While yesterday most markets were closed and unable to express their concerns at the very strong showing of "anti-austerity" parties in Spain's municipal election from Sunday, then today they have free reign to do just that, and as a result European stocks are broadly lower, alongside the EURUSD which dripped under 1.09 earlier today, with Spanish banks among the worst performers: Shares of Banco Sabadell, Bankia, Caixabank and Popular were down 1.8 to 2.3% earlier this morning, and while the stronger dollar was a gift to both the Nikkei and Europe in early trading, after opening in the green, Spain's IBEX has since slid into the red on concerns of what happens if the Greek anti-status quo contagion finally shifts to the Pyrenees.
"Markets are trying to digest what is going on in Spain and what it means for Greece," Michael Hewson, CMC Markets analyst, told Reuters. "Anti-austerity parties in Spain have been giving the incumbent government a kicking...That's keeping investors on the back foot."
As for Greece, with not even a chance of a deal on the horizon, the various local illiquid markets are getting hit with bonds getting the brunt of it so far:
- GREEK TWO-YEAR NOTES DROP WITH YIELD CLIMBING 172 BPS TO 24.82%
This comes as the Greek finmin does some more improv ahead of yet another Eurogroup meeting, this time proposing a 15% tax rate for deposits held abroad.
Asia was once again immune to any global newsflow, and Chinese stocks again bounced, this time by another 2% bringing the weekly gain to about 5%, on news that policymakers will allow cross-border sales of mutual funds with mainland China. The Shanghai Comp (+1.64%) and CSI 300 (+1.48%) have continued their strong start to the week, supported by the news that Beijing has invited private investors to help build and operate around $318bn of projects.This capped the biggest 6 day surge in the Composite since 2008.
And if anyone was worried that Friday's latest revelations about Hanergy could put an end to China's stock bubble, have no fear: more than 250 stocks rose by the 10% daily limit on the Shenzhen Composite, the smaller of China’s two exchanges that has doubled this year and trades at 71x reported earnings!
To be sure, nobody in China noticed or cared that Zhuhai Zhongfu Enterprise Co., which supplies bottles for Coca-Cola Co. and PepsiCo Inc. in China, said it won’t be able to fully repay a bond due May 28, raising concern it will become third company to default in onshore market this year. After all, the risk of a bond market collapse is bullish for stocks as it means even more stimulus by the PBOC to blow the mother of all bubbles.
The Nikkei was also modestly higher as the USDJPY rose to a fresh high not seen since 2007.
A closer look at European trading shows that as expected, today’s session has been dominated by news filtering out of Greece from over the weekend, with concerns mounting that the country will be unable to pay their IMF debts due in June. As many European participants come back to their desk after a long weekend, EUR has seen weakness this morning, breaking to four week lows and residing below the 1.0900 handle.
This comes after comments this weekend from the Greek Interior Minister Voutsis, who stated on Sunday that Greece will not make repayments to the IMF of EUR 1.6bln expected next, however these comments were later contradicted by Greek government spokesman Sakellaridis said Greece will make its debt repayments but wants a deal by end-May or early June and has not asked for a bailout extension. Also of note, Greece narrowly rejected a call to stop paying IMF debt & nationalize banks; voting 95-75 with one blank vote. EUR weakness has bolstered the USD, with USD/JPY (+122 pips) taking out touted barriers at 122.00 and 122.50 to trades at highest levels since 2007.
European equities trade in the red this morning (Eurostoxx: -0.37) amid concerns regarding Greece, despite the DAX initially opening higher benefiting from the weaker EUR. On an index specific basis, IBEX underperforms (-0.54) after Spanish local elections saw a strong performance from the anti-austerity Podemos party. In fixed income markets, Bunds trade around 75 ticks higher today amid concerns surrounding Greece and Spain, while the short end of the Greek yield curve has risen dramatically today, with 2 yr yields higher by over 230 bps. Also of note, in terms of corporate issuance, today may see a three tranche EUR 1.5bln deal from Ely Lilly. Looking ahead in terms of US equities, today sees earnings from AutoZone at 1200BST/0600CDT, while in fixed income at 1800BST/1200CDT there is a USD 26bln 2yr Note Auction.
Over the weekend Fed’s Fischer (voter, soft dove) said that he sees an argument for publishing the Fed’s rate path forecast but says that if they do so, the market must understand that the Fed has no obligation to stick to it. Fischer added that, while markets largely expect the first rate hike in September, it will be determined by data and not by date. While Fed's Mester (Non Voter, Hawk) said the time is near for a rate hike. Mester added that the FOMC will go into the June meeting with an 'open mind' about rate hikes and will look at the latest data. (BBG)
Looking ahead, the European afternoon sees US Durable Goods orders, Composite and Services PMI, New Home Sales and Richmond Fed Manufacturing Index.
