Global Stocks Surge On Rising Hopes Of Japan "Helicopter Money"

A quick headline search for the phrases "Japan stimulus" and "helicopter money" is all one needs to understand the very familiar reason for today latest overnight global stock rally, which has sent the USDJPY surging some more, in the process pushing the Nikkei higher by 2.5%, China up over 1% (with the help of some late FX intervention by the PBOC), European stocks up 1%, US equity futures up 0.5%, and so on, in what is a global wave of green on the back of the helicopter money which after Bernanke's visit to Japan, market participants are now convinced is just a matter of time.

As Bloomberg puts it, "global stocks advanced for a fourth day and commodities rose, buoyed by the prospect of stimulus in major economies."  And that is all there is to it.

While risk on assets soared, government bonds sank with the yen, which has now tumbled by over 300 pips since our warning to cover any USDJPY shorts last Thursday, when we previewed precisely these events warning that "something big" was coming. The MSCI All-Country World Index reached its strongest level since June 24, and the yen had its biggest two-day slide since 2014 after Japanese Prime Minister Shinzo Abe vowed to speed up efforts to defeat deflation. The pound rose for a third day as Home Secretary Theresa May prepared to take over as the U.K.’s next prime minister. Daimler AG led gains in European stocks and credit markets strengthened after earnings that beat analysts’ predictions. U.S. crude rebounded from a two month low.

In case it is still confusing what continues to drive the rally, here are some more hints:

"Risk remains very much on, as central banks around the world are turning more accommodative. That is trumping any fears investors may have concerning global growth,” Societe Generale strategists write in note.

“Risk appetite is in the ascendancy, and as a consequence we are seeing higher-yielding currencies rally and haven currencies including the yen decline,” said Jeremy Stretch at CIBC. “It’s a case of hopes for additional Japanese fiscal stimulus.”

Oh and remember Brexit, and the doomsday warnings should it pass? Well, global equities are now back to where they were when the U.K. voted for Brexit. Since then, futures traders have cut wagers on higher interest rates from the Federal Reserve while Abe won an election and said he would order ministers to begin compiling fresh stimulus. The majority of economists expect the Bank of England to cut interest rates this week and traders are betting there will be further monetary easing in the euro area this year.

And since central banks are once again pushing equities higher, this means that the Stoxx Europe 600 Index rose 1 percent as of 10:58 a.m. London time, after surging 4.4 percent over the last three trading days. Japan’s Topix climbed 2.4 percent and the MSCI Asia Pacific Index gained 1.2 percent. The U.K.’s FTSE 100 Index reached its highest level since August 2015. Futures on the S&P 500 added 0.5%following the gauge’s 0.3 percent advance to an all-time high on Monday. Alcoa Inc. unofficially kicked off the U.S. earnings season after markets closed Monday, reporting profit for the second quarter that topped analysts’ estimates.

While stocks were propped up by central banks, bonds got spooked that there could be a surge in supply to finance the upcoming helicopter money paradrop. As a result, yields on 10Y Treasuries rose four basis points to 1.47%, after climbing seven basis points on Monday as an auction of three-year notes attracted the weakest demand since 2009. Gains last week week pushed 10- and 30-year yields to record lows. The U.S. is due to sell $20 billion of 10-year notes Tuesday, followed by $12 billion of 30-year bonds Wednesday. German 10-year bonds, perceived to be among the safest debt securities in the euro area, declined for a second day, pushing the yield up by three basis points to minus 0.14 percent. Yields on French securities with a similar due date increased three basis points to 0.15 percent.

