Futures Ignore Ukraine Re-Escalation, Hope For Positive Surprise From Draghi

Despite Mario Draghi and Janet Yellen's (repeat) attempt to steal the show today, the first when the ECB reports its monetary decision (with zero real chance of announcing any change in policy considering all the furious, and failed, attempts to jawbone the Euro lower) as it faces the dilemma of deflationary pressure, record low bond yields and interest rates at record lows coupled with an export crushing Euro just shy of 1.40, and a practical impossibility to conduct QE even as the hawks jawbone a "potential" European QE to death, while Janet Yellen conducts the second part of the congressional testimony this time before the Senate Budget Committee where she will again, say nothing at all, it appears the world will be focused on Russia once again after the latest 24 hour "de-escalation" gambit is now once again dead and buried and on top of it is Putin waving a "come launch a nuclear attack at me, bro" flag.

Bulletin headline summary from Bloomberg

  • Treasury curve spreads steepen before week’s quarterly refunding auctions conclude with $16b 30Y bonds; BOE rate decision due at 7am ET, followed by ECB at 7:45am, Draghi press conference at 8:30am.
  • Long bonds to be sold today yield 3.425% in WI trading, 10bps below April award; stopout at that level would be lowest since June
  • BOE expected to leave main interest rate unchanged; ECB likely to keep policy on hold as April inflation data not low enough to trigger action, analysts say
  • Vladimir Putin said Russia is testing its entire military’s combat readiness, ramping up tensions again a day after he pledged to pull forces back from Ukraine’s border. NATO said there’s no sign of any withdrawal
  • China’s exports and imports unexpectedly rose in April, with exports increasing 0.9% from a year earlier, when figures were inflated by fraudulent invoicing, data  from the Beijing-based customs administration showed today
  • Barclays Plc will cut 7,000 jobs at its investment bank, about a quarter of the total, as CEO Antony Jenkins tries to revive profit by reducing the lender’s  dependence on the unit
  • U.S. First Lady Michelle Obama joined a social-media campaign calling for the rescue of more than 200 abducted Nigerian school girls seized by Islamist militants three weeks ago as international offers of assistance poured in
  • With five fundraisers in three days in California, Obama is trying to rally Democratic Party faithful amid signs of flagging interest in the fall election that will decide control of Congress 
  • The U.S. House of Representatives voted to hold Lois Lerner, the former IRS director of exempt organizations at the agency, in contempt of Congress for refusing to answer questions about her role in scrutinizing Tea Party groups
  • Sovereign yields higher. Asian stocks gain. European equity markets, U.S. stock futures gain. WTI crude lower, gold and copper higher

US/Europe Event Calendar

  • 7:45am: ECB seen holding benchmark interest rate at 0.25%
  • 8:30am: ECB’s Draghi holds news conference in Brussels
  • 8:30am: Initial Jobless Claims, May 3, est. 325k (prior 344k); Continuing Claims, April 26, est. 2.758m (prior 2.771m)
  • 9:45am: Bloomberg Consumer Comfort, May 4 Central Banks
  • 9:00am: Fed’s Plosser speaks in New York
  • 9:25am: Fed’s Evans speaks at Chicago banking conference
  • 9:30am: Fed’s Tarullo speaks in Chicago banking conference
  • 2:00pm: Fed’s Bullard speaks at conference in St. Louis
  • 9:30pm: Reserve Bank of Australia issues monetary policy statement
  • 1:00pm: U.S. to sell $16b 30Y bonds
  • 11:00am POMO: Fed to purchase $550m-$800m TIPS in 2018-2044 sector

A quick preview of the ECB and BOE's decisions today:

The ECB is again expected to overlook the meagre inflation growth across the joint currency bloc and not only keep the key rates unchanged but also refrain from succumbing to market pressure and introduce asset purchase program (QE). While the initial lack of further policy easing may disappoint those looking for the ECB to extend its ultra-loose policy stance, Draghi’s press conference will likely revive expectations of some sort of action in the coming months. Full preview.

Today’s Bank of England rate decision is likely to reveal no change in the central bank’s monetary policy. UK unemployment is now below 7.0% but the threshold no longer holds the same importance as previous with the new more diluted forward guidance placing more of an emphasis on the output gap.With a lack of action expected from the central bank the market reaction today - if any - should be short-lived and ineffectual. And since the BOE just announced no action, and there was, as expected, no market reaction.


Stocks in Europe failed to hold onto the initial upward price bias, as belief of a resolution to the stand-off in Ukraine ebbed following reports out of Ukraine. Nevertheless, European equities remain higher, benefiting from earnings and news flow suggesting de-escalation of the stand-off in Ukraine. The FTSE 100 (+0.4%) was led higher by Barclays (+4.71%) on news the Co. are to strategically overhaul operations, starting with 14,000 job cuts this year.


Higher money market rates supported EUR in early trade, which in turn saw the major pair advance ever so closer to the key 1.4000 level. At the same time. GBP/USD traded steady, with 1.7000 barrier level still intact. Looking elsewhere, USD/JPY trades range-bound capped by USD 2.867bln of option expiries between 101.80-102.00 due to roll off at today's 1000am NY cut.


Brent and WTI futures trade lower in today’s session with WTI retracing the gains seen yesterday after the DOE inventories report showed a crude oil drawdown. A reduction in geopolitical risk has also added weight to energy futures as Putin struck passive and dovish tones yesterday paving the way to dialogue with the West. China's trade balance rose more-than-expected last month, with crude oil imports rising to a record high of 27.88mln tonnes in April, failed to support prices, as the increase in imports was attributed to stockpiling.

