In what has been another quiet overnight session, which unlike the past two days has not seen steep, illiquid gaps higher in US equity futures (the E-mini was up 3 points and accelerating to the upside as of this writing so there is still ample time for the momentum algos to go berserk), the main event was the price of Brent rising above $50 for the first time since November with WTI rising as high as $49.97.
As shown in the chart below, Brent crude surpassed $50 a barrel for the first time since November, lifting commodity companies and buoying currencies where oil is produced.
A drop in U.S. stockpiles and shrinking output in Nigeria and Venezuela contributed to the gains in Brent, which is up more than 80 percent from January’s low of $27.10. The Bloomberg Commodity Index rose to the highest in a week as metals also advanced, and miners in the Stoxx Europe 600 Index headed for their biggest three-day jump in more than a month.
Brent is recovering after tumbling to a 12-year low in January. Now, the International Energy Agency and Goldman Sachs Group Inc. say a glut is dissipating as low prices take their toll on supplies. That may leave prices high enough to alleviate the threat of deflation and still low enough that they don’t impinge on economic growth. "It could well be that we have arrived at a ‘sweet spot’ -- low enough to support consumers and curtail industry job cuts, but not high enough to rile central banks and bond markets." said Michael Ingram, a market strategist at BGC Partners.
Well, if US consumers didn't benefit from low oil, they sure will benefit from higher "sweet spot" soil, supposedly.
As for markets, even the bulls are looking for an end to the latest torrid short squeeze: "It’s to be expected after the gains we’ve seen this week,” said Michael Hewson, a market analyst at CMC Markets in London. "The real test is whether or not we can sustain the gains of the last two days. There is a lack of conviction on the part of investors with respect to the overall direction of European stocks. I don’t see where that catalyst is coming from at the moment."
And yet, the levitation continues, driven by hope that Yellen will give some further indication of what the Fed will do tomorrow when she speaks at Harvard. And, much to Jeff Gundlach's dismay, the narrative has again shifted to "rate hikes are bullish" in a market which can't remember what happened even 5 months ago. "Markets are now more accepting of a U.S. rate increase,” said Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co. “The thought is that an increase won’t stop the U.S. economy from growing, but if the global economy slows, they have the means to change their policy."
Also notable was the drop in European peripheral bank shares after Spain's Banco Popular tumbled 20% on a €2BN share sale. As a result Spain’s benchmark IBEX 35 Index was the biggest decliner among western-European markets. World equities were little changed after the MSCI All-Country World Index staged a 2 percent recovery in the previous two days after weeks of stagnation. The Stoxx 600 was unchanged after its biggest two-day jump in three months. Futures on the S&P 500 were up 0.1%
The U.S. has durable goods orders data for April due as well as weekly jobless claims figures. In addition, leaders from the Group of Seven nations are meeting in Japan to discuss topics including economic policy, climate change and boosting infrastructure investment.