Global Market Snapshot

  • S&P 500 futures up 0.5% to 2141
  • Stoxx 600 up 0.9% to 336
  • FTSE 100 up 0.1% to 6690
  • DAX up 1.3% to 9962
  • German 10Yr yield up 5bps to -0.12%
  • Italian 10Yr yield up less than 1bp to 1.21%
  • Spanish 10Yr yield up less than 1bp to 1.16%
  • S&P GSCI Index up 1.4% to 361
  • MSCI Asia Pacific up 1.3% to 132
  • Nikkei 225 up 2.5% to 16096
  • Hang Seng up 1.6% to 21225
  • Shanghai Composite up 1.8% to 3049
  • S&P/ASX 200 up 0.3% to 5353
  • US 10-yr yield up 5bps to 1.48%
  • Dollar Index down 0.46% to 96.12
  • WTI Crude futures up 1.8% to $45.57
  • Brent Futures up 2.1% to $47.24
  • Gold spot down less than 0.1% to $1,355
  • Silver spot up 0.9% to $20.46

Top Global Headlines

  • Xerox Said in Talks to Acquire, Then Split R.R. Donnelley: Xerox would be acquirer, merge R.R. Donnelley with spun units
  • Seagate Expands Job Cuts to 6,500 as PC-Component Market Suffers: Cuts jobs to 14% of workforce, seeks to reduce costs
  • Airbus, Boeing Get a Boost From Asia’s Appetite for Air Travel: China, Vietnam airlines order jets at Farnborough show; Boeing, Airbus Duel for $12 Billion Deal With India SpiceJet: Planemakers said to offer steep price cuts for discounter deal
  • Alcoa Tops Estimates as Parts Business Shines Ahead of Split: Investors cheer split plan
  • Lyft Is ‘Very Likely’ to Expand Outside U.S., Co-Founder Says: Global alliance includes China’s Didi Chuxing, India’s Ola and Southeast Asia’s Grab
  • Imperva Said to Be Working With Qatalyst to Explore a Sale: Cybersecurity firm targeted by activist Elliott last month
  • UBS’s Orcel Signals Halt to Years of Investment Bank Cuts: 2016 is going to be a tough year for everyone’ on pay
  • Holder’s DoJ Overruled Advice to Prosecute HSBC, Report Says: Republican lawmakers say Holder misled Congress in testimony
  • Adidas Sues Skechers, Says It Stole Shoe Design: Reuters: Co. says Skechers infringed two patents
  • Facebook to Announce Plans to Use Microsoft’s Office 365: WSJ: Plans to be announced Tuesday
  • SEC Investigating Tesla for Poss. Securities Law Breach: CNBC/DJ: Co. didn’t notify investors of autopilot accident

Looking at regional markets, another session of gains for Asian equities following a record close in the S&P 500 with risk on sentiment in full swing. Nikkei 225 (+2.5%) outperformed again amid a softer JPY following expectations of an imminent announcement of additional stimulus from PM Abe. ASX 200 (+0.3%) and Hang Seng (+1.6%) also extended on gains with the latter benefiting from upside in gaming names with analysts at UBS noting a strong start for July in Macau gaming revenue. Shanghai Comp (+1.8%) fluctuated between gains and losses before closing higher as participants await key data releases later in the week. JGBs fell following the improvement in risk sentiment while yields saw some upside across the curve, particularly in the long end following a lacklustre 30yr auction in which the b/c was lower than the prior announcement allied with a rise in the tail in price. Japan are to contemplate the size of economic stimulus for the time being and it is possible that they will issue construction bonds as a form of stimulus.

Top Asian News:

  • Yen Extends Biggest Decline Since 2014 Before Stimulus Details: Prime Minister Shinzo Abe said he planned to add fiscal stimulus
  • BYD Loses Bulk of $270 Million Electric Bus Order in China: Shenzhen Western Bus cancels buses after adjusting capacity
  • Sun Hung Kai Billionaire Kwok Freed on Bail Pending Appeal: Former Sun Hung Kai co-chairman had been in jail since 2014
  • Ground Zero of China’s Slowdown Leaves Locals Looking for Exit: China’s regions increasingly split between winners and losers

In Europe, equities trade in positive trade once again today, continuing the trend seen in both US and Asia, to see a high of 2908 in the EUROSTOXX (+1.7%), the best performer of the European bourses is the FTSE MIB which is currently up 2.1% as financials are leading the sectors in terms of performance. Also of note the automakers are performing well as Daimler (DAI GY) posted positive sales results and boosted guidance. After the solid performance in equities, fixed income has fallen of the back of strong risk appetite and as such, Bunds haver slipped back below the 166.00 level to trade at the lowest level since July 4th. Elsewhere, Gilts also trade lower but have been relatively steady alongside comments from BoE's Carney during his appearance at the Treasury Select Committee.

