Futures Continue Levitation On More "Deescalation" Hopes Despite UK Warning Russia Of "Serious Consequences"

There were headlines for everyone this morning, but especially for fans of what is increasingly known as Russia's "Schrodinger Invasion" of East Ukraine: one which may or may not be happening depending on i) one's point of view and ii) how one is observing it.

On one hand, following last night's UK-based report by "eyewitnesses" that Russian military trucks had entered the Ukraine through an unguarded checkpoint in the Donetsk area, Ukraine promptly confirmed that this had indeed happened, when Leonid Matyukhin, Ukrainian Defense ministry spokesman, said that military vehicles crossed the border last night, declining to give further details. He was surprised this comes as news after the Ukraine government has been "saying for months that rebels get reinforcements from Russian territory." The Ukraine defense ministry added that APCs and military trucks entered Ukraine through Izvaryne border checkpoint which is under rebels’ control, according to Interfax reports.

Of course, Russia promptly denied reports that troops had crossed into the border according to RIA (the same news agency which a week ago when futures were almost 70 point lower started the whole "de-escalation" meme) and instead is merely patrolling along the border with Ukraine, though only on Russian side, based on a Federal Security Service’s border guard unit report.

So far so good, however the reason why futures once again blasted off overnight were the following headlines:


Bloomberg clarified that 59 Ukrainian border servicemen and customs officers have started an inspection of Russian aid convoy on Russian side of border, Defense Ministry in Kiev says in Facebook posting.  If Ukrainian authorities and Red Cross approve aid cargo, it’ll go through Izvarine border check point in Ukraine and further to Luhansk region. No time frame was given for the completion of the check.

Russia chimed in also, saying it was unclear when convoy will start moving again, Boris Pashchenko, official with Russia’s Emergencies Ministry, tells reporters in Rostov region. "We’ll wait as long as we need to. A day, two, three, a week, a month." Pashchenko says.

Finally, just to confuse everyone, moments ago Ukraine added this:


While the reaction to the "de-escalation" quickly spread to the UK:


To summarize, a week of "de-escalation" which has culminated with Russian troops supposedly entering Ukraine territory, well, technically the Donetsk republic, while the Ukraine is inspecting the Russian humanitarian convoy. Net impact on stocks: the S&P is back to a whisker away from its all time highs, and may just surpass it today. After all, it is i) Firday and ii) OpEx...

In other news, European shares rise close to intraday highs with the retail and basic resources sectors outperforming and banks, tech underperforming. The German and Dutch markets are the best-performing larger bourses, Italian market is closed for holiday. The euro is little changed against the dollar. Irish 10yr bond yields fall; Spanish yields decline. Commodities little changed, with natural gas, soybeans underperforming and nickel outperforming. U.S. Empire manufacturing, industrial production, capacity utilization, Michigan confidence, PPI due later.

