Equity Futures At Session Highs Following Chinese QE Hints; Europe Lags On Greek Jitters

It has been a story of two markets so far, with China's Shanghai Composite up another 3% in today's continuation of the most ridiculous, banana-stand driven move of the New Normal (and there have been many ridiculous moves in the past 6 years) on the previously reported hints that the PBOC is gearing up to start its own QE, while Europe and the Eurostoxx are lagging, if only for the time being until Citadel and Virtu engage in today's preapproved risk-on momentum ignition, on Greek jitters, the same jitters that last week were "fixed"and sent Greek stocks and bonds soaring. Needless to say, neither Greek bonds nor stocks aren't soaring following what has been the worst week for Greece in months.

As for US futures, just keep a track of the increase in the USDJPY once the math PhDs wake up and activate their Yen correlation algos: that's all you need to know if the S&P will hit another all time high, with GAAP EPS now solidly above 21x. At last check, futs were up 0.2%, at the highs of the overnight session.  Expect the now standard zero volume levitation ramp as the Fed now seems to have moved to 2200 on the S&P as its next "fair value" target.

A more detailed look at Asia shows equities mostly rose led by Chinese bourses with both Shanghai Comp (+3%) and Hang Seng (+1.4%) extending last week’s gains to touch fresh 7yr highs. The latter was lifted by financials after HSBC (+5%) surged on news of a planned GBP 20bln spin-off. Talk also did the rounds overnight that the PBoC could consider a QE programme, although a PBoC economist has stated that China does not need strong stimulus. ASX 200 (+0.7%) neared 6,000 amid strength in miners with iron ore technically in a bull market, after gaining over 20% since April 2nd. Nikkei 225 (-0.2%) bucked the overall trend after falling below 20,000 amid profit taking, ahead of Thursday’s BoJ meeting.

Japan cut to `A` from `A+` by Fitch, Outlook stable with Fitch citing insufficient fiscal measures in the FY budget in replacement of a deferred rise in consumption tax.

Despite European equities opening higher, markets reside in negative territory with participants now focusing on Greece, due in part to the today’s light economic calendar. In stock specific news, Deutsche Bank is the worst performing stock in Europe after reporting earnings and adding that profits were negatively impacted by litigation fees of USD 1.5bln with its CFO warning over heavy litigation before the end of 2015. Elsewhere, Volkswagen are among the leading gainers in Europe after Chairman Piech was dismissed consequently ending the boardroom rift in the DAX heavyweight which has taken focus in recent weeks.

Bunds have edged higher alongside UST’s with dampened sentiment emanating throughout the Eurozone on Greek worries after Friday’s disappointing meeting in Riga, while this week provides substantial increase in redemptions at around EUR 65bln. This week also sees supply in the Eurozone move back to a more typical figure of EUR 13bln from the modest EUR 2.8bln last week as Italy kicked off proceedings today when they came to market with a CTZ and two inflation-linked offerings.

The USD index sits comfortably above 97.00 with mild weakness observed in EUR and GBP with political uncertainty continuing to take hold. Separately, rumours surrounding that the PBoC could conduct a QE programme has resulted in CNY set for its largest fall since late February against the USD with short covering in USD/CNY citing Asian trading sources as the economy attempts to combat stifling growth. Volatility was observed in USD/JPY after Fitch downgraded Japan which saw the pair spike higher by 27 pips above 119.40, only to pare those all of those gains. Of note, the BoJ rate decision is scheduled on Thursday.

WTI and Brent crude futures erased its earlier gains with the USD exhibiting strength heading into the North American crossover as Brent falls below its 65.00 handle. Spot gold retraced some of Friday’s losses after US stocks reached fresh record highs with concern over Greece aiding the yellow metal. Furthermore, precious metals remain tentative ahead of Wednesday’s FOMC meeting.

Bulletin headline summary from RanSquawk and Bloomberg

  • Market focus turns to Greek uncertainty, due in part to today’s light economic calendar thus weighing on European equities
  • Looking ahead sees the release of US Services PMI and large cap earnings after-market including the world’s largest company Apple
  • Treasuries steady before week’s auctions begin with $26b 2Y notes, WI yield 0.54% vs 0.598% in March; 10Y yields have spent nearly a month spent between 1.800% and 2.01% as weaker-than-forecast eco reports call timing of Fed liftoff into question; FOMC statement due Wednesday.
  • Greece is counting on deposits of local governments, cities and other funds to meet end-of month payments of over EU1.5b ($1.6b) after euro area finance ministers on Friday said they won’t disburse more aid until bailout terms are met
  • The PBOC is discussing adopting unconventional policies to rebuild its balance sheet and reinvigorate economy, including making direct purchases of local government bonds from market, MNI reports, citing unidentified people
  • China may cut the number of centrally administered SOEs to 40 from the current 112 through mergers and restructuring, the Economic Information Daily reported
  • As authorities show a newfound tolerance for defaults and debt levels at Shanghai Composite Index members climb to all-time highs, Chinese companies are increasingly tapping the equity market for funds to pay down liabilities and invest in growth
  • Fitch lowered Japan’s sovereign-credit rating to A from A+, citing a lack of steps by the government to offset effects from a delayed sales-tax increase
  • Japan’s central bank appears to be wavering in its commitment to QE, said Kozo Yamamoto, an adviser to Prime Minister Shinzo Abe and advocate of reflationary policies
  • The Bank of Japan shouldn’t expand monetary stimulus, as such a move would fail to spur growth and make prospects for an eventual exit from the policy harder, the new head of a business lobby said
  • India’s smallest capital infusion for state banks since 2009 should boost corporate bond sales as lenders have less room to fund businesses, ratings companies say
  • Hopes for finding survivors trapped under rubble began to fade 48 hours after Nepal’s worst earthquake in decades even as rescuers ferried scores of climbers trapped on Mount Everest to safety
  • Sovereign bond yields mostly lower. Asian stocks decline, European stocks fall, U.S. equity-index futures rise. Crude oil lower, gold and copper gain