Top European News

  • Daimler Rises as Profit Surprises and Mercedes Seals Sales Lead: Takata air-bag recalls cost almost EU500m, carmaker confident of reaching full-year operating-profit goal
  • Sanofi Sees Cure for Cancer Woes in Moving West for Acquisitions: French drugmaker seeks ready drugs as well as bolder pioneers
  • Covestro Cut Loose From Bayer Puts New Freedom to Work: Covestro stake could help Bayer get financing for Monsanto
  • Airbus Said Close to Winning Germania Order for 25 A320neo Jets: Order would be valued at $2.68b at list prices,
  • May Starts Work to Steady U.K. for Brexit After Promotion: Next U.K. leader best known to U.S. in fight against terrorism
  • EU Finance Chiefs Call for Accelerated Brexit With May Ascent: Britain needs to trigger Article 50 to start exit from bloc
  • Soapmaker Nirma Said to Plan $596 Million Bonds for Lafarge Deal: Nirma beats Indian billionaire Piramal, JSW in cement bidding

In FX, Japan’s currency fell 0.6 percent to 103.41 per dollar, adding to a 2.3 percent decline from the day before. Sunday’s election, which saw Abe’s ruling group score a convincing victory in the upper house, “opens up the scope for sweeping reforms,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. "The Bank of Japan is likely to add to the macroeconomic stimulus package by easing monetary policy along with a more supportive fiscal environment.” The pound rose 1 percent, its biggest gain since before the June 23 referendum, as May’s confirmation as the only remaining candidate to replace David Cameron removed a layer of political uncertainty. The Australian dollar rallied 1.3 percent, the best performance among 31 major currencies, as a report showed business confidence picked up last month and investors favored higher-yielding currencies. The MSCI Emerging Markets Currency Index added 0.1 percent. South Africa’s rand led gains, climbing 1 percent and Mexico’s peso advanced 0.7 percent.

In commodities, crude oil climbed 1.7 percent to $45.53 a barrel in New York before data forecast to show U.S. inventories fell for an eighth week. Nickel jumped 2.8 percent to $10,330 a metric ton in London amid speculation of supply cuts in the Philippines, the biggest ore producer, as the government threatens to close mines that don’t meet environment and safety standards. Goldman sees the price climbing to $12,000 over the next six months as the bank increased its price forecasts for most industrial metals through 2017. Copper, lead and zinc all gained more than 1 percent. Steel rebar jumped as much as 5.8 percent in Shanghai as the production hub of Tangshan city in China’s Hebei province was said to be restricting output before a memorial event. Iron ore climbed 5.9 percent in Singapore.

On today's US calendar, we get the NFIB small business optimism survey for June which printed at 94.5, modestly higer than the 93.8 expected. Also we'll get the JOLTS job openings report for May where the focus will be on the hiring and quits rates. That said given the rebound in payrolls for June this data may look a little stale. The other data due out this afternoon will be the wholesale inventories and trade sales report.