Asian stocks mostly rose led by Chinese bourses which showed few signs of slowing down the recent rally. Shanghai Comp. (+2.02%) is on course for its biggest 6-day rally since Nov’08, as the Hang Seng (+0.92%) soared to a fresh 7yr high amid reports HK fund managers are going to be allowed to sell HK funds to Chinese investors. ASX (+0.91%) rose after breaking above its 100 DMA, while Nikkei 225 (+0.12%) is relatively unchanged amid light newsflow.
Commodities have spent the day in the red, weighed on by the aforementioned greenback strength. Brent July crude futures have so far today found support around the USD 65.00, while spot gold (1193.33) has broken below the psychological USD 1200 handle and 50 DMA at 1197.85 this morning to reach its lowest level since 7th March. As a reminder, today sees the expiry of Gold, Silver, Heating Oil, RBOB and Henry Hub NatGas June’15 options.
In summary: European shares fall with the utilities and banks sectors underperforming and travel & leisure, basic resources outperforming. Fed’s Mester yday said ‘time is near’ for U.S. interest-rate boost. IMF says yuan Is no longer undervalued amid reserve currency bid. The German and Spanish markets are the worst-performing larger bourses, the Italian the best. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with silver, natural gas underperforming and soybeans outperforming. U.S. consumer confidence, FHFA house price index, new home sales, Dallas Fed index, durable goods orders, capital goods orders, Richmond Fed index, Markit U.S. composite PMI, Markit U.S. services PMI due later.
- S&P 500 futures down 0.2% to 2121
- Stoxx 600 down 0.2% to 405.8
- US 10Yr yield down 4bps to 2.17%
- German 10Yr yield down 6bps to 0.55%
- MSCI Asia Pacific down 0.3% to 153.5
- Gold spot down 0.7% to $1194.8/oz
- 5 out of 19 Stoxx 600 sectors rise; travel & leisure, basic resources outperform, utilities, banks underperform
- Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
- MSCI Asia Pacific down 0.3% to 153.5
- Nikkei 225 up 0.1%, Hang Seng up 0.9%, Kospi down 0.1%, Shanghai Composite up 2%, ASX up 0.9%, Sensex down 0.3%
- 3 out of 10 sectors rise with financials, energy outperforming and consumer, staples underperforming
- Charter Said to Be Near Time Warner Cable Deal for $55.1b
- BYD Said to Plan About $1.6b Private Share Sale in China
- Euro down 0.63% to $1.0909
- Dollar Index up 0.99% to 96.97
- Italian 10Yr yield up 7bps to 1.92%
- Spanish 10Yr yield up 1bps to 1.85%
- French 10Yr yield down 5bps to 0.85%
- S&P GSCI Index down 0.4% to 440.2
- Brent Futures down 0.7% to $65.1/bbl, WTI Futures down 0.7% to $59.3/bbl
- LME 3m Copper up 0.1% to $6166/MT
- LME 3m Nickel down 0.4% to $12660/MT
- Wheat futures down 0.5% to 512.8 USd/bu
Bulletin Headline Summary from RanSquawk and Bloomberg
- USD trades higher by over 0.5% as EUR is weighed on by suggestions from the Greek Interior Minister that the country may not pay their IMF repayment on June 5th
- European equities reside firmly in the red, also weighed on by Greek concerns
- Looking ahead, today sees US Durable Goods orders, Composite and Services PMI, New Home Sales and Richmond Fed Manufacturing Index
- Treasuries gain as wrangling continues over Greece’s aid demands; week’s auctions begin with $26b 2Y notes, WI yield 0.65%, highest since Dec., vs 0.54% in April
- Greek officials will revive their bid to access financial aid with Finance Minister Yanis Varoufakis blaming creditors’ insistence on more austerity for the impasse
- While PM Tsipras’s spokesman said yesterday a deal can be reached by end of May, he admitted that disagreements remain in areas such as budget targets, sales-tax rates, pension and labor market rules
- The IMF officially dropped its long-held view that the yuan is undervalued, strengthening China’s case for the currency to win reserve status at the lender
- Chinese stocks rallied, with the Shanghai Composite completing its biggest six-day advance since November 2008
- More than 250 stocks rose by the 10% daily limit on the Shenzhen Composite, the smaller of China’s two exchanges that has doubled this year and trades at 71 times reported earnings
- China set out its ambitions for a bigger naval presence far from its coasts, amid wariness among its neighbors over whether the country’s fleet will be used to back up its territorial claims
- Iraq has announced the launch of an operation to drive Islamic State out of western Anbar province, where the extremists captured the provincial capital earlier this month: AP
- Charter Communications Inc. is near an agreement to buy Time Warner Cable Inc. for about $55.1b in cash and stock, according to people familiar with the matter
