Precious Metals Surge Continues, As Does Italian Bank Pain, In Holiday-Shortened Session

In today's US holiday-impacted session, the biggest overnight story was the dramatic surge in precious metals, which saw silver briefly soar above $21 following a Chinese short squeeze sending the metal as much as 7% higher overnight, its biggest one day gain since December 1, 2014. As we reported overnight, silver touched a two-year high and gold rallied for a fourth day after the Brexit vote spurred demand for havens. The catalyst is familiar: speculation central banks in some of the world’s leading economies will step up monetary stimulus in the wake of Britain’s decision to leave the European Union.  The commodity complex helped push the Shanghai Composite higher by 1.9%, closing the SHCOMP just shy of 3,000, the highest since May.

“Investment demand for metals continue on expectations of a dovish Fed, growth worries and central bank policies putting more and more sovereign bonds into negative yields,” said Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank A/S by e-mail. “The policies of the ECB and BOJ are already ultra loose and further stimulus could be added following the Brexit vote.”

Brent crude held above $50 a barrel as Nigerian militants threatened more supply disruptions, while nickel climbed to an eight-month high after the Philippines announced plans to audit all mining operations. Miners in the Stoxx Europe 600 Index traded at the highest level since April, while automakers and builders led the industries lower. Currencies of commodity producers Australia, Canada and New Zealand were the best performers among major peers. The Shanghai Composite Index climbed the most since May.

Meanwhile, things for European, and especially banks, have turned from bad to worse, with Italy’s FTSE MIB Index falling 0.9%, the biggest decline among western-European markets, as Banca Monte dei Paschi di Siena SpA and Banca Popolare dell’Emilia Romagna SC lost more than 3 percent. The catalyst was news that the ECB asked Monte Paschi to draw up a plan for tackling its bad-loan burden, yet another confirmation the nation’s banks are under pressure to bolster their finances. As a result European equities turned lower this morning, having reversed their opening gains as Italian banks drag the region lower amid dampened hopes of further state aid.

The Stoxx 600 slipped 0.2 percent, after posting is biggest four-day rally since February. The volume of shares changing hands was about 20 percent lower than the 30-day average, with the U.S. market closed for the Independence Day holiday. S&P 500 Index futures gained 0.2 percent. The U.K.’s FTSE 100 Index was little changed. The gauge of megacaps is close to entering a bull market, boosted by a weaker pound and a rally in miners of precious metals. Fresnillo Plc and Randgold Resources Ltd. climbed more than 4 percent on Monday.  The MSCI Emerging Markets Index rose 0.5 percent to the highest since April. It is up 6.1 percent in five days, the best performance for the period since March 7.

The US is closed today with all floor exchanges, the CME, CBOT, NYSE and NYMEX dark.

Market Snapshot

  • S&P 500 futures up 0.2% to 2101
  • Stoxx 600 down 0.2% to 331
  • US 10-yr yield unch at 1.44%
  • Nikkei up 0.6% to 15,776
  • SHCOMP up 1.9% to 2,989
  • Dollar Index unch at 95.73
  • FTSE down 0.1% to 6,568
  • EURUSD down 0.14% to 1 1123
  • USDJPY up 0.1% to 102.62
  • WTI Crude futures up 0.4% to $49.15
  • Brent Futures up 0.5% to $50.58
  • Gold spot up 0.7% to $1,351
  • Silver spot up 4.0% to $20.27

Looking at regional markets, Asian equity markets traded positive across the board following the biggest weekly YTD advance in the S&P 500 and Dow Jones last week. Nikkei 225 (+0.6%) shrugged off its initial weakness as JPY pared some of its strength, while ASX 200 (+0.6%) has also rebounded, led by materials after continued gains across metals in which silver rallied above the USD 21/oz level for the first time since July 2014. Elsewhere, Chinese markets conformed to the positive sentiment with the Hang Seng (+1.3%) seeing strength as it played catch up to last Friday's gains and the Shanghai Comp (+1.9%) benefiting from another firm liquidity injection. Finally, 10yr JGBs traded in negative territory amid the improvement in appetite for riskier assets, although 2yr and 20yr yields declined to fresh record lows while today's BoJ operations were for a paltry JPY 390b1n in government debt.