Market Wrap

  • S&P 500 futures up 0.2% to 1958.2
  • Stoxx 600 up 0.7% to 333.2
  • US 10Yr yield down 1bps to 2.39%
  • German 10Yr yield down 1bps to 1.01%
  • MSCI Asia Pacific up 0.1% to 148
  • Gold spot down 0% to $1313/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Further reduction of war-related premiums amid reports that Ukrainian border guards were allowed to check Russian humanitarian cargoes supported flows into EU stocks this morning.
  • Bunds remained supported by the prospect of further policy easing by the ECB following a raft of less than impressive macroeconomic data over the past few days.
  • UK Q2 prelim GDP Q/Q 0.8% vs. Exp.0.8% (Prev. 0.8%), Y/Y 3.2% vs. Exp. 3.1% (Prev. 3.1%)
  • Treasuries yields fall overnight; 5Y and 7Y now down 5bps and 6bps, respectively, WTD to their lowest levels since end of May as soft economic data and conflicts spark FTQ flows.
  • Bonds trounced stocks worldwide over the past month as investors sought safety amid unrest in Ukraine and the Middle East and uneven economic growth; now money managers are starting to say debt is too expensive
  • Borrowing costs from Ireland to Italy fell to all-time lows today and Germany’s 10-year yields dropped below 1 percent yesterday for the first time on record as data showed Europe’s largest economy shrank more in the second quarter than analysts forecast
  • Even as Russia proposed a cease-fire for humanitarian aid deliveries to southeastern Ukraine,, journalists at news outlets including Novoye Vremya and Hromadske TV reported seeing armored personnel vehicles crossing into Ukraine
  • Iraqi Prime Minister Nouri al-Maliki said he has agreed to leave office and clear the way for his designated successor to take over
  • Obama said that danger from radicals in Iraq still requires U.S. involvement even after the siege that trapped members of a religious minority on a mountain has been broken
  • Israel and Gaza Strip militants entered the second day of a truce amid disclosures of the U.S. slowing down arms shipments to its Israeli ally during the monthlong conflict
  • Obama, speaking from Martha’s Vineyard where he is vacationing, made a plea for calm in Ferguson, Missouri and promised a full and independent investigation of the fatal shooting of a teenager by police
  • Images of police in camouflage brandishing assault rifles and training laser sights on unarmed protesters in Missouri stirred criticism of military tactics inU.S. law enforcement
  • The Bank of Japan may cut its growth forecast for this fiscal year for a fourth time, as exports fail to bolster an  economy weakened by April’s sales-tax increase
  • Sovereign yields higher. Euro Stoxx Banks +0.9%. Asian and European equities higher, U.S. stock futures gain. WTI crude and gold little changed, copper falls
  • Focus will be on the latest US Empire Manufacturing Survey, PPI report, TICs and U. Michigan prelim survey.

US Event Calendaar

  • 8:30am: Empire Manufacturing, Aug., est. 20 (prior 25.6)
  • 8:30am: PPI Final Demand m/m, July, est. 0.1% (prior 0.4%); PPI Ex Food and Energy m/m, Jul, est. 0.2% (prior 0.2%); PPI Ex Food and Energy y/y, July, est. 1.6% (prior 1.8%)
  • 9:00am: Net Long-term TIC Flows, June (prior $19.4b); Total Net TIC Flows, June (prior $35.5b)
  • 9:15am: Industrial Production m/m, July, est. 0.3% (prior 0.2%)
  • Capacity Utilization, July, est. 79.2% (prior 79.1%)
  • Manufacturing (SIC) Production, July, est. 0.4% (prior 0.1%)
  • 9:55am: UofMich Confidence, Aug. preliminary, est. 82.5 (prior 81.8)
  • 10:45am: Fed’s Kocherlakota Speaks on Community Banking


Despite higher stocks and tighter peripheral bond yield spreads on the prospect of further policy easing following a raft of less than impressive macroeconomic data in recent days, Bunds remained in positive territory, as risks of a prolonged low inflation in the bloc continued to support core EGBs. As a result, 2y inflation swap rates declined further this morning, falling to Dec’08 levels, while the 1y1y EONIA fwd fell to its lowest level since Dec’12. Of note, reports from Goldman Sachs have suggested that Fed Chair Janet Yellen’s remarks at the Jackson Hole economic symposium “to be generally dovish in tone, emphasizing the degree of slack remaining in the labour market using a ‘dashboard’ approach.”


Stocks in Europe traded higher since the get-go, as war-related premium continued to be scaled back as reports surfaced that Ukrainian border guards were allowed to check Russian humanitarian cargoes. Materials sector outperformed, with BHP Billiton (+2.8%) surging at the open after the mining giant declared its preference for a demerger of its unwanted aluminium, manganese and nickel assets. At the same time, Deutsche Lufthansa (+2.72%) benefited from reports that German lawmakers want aviation policy reconsidered to increase competitiveness.


EUR/USD is trading marginally higher this morning paring back some of the lost ground seen yesterday after the disappointing Eurozone Q2 GDP figures. Meanwhile despite some volatility seen in cable prices remain relatively flat as the preliminary reading confirms that the UK is growing 0.2% above pre-crisis levels. Looking elsewhere USD/JPY is trading around the high end of its range into the US session with RANsquawk sources noting offers at 102.65/70, meanwhile USD/CAD is trading close to a large (670mln) option expiry for the 10 AM NY Cut (1500BST).