- Zhuhai Zhongfu Enterprise Co., which supplies bottles for Coca-Cola Co. and PepsiCo Inc. in China, said it won’t be able to fully repay a bond due May 28, raising concern it will become third company to default in onshore market this year
- Sovereign bond yields mostly lower; Greek 10Y +60bps. Asian stocks gain, European stocks, U.S. equity-index futures fall. Crude oil and copper lower; gold higher
US Event Calendar
- 8:30am: Durable Goods Orders, April, est. -0.5% (prior 4.7%)
- Durables Ex-Transportation, April, est. 0.3% (prior 0.3%)
- Cap Goods Orders Non-def Ex-Air, April, est. 0.3% (prior 0.6%)
- Cap Goods Ship Non-def Ex-Air, April, est. 0.3% (prior 0.9%)
- 9:00am: FHFA House Price Index m/m, March, est. 0.7% (prior 0.7%)
- 9:00am: S&P/Case-Shiller 20 City m/m SA, March est. 0.90% (prior 0.93%)
- S&P/CS 20 City y/y, March, est. 4.60% (prior 5.03%)
- S&P/CS 20-City NSA, March, est. 175.00 (prior 173.67)
- S&P/CS US HPI m/m, March, est. 0.50 (prior 0.42%)
- S&P/CS US HPI y/y, March (prior 4.22%)
- S&P/CS US HPI NSA, March (prior 166.80)
- 9:45am: Markit US Composite PMI, May preliminary (prior 57.0)
- Markit US Services PMI, May preliminary est. 57.0 (prior 57.4)
- 10:00am: New Home Sales, April, est. 500K (prior 481K)
- New Home Sales m/m, April, est. 4.0% (prior -11.4%)
- 10:00am: Consumer Confidence Index, May, est. 95.2 (prior 95.2)
- 10:00am: Richmond Fed Mfg Index, May, est. 0 (prior -3)
- 10:30am: Dallas Fed Mfg Activity, May, est. -12.5 (prior -16.0)
- 1:00pm: U.S. to sell $26b 2Y note
- 12:30pm: Fed’s Fischer speaks in Tel Aviv, Israel
- 7:50pm: Bank of Japan releases April 30 mtg minutes
- 8:10pm: Fed’s Lacker speaks in Baton Rouge, La.
DB's Jim Reid completes the overnight summary
With most major markets closed yesterday, we’ve re-attached the week ahead that Craig published yesterday at the end of the report this morning. It was an unsurprisingly quiet session yesterday from a trading volume and newsflow standpoint. The political events in Spain attracted the bulk of the attention following the Spanish local and regional elections over the weekend in which the ruling People’s Party suffered its worst election result in 24 years. The previous two-party regime is looking now more like a four-party contest after both the anti-austerity focused Podemos and (to a lesser extent) newcomer Ciudadanos made strides. Spanish equities fell 2.01% in yesterday’s session in the aftermath of the weekend’s results. Despite the People’s Party still remaining the largest political presence in Spain by number of votes, the nation is now in something of an uncertain period with a number of close calls across regions meaning lengthy coalition negotiations will now begin. There was a notable win for the Podemos backed activist Ada Colau who was elected mayor of Barcelona, while in Madrid, the fragmentation of the Spanish political scene was evident as, after 24 years of control, the People’s Party look set to lose out to a Podemos coalition should they secure sufficient backing. With a Spanish General Election due by the end of the year, Prime Minister Rajoy attempted to instill some confidence in his voters yesterday, saying that the People’s Party still remains the Spanish voters ‘first choice’ and that, although acknowledging the significant loss of votes, is still ‘very comfortable’ leading his party into a General Election. So political risk is still high in Europe. Podemos have actually been dipping in the polls all year as the economic recovery builds. Perhaps the full general election will see the main parties benefit more from the recovery but European politics remains fragile and probably will remain so for a number of years.
As well as in Spain, there were similar falls for other European peripheral equity markets yesterday as the FTSE MIB and ASE fell 2.09% and 3.11% respectively. Commodity markets were fairly muted as Gold finished +0.03% and Brent was +0.23%. The Euro meanwhile ended 0.32% down versus the Dollar as both the Spanish political situation and Greece saga weighed on sentiment. On the subject of Greece, talks are due to resume today between the Brussels Group and Greek government with issues over fiscal targets and specifically pension and labour reforms still dominating the agenda. Greek government spokesman Sakellaridis said yesterday that a deal can be made by the end of May and that ‘based on the liquidity problems that we have, there is an imperative need for us and the euro zone to have a deal as soon as possible’. The head of the ESM, Klaus Regling, was a lot more cautious however in an interview with German newspaper Bild. Regling was quoted as saying that ‘there is little time left’ and that ‘without an agreement with the creditors, Greece will not get any new loans’ before warning that ‘then there’s a threat of insolvency’.
