Don't look now but futures are up as usual, driven higher by both good and bad news.
The biggest news event of the weekend, if largely priced in, was the victory by Abe's coalition in the upper-house leading to the following seat breakdown.
Of course, judging by the Yen and market reaction, which barely managed to eek out a gain: its first in four trading days, the event was largely of the "sell the news" type despite such bold proclamations: "Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy," John Vail, Tokyo-based chief global strategist at Nikko Asset Management Co., which manages $162 billion, wrote in an e-mail. "Global investors should be seriously considering Japanese equities, or they may well miss out on major opportunities. These reforms will be even stronger than promised before the election." Or not, considering Abe may need to add a fourth and fifth arrow to slay the "population" and "energy" monsters now that he has given the impression the deflation monster is under control. Of course, this latest cognitive dissonance between "confidence in the future" and "reality" will be an entertaining one to watch unfold, if not so much for the Japanese people if for Goldman and its 2013 bonus pool already on pace to hit a multi-year high.
Elsewhere in Europe, Portugal bond yields have plunged by roughly 60 bps on news that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls. Well, what else is he going to do? This also comes on the heels of a Goldman report that said a second bailout for the country will be necessary and will likely be discussed in the fall. That too is bullish. What also was bullish in Europe apparently is that government debt hit a new record high of 92.2% of GDP. Remember: debt is wealth so just buy more futures.
Looking forward to the US, the market will focus on the latest existing home sales data, the Chicago Fed activity index, as well as earnings report releases from McDonalds, Texas Instruments and Halliburton and a bunch of other companies that will beat EPS and miss revenues.
Full news breakdown from RanSquawk:
- PO/GE 10s spread tightened by over 40bps to below the 500bps mark, after the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls.
- Japanese PM Abe's ruling bloc won a decisive election victory on Sunday, cementing his grip on power.
- UBS and Julius Baer traded up over 3% after releasing encouraging inflows data.
- Market participants will now await earnings report releases from McDonalds, Texas Instruments and Halliburton.
Stocks in Europe traded higher this morning, as market participants reacted positively to the reports that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls and also after encouraging inflows data released by UBS and Julius Baer. As a result, PO/GE 10s spread tightened by over 40bps to below the 500bps mark, with analysts at Goldman Sachs noting that a further compromise will be found between Portugal and the Troika that involves a new financial assistance programme. Financials led the move higher, with UBS and Julius Baer up around 3%, while Commerzbank also gained around 2% after WiWo reported citing sources that German rescue fund Soffin may sell its 17% stake in the bank within the next six weeks. However, German finance ministry spokesman said that the government is not currently speaking to investors about selling its stake in the bank.
Going forward, market participants will get to digest the release of the latest existing home sales data, Chicago Fed Nat. activity index, as well as earnings report releases from McDonalds, Texas Instruments and Halliburton.
Of note, G20 communique said G20 are committed to moving more rapidly to market-determined exchange rates. Said changes to monetary policy must be carefully calibrated and clearly communicated, and that they are mindful of risks of extended periods of monetary easing. They also said there are signs of stabilisation in the Eurozone and will support continued monetary stimulus where it is needed.
Overnight in Asia, Japanese PM Abe's ruling bloc won a decisive election victory on Sunday, cementing his grip on power. Abe's LDP and its New Komeito ally obtained 135 out of 242 seats in the upper house, giving the coalition control of both houses for the first time in several years.
BoJ board member Sato said Japan's annual CPI growth is likely to turn positive this summer and that the chance of Japan seeing 2% inflation in 2 years is not necessarily high.
EU & UK Headlines
PO/GE 10s spread tightened by over 40bps to below the 500bps mark, with analysts at Goldman Sachs noting that a further compromise will be found between Portugal and the Troika that involves a new financial assistance programme.
- President Silva also commented that a snap election is not a solution and that the country is governable.
- Portugal's opposition socialist leader Seguro said the ruling coalition rejected broad political deal with his party. Said the Party insists on renegotiation of bailout.
ECB’s Weidmann said the time for Europe’s exit from expansive monetary policy has not yet come. Weidmann added that Germany’s economy likely expanded strongly in Q2 of this year and expects more moderate growth for Q3.
PIMCO's Bill Gross forecasts Fed tightening policy for 2016 at earliest.
Stocks in Europe traded higher this morning, as market participants reacted positively to the reports that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls and also after encouraging inflows data released by UBS and Julius Baer. Financials led the move higher, with UBS and Julius Baer up around 3%, while Commerzbank also gained around 2% after WiWo reported citing sources that German rescue fund Soffin may sell its 17% stake in the bank within the next six weeks. However, German finance ministry spokesman said that the government is not currently speaking to investors about selling its stake in the bank.
EUR/USD and GBP/USD traded higher, spurred on by the risk on sentiment stemming from positive developments in Portugal, where the President Silva has backed the centre-right coalition government, consequently ruling out snap polls. Elsewhere, weaker USD ensured that in spite of the risk on sentiment, USD/JPY traded heavy, in part due to touted profit taking after Japanese PM Abe's ruling bloc won a decisive election victory on Sunday, cementing his grip on power. SNB President Jordan said he has no intention to change or scrap the EUR/CHF floor of 1.2000.
