With all eyes on today's jobs report, where consensus expects a 180K payrolls gain, European, Asian stocks and S&P futures all rise amid a surge in government debt as markets digest the BOE's "kitchen sink" easing for a second day. But please don't overthink it. In deja vu fashion, Bloomberg summarizes the action simply as "stocks rose around the world on speculation central bank stimulus measures will support the global economy." We've heard that just a few times before.
We've also heard this: “There’s a lot of hope that central banks can counter any downside to growth, especially after the Bank of England shot a pretty big torpedo yesterday,” said Dirk Thiels, head of investment management at KBC Asset Management in Brussels. “But anxiety about the economy can just as easily come back as it went away. It’s important that the U.S. holds strong, as that also helped bring optimism back to markets.”
Futures are up 0.2%, despite a drop in both oil and USDJPY, with the dollar weaker ahead of what is supposed to be a relative strong jobs report forecast to show the increase in payrolls returned to the modest pace of growth, but not too good: analysts predict America’s employment market continued to improve at a pace that probably won’t trigger the Federal Reserve to push ahead with raising interest rates this year.
In other words, whatever happens stocks will end up higher as a stronger report will "confirm" the US economy is rebounding, while a weak report will suggest those central banks which are still easing, "have this." As Heo Pil Seok of Midas International Management said, “the BOE’s move looked like an inevitable choice, but it was taken as a positive signal for investors in terms of boosting expectations for increased liquidity in the global market. While improved sentiment is reflected especially in the equities market today, the U.S. data is something to keenly watch as it may fuel concerns of a rate hike.”
It wasn't all good news, however, as PIMCO parent Allianz SE slipped 3.6% after the insurer said second-quarter profit fell by almost half, missing analysts’ estimates. Elsewhere, bailed out UK banking giant, RBS declined 4.6% after the British lender posted a larger loss than projected and gave no update on the planned sale of its Williams & Glyn consumer bank. As Reuters' Jamie McGeever summarized RBS since 2007:
- Losses £50 bln
- Share price -95%
- Taxpayer bailout £45 bln
- Jobs cut 44,200 (134,000 if incl. ABN Amro acquisition in 2007
That was not enough to put a damper on global risk on mood and the MSCI All Country World Index rose 0.2 percent in early trading, advancing for a second day. The Stoxx Europe 600 Index was up 0.3 percent, with trading volumes 33 percent below the 30-day average on the final day of the week. S&P 500 Index futures also increased 0.2%. BHP Billiton Ltd. and ArcelorMittal led a gauge of miners to the best performance of the Stoxx 600’s 19 industry groups as metals prices rebounded. LafargeHolcim Ltd. jumped 5 percent as second-quarter earnings improved more than analysts had expected. Hugo Boss AG added 5.7 percent after the German fashion label posted better-than-expected revenue.
The MSCI Emerging Markets Index climbed 1 percent, bringing this week’s gain to 1.3 percent. Shares are headed for the fourth weekly advance and longest winning streak since October.
Ironically, while some explained the move higher in Asian stocks as a result of yesterday's rebound in oil, today oil is modestly lower, at least as of this moment, with WTI slipping 0.8% to $41.60 a barrel following a two-day, 6.1% rebound. Downward pressure returned as overproduction in crude and refined products has left onshore storage tanks brimming and triggered the chartering of tankers to store unsold fuel. There are also growing worries that China's imports are weakening from records set in 2015 and this year.
"Signs of fatigue are already apparent and include a notable dip in Chinese crude oil imports," PVM's Stephen Brennock wrote, adding that spare capacity in the country's strategic storage space is less than 100 million barrels. "A major pillar of oil demand is therefore on course to ease considerably over the coming months," Brennock said.
Oil prices were still more than $2 per barrel above the week's lows, which most analysts attributed to short-covering. Investors added the equivalent of 56 million barrels of short positions in the three main Brent and WTI futures and options contracts in the week to July 26. "Since there was no news yesterday that might have triggered the price rise, this points to short-covering," Commerzbank analyst Carsten Fritsch said. "Clearly many market participants were caught on the hop by the increase in prices following the publication of U.S. inventory data on Wednesday."
Yields on 10-year Treasuries were little changed at 1.50 percent, after declining five basis points over the past two sessions. U.S. debt climbed with European bonds in the last session as the BOE’s move reinforced the trend for monetary easing globally. Wagers on a 2016 increase by the Fed have been cut to 37 percent from 59 percent two months ago.