In Europe, equities are lower this morning, having reversed their opening gains as Italian banks drag the region lower amid dampened hopes of further state aid. This comes after reports that an Italian official has denied that PM Renzi is to challenge the EU and intervene in the banking sector, as such the FTSE MIB has been the notable underperformer. Additionally, Monti Paschi (-7%) plunged to a record low after the ECB demanded that the company reduced its holding of NPLs. However, price action has been contained with volumes lighter as many participants are away for the US Independence Day holiday. While in terms of credit markets, Bunds are a touch softer with the price remaining in close proximity to the 167.00 level.

In FX, The Australian, Canadian and New Zealand dollars appreciated at least 0.3 percent, buoyed by the pickup in commodity prices. The British pound was little changed versus the dollar, after Chancellor of the Exchequer George Osborne floated the possibility of a lower corporate tax rate and before Bank of England Governor Mark Carney outlines the available macroprudential tools on Tuesday. The currency tumbled 8.1 percent in June, the most since 2008, as the U.K.’s decision to leave the EU shocked investors and triggered political upheaval in the country. Japan’s yen weakened 0.1 percent to 102.60 per dollar. It declined 0.3 percent last week as BOJ Governor Haruhiko Kuroda said more funds could be injected into the market should they be needed. The haven currency touched 99.02 in the wake of the vote for Brexit, its strongest level since 2014.

In Commodities, silver soared as much as 7 percent, its biggest intraday gain since 2014, before paring its advance to 3 percent as it traded at $20.3404 at 11:28 a.m. in London. Holdings in silver-backed exchange traded funds expanded to a record last month, and assets in gold ETFs are now at the highest since August 2013 as investors bet on a continued low-yield environment. Gold bullion rose 0.7 percent on Monday. “Brexit has created all sorts of fear and loathing across markets,” Commonwealth Bank of Australia analysts, including Tobin Gorey, wrote in a July 4 note, adding that investors are cutting back on risk. “Gold and silver, as we would expect, benefit the most from safe-haven demand flows.”

Brent crude added 0.5 percent to $50.59 a barrel. A militant group operating in Nigeria’s southern oil-producing region said it attacked five crude-pumping facilities, dealing a blow to the government’s effort to enforce a cease-fire. Nickel, which is used in the production of stainless steel, rose 3.6 percent to more than $10,000 a ton in London. It surged 5.6 percent on Friday after the Philippines announced its audit plans, threatening to curb supplies from the southeast Asian country. Less than a third of miners operating in the nation are compliant with international standards for responsible mining, according to the government. Rubber futures climbed 3.7 percent in Tokyo, buoyed by shrinking stockpiles after rains disrupted production in Thailand.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities are lower this morning, having reversed their opening gains as Italian banks drag the region lower amid dampened hopes of further state aid
  • In FX, we have seen some decent movement in the majors, led by the AUD which has recovered swiftly from the weekend gap lower on the back of the tight election results in Australia
  • Looking ahead, there are no major standouts on the data slate

US Event Calendar

  • July 4 Holiday

DB's Jim Reic conludes the overnight wrap

Welcome to Amexit Day, more latterly know as US Independence Day. Happy holidays to our friends stateside. Wherever you are you may have noticed that the EMR has been coming out a bit earlier recently. You may have thought that this was due to extra diligence and professionalism around the Brexit saga. You would be slightly correct but the truth is that it has more to do with a 'murder' of crows which is an apt name for a group of them given what they are driving me towards. Every morning at 4am we get woken by crows pecking very aggressively at our windows. After a few days of bad sleeps we researched into it and found that it is currently mating season and a period that the male crows get incredibly territorial. They think the reflection in the window is a love rival and they try to fight with it. They also produce an awful lot of waste whilst doing so. My wife who has far better hearing than me wakes immediately and curses as she's also been up with Maisie previously. She then typically wakes me to ask if I can hear it!! I usually say no I can't but I can now that you've woken me. Anyway on the advice of the internet we yesterday bought a scarecrow owl that bobs up and down in the wind and also some reflective tape that flutters and apparently scares them.