As it currently stands, Greece has €1.6bn of redemptions due in June alone (of which €1.5bn are due to the IMF), starting on June 5th with a €310m payment. Although we have little transparency on the government’s cash position, comments from both Greece officials and its creditors suggest that it looks increasingly difficult that Greece will be able to make the payment due on the 5th. In the meantime, we appear to be no closer to a Staff Level Agreement needed to release funds. Given that progress continues to be slow and non-payment is looking increasingly more likely, we list below three potential scenarios as highlighted by DB’s Mark Wall in the Focus Europe piece last week. The first scenario is where a Staff Level Agreement is made and approved by the Eurogroup, then even before we have had the national approvals, we would expect the ECB to accommodate the non-payment through letting the ELA and T-Bill ceiling rise to allow Greece to make payment. The second scenario is similar to the first but where a referendum is called, resulting in adding 2-3 weeks to the timeframe. In this situation, we believe that the ECB would be willing to find a balanced solution and would envisage haircuts on collateral at the ELA being raised, but not enough to cap ELA and trigger capital controls. The third scenario is where there is no Staff Level Agreement and Eurogroup approval. Although a non-payment on the IMF repayment would not necessarily be deemed a ‘default’ as per credit rating agencies, we believe that the ECB would view the lack of payment as rendering Greece insolvent. A potential reaction would be to immediately cap ELA and force Greece to close its banks and reopen them under capital controls. A split deal and parallel currency have also been mentioned at various stages as other scenarios, however we deem these lower probability scenarios as of now.
If this wasn’t enough, despite PM Tsipras winning backing from his Syriza party, tensions clearly still lie internally. The WSJ has reported that when Syriza’s Central Committee debated the state of debt negotiations this weekend, the hard-line Left Platform submitted a motion calling for the government to default on the IMF loans rather than compromise. The proposal was only just rejected, with 75 voting in favour and 95 against. The Left Platform leader Lafazanis (also the Minister of industry and energy) highlighting the divergent views in the party after being quoted as saying that ‘who says that an exit from the euro and a return to the national currency is a catastrophe?’. Ultimately the situation continues to remain very tense, with internal pressures still very much an issue and the end game still uncertain. We continue to think that a Grexit will be avoided, but the path to such an outcome is not easy to predict.
Away from Greece and Spain, it was interesting to see that the ECB slowed the pace of asset purchases slightly last week after data released yesterday, despite Coeure’s comments that asset purchases are set to be front loaded over the next two months ahead of low liquidity in July and August. The data released yesterday showed that €11.8bn of government and agency bonds were purchased over the week which marks the smallest increase in three weeks.
Despite US markets being closed yesterday, there was some Fedspeak as Vice Chair Fischer and Cleveland Fed President Mester were speaking. Fischer in particular reiterated much of the other comments of late, saying that any move will be data dependent while also noting that it is ‘misleading’ to give so much importance to the first move given that any process of returning to normalization will likely take a few years. Meanwhile, the hawkish leaning Mester said that ‘the time is near’ for a move and that ‘in my mind every meeting is on the table’.
Looking at our screens this morning, bourses are mostly trading firmer and led by the Hang Seng (+1.42%) which has bounced on the news that policymakers will allow cross-border sales of mutual funds with mainland China. The Shanghai Comp (+1.64%) and CSI 300 (+1.48%) have continued their strong start to the week, supported by the news that Beijing has invited private investors to help build and operate around $318bn of projects. Elsewhere, the ASX is +0.78% and the Nikkei (+0.08%) is more or less unchanged. Treasuries have started this morning on a firmer footing, led by the 10y (-1.8bps) in particular.
Looking at the week’s calendar now, we’ve just got Japan PPI and UK CBI reported sales to look forward to in the Asia and European timezones this morning before we get a bumper data day in the US this afternoon with durable goods orders, capital goods orders, FHFA house price index, S&P/Case Shiller house price index, May flash composite and services PMI’s, new home sales, consumer confidence, Richmond Fed manufacturing index and the Dallas Fed manufacturing activity index. Tomorrow starts in China where we get industrial profits data for April and small business confidence in Japan. There are more confidence indicators in Europe on Wednesday with German and French consumer confidence. There are no releases of note in the US in the afternoon. On Thursday we get Japan retail sales in the early morning. We then turn to Europe where we get various May confidence indicators for the Euro area. Initial jobless claims and pending home sales will be due in the US on Thursday. It’ll be a busy end to the week on Friday as we get CPI, industrial production, housing starts and the jobless rate out of Japan. In Europe we start with French consumer spending, quickly following by Euro area money supply data and then the preliminary Q1 GDP report for the UK. Over in the US the second reading for Q1 GDP will be important given the expected revisions, while we also get the Chicago PMI and the final May University of Michigan consumer sentiment reading. There’s plenty of Fedspeak this week with Fisher, Mester, Lacker, Williams and Kocherlakota all due.