- S&P 500 futures up 0.2% to 2164
- Stoxx 600 up 0.3% to 339
- FTSE 100 up 0.3% to 6759
- DAX up less than 0.1% to 10237
- German 10Yr yield up 1bp to -0.08%
- Italian 10Yr yield unchanged at 1.15%
- Spanish 10Yr yield up less than 1bp to 1.03%
- S&P GSCI Index up 0.2% to 341.5
- MSCI Asia Pacific up 0.7% to 136
- Nikkei 225 down less than 0.1% to 16254
- Hang Seng up 1.4% to 22146
- Shanghai Composite down 0.2% to 2977
- S&P/ASX 200 up 0.4% to 5497
- US 10-yr yield down less than 1bp to 1.5%
- Dollar Index down 0.16% to 95.6
- WTI Crude futures down 0.4% to $41.77
- Brent Futures down 0.5% to $44.07
- Gold spot up less than 0.1% to $1,362
- Silver spot down 0.2% to $20.31
Top Global News
- U.S. Employment Seen Returning to Normal After Two Quirky Months
- Pimco Sees Misunderstood U.S. Bank Bonds Offering Room for Gains: Head of credit research says U.S. lenders ‘radically improved’
- Bayer Said to Review Monsanto’s Books as It Mulls Higher Bid: Monsanto said to allow due diligence in key step for deal
- Mercedes to Challenge BMW, Tesla With 4-Car Electric Lineup: Move comes as Tesla struggles, BMW plans next e-car in 2021
- LinkedIn Results Beat Expectations Ahead of Microsoft Deal: 2Q adj. EPS, revenue higher than analysts expected
- Alibaba, Baidu Said to Prepare for Audit by U.S. PCAOB, WSJ Says
- Kraft Earnings Top Estimates as Budget Cuts Fuel Profit Growth: 2Q adj. EPS beats analyst expectations
- Priceline Beats Profit Estimates as Room Night Bookings Grow
- Golfsmith Said to Consider Bankruptcy as It Seeks New Owner
- Takata Air-Bag Report Clears Way for Cost Talks With Carmakers
- Mercedes to Challenge BMW, Tesla With Four-Car Electric Lineup
- Rackspace Said to Be in Talks to Be Sold to PE Firm, DJ Says
- Yahoo Communications Chief Leaves Ahead of Verizon Takeover: Anne Espiritu leaves after 4 years at the co.
- Disney Said to Develop ‘Star Wars’ Toys With AR Technology: WSJ: Co. is looking at using augmented reality technology for new “Star Wars” toys
- Alibaba, Baidu Said to Prepare for Audit by U.S. Public Company Accounting Oversight Board, WSJ Says: Audit documents provided to the PCAOB may be heavily redacted
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Looking at regional markets, we start as is custom in Asia, where markets trade mixed to mostly higher on the back of oil advances and after the BoE's rate cut and easing announcement, although a looming NFP has kept gains in check. Nikkei 225 (flat) traded flat with fluctuations in JPY driving price-action, while ASX 200 (+0.4%) was boosted as commodities strength supported energy and mining names. Hang Seng (+1.4%) outperformed to break above 22,000, while the Shanghai Comp (-0.2%) lagged after a net weekly liquidity drain from the PBoC. 10yr JGBs traded with minor losses as demand for the paper was dampened amid gains across riskier assets, while the BoJ's presence in the market for 1.25tr1 of government debt helped stem losses.
Top Asian News
- India Said to Keep Rajan Inflation Target as Term Nears End: Rajan urges successor to continue war on price pressures
- RBA Frets Over Currency, China; Sticks With GDP, CPI Outlook: Australia’s central bank says inflation likely to be below 2% most of forecast period
- Indonesian Growth Beats Forecasts as Widodo Spending Surges: 2Q GDP increases 5.18% y/y vs est. 5.00%
- Vanke Saga Takes New Twist With Surprise Entry of Evergrande Emergence of billionaire Hui Ka Yan injects new uncertainty
- DBS’s Swiber Losses Put Spotlight on Provisions Before Earnings: Singapore banks’ energy provisions may be inadequate, Moody’s says
- Goldman Summoned by New York Bank Regulator Over 1MDB Bond Sales: DFS letter seeks more information on bank’s 1MDB underwriting
European equities are trading in positive territory as the market continues to digest stimulus action from the BoE . FTSE 100 is up 0.3% despite heavy losses reported from Royal Bank of Scotland, who reported a record loss, this led to shares falling around 5% at the open. While other banking names across Europe continue to extend on gains due to BoE's plethora of stimulus measures. In terms of fixed income in the wake of the BoE's announcement, there has been a pick up in GBP denominated issuance with Barclays and Vodafone issuing GBP-denominated debt. This comes as yields plunge to record lows in gilts and GBP corporate bonds. While the decline also increases competition against the EUR and USD market. Elsewhere Bunds have slightly pulled off yesterday's best levels amid light news flow ahead of the NFP report.