- S&P 500 futures up than 0.1% to 2090
- Stoxx 600 down 0.1% to 348
- FTSE 100 up less than 0.1% to 6267
- DAX up 0.2% to 10226
- S&P GSCI Index up 0.4% to 372.3
- MSCI Asia Pacific up 0.3% to 127
- Nikkei 225 up less than 0.1% to 16772
- Hang Seng up 0.1% to 20397
- Shanghai Composite up 0.3% to 2822
- S&P/ASX 200 up 0.3% to 5388
- US 10-yr yield down less than 1bp to 1.86%
- German 10Yr yield up less than 1bp to 0.16%
- Italian 10Yr yield up less than 1bp to 1.36%
- Spanish 10Yr yield up 2bps to 1.49%
- Dollar Index down 0.15% to 95.21
- WTI Crude futures up 0.5% to $49.83
- Brent Futures up 0.6% to $50.02
- Gold spot up 0.3% to $1,228
- Silver spot up 0.5% to $16.40
Top Global News
- Lenovo Profit Misses Estimates as Motorola Smartphones Struggle
- UniCredit Said to Seek Buyers for $838 Million of Bad Loans
- Ubisoft Said to Seek White Knight to Fend Off Vivendi Approach
- Abe Warns G-7 Leaders of Risk of Lehman-Scale Economic Crisis
- Qatar Stuns Mideast Debt Market With Record $9 Billion Bond
- Hedge Funds May Lose 25% of Assets, Blackstone’s James Says
Looking at regional markets, Asian equities traded in modest positive territory underpinned by the continued oil increase. ASX 200 (+0.3%) was supported by the fresh YTD highs in crude futures in which Brent rose above USD 50/bbl, but the index then pared most of its advances following mixed Capex data. Nikkei 225 (+0.1%) is also positive although off its best levels as JPY strength clouds sentiment. Elsewhere, the Shanghai Comp (+0.3%) underperformed for much of Asian trade amid debt and financial sector concerns, as brokerages are seen to suffer from weaker activity, however did see a turnaround late on to conform with its counterparts. This morning has seen thin volumes from a fixed income perspective with Bunds relatively flat for the session as some participants observe the Corpus Christi holiday while some remain on the side lines until the conclusion of the G7 summit. Additionally, the persistent upside in crude prices have weighed on the long end, subsequently reversing some of the bull flattening seen yesterday.
Top Asian News
- India Said to Require Local Sourcing by Apple to Open Stores: Minister said to rule Apple must comply with sourcing rules
- Macau Economy Seen at Risk as Moody’s Downgrades Gaming Hub: Agency expects Macau GDP to continue shrinking in 2016, 2017
- New Zealand Leaves Door Open to Tax Cuts as Budget Surplus Grows: Govt forecasts 2016-2017 budget surplus of NZ$719m
- Takata Said to Hold Talks With Possible Buyers Including KKR: Shares surged by daily limit after earlier report by Nikkei
- One Year After Bubble Burst, China’s Stock Market Has Gone Quiet: Volatility on the Shanghai Composite is lowest since 2014
European equities trade in mixed fashion with the Euro Stoxx 50 (+0.1%) modestly higher. Notable underperformance has been observed in periphery banks, particularly the Spanish banking sector after Banco Popular (-20%) reported that they are seeking to raise EUR 2Bn through a share sale. Elsewhere, energy and material names have been among the best peroformers amid the upside in the commodity complex with Brent crude futures continuing to hover around YTD highs to remain above USD 50/bbl, while WTI crude trades slightly south of that mark having earlier reached a high of USD 49.95/bbl.
Top European News
- Europe’s Troubles Pile Up at Home as Leaders Cross Globe for G-7: Cameron, Merkel, Renzi and Hollande facing domestic challenges. Brexit to French strikes, refugees and elections occupy voters
- Podemos Wants to Talk to Investors About Easing Spain’s Debt: Anti-establishment group wants longer duration, lower interest. Party seeking alliance with Socialists after June election
- VW Says Bonds Meet ECB Purchase Criteria Ahead of Market Return: Potential for ECB acquisitions ‘can only be good’ for carmaker. Company shut out of debt market following emissions scandal
- French Strikes Intensify as Government Holds Firm on Labor Law: CGT Union ‘doesn’t make the law,’ Prime Minister Valls Says. Unions split over protest as business warns of slowdown
- Telecom Italia Approves $45 Million Incentive Plan for CEO: Payout tied to turnaround plan for former phone monopoly. Two months into job, Cattaneo almost tripled cost-cut goals
In FX, the yen strengthened 0.2 percent. The Bloomberg Dollar Spot Index declined 0.2 percent following a 0.2 percent drop in the last session. The MSCI Emerging Markets Currency Index rose 0.2 percent, led by currencies from commodity-producing countries. Russia’s ruble climbed for a third day, advancing 0.4 percent. Higher oil prices supported the Norwegian krone, which rose 0.9 percent versus the greenback, and Malaysia’s ringgit, which advanced 0.5 percent. A measure of volatility in the pound versus the dollar covering the period when the result of the referendum on European Union membership will be known jumped to its highest level in six years. The pound was little changed. The kiwi touched its weakest level since March after Fonterra Cooperative Group Ltd., the world’s largest dairy exporter and New Zealand’s biggest company, forecast a lower-than-expected payout to its farmer shareholders.
