Futures Unexpectedly Red Despite Disappointing Economic Data From Around The Globe

Today is shaping up to be a rerun of yesterday where another frenzied Asian session that has seen both the Shanghai Composite and the Nikkei close higher yet again (following the weakest Chinese HSBC mfg PMI in one year which in an upside down world means more easing and thus higher stocks) has for now led to lower US equity futures with the driver, at least in the early session, being a statement by the BOJ's Kuroda that there’s a "possibility" the Bank of Japan’s 2% inflation target will be delayed and may occur in April 2016.

This official admission of failure (first of many) by the central bank that it won't be able to reach 2% inflation by its stated year-end goal, clearly reduces expectations of additional easing on April 30, according to Shinkin Asset Management. And in a world without EPS growth (and outright revenue declines) in which every PE multiple expansion turn is driven by some incremental central bank easing (preferably sooner rather than later), less easing is bad for risk, which may explain why US futures are red, if only for now: we fully expect a momentum ignition wave in the USDJPY to promptly push the pair above 120, and take the S&P with it to new all time highs on nothing but correlation algos, either at the usual ramp time of 8:30 am or just before the US market open.One just has to think like a criminal algo.

Meanwhile, "recovering" Europe also fired the first shot across the QE bow, reminding everyone that soaring stock markets have nothing to do with the underlying economies, as Europe's PMIs disappointed across the board. As Goldman summarizes, the Euro area flash composite PMI fell by 0.5pt to 53.5 in April, below consensus expectations of a modest gain (Cons: 54.4, GS: 54.2). This was the first decline since November. The manufacturing and services subcomponents were both weaker on the month, declining 0.3pt and by 0.5pt respectively. On a national level, composite PMIs for April fell both in Germany (by 1.2pt) and in France (by 1.3pt).


As closer look at Asia reveals that that equities mostly rose with Chinese bourses at the forefront, in the wake of further disappointing Chinese data. Chinese HSBC flash Mfg PMI tumbled to a 12-month low at 49.2 vs. Exp. 49.6, the 4th consecutive month of contraction. Shanghai Comp (+0.4%) and Hang Seng (-0.4%) traded higher for most of the session as the data supports the case for more government easing. Nikkei 225 (+0.3%) extended on its 15yr peak after finishing yesterday’s session above 20,000 for the first time since Apr’00. JGBs fell after prices followed through yesterday’s global fixed income sell-off, although further downside was capped by a poor 40yr auction which attracted the lowest b/c since Aug’14.

Despite opening modestly higher, European equities have been dragged lower following a slew of lacklustre Eurozone PMI data with German and France setting a downbeat tone for the session after missing expectations on manufacturing, services and composite readings. This has also been coupled with underperformance in tech names after Ericsson posted a disappointing pre-market update, ASML paring yesterday’s gains and Texas Instruments in the US posting a disappointing after-market update, while Allianz warned of a potential stock market crash. Additionally, concerns over Greece continue to linger with reports in Handelsblatt suggesting the ECB’s patience has been tested and there are no agreements with Greece on the horizon.

From a fixed income perspective, Bunds have seen a pullback of yesterday’s heavy Gilt-inspired losses, with the move to the upside also provided a boost by the softness seen in European equities.

In FX markets, the USD-index was initially seen higher in earlier trade before being dragged lower to relatively unchanged levels alongside the softness seen in US yields. Elsewhere, AUD remains softer in the wake of the disappointing Chinese HSBC flash manufacturing PMI, with NZD also weaker following dovish rhetoric from RBNZ’s Asst. Gov. McDermott, who said weaker demand and prices would prompt consideration of a rate cut. Finally, UK retail sales weighed on GBP after missing expectations with the ONS saying the 6.2% drop in fuel sales in March was the largest since April 2012.

In the commodity complex, WTI and Brent crude futures have seen a minor extension of yesterday’s DoE-inspired losses with
energy newsflow overall relatively light. In precious metals markets, spot gold and silver trade relatively unchanged, while copper
has pared its overnight losses stemming from the disappointing Chinese data. Elsewhere, iron ore prices rose by the most since
2012 as BHP Billiton is set to curb the pace of its iron ore expansion program.

In summary: European shares remain lower though off intraday lows, with the tech and insurance sectors underperforming and utilities, telco outperforming. Euro-area, French, German, Chinese manufacturing PMI data all below estimates. U.K. retail sales fall vs forecast gain. Greece hasn’t discussed “Plan B” with creditors, official says. The German and Swedish markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with zinc, nickel underperforming and silver outperforming. U.S. jobless claims, continuing claims, Markit U.S. manufacturing PMI, Bloomberg consumer comfort, Kansas City Fed index, new home sales due later.