US Event Calendar

  • 9:45am: Markit US Composite PMI, April preliminary (prior 59.2)
  • Markit U.S. Services PMI, April preliminary, est. 58.8 (prior 59.2)
  • Markit U.S. Services PMI, April preliminary, est. 58.8 (prior 59.2)</li></ul>
  • 10:30am: Dallas Fed Mfg Activity, April, est. -12 (prior -17.4)

DB's Jim Reid concludes the overnight recap

Q1 US GDP and the April FOMC are two of the key events this week. With regards to GDP (Wednesday), consensus is at 1% YoY with DB lowering its forecast to 0.7% from 1.7% following the weaker-than-expected core durable goods shipments and inventory figures. The 'trendy' Atlanta Fed GDPNow is currently at 0.1% and has been below 1% since early March, well ahead of the street. Assuming a weak reading, the bulls will point to the weather impact, the West Coast port disruptions and the recent strange pattern of weak Q1s relative to the rest of the year. The bears will suggest the dollar and a sluggish global economy is having an impact and that the secular stagnation theory is still alive. We continue to have sympathy for the latter arguments but it wouldn't be a surprise to see some bounce in the data as Q2 progresses which may be as confusing to the market as weak data has been in Q1. Trying to assess the trend will be tough for several weeks if not months. This could cause volatility as the market over-interprets the real-time data.

How the Fed interprets this will be far more important though and this week's low key FOMC meeting (Wednesday conclusion) will be interesting in so far as how much they acknowledge weak Q1 growth and inflation and how confident they are that its temporary. There is no press conference or economic update, just a statement.

Moving on to markets, the Asian session is faring pretty well overnight with key equity benchmarks higher across the board. Greater China markets are leading the gains as we type with Hong Kong and Shanghai up +1.3% and +1.8%, respectively. Asia credit spreads are holding firm overnight and are not really being affected by developments around the first SOE default in China. There are some new developments on the story though as Caixin reported that Baoding Tianwei will get loans from China Construction Bank to repay the CNY85.5m missed coupon after co-ordination by the PBOC. CCB is said to be the underwriter and creditor of the bonds. Staying in China, the MNI overnight reported that the PBOC is discussing adopting unconventional policies to rebuild balance sheet and reinvigorate the economy, including market direct purchases of local government bonds from the market. Sounds a bit like QE to us! Finally in overnight terms, the EUR is fairly stable at around 1.085 against the Dollar despite stalled Greek negotiations over the weekend.

In terms of the latest on Greece key EU stakeholders are still in a deadlock after the meeting at Riga last Friday. Indeed there are also signs that Greek finance minister Yanis Varoufakis is increasingly being isolated both in Brussels and in Athens which has prompted officials to bypass the finance minister in upcoming debt talks. Merkel and Tsipras agreed on a phone call on Sunday to maintain contact during talks in order to reach a debt deal and the tone of the call was apparently positive. Negotiations are said to resume today over a call and the leaders will also meet in person on Wednesday. Separately the Bild has reported that Tsipras tried to convince Merkel and Dijsselbloem to hold an EU emergency summit this week so still plenty of Greek headlines to come.

With month-end approaching Greece is faced with payments of over EUR1.5bn in pensions and salaries. Bloomberg has said that Greece will use the deposits of local governments, cities and other funds to meet them. Greek deputy Finance Minister last week said that the country is about EUR400m short of the amount needed for meeting salaries and pension obligations. Beyond that there is also EUR201m of interest payment due on its IMF loan on 6th May and a principal repayment of EUR766m due on the 12th May (ekathimerini). Recent local polls are showing that a majority of Greeks are concerned about a sovereign default and if talks over a new deal fail the government would consider the options of snap elections or a referendum according to the deputy Prime Minister (Bloomberg). Greek 10yr bond yields were up 40bps on Friday to around 12.7%.

Taking a quick look at Friday’s trading session we saw the S&P 500 (+0.23%) and NASDAQ (+0.71%) close at record highs. For the S&P 500, Friday’s strength was led by Consumer Discretionary (+1.3%), IT (+1.0%), Utilities (+1.0%) and Materials (+0.8%). Good corporate earnings were said to be a key driver behind the rally. Interestingly the risk-on tone failed to deter buyers of Treasuries with the 10yr yield closing 5bps lower at 1.909% on weak data. The headline durable goods orders for March rose 4.0% but the core report was weak once we adjusted for the stronger aircraft orders. The February numbers were also marked down materially. Nondefense capital goods orders were down -0.5% mom after a downward revision to February from -1.4% to -2.2%. The Dollar fell again on Friday to round off its second consecutive weekly decline.

Speaking of corporate earnings, we do have a very busy week of company results ahead in the US with over 160 firms (or 31% of the S&P 500’s market cap) lined up for Q1 announcements. We'll highlight some of the key earnings to watch later, but first let's take a quick look at the performance so far. About two weeks into the earnings season, we’ve seen over 180 companies release their Q1 results. So far the beat/miss ratio has been fairly strong for earnings but fairly disappointing for sales. Indeed just over three quarters of US firms have exceeded consensus EPS estimates but just less than half of those have beaten sales forecasts. Lower sales beats (relative to EPS) have been a familiar sight in a post crisis world but the current run rate is still lower than the average beat of 59% since 2010. Things are quite different on the other side of the pond with more sales revenue beats than EPS beats. It is still early days for European earnings but two thirds of firms have come ahead of analysts’ sales target whereas only around 56% have managed to do the same for earnings.