Top European News
- RBS Posts Quarterly Loss on $1.7b Litigation Expense: Lender may not reach 2019 goals amid rate cut, drop in demand
- LafargeHolcim Pledges More Asset Sales After Profit Rises: Cement maker keeps 2016 targets, lowers demand growth outlook
- Allianz Quarterly Profit Falls 46% on Disasters, Unit Sale: Pimco outflows grow from 1Q to EU18b
- Hugo Boss Rises on Signs of Recovery as Sales Beat Estimates: Co. sees full-year profit down as much as 23%
- Novo Nordisk Plummets as U.S. Market Becomes More Challenging: Co. trims sales and profit forecasts for 2016
- German Factory Orders Slide Amid Dwindling Euro-Region Demand: Orders declined 0.4% on month vs est. 0.5% gain
- U.K. House Prices Slide by Most in 5 Months After Brexit Vote: Values slipped 1% in July, falling most since February
In FX, the Bloomberg Dollar Spot Index, which tracks the U.S. currency against a basket of its major peers, slipped 0.2%, erasing this week’s advance. The yen climbed 0.3 percent to 100.94 per dollar. In emerging markets, Malaysia’s ringgit and Russia’s ruble advanced at least 0.5 percent. Payrolls probably rose by 180,000 workers in July, following a 287,000-person increase in June, according to the median of economists’ estimates compiled by Bloomberg. The jobless rate is projected to fall to 4.8 percent, from 4.9 percent in the previous month. The Australian dollar climbed to a three-week high after the central bank gave no interest-rate guidance in its quarterly statement Friday and left its growth and inflation forecasts little changed. It reduced the benchmark rate to a record-low Tuesday. The pound rose 0.3 percent to $1.3140, following a 1.6 percent drop Thursday. While unveiling stimulus, BOE Governor Mark Carney said a negative rate path would be wrong.
In commodities, aluminum and zinc rallied in the wake of losses on Thursday, climbing at least 0.4 percent in London. Gold for immediate delivery was up 0.1 percent at $1,362.43 an ounce before the payrolls data, headed for a 0.8 percent climb in the week, the haven asset’s second straight weekly advance. Copper is headed for its first weekly decline in four as Goldman Sachs Group Inc. forecasts a “supply storm” is about to hit the market amid a pick-up in mine supply, lower production costs and softening demand growth. West Texas Intermediate crude slipped 0.8 percent to $41.60 a barrel following a two-day, 6.1 percent rebound. U.S. government data Wednesday showed gasoline inventories decreased, while crude stockpiles unexpectedly rose for a second weekly gain. Both are at the highest seasonal level in at least two decades. Corn for December delivery headed for a 2.8 percent decline this week. November-delivery soybeans rose 1.4 percent to trim this week’s drop to 3.3 percent.
On today's calendar, all the focus will be on the July employment report which will be out at 8.30am EDT, published alonside the latest trade balance data. Later on this evening we’ll also get the June consumer credit data.
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Bulletin Headline Summary From RanSquawk and Bloomberg
- European equities trade modestly higher in the wake of yesterday's BoE stimulus despite RBS shares lagging in the wake of their pre-market update
- FX markets have seen relatively muted trade thus far with EUR/USD pushing back to 1.1150 and USD/JPY dipping below 101.00 again
- Looking ahead, highlights include US and Canadian jobs reports
- Treasuries mostly steady in overnight trading ahead of today’s nonfarm payrolls (est. 180k) and unemployment (est. 4.8%) releases while global equities rally with gold on stimulus bets.