Market Wrap

  • S&P 500 futures down 0.3% to 2093.8
  • Stoxx 600 down 0.6% to 406.6
  • US 10Yr yield down 3bps to 1.95%
  • German 10Yr yield down 3bps to 0.14%
  • MSCI Asia Pacific up 0.1% to 154.9
  • Gold spot up 0.2% to $1189.9/oz
  • Eurostoxx 50 -0.5%, FTSE 100 +0.1%, CAC 40 -0.8%, DAX -1.1%, IBEX -0.3%, FTSEMIB -0.6%, SMI +0.2%
  • Asian stocks rise with the Kospi outperforming and the Sensex underperforming.
  • MSCI Asia Pacific up 0.1% to 154.9; Nikkei 225 up 0.3%, Hang Seng down 0.4%, Kospi up 1.4%, Shanghai Composite up 0.4%, ASX up 0.1%, Sensex down 0.6%
  • Euro up 0.18% to $1.0744
  • Dollar Index up 0.01% to 97.94
  • Italian 10Yr yield up 0bps to 1.4%
  • Spanish 10Yr yield down 0bps to 1.37%
  • French 10Yr yield down 3bps to 0.38%
  • S&P GSCI Index down 0.2% to 425.8
  • Brent Futures down 0% to $62.7/bbl, WTI Futures down 0.2% to $56/bbl
  • LME 3m Copper down 0.1% to $5906.5/MT
  • LME 3m Nickel down 0.7% to $12585/MT
  • Wheat futures up 0.5% to 501.3 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

  • European stocks are seen lower after Eurozone PMIs paint a dreary picture of the area’s economy
  • Furthermore, Greece continues to remain a key issue ahead of tomorrow’s Eurozone finance minister meeting, while the ECB are said to be getting frustrated with the lack of Greek progress
  • Looking ahead, today sees the release of US Initial Jobless Claims, New Home Sales, EIA NatGas storage change as well as a host of large cap US earnings with 50 S&P 500 Co.’s due to report
  • Treasuries gain with bunds and gilts as manufacturing reports showed slowing growth in China and Europe; approach of month-end could provide support before FOMC and 2Y/5Y/7Y auctions next week.
  • Greece and its creditors haven’t discussed having the country miss a payment to the IMF or default as agreement over bailout disbursements remains beyond reach, a senior Greek government official said
  • Markit/HSBC’s China manufacturing PMI fell to a 12-month low in April, suggesting government efforts to cushion a slowdown are yet to revive the nation’s factories
  • Markit’s euro-area services PMI fell to 53.7 from 54.2 in March; manufacturing PMI fell to 51.9 from 52.2; gauges for both industries also signaled slower growth in Germany and France
  • U.K. retail sales fell 0.5% in March vs estimate for 0.4% gain; separate figures showed the budget deficit in the fiscal year ended March narrowed more than officials thought
  • BOJ’s Kuroda said there is possibility that timing of achieving central bank’s 2% inflation target will occur early in FY16 rather than FY15
  • Kuroda also said letting central bank’s JGB holdings mature is a possible exit step; raising rate on excess reserves, conducting money market operations also possible steps
  • A stock market crash is possible as equity prices and real economy are diverging, Allianz management board member and CEO designate Oliver Baete says in an interview with Manager Magazin
  • Allianz CEO Diekmann says that problems at Pimco not yet over; while situation has stabilized, there are still net outflows and this will probably not change for the year
  • Sovereign bond yields mostly lower. Asian stocks gain, European stocks, U.S. equity-index futures fall. Crude oil lower, gold higher, copper little changed

US Event Calendar

  • 8:30am: Initial Jobless Claims, April, est. 287k (prior 294k)
  • Continuing Claims, April 11, est. 2.290m (prior 2.268m)
  • 9:45am: Markit U.S. Manufacturing PMI, April preliminary, est. 55.7 (prior 55.7)
  • 9:45am: Bloomberg Consumer Comfort, April 19 (prior 46.6)
  • 10:00am: New Home Sales, March, est. 515k (prior 539k)
  • New Home Sales m/m,  March, est. -4.5% (prior 7.8%)
  • 11:00am: Kansas City Fed Mfg Activity, April, est. -2 (prior -4)

DB's completes the overnight event summary

Regular readers will know we think bonds are in a bubble, however we think it’s a necessity bubble. There is so much debt outstanding across the globe, especially in the developed world, that to keep the system afloat and solvent we need to have a bubble in fixed income. I'm not convinced we'll look back on April 21st/22nd 2015 as the big turning point in global yields but when you're in a bubble you have to be mindful that it will pop at some point. As a minimum it’s been an interesting move. Completing the bond move story, US 10yrs weakened in sympathy closing 7bps higher at 1.979% but periphery bonds did rally with Spain (-7.9bps), Italy (-6.1bps) and Portugal (-8.3bps) tightening to 1.364%, 1.387% and 1.985% respectively.