In commodities, Brent crude rose 0.3% at $50.06 a barrel at 10:39 a.m. in London and West Texas Intermediate climbed as high as $49.97 before retreating modestly. Bloomberg’s index of commodity returns gained 0.5 percent, rising for a second day. U.S. inventories slid by 4.23 million barrels last week, exceeding an expected drop of 2 million barrels. Attacks in Nigeria have cut production to a 20-year low and Venezuela is struggling to maintain output amid power cuts. Producers in Canada are beginning to restart oil-sands operations halted by wildfires.
French power for delivery in June climbed as much as 3.4 percent to 25.70 euros a megawatt-hour, the highest price since March 31, as a strike that has halted refineries across the nation spread to nuclear power plants. Output at 11 reactors operated by Electricite de France SA was reduced by the protests against a new labor law. Copper advanced 0.8 percent to $4,691 a metric ton, a third day of gains. The metal used in wires and cables is heading for the first weekly gain this month. Nickel added 0.6 percent and zinc rose 1.9 percent. Gold halted six days of losses to rebound from the lowest level in seven weeks as a rally in the dollar paused.
In the US, the big focus will be on the durable and capital goods orders for April. Current expectations are for a +0.5% mom in headline durable goods and +0.3% mom in core capex orders. Elsewhere, also due to be released this afternoon will be pending home sales for April which is expected to continue the run of strong housing market data, while last week’s initial jobless claims data will also be released (275k expected). The calendar will be rounded off with some more regional manufacturing data in the form of the Kansas City Fed’s manufacturing activity index. Fedspeak wise today we’ve got Bullard (at 6.10am) speaking at an event in Singapore, while Powell (at 12pm) is due to talk on ‘recent economic developments and monetary policy’.
Bulletin Headine Summary From Bloomberg and RanSquawk
- Underperformance observed in periphery banks after Banco Popular shares fall over 20% as they seek a EUR 2bIn share sale.
- GBP pares gains following downward revisions in the UK GBP Y/Y reading, while commodity linked currencies remain firm amid the persistent upside in crude prices.
- Later in the day we will be looking out for US Pending Home Sales, Durable Goods Orders and Initial Jobless Claims
- Treasuries slightly higher along with global equities as crude oil flirts with $50 a barrel mark; week’s auctions conclude with $28b 7Y notes, WI yield 1.68%, compares with 1.634% awarded in April.
- Japanese PM Shinzo Abe presented documents to his fellow G-7 leaders Thursday that he said indicated a risk of the world economy falling into a crisis on the scale of the 2008 Lehman shock if appropriate policy measures weren’t taken
- Qatar sold $9 billion of Eurobonds on Wednesday, helping push 2016 offerings from the Middle East and North Africa to $29.3 billion, a record for the first half of a year
- Bill Gross said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices
- U.S. billionaire Wilbur Ross said he’s considering investing in nonperforming loans in China, as Moody’s Investors Service said that the nation has the tools to prevent a financial crisis in the near term
- Spanish consumer strength boosted by job creation helped maintain growth momentum in the first quarter as the nation grappled with political deadlock. Household consumption rose 0.9% from the previous three months
- Sovereign 10Y yields mixed; European, Asian equities higher; U.S. equity-index futures rise; WTI crude oil higher, precious metals rally
US Event Calendar
- 8:30am: Initial Jobless Claims, May 21, est. 275k (prior 278k)
- Continuing Claims, May 14, est. 2.142m (prior 2.152m)
- 8:30am: Durable Goods Orders, Apr P, est. 0.5% (prior 0.8%)
- Durables Ex-Transportation, Apr P, est. 0.3% (prior -0.2%)