- The European Central Bank is letting a pall of secrecy hang over the health of some of the continent’s banks as it’s decided against publicly disclosing the outcome of its test for 56 banks
- ECB tapped Fed’s FX swap line for $800m for seven days at 0.87%, for week ended Aug. 3, most since July 6, Federal Reserve data show
- New European rules are forcing junk-rated issuers to disclose more information to investors and some companies are considering whether to list their high-yield bonds overseas to avoid them
- New York’s top banking regulator asked Goldman Sachs to supply more information about its work for a Malaysian investment fund amid investigations into whether any money laundering, sanctions violations or other misconduct occurred
- German factory orders unexpectedly declined 0.4% m/m in June as demand for investment goods from within the euro area slumped in the run-up to Britain’s referendum on European Union membership
- Italian industrial production unexpectedly fell 0.4% m/m in June in a setback for Prime Minister Matteo Renzi’s plans to put economic growth on a stable footing
- While sterling tumbled versus the dollar as the Bank of England governor announced a suite of measures to support the U.K. economy, the currency only fell to levels seen last week
- Mark Carney said his stimulus plans will help revive an economy reeling from the country’s decision to quit the European Union, rejecting criticism that monetary policy has reached its limits
US Event Calendar
- 8:30am: Change in Non-farm Payrolls, July, est. 180k (prior 287k); Unemployment rate, July, est. 4.8% (prior 4.9%)
- Change in Private Payrolls, July, est. 170k (prior 265k)
- Change in Manufacturing Payrolls, July, est. 4k (prior 14k)
- Average Hourly Earnings, July, est. 0.2% (prior 0.1%)
- Average Hourly Earnings y/y, July. est. 2.6% (prior 2.6%)
- Average Weekly Hours All Employees, July, est. 34.4 (prior 34.4)
- Change in Household Employment, July (prior 67)
- Labor Force Participation Rate, July (prior 62.7%)
- Underemployment Rate, July (prior 9.6%)
- 8:30am: Trade Balance, June, est. -$43b (prior - $41.1b)
- 1pm: Baker Hughes rig count
- 3pm: Consumer Credit, June, est. $16b (prior $18.558b)
DB's Jim Reid concludes the overnight wrap
Today sees the market stop for the biggest show on earth where many of us from around the world will be glued to our screens. Yes it's another payrolls Friday for us to enjoy before we see the small matter of the Olympic opening ceremony in Rio. In a moment of stupidity yesterday I wondered at what point in history my best 100m time would have put me as the fastest man in the world. Given that my best time at school was a slovenly 15 seconds and given the winning time was 10.6 seconds in 1912 (the first recorded time) then extrapolating back I figure that maybe I'd have to time-travel to early homo sapiens days to have had a sniff. And back then with my knees I probably would have been eaten by a lion first. Creative destruction at its finest.
The BoE reacted like a cornered lion yesterday as they loosened policy more than expected and in a fairly wide reaching manner. This was after the bank made its largest downgrade to its growth forecasts (including 2017 down from 2.3% to 0.8%) since the creation of the MPC back in 1997. As DB's Mark Wall expressed, the 25bp rate cut was in line with expectations, but this came with a plethora of additional policy moves: a new GBP100bn four-year Term Funding Scheme (TFS) to aid the transmission of monetary policy at low interest rates through the banking system (an unexpected innovation); GBP60bn of gilt-based QE over the next 6 months (they had thought this would wait until September, but the pace of purchasing is about half the rate they were assuming); and a corporate QE programme of up to GBP10bn. The bank did signal that all the policies have room to be expanded if necessary with the caveat that Mark Carney reiterated that he is not a big fan of negative rates. So the UK may respect the zero bound if you take his consistent comments at face value.
The breadth of the policy response was impressive but as other central banks have found you can lead a horse to water (i.e. enhance the supply of bank credit) but you can't make him drink (i.e. create aggregate demand) so these measures are unlikely to be a panacea but as Mark Wall suggests it gives the BoE some breathing space before there's a fiscal response in the autumn. That's going to be the main determinant in cushioning the growth shock in say 2017 in our opinion.
The level of fresh QE is still low as a percentage of outstanding relative to the BoJ and the ECB but given they said it could be increased then the relatively small size didn't stop it having an impact. 2, 10 and 30 year gilts rallied 8.5bps, 16.0bps and 13.7bps respectively comfortably outperforming 10yr USTs (-4.1bps) and Bunds (-5.8bps). As for corporates sterling IG non-financials were 9bps tighter on the day. This doesn't sound like a lot but a look at the records show that outside of a month end date straddling March/April 2009 - that includes an index rebalancing component - this is the largest daily move tighter since the iBoxx sterling index started in 1999.
Staying with the sterling credit purchases, this morning Michal Jezek in my team published a note entitled ‘Not Wasting Time: Bank of England to Start Corporate Bond Purchases’. In it Michal notes that while the Bank of England had clearly telegraphed it would ease policy in August, the Corporate Bond Purchase Scheme (CBPS) was a surprise at this stage. We look into the details of the scheme in the context of the other measures taken, with a particular focus on the bond eligibility criteria. We review the market reaction and current pricing, and provide our broader views. GBP non-financial corporate bonds have rallied sharply and we think this momentum has a bit more to go particularly for the CBPS-eligible bonds, similar to the ECB CSPP experience although we note that market expectations of the CBPS had been stronger prior to the announcement than was the CSPP’s case. Unlike the ECB, the BoE provided a numerical target for its purchases. We think the BoE’s option to scale up the CBPS if funding conditions deteriorate is likely to create a Carney put for the UK corporate bond market, reducing perceived risks and transforming the eligible bonds to lower-beta securities, similarly to what we have seen in the CSPP-eligible EUR space. Many market participants have taken enormous comfort in CSPP technical’s, showing limited care for the underlying credit risk since the programme was announced. This is likely to create positive spillover effects for the ineligible GBP corporate bonds, including lower down the rating spectrum.