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Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities once again trade higher amid upbeat sentiment in Asia overnight and yesterday's record close in the S&P 500
  • JPY continues to be swayed by ongoing stimulus expectations in Japan, although some momentum was taken out of the move after Japan failed to unveil any further details on the size of the package
  • Looking ahead, highlights include US Wholesale Inventories, JOLTS Job Openings, API Crude Oil Inventories and potential comments from Fed's Bullard, Tarullo and Kashkari
  • Treasuries lower in overnight trading as global equities rally along with commodities amid rising hopes of more stimulus; auctions continue with $20b 10Y notes (reopen), WI 1.485%; last sold at 1.702% in June, lowest since Dec. 2012.
  • Theresa May is on a fast track to succeed David Cameron as prime minister and now has just two days rather than two months to build a team to rescue the U.K. from its worst political crisis in a generation and begin extricating it from the EU
  • Mark Carney defended the Bank of England against criticism that it undermined its independence by highlighting the risks of a British decision to quit the European Union in the run-up to the referendum
  • Banks’ demand for cash increased in the Bank of England’s third liquidity operation since the U.K. vote to leave the European Union sparked financial market turmoil
  • Japanese Prime Minister Shinzo Abe told former Federal Reserve Chairman Ben S. Bernanke at a meeting in Tokyo he wants to speed up the nation’s exit from deflation, underscoring his commitment to implementing fresh economic stimulus
  • The Bank of Japan will need to reduce the pace of its record purchases of government debt as it is approaching the limits of the bond market, said a former BOJ executive director
  • The global search for bond returns has pushed Ukrainian government debt to highs not seen since before the first bullets were fired amid anti-government protests on Kiev’s central Maidan square more than two years ago
  • China’s assertions to more than 80 percent of the disputed South China Sea have been dealt a blow with an international tribunal ruling it has no historic rights to the resources within a 1940s map detailing its claims
  • President Obama will send 560 more troops to Iraq to help retake Mosul, the largest city still controlled by the Islamic State. The additional troops are the latest escalation of the American military role in Iraq

US Event Calendar

  • 10:00am: Wholesale Inventories, May, est. 0.2% (prior 0.6%); Wholesale Sales, May, est. 0.5% (prior 1%)
  • 10:00am: JOLTS Job Openings, May, est. 5.65m (prior 5.788m)
  • 1:00pm: U.S. to auction $20b 10Y notes (reopen)

Central Banks

  • 9:15am: Fed’s Tarullo speaks in Washington
  • 9:35am: Fed’s Bullard speaks in St. Louis
  • 5:30pm: Fed’s Kashkari speaks in Marquette, Mich.
  • 9:30pm: Fed’s Mester speaks in Sydney

DB's Jim Reid concludes the overnight wrap

With a new PM (Theresa May) now suddenly in place in the UK - two months earlier than expected - the post Brexit policy agenda will soon be set. A combination of a new PM and Brexit is an opportunity for one country at least to embark on a major policy shift in a world where economic policy is in danger of going slowly down a col-de-sac. Obviously we may just have more of the same (loose monetary policy and fiscal straight jackets) but it's possible that the UK might use Brexit as an excuse to loosen fiscal policy with the Bank of England there to support it. Indeed it wouldn't be a surprise to see looser fiscal policy and more UK QE before year end and if that's not officially called helicopter money it might as well be. So watch to see who the new UK chancellor is and what they say. Listening to Theresa May yesterday you get the sense she would move away from deficit reduction being at the centre of policy. However the favourite for the Chancellorship according to the press seems to be Phillip Hammond who is known to be a fiscal hawk. So a fair bit of intrigue ahead. It's likely her cabinet will be in place by Thursday. One interesting comment May made recently was that Article 50 wouldn't be triggered this year. Whether this changes given her unexpected early coronation will also be closely watched.

Also under the spotlight right now is Japan where markets are on edge over the possibility of a hotly anticipated large fiscal stimulus package announcement. This comes following comments from PM Abe yesterday and the suggestion is that he is due to meet former Fed Chair Bernanke today after Bernanke met with BoJ Governor Kuroda yesterday. There’s been no announcement so far this morning but the story is dominating the wires. Our Japanese economists are noting that the market is expecting a package in the range of JPY10-20tn and the Nikkei newspaper also suggested that the government is considering issuing new debt for the first time in four years.

Japanese equity markets have rallied for a second consecutive day with the news. The Nikkei is +2.65% and the Topix +2.59%. The yen has weakened -0.30% although JGB’s are relatively little moved. Bourses elsewhere in Asia are firmer too. The Hang Seng (+0.60%), Shanghai Comp (+0.08%), Kospi (+0.05%) and ASX (+0.88%) in particular are all up.