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In conclusion, here is the overnight recap by DB's Jim Reid

What a difference a year makes. Last May's JEC testimony from Bernanke caused shockwaves around the world as the ex-Fed chairman hinted in the Q&A that the Fed might start tapering by Labor Day (always the first Monday in September). This triggered a late spring/early summer risk selloff, which was felt most in the EM world. 12 months on and Yellen's equivalent testimony seems to have been far less eventful even if there was a little volatility as she spoke.

Indeed the release of Yellen’s prepared remarks saw the S&P500 sell off by about 9pts to the intraday lows. The prepared remarks were considered to be fairly balanced, with some dovish elements mixed in with more hawkish elements. Yellen stated that a high degree of monetary accommodation remains warranted, that labour conditions were far from satisfactory and that inflation persisting below the Fed’s target could pose risks. This was mixed with less dovish comments such as her view that low Q1 growth was transitory and that low yields are prompting investors to reach for yield. After this the market seemed to take more comfort Yellen’s Q&A than her prepared speech, and we saw the S&P500 recover all of its losses on its way to a 0.56% gain on the day. This compares to a 0.83% loss on the day of last year’s JEC testimony from Bernanke. In yesterday’s Q&A, Yellen sidestepped questions on the timing of first rate hikes, saying that there was no timetable and that it remained data dependent. On April’s surprisingly strong payrolls, Yellen said that the Fed will not make too much of any one month’s data, and that she prefers reviewing labour data over one or two quarter timeframes. Again she stated that the labour force participation rate had fallen a lot. The Fed Chair put a renewed focus on the flattening housing market saying that more subdued activity could be more protracted than expected – something that “will bear watching”. The WSJ’s Hilsenrath take is that if housing fails to revive as expected, Fed officials could decide to take an even more cautious approach to eventual rate hikes.

Outside of the equity market reaction, there was some interesting price action in US treasuries with yields attempting to sell off in the lead up to Yellen’s testimony and ahead of a 10yr note auction. Indeed, in the hours leading up to the start of the testimony, yields moved up by 4bps to an intraday high of 2.625%. There was a bit of volatility after Yellen began speaking but then very soon after we saw a rally back below 2.58% before closing just under 2.60% at the NY bell. With the front end of the UST curve outperforming, there was some steepening in the treasury curve and we saw 30yr yields close a couple of basis points higher. Gold was one of the biggest losers yesterday, losing 1.4%, while the dollar lost ground against the EUR following Yellen’s comments.

Today the central bank baton passes over to the ECB. The general expectation across the street is that policy will remain unchanged. As our European Economics team notes, having previously raised expectations of policy action Draghi appears to have dialled-down his rhetoric more recently as he noted that FX appreciation need not always be negative for medium-term inflation and that if the ECB was going to move against appreciation it would do so using, “conventional policy” rather than asset purchases, although he did define negative deposit rates as conventional policy. On top of these vocal exercises the continuing pick-up in the pace of the growth recovery and the most recent inflation readings (which whilst still weak saw some recovery from prior lows) have likely given the ECB some breathing room. Our Economist’s expect today's rhetoric to remain dovish and for the ECB to leave its options open even as policy remains unchanged.

Looking ahead however they do expect action from the ECB at its June and September meetings. In June the ECB will have its updated staff forecasts which will likely see a downgrading of nearer term inflation expectations and so provide some impetus for action. In terms of the choice of action, DB expects that in June it will take the form of an extension of the full allotment period rather than anything more aggressive. At the September meeting our Economist’s expect the ECB to announce QE, which they think will take the form of a private asset purchase programme, likely on a modest scale and directed towards business lending.

Ahead of today’s ECB meeting, EURUSD is trading flat at 1.391 in the Asian timezone and 10yr UST yields are up 3bp at 2.62%. Asian equities are trading broadly higher including in Japan (Nikkei +1.1%) and China/HK (HSCEI +1.3%) supported by a rebound in China’s trade numbers. Chinese April exports were up  0.9% YoY compared with consensus expectations of -3.0% YoY and last month’s reading of -6.6%. Similarly, imports are up 0.8% YoY versus expectations of -2.1% and March’s outturn of -11.3%. Elsewhere in Asia, new corporate EM issuance remains a major theme. The release of better than expected Australian employment data has given the Aussie dollar a small boost (+0.2%) against the USD.

Coming back to yesterday, the rally in US equities came despite another ugly day for internet and biotech stocks. This pushed the YTD performance gap between the S&P500 and NASDAQ index to 3.25%. Yesterday saw some sharp falls in internet stocks such as Amazon (-1.57%), Yahoo! Inc (-6.63%) and Groupon (-21.7%). Outside of DM, the news out of Ukraine took a surprising turn for the better, which helped solidify an impressive day for EM across all assets. Russian President Putin said he was pulling troops away from the Ukrainian border and urged pro-Russian separatists in eastern Ukraine to delay this weekend’s independence referendums to ease tension. Putin also said that he is willing to begin dialogue with OSCE to begin resolving the crisis. The Russian 10yr bond gapped tighter by 36bp and the MICEX gained 3.4%. A number of other EM sovereign bonds gapped in by 10bp or more following the Russian headlines. The USD (index +0.2%) has managed to clawback some its losses since payrolls, but a number of EM currencies managed to gain against the USD including the MXN (+0.48%), BRL (+0.6%).

Looking at day ahead, we start with industrial production numbers for Germany and Spain. The Bank of England’s policy announcement is due at midday London time (no change expected). This will be followed shortly by the ECB at 12:45pm and then Draghi’s press conference 45 minutes later. In the US, the focus will be on initial jobless claims which will provide some clues whether April’s payrolls momentum has carried through to early May. Of some relevance for the wider market, Barclays Bank is holding its strategy day today and there have been reports in various media outlets that the bank may drastically restructure or divest from some businesses (Bloomberg, FT).


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