Commodity Rout Halted On Dollar Weakness, Equities Unchanged

If yesterday's market action was boring, today has been a virtual carbon copy which started with the usual early Chinese selloff levitating into a mildly positive close, with the SHCOMP closing just above the psychological 4,000 level: the next big hurdle will be 4058, the 38.2% Fib correction of the recent fall.

The Nikkei likewise rallied into the close after a massive Toshiba accounting scandal sent the stock higher, even if it cost the CEO his position. European equities are mixed with an early push lower becoming a flattish morning. The Euro Stoxx 50 future is down small, still eyeing its April 13 high at 3769, above which the future would be trading at 200 levels.

In the US equity futures are currently unchanged ahead of a day in which there is no macro economic data but lots of corporate earnings led by Microsoft, Verizon, UTX and of course Apple. Most importantly, some modest USD weakness overnight (DXY -0.1%) has helped the commodity complex, with gold rebounding from overnight lows, while crude has at least stopped the recent carnage which sent WTI below $50.

Asian equities rose following modest gains on Wall Street, as technology names bolstered US indices ahead of earnings from tech giants Apple and Microsoft, which saw the NASDAQ Comp print fresh record highs . Consequently, the Nikkei 225 (+0.9%) rose and is now on course to post its 2nd longest winning streak of the year as participants played catch up on return from their elongated break. Hang Seng (+0.5%) and Shanghai Comp (+0.6%) traded in volatile fashion, with initial weakness following reports that some margin lenders are to require clients sell stocks purchased through margin debt. However, Chinese stocks then shrugged off losses and are on course for its longest run of gains since May. JGB's traded relatively flat with minor gains seen as the BoJ conducted its large JGB purchase program.

Less than impressive earnings by blue-chip names including Novartis (-2.6%) this morning and IBM after yesterday's close weighed on sentiment in Europe this morning . As a result, stocks traded lower since the get-go (Euro Stoxx: -0.1 %), with health-care and information technology sectors underperforming as a result. Consequently, this supported the bid tone by Bunds, with market participants failing to react positively to the reports that the Greek government has submitted a bill on bailout prior measures to parliament as per the request of Greece's creditors, measures including actions such as bank restructuring.

In FX, despite the growing expectations of a rate hike by the Fed, the USD index traded lower, albeit marginally (-0.1%), driven by the upside by EUR/USD after stops were tripped on the break of overnight high, which in turn supported GBP/USD and subsequently saw USD/JPY move into negative territory.

Antipodeans were in focus in the Asia-Pacific session with AUD/NZD notably underperforming in the wake of RBA minutes, where the RBA reiterated that further AUD depreciation is likely and needed. Elsewhere, NZD continued to extend on gains after NZ finance minister English stated that dairy prices could recover by year-end coupled with reports of Tokyo-based banks buying in NZD/JPY.

Precious metals have seen a paring of some of yesterday's heavy losses, with spot gold and platinum both up over USD 10/oz on the day. However gold still remains near 5 year lows, with analysts at ABN Amro suggesting that gold will reach USD 1,000/oz due to the firmer USD amid Fed's rate outlook. Elsewhere, WTI and Brent crude futures have swung between gains and losses amid light fundamental news, with WTI Sep'15 crude futures briefly falling below the psychological USD 50/bbl handle ahead of today's API crude oil inventories (Prey. -7300k).

There is little in terms of tier-1 data releases, however market participants will be looking out for comments from BoE's Carney, especially following a raft a hawkish comments by the fellow MPC and ahead of tomorrow's release of the BoE July meeting minutes.

Today's most notable US earnings report comes in the form of Apple, who are scheduled to report after markets with the likes of Microsoft, Verizon and United Technologies also scheduled to report.

US Event Calendar From Bloomberg and RanSquawk

  • Less than impressive earnings by blue-chip names has weighed on sentiment in Europe
  • Despite the growing expectations of a rate hike by the Fed, the USD index traded lower, albeit marginally
  • Today sees comments from BoE's Carney and earnings from Apple, Microsoft and United Technologies
  • Treasury curve steepens overnight amid “commodity rout” that has sent Bloomberg Commodity Index to 13-year low; no economic data releases today.
  • Volumes were reported light in futures (40% normal) and cash (60%), ED&F Man head of U.S. rates Tom DiGaloma writes
  • The worst isn’t over yet for gold. That’s what options trading is signaling, at least, as two of the three gold options attracting the most volume on Monday were wagers on further declines
  • European Commissioner Pierre Moscovici said Greece’s European creditors have agreed to provide debt relief so long as the country’s government can deliver on the terms of its third bailout package
  • Puerto Rico’s budget director ratcheted up the risk of a default on some agency securities, saying cash from the commonwealth’s operating budget won’t be redirected to make debt payments due next month
  • Treasury investors are starting to believe in a September interest-rate increase again. Futures show a 42% chance the Federal Reserve will raise borrowing costs in that month, up from 35% odds a week ago
  • BoE close to taking concrete step toward first interest-rate increase in eight years as at least one Monetary Policy Committee member will vote next month to raise the key rate from a record low, according to 65% of 26 economists in a Bloomberg survey
  • Sovereign 10Y bond yields mostly steady. European stocks mixed, Asia higher; U.S.equity- index futures mixed. Crude oil drops, copper and gold rise

US Event Calendar

  • 10am: Revisions to U.S. Industrial Production data
  • 11:30am: U.S. to sell $25b 1Y bills, $40b 4W bills

DB's Jim Reid concludes the overnight event recap as usual

With Greece now paying its bills with freshly borrowed money and few serious players allowed to short or sell the Chinese stock market it does feel like markets are becalmed again and have been allowed to settle into a typical summer lull. Yesterday was pretty dull but we did see the S&P 500 (+0.08%) briefly pass its record closing high intra-day before retracing gains into the close. It seemed Energy was to blame for the softer close as the recent commodity rout continued quietly in the background. WTI (-1.45%) dipped below $50 at one stage for the first time in over 3 months and Gold (-3.32%) fell further to five-year lows.