Commodities have remained lacklustre, with some minor upside noted in gold supported by early inflows into bonds, while the energy complex has traded sideways awaiting further geo-political news. Of note, overnight reports suggested that China will hike gas prices and increase supply, and as such NatGas has underperformed its peers.

* * *

DB's Jim Reid concludes the overnight summary

One of the most notable market moves yesterday for us was in European core rates. The 10yr Bund yields broke the 1% handle briefly and dipped to an intraday low of 0.998% before closing at 1.017% on the day. Clearly the disappointing European GDP stats yesterday (more below) didn’t help but direction of the 10yr Bund yield has been pretty one way this year with multiple new record lows made along the way. Still crossing the 1% mark is a bit of a milestone which will probably help anchor other developed government bond markets for the time being. Indeed it was also a positive session for US Treasuries yesterday with the 10yr closing 2bp lower at 2.40%. Some of that was also supported by a strong demand for the long dated bond auction yesterday. The US Treasury sold US$16bn in 30yr bonds yesterday at a yield of 3.224% which was the lowest since May 2013. The bid/cover ratio of 2.6x was also above a recent average of 2.4x.

Let's move back and take a closer look at the European GDP releases yesterday. The euro area GDP came in flat at 0.0% QoQ. This proved to be weaker than already lowered expectations. Indeed the consensus before the release was 0.1% down from 0.3% just a month ago. Mark Wall noted that there are some noise in the data related to the drop in German construction after the weather driven boom in Q1 but persistent weakness in French residential investment and a Russia-related drag on European exports also added to the weakness. Looking ahead our European economics team thinks the H2 growth expectations are vulnerable and appears to be concerned about a pause in activity on the back of geopolitical uncertainties. As for their view on the ECB they now think that private debt QE in 2015 is not just possibility but a probability.

For us we can't help thinking that Europe has been perfectly fitting our shorter business cycle theory that we developed in 2010 after the financial crisis.  The theory was based on the fact that many countries will have much less control over their fiscal and monetary policy post GFC as government debt is perceived to be too high to expand to help the recovery and monetary policy is more impotent at the zero bound. The US has escaped our shorter cycle theory as they have managed to use both fiscal and monetary policy aggressively post GFC. However we still think without extraordinary intervention that the shorter cycle theory remains a starting template for developed economies in this era.

Moving on to the latest geopolitical news. The 280-truck Russian convoy continues to make its way westward and is said to have arrived close to the border with eastern Ukraine near a crossing point controlled by pro-Russian separatists. The Guardian has reported that while the trucks came to a halt well short of Ukraine's border some 23 armoured personnel carriers, supported by fuel trucks and other logistics vehicles with official Russian military plates, have travelled forward towards the border near the Russian town of Donetsk. Geopolitics is also starting to take a toll on Russian corporate. According to the FT Rosneft has asked the Russian government for as much as US$42bn in aid amid increasing signs of how the sanctions are having an impact on state owned companies. The Russian government said it will consider the request over the next two weeks. Away from Russia, Hamas and Israel have agreed to extend their truce period for five more days after further negotiation which should prove to be of some relief.

Back to markets, equities traded mostly sideways yesterday to consolidate moderately higher on both sides of the pond. The S&P 500, the Stoxx600, and the FTSE were up +0.43%, +0.31% and +0.43%, respectively. The European Main and US CDX IG indices were about 1bp tighter. Yesterday was also a strong session for the peripheral bond markets in Europe with 10yr yields of Greece, Italy and Spain closing 24bp, 5bp and 9bp lower on the day, respectively. Asian markets overnight have largely followed the positive lead with main equity indices in China, Hong Kong, and Australia up 0.7%, 0.7% and 0.5% respectively. The Hang Seng is also trading at its highest since May 2008. Asian credit continues to grind tighter as we have consolidated back to YTD tights.

Looking ahead we have the NY Fed Empire Manufacturing Survey, Industrial Production and preliminary UoM Consumer Confidence survey in the US today. We also have the first print of Q2 UK GDP today.


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