Following on from the moves in bond markets yesterday, 10y Treasury (-1.2bps) yields have clawed back some of those losses, although bond markets across Asia are some 2-10bps wider generally. Much of the attention is on China and Japan however where the flash April manufacturing PMI’s are out. The numbers make for slightly disappointing reading with both China (49.2 vs. 49.6 expected) and Japan (49.7 vs. 50.7 expected) coming in below market. The reading for China in particular is the lowest since April last year and will add to the argument that more stimulus is needed despite the recent RRR cut. Despite dropping shortly following the print, both the Shanghai Comp (+0.21%) and CSI 300 (+0.24%) have recovered, while the Nikkei (+0.29%) is firmer. Credit markets in both regions are 1-2bps better off.

Moving on, yesterday’s earnings reports in the US along with some slightly better than expected data helped support a modest rise in equity markets. The S&P 500 (+0.51%) and Dow (+0.49%) both closed up while the Dollar (+0.04%) was more or less unchanged – although it was once again much of the focus in earnings calls yesterday. The market appeared encouraged by earnings out of both McDonalds (+3.1%) and Coca Cola (+1.3%) yesterday, while post-market close releases from Facebook (miss) and EBay (beat) should provide some of the early direction in trading today after declining 4% and rising 4% in aftermarket trading respectively. Facebook’s results appeared to sum up much of the trend we’ve highlighted so far. Despite reporting a beat in profits, revenues came in below expectations as management cited that advertising revenue gains of 46% could have been as much as +55% had it not been for currency fluctuations.

US housing data yesterday proved to be supportive. Existing home sales in March rose +6.1% mom and well ahead of expectations (+3.1%). The reading was in fact the highest jump since December 2010 – reflective perhaps of a weather related rebound - while the annualized 5.19m rate is the highest since September 2013.The FHFA housing index for February also showed similar encouraging signs, as the +0.7% mom print came in above the +0.5% market expectations.

Closer to home yesterday, equity markets were a tad more mixed as the DAX (-0.60%) declined, Stoxx 600 (-0.03%) closed more or less unchanged and the CAC (+0.36%) finished higher. The Euro (-0.10%) closed lower for the third consecutive day, while Greek equities (+2.08%) and 3y yields (-223bps) rebounded – which we’ll touch on later. Despite the selloff in bond markets and fairly mixed performance in equity markets credit had a better day as Crossover finished 7bps tighter.

Data was fairly thin on the ground yesterday, with just a worse than expected flash April Euro area consumer confidence reading (-4.6 vs. -2.5 expected) to speak of. Rather it was the release of the Bank of England minutes that grabbed most of the headlines. With Gilts selling off as mentioned, the Pound also rose +0.74% and +0.85% against the Dollar and Euro respectively following the more hawkish tone to come out of the text. Despite voting unanimously (9-0) in favour of keeping rates on hold, two members noted that the decision was ‘finely balanced’. More telling however, comments that the Gilt curve is ‘exceptionally flat’ and that sterling appreciation could be feeding through into inflation ‘more quickly’, implied perhaps that there is less downward pressure on prices to come and perhaps a faster than expected rise in inflation.

On the subject of Central Banks, the Swiss National Bank yesterday reduced the number of sight deposit accounts that are exempt from its negative interest rate, exposing them to the -0.75% deposit rate enacted back in January. A spokeswoman for the SNB suggested that the move was ‘made not principally due to monetary policy imperatives, but on grounds of equal treatment’. The news caused the Swiss Franc to close 1.6% lower versus the Euro.

Onto Greece now, yesterday we heard what we had largely come to expect this Friday as head of the Eurogroup Working Group, Thomas Weiser, said that ‘there won’t be a new list in Riga, but over the course of May it must finally be reached’. Perhaps of more interest however and with various conflicting views on the matter, Wieser also noted that ‘the liquidity situation in Greece is already a little tight, but it should be sufficient into June’. Meanwhile, along with the ECB approving another €1.5bn in ELA funding, Greek Deputy Finance Minister Mardas suggested that the decree forcing state entities to move reserves to the Bank of Greece should raise €2.5 (higher than previous reports we’ve seen), covering obligations due in May.

Turning over to today’s data, there’s a bit more activity this morning with the April flash manufacturing, services and composite PMI’s for the Euro area, France and Germany to look forward to. UK will again be some focus with retail sales and public sector net borrowing data for March due up. Over in the US this afternoon, the April flash manufacturing PMI will be important, while jobless claims, new home sales and the Kansas City Fed manufacturing activity index are also due. On the earnings front, Amazon, Caterpillar, Google, Microsoft, General Motors and Proctor and Gamble are the highlights.