Anyway I'll let you know how that goes on Wednesday as today I'm having knee surgery so will leave the reigns fully to Craig tomorrow while I recover. The irony is that as I haven't been able to do much cardio in recent weeks, I've gone back to doing upper body weights to try to stay fit. This weekend I've started getting a minor dislocation sensation in my shoulder similar to what happened before I had shoulder surgery 3 years ago. I'm desperately hoping it doesn't develop into the same problem again. I am falling apart.

Financial markets were certainly more robust last week post Brexit than my failing body. Indeed despite the heavy declines across markets last Monday, markets roared back in style from Tuesday onwards as the focus quickly turned over to the Central Banks reaction function. In fact last week saw a number of European equity markets record their best week in a month. The Stoxx 600 (+0.72% on Friday, +3.19% over the week) had its best week since the end of May along with the DAX (+0.99%, +2.29%) while even more impressively the IBEX (+1.29%, +6.18%) had its best weekly return since October last year. Amazingly the FTSE 100 (+1.13%, +7.15%) had its best one-week gain since 2011 and you’d have to go back to 2008 to find the last time that the index recorded a better four-day gain (Tuesday-Friday). Clearly alot of that has to do with Sterling (-0.33%, -3.01%) which is hovering around 1.3285 this morning although still hasn’t quite got down to those Monday lows. Meanwhile across the pond the S&P 500 (+0.19%, +3.22%) – while enduring a slower session on Friday ahead of the long weekend – still had its best weekly gain this year.

It was much the same in credit markets too. In Europe the iTraxx Main (-5bps Friday) and Xover (-22bps Friday) closed the week just 4bps and 26bps off their pre-referendum levels on the 23rd. The peripherals were the standouts in the sovereign bond market where 10y yields in Italy, Spain and Portugal closed the week 32bps, 48bps and 33bps lower respectively. 10y Gilt yields were 22bps lower over the week and the Swiss yield curve turned completely negative – along with a number of other eye watering record lows being achieved. Commodity markets also joined in the global rally. Gold was up +1.32% over the week, Silver +11.35%, Copper +4.53%, Nickel +10.53% and WTI Oil +2.83%.

One market which is struggling to keep up is European Banks however. The Euro Stoxx Banks index was down -0.88% last week and is nearly 19% down from its pre referendum levels. Italian Banks are at the heart of that weakness with the likes of Unicredit, Intesa, Banco Monte dei Paschi and UBI down -9.78%, -3.44%, -15.79% and -6.11% respectively last week. There’s been plenty in the press about possible liquidity guarantees and recaps for Italian Banks and it looks like this one still has plenty of room to run. The FT ran a story over the weekend suggesting that Italy PM Renzi is set to inject public funds into the banking system should it come under severe systematic stress, and so break the bail-in principles of EU regulation. While UK politics has dominated headlines for the last few weeks it feels like the health of Italian Banks could well takeover in the near term.

The Brexit chat should reduce this week whilst never being too far beneath the surface. As the week builds Friday's payrolls will also loom large. We should get some payback from last month's weak 38k headline print and 59k downward revisions to prior months. DB don’t expect a return to prior levels though and are at 155k. Consensus is at 175k while expectations are also for the unemployment rate to creep up one-tenth to 4.8% (DB at 4.9%).