The move in Gold supported a selloff across most of the precious metal space with Silver (-1.22%), Platinum (-1.62%) and Palladium (-1.47%) also dipping lower. The move has largely been attributed to the prospect of Fed liftoff and the recent strong run in the Dollar with attention moving back to the Fed after recent events in Greece and China. Reuters are also suggesting that the mini flash crash experienced in trading in Asia yesterday (when Gold tumbled nearly 5%) was exaggerated with the relatively low liquidity as CME circuit breakers triggered twice in just one minute with suggestions of large amounts of stop-loss selling. So this will give all of us worried about a lack of trading liquidity more ammunition that this cycle is behaving quite differently in this respect.

The moves in Gold also come on the back of the lower than expected reserves data out of China on Friday which we touched on yesterday. The latest leg lower in the commodity complex has now helped take the Bloomberg commodity index to the lowest level since March 2002. In the S&P 500, energy (-1.29%) and material names (-0.90%) were the main decliners yesterday with the likes of Newmont Mining (-12%) hardest hit. The pain was felt elsewhere too with AngloGold falling to all time lows in South Africa and the world’s largest producer Barrick Gold crashing 16% lower in Canada to the lowest level since the early 90s.

Despite this, further supportive earnings reports out of Halliburton, Lockheed and Hasbro in particular helped offset much of the pressure in the commodity space, while in Europe we saw the Stoxx 600 (+0.28%), DAX (+0.53%) and CAC (+0.35%) all close up. Europe credit markets also ended a touch better with Crossover 5bps tighter at the close while across the pond CDX IG was +0.4bps.

We remain positive on credit and equities due to what is still huge global central bank liquidity but prefer Europe equities to the US as QE related trades build again. In European credit we continue to prefer HY to IG but as we showed in our HY monthly at the start of the month the valuation of HY and IG have converged for the first time in 18 months. In the first 6 months of 2014, HY traded increasingly expensive to IG and then reversed this trend completely in H2 to be left very cheap to IG at the start of this year. As we stand now they're broadly fair value to each other so our HY overweight is more based on the extra carry and the extra spread tightening that HY will bring in a spread compression period. We still think the financial world is a bit of a manipulated mess but for now liquidity is likely to be the dominant theme. We'll revisit as the Fed gets closer to potential lift-off meetings but we still think a delay into 2016 is marginally more likely.

Taking a look at markets this morning now, we’ve seen a small bounce back in Gold (+0.73%) although WTI (-0.34%) and Brent (-0.04%) have continued to move lower. Having closed for a public holiday yesterday, the Nikkei (+0.54%) is leading the equity gains in Asia this morning followed by the ASX (+0.38%) and Hang Seng (+0.38%) while the Kospi (-0.14%) is slightly lower. It’s another volatile session in China. Having initially plunged some 2% at the open, the Shanghai Comp (+0.26%) has bounced back along with the CSI 300 (+0.13%) and Shenzhen (+0.92%) with 543 mainland companies still suspended from trading. S&P 500 futures are unchanged while Asia credit is around half a basis point wider.

Moving on, comments out of St Louis Fed President Bullard yesterday helped support a modest move up in Treasury yields and the Dollar. The benchmark 10y yield closed 2.5bps higher at 2.373% while 5y (+3.6bps) and 30y (+1.2bps) yields also moved slightly higher, while the Dollar index closed the session +0.17% for the fourth consecutive daily gain with the index now extending its MTD gains to +2.7%. Bullard said that the US economy is closer to normal than it has been over the last five years and that ‘I’d see September having more than a 50% probability right now’. Bullard also said that he expects unemployment to probably move below 5% and that, consistent with other Fedspeak, any decision will be on a meeting by meeting basis.

Staying on the Fed, yesterday the Central Bank approved a final rule requiring the largest and most systematically important banks to further strengthen their capital positions. The findings found that the 8 largest banks have extra capital requirements of between 1% and 4.5% with JP Morgan at the top end of that range at 4.5% (a shortfall of $12.5bn although lower than initial estimates). Citigroup, Goldman Sachs, Morgan Stanley and Bank of America are the other notable institutions next in line with the surcharges due to be phased in from 2016 and becoming fully effective from 2019.

Wrapping up markets yesterday in Europe, 10y Bund yields closed the session 2.6bps lower at 0.761% while yields in the periphery were more mixed with Spain (+0.9bps) a touch higher but Italy (-1bp) and Portugal (-4.3bps) lower. As mentioned earlier yesterday we got confirmation that Greece repaid €6.8bn owed to the ECB and IMF as banks reopened under continued strict capital controls. According to Bloomberg Greek parliament is set to vote tomorrow on a second set of prerequisites for further aid.

It’s set to be another quiet day ahead for data with just UK public sector net borrowing prints expected this morning in Europe and no data due out of the US this afternoon. Corporate earnings will likely retain much of the focus with Apple, Microsoft and Verizon the big names due up.