Gold prices rallied aggressively overnight, up around USD 20.00 or 1.5%, on the back of touted short squeeze as shorter-dated gold forward rates (GOFO) continue to trade in negative territory. The 6 Month Gold Forward Offered Rate (GOFO), as well as the 1 and the 3-Month rates slid into negative territory in early July for the first time since 2008 and 1999 respectively. The move was driven by the lack of liquidity in the leasing market, which back in 2008 resulted in a sharp price rally.
Speculators have increased their net long in gold for a third straight week, adding 19,844 lots to 55,535 and added 125 lots to their silver net long taking the total to 4,830, the largest since early May.
Anglo American CEO says only third of projects are on budget. Underlying earnings from Amplats at USD 92mln and H1 platinum output at 1.2moz. Amplats says platinum market continues to suffer disruptions and palladium market to remain in deficit in 2013.
Crude oil flow through the Iraq-Turkey pipeline have been halted since yesterday, according to a shipping source
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Jim Reid recaps all the weekend events:
Japan’s upper house elections on Sunday delivered a majority to Abe’s government. The result was broadly expected by pre-election polls and we’re seeing the Nikkei little changed this morning (-0.05%) after paring back earlier gains of +1%. Dollar yen is also being sold (currently down 0.7% to 99.99) and 10yr JGB yields are down slightly to 0.79%. Although voter turnout was low, the elections delivered PM Abe’s coalition 76 seats out of the 121 seats that were being contested (LDP secured 65 seats, New Komeito 11). This cleared the 63 seats needed for the coalition to claim a majority in the chamber. Overall, the
LDP and New Komeito will hold a combined 135 seats out of the 242 upper house seats including the seats not up for grabs in the latest election. Meanwhile, the opposition Democratic Party of Japan, which had held 44 of the contested seats, managed to secure only 17, a record low for the party. The result gives the ruling government control of both chambers of the Diet, which some see as paving the way for Abe’s reform agenda. Indeed, according to the FT, Japan now has no elections planned for the next three years suggesting “Abenomics” will be here to stay for some time. Politics aside, the next test for Abe’s economic agenda is Japanese corporate profitability with the domestic earnings season kicking off this week. Though the number of corporates reporting will be relatively modest (27 Nikkei constituents), the list does include a number of heavyweights including Canon, Ricoh NTT Docomo and Kobe Steel. With the sharp rise in share prices since late last year, it would be safe to say that expectations are high. Indeed, the FT writes that large companies are expecting recurring profits to rise by about a quarter year-on-year in Q2 after a one-tenth rise in the first quarter of 2013.
Elsewhere in Asia, equity markets are trading without any firm direction this morning. Its interesting to see Chinese banks underperform (-1.0%) the broader Shanghai Composite (-0.5%) after Friday’s news that the PBoC will get rid of lending rate floors (previously set at 30% below benchmark rates). DB’s economists view is that the reform can potentially allow banks to reduce average lending rates if the central bank injects more liquidity into the interbank market or reduces the reserve requirement (hence reducing banks' funding costs), but at the same time it could potentially reduce banks' net interest margins by a small amount. Other views on the impact of the PBoC’s announcement vary widely, with many seeing this as a positive incremental step to the end goal of interest rate liberalisation. The bears are concerned that it will lead to credit risk being priced more effectively which will likely raise the cost and therefore be another downward source of growth pressure. The Hang Seng is trading at -0.2% while the ASX200 (+0.6%) and KOSPI (+0.6%) sit on small gains. In commodities, spot gold (+1.6% overnight) rose above $1300/oz for the first time in more than a month on reported short-covering flows.
The other political development of note on Sunday was in Portugal where the major parties failed to agree on a “national salvation pact”. However the President announced a new solution to the political situation late last night which involves the ruling coalition government remaining in office after the ruling bloc gave the President “additional guarantees” that they would keep their coalition together to see through the country’s EU programme (Financial Times). The President ruled out calling a snap general election two years ahead of schedule and said the ruling coalition would shortly table a confidence motion setting out its economic plans until the end of it term in 2015.
Looking at the rest of the week ahead, it will be a bumper one for US earnings as around 160 S&P500 constituents are scheduled to report. With US bank earnings now largely out of the way, we should get a clearer picture of how corporate America is performing. Those reporting include a number of market heavyweights including McDonald’s (Mon), Apple and UPS (Tues), Ford Motors, Caterpillar (Wed) and Amazon (Thurs). European companies reporting include GlaxoSmithKline (Wed), Unilever, Credit Suisse, (Thurs) and Total SA (Fri).
The other important thing to look out for this week are the global flash PMI reports on Wednesday. On this front, the market consensus (Bloomberg) is expecting further good news out of the Euroarea where the composite PMI is tipped to print at 49.1 from 48.7 last month. If consensus is correct, this would be highest reading in 17 months. Consensus is also looking for a 0.3pt rise in the Chinese HSBC manufacturing PMI after it fell to a 9-month low of 48.5 in June.
Outside of PMIs, the dataflow will be fairly light. We have US existing home sales today. This will be followed up Euroarea consumer confidence and French business confidence readings tomorrow. On Wednesday, US new homes sales and Japanese trade data are scheduled in addition to the PMIs mentioned above. On Thursday, we have US durable goods orders, Q2 UK GDP and German IFO. On Friday, Japanese inflation and the final UofMichigan consumer confidence reading for July round out the week’s data docket.