- Cap Goods Orders Non-defense Ex Air, Apr P, est. 0.3% (prior 0.1%, revised -0.8%)
- Cap Goods Ship Non-defense Ex Air, Apr P, est. 0.1% (prior 0.5%, revised 0%)
- 9:45am: Bloomberg Consumer Comfort, May 22 (prior 42.6)
- 10:00am: Pending Home Sales m/m, April, est. 0.7% (prior 1.4%)
- Pending Home Sales NSA y/y, April, est. 0.2% (prior 2.9%)
- 11:00am: Kansas City Fed Mfg Activity, May, est. -3 (prior -4)
- 12:15pm: Fed’s Powell speaks in Washington
DB's Jim Reid concludes the overnight wrap
At the moment the Fed look like they have super powers. A week on from a hawkish set of FOMC minutes one would have to say that they have won the first round in the fight to raise rates in June or July. We're still not convinced they'll be able to and it seems reasonable to expect tougher rounds in the battle ahead but it's worth highlighting the performance of a few global variables since just before the minutes were released last Wednesday night. Indeed, looking firstly at the moves in the US, the S&P 500 is up +1.62% from the moment just prior to the minutes despite what was an initial 24 hours of weakening, while the S&P 500 Banks sector has outperformed the wider equity index with a +3.34% gain. Meanwhile the US Dollar index has strengthened +0.81% and 2y and 10y Treasury yields are 7bps and 5bps higher respectively. Of course in that time we’ve also seen the probability of a June rate hike move from 12% to 34% and a July hike move from 28% to 54%.
Interestingly moves in Europe have actually been more impressive although the positive developments around Greece and the ECB commentary concerning banks has largely fuelled that, along with the weaker Euro (-1.21%). The Stoxx 600 is +3.26%, DAX +2.64% and Spanish and Italian equities are +3.96% and +2.77% (although we’d stress that much of this has come in the last two days) while Stoxx 600 Banks are up an impressive +7.24%. Emerging markets have been the obvious laggard with the MSCI EM equity index down -0.86%. WTI Oil (+0.38%) initially tumbled with the strength in the USD from $49.50/bbl to a low of $47.26/bbl, but has recovered all of that loss and a little more to test that $50/bbl mark again. Unsurprisingly it’s Gold (-3.90%) which is the main underperformer.
So you have to imagine that moves in the last week or so will be of reasonable comfort to the Fed. The last 48 hours in particular has been a strong one for risk assets with indices yesterday including the S&P 500 (+0.70%), Dow (+0.82%), Stoxx 600 (+1.29%) and DAX (+1.47%) all rallying again. Banks were again at the forefront of the moves although this time it was energy stocks which led all other sectors as both WTI and Brent edged closer and closer to the elusive $50/bbl level. This morning in fact has seen Brent just tip over that mark, currently hovering around $50.10/bbl and it’s managed to hold above $50/bbl for a couple of hours or so now. The move has been helped by the latest EIA stockpile data, along with a slightly weaker US Dollar which fuelled yesterday’s gains. Indeed crude stockpiles were reported as falling 4.2m barrels last week with the WSJ journal highlighting that a poll showed that ‘just’ a 2.5m decrease was expected. At the same time US output was also reported as falling for an 11th consecutive week. It wasn’t just equities which benefited from the move as credit markets also extended their strong run of gains. In Europe we saw the iTraxx Main and Crossover indices end 3bps and 12bps tighter while in the US CDX IG was 2.5bps tighter, meaning it is nearly 7bps tighter this week alone which compares to the S&P 500 which is just shy of 2% firmer. It’s also worth noting that all of a sudden US HY energy cash spreads are 18bps tighter in the last three sessions and 72bps tighter in the month of May. They are currently hovering around 904bps in spread terms which compares to the wides in spread of 1932bps back in February.