Overall yesterday was a good day for our long standing view that global QE remains still in the early stages rather than coming to an end. That's not to say it's a good idea or that it will stay in its current form. We think it will eventually transition away from simply buying financial assets to being a partnership with governments with a view to try to increase aggregate demand. Helicopter money would be one way to describe this development. I'd be stunned if major central banks were not still buying government bonds for this purpose way into the 2020s. If they're not it's probably because they have suddenly decided to take the creative destruction/default way out. This is unlikely.
Anyway this story has slightly overshadowed an important Payrolls release given the huge range over the last two months. Indeed as it stands the market is expecting a 180k reading this afternoon which compares to 287k in July and a measly 11k in June. DB’s Joe Lavorgna is looking for a below market 150k print which is more or less in line with the 2month, 3month and 4month trailing average notwithstanding the big high to low range in that time. Wednesday’s ADP employment report (179k) validated the consensus forecast for today although there were signs of softness in the employment components of both ISM’s. It feels like we’ll need a big beat or miss to really get much of a reaction in markets particularly given that the Fed is likely sitting on its hands until we see a bounce in GDP related data too.
As always it’s also worth keeping an eye on the other important elements of the report including the unemployment rate (expected to decline one-tenth to 4.8%), average hourly earnings (+0.2% mom expected), the participation rate and average weekly hours.
In terms of rest of markets yesterday, a -1.64% decline for Sterling versus the Greenback to 1.311 (its sitting around that level this morning) helped the FTSE 100 (+1.59%) and FTSE 250 (+1.45%) outperform other European indices (Stoxx 600 +0.67%, DAX +0.57%). A boost from Oil (WTI +2.69%) helped push energy stocks up again but we did also see UK financials perform strongly with the likes of Aviva (+6.70%), Standard Chartered (+5.16%), Old Mutual (+3.37%) and Prudential (+3.13%) all outperforming while homebuilders (Taylor Wimpey +1.75%, Berkley Group +1.73%) also got a bit of a boost.
Markets in the US initially got off to a positive start too but that didn’t last long as the tone quickly turned more cautious ahead of today’s payrolls. The S&P 500 (+0.02%) was little changed by the close with some softer than expected results from MetLife (which saw shares tumble nearly 10%) offset by gains for Kellogg and Ball Corp following their latest quarterly numbers. Kraft Heinz shares were also up 3% in extended trading after Q2 earnings bettered consensus.
Refreshing our screens this morning, markets in Asia are generally slightly firmer ahead of the big event this afternoon. Indeed the Nikkei (+0.22%), Hang Seng (+1.45%), Kospi (+0.49%) and ASX (+0.42%) are all up, while bourses in China are flat. 10y JGB yields are 1.5bps lower while the Yen is little changed. US equity index futures are also modestly in the green.
Meanwhile, of the limited economic data that we did get yesterday it wasn’t really enough to move the dial. Initial jobless claims nudged up 3k last week to 269k (vs. 265k expected) with the four-week average now sitting at 260k. Claims have now been below the 300k number for 74 consecutive weeks. Factory orders (-1.5% mom vs. -1.9% expected) declined slightly less than expected in June while headline durable goods order were revised up one-tenth in June to -3.9% mom and core capex orders were revised up two-tenths to +0.4% mom. Interestingly the Atlanta Fed has pegged US Q3 GDP growth at +3.7% following its update yesterday.
Looking at the day ahead the only data due out in Europe this morning are Germany factory orders numbers for June, the latest trade balance reading for France and the latest UK house price data. This afternoon in the US all the focus is on the July employment report which will be out at 1.30pm BST. Later on this evening we’ll also get the June consumer credit data. Away from the data there’s nothing in the way of Central Bank speak due but one thing worth keeping an eye on is Moody’s sovereign rating decision for Turkey where we could see the agency follow S&P in downgrading Turkey to high yield. Earnings wise today we’ll get quarterly reports from just 8 S&P 500 companies including Berkshire Hathaway, while in Europe RBS and Allianz are due. Before we wrap up it’s also worth noting that China is due to release its July FX reserves data on Sunday.