P500 (+1.48%) managed to post its second largest oneday gain of the year with the help of the aforementioned WSJ article. The higheryielding sectors including utilities (+1.6%) and REITs (+2.9%), which have been underperforming of late, managed to lead the gains. 10yr USTs had their second strongest day of the year in yield terms (-8bp) and finished near the day’s lows at 2.15%. Indeed rates were a touch lower across the core markets yesterday including 10yr gilts (-2bp), bunds (-3bp) and OATs (-3bp). The rally in rates gave the credit asset class a breather with the CDX IG (-6bp) and HY (+1.125pts) indices finishing firmer for the first time this week, matching a late-session rally in European credit.

Turning to overnight markets, Asian equities are also trading with a positive tone, taking their lead from the performance in US equities. The Nikkei (+2.9%) has recovered some of yesterday’s 6.35% loss. There was a muted market response to the release of BoJ minutes from its May21-22 meeting. The minutes revealed that one board member had suggested a two-year limit be specified for the central bank’s easing to help quell bond market volatility. Another board member suggested that the bank’s communication about easing plans “might be destabilising expectations for the bond market”. The yen is 0.1% higher against the USD (95.3 as we type) and 10yr JGB yields are little changed at 0.84% following the minutes. Outside of Japan, the Hang Seng (+1.0%), Shanghai Composite (+0.4%) and KOSPI (+0.4%) are also enjoying solid gains. Asian and Australian credit gapped tighter at the open, but have since given up some of those gains but their respective benchmark IG indices are still about 5-6bp tighter on the day. Asian sovereign CDS and cash are trading firmer today, with Indonesian sovereign CDS quoted 30bp tighter this morning.

Briefly touching on geopolitical headlines, the WSJ suggested late yesterday that the US involvement in the Syria conflict may expand. Indeed, the article suggests that the US military is considering a proposal to arm Syrian rebels, together with the establishment of a 25mile no-fly zone that would be enforced from Jordanian territory. U.S. military officials believe it will take about a month to get such a limited no fly zone up and running, but the situation could be complicated if Russia decides to provide advanced S-300 air defense weapons to Syria, according to the article.

Turning to the day ahead, we suspect that further reaction to the tapering debate and positioning ahead of next week’s FOMC meeting will be the predominant theme. In terms of data, the preliminary University of Michigan consumer sentiment reading for June is scheduled for today (consensus is for it to be unchanged at 84.5). US industrial production for May and the US current account balance for Q1 are also scheduled.


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