After last month's payroll report and Brexit, the Fed have been priced out until October 2018 now (the probability of a December hike this year is 12% and a December 2017 hike is 45%) and regular readers will know that we've always felt the Fed will struggle to raise rates this cycle. However the pattern has always been under and over pricing the risk and perhaps the market has got a little complacent about the Fed again. If Brexit chat eases for a while and the data is ok, there will be a number of Fed members who start getting hawkishly excited again. So watch out for this, even if we think that they will still struggle to raise rates this cycle.
In terms of the weekend newsflow and unlike in previous weeks there’s not actually a great deal to report. It’s been largely politics orientated again and the biggest perhaps is the news that the UK Chancellor George Osborne is considering a cut in the corporate tax rate to less than 15% (from 20% now) in a bid to deter businesses from leaving the UK.

Glancing at our screens, markets in Asia are opening the week on the front foot and largely following the lead from the European and US sessions on Friday. Bourses in China are leading the way with the Shanghai Comp currently +1.33% and CSI 300 +1.07%, while the Hang Seng (+1.54%) has also risen strongly. Elsewhere the Nikkei (+0.44%), Kospi (+0.35%) and ASX (+0.32%) are also up. Meanwhile the Aussie Dollar has pared early losses after the Australian General Election over the weekend failed to yield a clear winner on election night.

Moving on. This morning we published our latest HY monthly where we’ve highlighted the orderly nature in which markets have handled the outcome of the UK referendum on EU membership. Overall there is evidence that both GBP HY and generally domestically focused UK names have been under pressure since the referendum. Whether this is a trend that continues will probably depend on the ultimate outcome for the UK economy. Near-term there might be some respite for the relative underperformance purely due to a lack of information. Ultimately the Conservative leadership contest and subsequent negotiations with the EU are likely to drive sentiment. See the report from Nick Burns just before this one.

Just when you thought we were done with politics, one interesting development on Friday came in Austria with the news that the Austrian Constitutional Court has decided in favour of the FPO contestation and annulled May 22nd's election result with a likely new run-off presidential election to be held in autumn according to our European economists. Significantly, our colleagues note that it seems likely that the new election will be neck-and-neck again. As a result political uncertainty has resurfaced as the far right wing populist Hofer again has the chance to become Austria’s president. He had previously caused some uproar with his statement that if he was elected president there would be early parliamentary elections and pointing to a referendum on EU membership (Oxit) in the event EU policy goes in the wrong direction. One to keep an eye on.

The economic dataflow on Friday in the US was a bit of a mixed bag. On the positive side the ISM manufacturing reading for June rose 1.9pts to 53.2 (vs. 51.3 expected) which was the best reading since February last year. In the details the employment component rose above 50 (+1.2pts to 50.4) for the first time since November while new orders, production and new export orders also rose. On the negative side however construction spending in May was unexpectedly weak (-0.8% mom vs. +0.6% expected) while total vehicle sales in June declined to an annualized 16.6m rate (vs. 17.3m expected) from 17.4m in the prior month.

Meanwhile in Europe there was a relatively positive read-through from the final manufacturing PMI revisions for June. The Euro area reading was revised up two-tenths to 52.8 while readings for Germany and France were revised up to 54.5 (+0.1pts) and 48.3 (+0.4pts) respectively. The PMI for the UK came in at 52.1 (vs. 50.1 expected) which was a decent increase on the 50.4 in May although it remains to be seen how much of an effect the referendum at the end of the month played a part.

There was a little bit of central bank speak on Friday too. The Cleveland Fed’s Mester (hawkish) said (unsurprisingly) that it is too early to judge the Brexit impact on the US which was a view also shared by Vice-Chair Fischer (centrist to slightly dovish), with Fischer also adding that recent data since the weak payrolls print last month ‘has done pretty well’.

Away from the data we’ve got a number of central bank speakers scheduled through the week. Over at the Fed Dudley is due on Tuesday and Tarullo on Wednesday. The BoE’s Carney will publish the BoE financial stability report tomorrow and the BoJ’s Kuroda is due to speak on Thursday. The latest twist in UK politics sees the Conservative Party begin the process of electing a new leader on Tuesday.