The moves this morning come after markets yesterday continued to bask in the glow of Friday’s strong payrolls number. While moves were more modest by comparison, the S&P 500 managed to shrug off a stronger day for the Dollar closing up +0.34% and more notably at a new all time high when it passed the intraday record set back in May last year. The Nasdaq (+0.64%) also briefly passed the 5000 level for the first time this year and the Dow (+0.44%) is now within 90pts of its all time high made last year. The positive sentiment continued after the closing bell when Alcoa kicked off earnings season by reporting beats at both the earnings and revenue lines, sending shares up 4% in extended trading.

Markets in Europe were even more impressive yesterday with the Stoxx 600 closing up +1.64% and the DAX +2.12%. Meanwhile and in what feels fairly remarkable given the events of recent weeks, the FTSE 100 (+1.40%) has now entered a bull market having risen 21% from the February lows. Even the FTSE 250 surged +3.27% yesterday and has pared its post Brexit loss now to just 4%. The Euro Stoxx Banks index was up +1.50% too although that still has a fair way to go to get back to those pre-referendum levels with the index still down 18% in that time.

Just on the subject of banks, late last night the IMF weighed in on the Italian Bank debate, saying that ‘concerns related to the bail in of retail investors should be dealt with appropriately’. According to the FT the IMF mission chief for Italy said that ‘there is adequate flexibility within the existing state aid and BRRD framework to be able to deal with the problems’ and that ‘the framework exists and the framework is able to handle that’. This came after PM Renzi said earlier in the day that he sees an accord between Italy and the EU as ‘within reach’.

Where we did see a change in price action yesterday was in rates markets, where in contrast to the leg lower yields took post payrolls on Friday, sovereign bonds weakened for the most part yesterday. Indeed Treasuries stood out most with 10y yields there ending over 7bps higher at 1.431% and back to the highest in a week. 2y yields were also 5bps higher and at the highest post the UK referendum vote. Commentary attributed this partly to a weak 3y auction where demand was said to be the weakest since 2009 (based on the bid-to-cover ratio).

In terms of newsflow there wasn’t a huge amount to report outside of the latest UK political developments. We did hear from one of the most hawkish members at the Fed in Kansas City Fed President George who, having withdrawn her dissent for higher rates at the June FOMC meeting, said that the US economy is ‘at or near full employment’ and that while short term interest rates remain at historic lows, ‘keeping rates too low can also create risks’. George also said that the Fed has ‘largely achieved what it can on its dual mandate’ and that ‘I view the current level of Fed policy as too low’.

Away from this, in terms of the data that we got yesterday, in France the latest business sentiment reading in June came in unchanged at 97. Over in Italy the latest industrial production data was seen as disappointing (-0.6% mom vs. +0.1% expected) with the broader Euro area report looming tomorrow. Meanwhile in the US the lone data release yesterday came in the form of the June labour market conditions index (composed of 19 labour market indicators) which fell 1.9pts in June following a 3.6pt fall in May.

Looking now at the day ahead, this morning in Europe we’re kicking off shortly after this goes out in Germany where we’ll get the final revision to the June CPI report. Over in the US the early data release is the NFIB small business optimism survey for June which is expected to come in little changed relative to May. Following that, this afternoon we’ll get the JOLTS job openings report for May where the focus will be on the hiring and quits rates. That said given the rebound in payrolls for June this data may look a little stale. The other data due out this afternoon will be the wholesale inventories and trade sales report.

Away from the data it’s a busy day of Fedspeak. Tarullo (2.15pm BST), Bullard (2.35pm BST) and Kashkari (10.30pm BST) are all scheduled to speak today. Meanwhile the BoE is due to publish the record of the Financial Policy Committee’s meeting held on June 28th with Governor Carney due to speak shortly after at 10am BST.