Back to markets and despite the positive lead from the US last night and the moves for Oil, it’s been a bit of a mixed start for equity bourses in Asia this morning. Japanese equities are shrugging off a reasonable strengthening in the Yen (+0.5%) to post modest gains (Nikkei +0.29%). Elsewhere the ASX and Kospi are flat, however the Hang Seng (-0.23%) and Shanghai Comp (-0.90%) have weakened despite minimal newsflow. Meanwhile we’re seeing decent gains for Oil-sensitive currencies (Norwegian Krone leading the way) while US equity index futures are modestly in the red.
Moving on. Yesterday’s economic data was a bit of a mixed bag across the pond. The advance goods trade balance for April showed a very modest widening in the deficit to $57.5bn from $57.1bn although expectations had been for a widening to $60bn. While imports rose as expected (by +1.9% mom), the surprise was the +2.4% mom increase in exports which will be seen as positive for Q2 GDP. Meanwhile the remainder of the flash May PMI’s were released too, with the services reading (51.2 vs. 53.0 expected) disappointing after declining 1.6pts from April. When combined with the manufacturing data earlier in the week, the flash composite print of 50.8 is also down 1.6pts from April. The only other data of note in the US yesterday was the FHFA house price index which was reported as increasing a higher than expected +0.7% mom in March.
Over in Europe the highlight was the better than expected German IFO survey for May. The business climate reading was up a full point from April to 107.7 (vs. 106.8 expected) thanks to similar gains in the current assessment (+1pt to 114.2) and expectations (+1.1pts to 101.6) components. This means that the business climate reading has now made up more than half of the decline it had seen from November (109.1) to February (105.8). Our economists in Europe noted that the data supports their expectation that GDP growth should bounce back in Q3 (they expect +0.5% qoq) after a weak Q2 (+0.1% qoq expected) that is impacted by seasonal factors and one-offs.
Staying in Europe and a bit more on the Greece announcement 24 hours ago. Most will have seen the details by now, with the €10bn disbursement having been approved with the first tranche due to be delivered in June, as well as the commitment for future debt relief in 2018. What appears to be more debated however is the IMF’s participation in all of this. While the Fund stated that it is willing to continue participating financially in the program, the decisions will be taken by the ‘end of this year’ subject to an ‘updated debt sustainability analysis’. As DB’s George Saravelos pointed out, the key muddle through aspect of the agreement is the fact that the IMF has managed to delay participation by another six months, so the ambiguity on whether the IMF ends up participating remains. Indeed the IMF’s main negotiator at the talks, Paul Thomsen, said that ‘we will need to assess the adequacy of the measures, and we will only go ahead if there is an assessment that they are adequate’. That said, yesterday’s announcement is still very much significant progress and keeps Greece on a familiar track of year-by-year deal making.
Before we look at today’s calendar, the latest stop on the Fedspeak tour saw Dallas Fed President Kaplan (moderately hawkish usually) say that should the economic data keep going the way it is then ‘I will advocate for an increase in the near future’. He also said that his view was unchanged relative to that in March when he indicated that two hikes this year could be appropriate. Kaplan refused to comment specifically on timing but did make mention of the UK EU referendum as representing ‘some amount of tail risk’.
Turning now to the day ahead, this morning in Europe the main highlight is the second reading for Q1 GDP in the UK where no change from the initial +0.4% qoq estimate is expected. Over in the US the big focus will be on the durable and capital goods orders for April. Current expectations are for a +0.5% mom in headline durable goods and +0.3% mom in core capex orders. Our US economists are more optimistic and are looking for a +1.0% mom rise in headline durable orders which should be propped up by Boeing orders. They do however expect ex-transportation orders to be flat for the month continuing the trend of weak business investment. Elsewhere, also due to be released this afternoon will be pending home sales for April which is expected to continue the run of strong housing market data, while last week’s initial jobless claims data will also be released (275k expected). The calendar will be rounded off with some more regional manufacturing data in the form of the Kansas City Fed’s manufacturing activity index. Fedspeak wise today we’ve got Bullard (at 11.10am BST) speaking at an event in Singapore, while Powell (at 5.15pm BST) is due to talk this afternoon on ‘recent economic developments and monetary policy’.