S&P Futs Near All Time High On Strong Euro Data; Oil Drops On Trump's SPR Sale Plans

S&P futures rose alongside European stocks as Asian shares posted modest declines. The euro set a new six-month high and European bourses rose as PMI data from Germany and France signaled that the ECB will have to tighten soon as Europe's recovery remains on track, with the German Ifo business confidence printing at the highest level on record, and hinting at a GDP print in the 5% range. Oil declined after the Trump budget proposal suggested selling half the crude held in the US strategic petroleum reserve.

Strong economic survey data across the Eurozone supported EU bourses, despite a cautious start to trade after last night's deadly terror attack in the UK. Alongside strong headline numbers, one of the most eye-catching details in the data was the biggest manufacturing sector job growth reading in the survey's 20-year-history and overall employment gains were the second best in a decade.

"It's a very good result and it's broad based. We've got a good pace of growth here. The fact we have maintained this high level in May is great news for second quarter GDP," said Chris Williamson, chief business economist at IHS Markit."

Just like in the US, tech companies helped propell the Stoxx Europe 600 Index higher after Nokia Oyj settled a litigation with Apple. The U.K.’s FTSE 100 Index rose a third day, the pound pared declines and gilts were steady after the Manchester bombing. The dollar declined after the Washington Post reported Donald Trump asked intelligence chiefs to publicly deny collusion between his campaign and Russia, a potentially impeachable offense. The U.S. president in March asked Director of National Intelligence Daniel Coats and NSA Director Michael Rogers to publicly deny existence of any collusion between his campaign and the Russian government, the Washington Post reported, citing unidentified current and former officials.

Oil dropped, halting a four-day rising streak that took the price of crude above $51 a barrel.

It wasn't just the German IFO surge: a euro-area Purchasing Managers’ Index showed manufacturing in the bloc expanded at the fastest pace in more than six years, bolstering the case for an ECB rate hike and further capital flows out of the US and into Europe as political wrangling in Washington rumbles on, diverting attention from President Trump’s spending and tax plans.

“Europe’s growth numbers aren’t knocking the skin off the ball, but they are less volatile and it’s doing relatively well compared to the U.S., U.K. and Japan,” said Bill Blain, head of capital markets at London-based Mint Partners. “More than a few global investors have lost faith in the U.S. recovery and Trump jump.”

There was some bad news: signs that euro zone authorities and the International Monetary Fund remain some way apart on Greece's debt problems combined with the strong data to nag at bond markets. Greece's short-dated government bond yields rose sharply as the IMF's chief negotiator stuck to its stance that there needs to be more realism on what Athens can deliver. The prospect of the ECB scaling down its multi trillion euro stimulus program meanwhile nudged up yields on German Bunds DE10YT=TWEB and other higher-rated government debt.

"The risk-off environment is already erased and we are back to the levels we saw yesterday on the back of the very bright economic outlook," said DZ Bank analyst Rene Abrecht.

The Stoxx Europe 600 Index gained 0.2 percent in early trading. The U.K.’s FTSE 100 Index added 0.1 percent. Futures on the S&P 500 climbed 0.1 percent after the underlying gauge rose 0.5 percent on Monday. The selloff in Brazilian assets resumed on Monday. The NEXT Funds Ibovespa Linked Exchange Traded Fund, an equity ETF that tracks Brazil’s benchmark index, slumped 3.9 percent in Tokyo trading Tuesday.

Asian trading had seen a modest pull back in risk appetite with MSCI's broadest index of Asia-Pacific shares not including Japan dropping back from near two-year highs. Tokyo's Nikkei closed down 0.3 percent as Japanese manufacturing activity expanded at the slowest pace in six months in May, while trading in China was choppy on concerns over a regulatory crackdown on risky lending practices. Japan’s Topix dropped 0.2 percent after swinging between gains and losses. South Korea’s Kospi rose 0.3 percent. Hong Kong’s Hang Seng fell 0.1 percent. The Shanghai Composite Index lost 0.5 percent.

The dollar remained in the doldrums too. It dipped to a 6-1/2-month low against a basket of other major currencies as low 10-year U.S. Treasury yields continued to underscore fading expectations for fiscal stimulus from the Trump administration.

Of note, today the White House will present Trump's first full budget plan to lawmakers on Tuesday. Its proposals include a $3.6 trillion cut in government spending over 10 years, balancing the budget by the end of the decade. Congress holds the federal purse strings and often ignores presidential budgets, which are proposals and may not take effect in its current form. But the plan, which advocated selling half of strategic U.S. oil reserves, weighed on crude futures according to Reuters, offsetting optimism over expectations that other major oil producers would agree to extend supply curbs this week.

Brent retreated 0.8 percent to$53.44 a barrel. U.S. crude futures gave up all their earlier gains to edge lower to $50.71, after hitting their highest level in more than a month earlier in the session. The weaker dollar, meanwhile, lifted gold slightly. Spot gold climbed 0.1 percent to $1,261.56 an ounce in its third straight session of gains.

This afternoon sees US new home sales and the much-ignored Markit manufacturing PMI. Neither is expected to be much-changed from last month. The big event for the US market is the FOMC Minutes tomorrow. "The big question for markets is how fast investors get back to the business of hunting carry" according to SocGen's Kit Juckes. "I am watching USD/BRL which has stabilised after last week's spike, and if this starts to edge down again while US equities move towards new highs, that would increase the likelihood of a June Fed rate hike rate, while also supporting all the higher-yielding currencies. That does, in G10FX, lead to NZD/JPY."

Bulletin Headline Summary from RanSquawk

  • Strong PMI and IFO surveys across the Eurozone have supported EU bourses despite a cautious start to trade following last night terror attack in the UK
  • WTI and Brent crude futures enter the North American crossover in negative territory as concerns continue to mount regarding the factions within the cartel and whether all players are on board with output curbs
  • Looking ahead, highlights include Fed's Kashkari, Harker and ECB's Coeure

Global Market Snapshot

  • S&P 500 futures up 0.2% to 2,396.75
  • STOXX Europe 600 up 0.3% to 392.14
  • MXAP down 0.2% to 151.94
  • MXAPJ down 0.1% to 496.39
  • Nikkei down 0.3% to 19,613.28
  • Topix down 0.2% to 1,565.22
  • Hang Seng Index up 0.05% to 25,403.15
  • Shanghai Composite down 0.5% to 3,061.95
  • Sensex down 0.3% to 30,494.69
  • Australia S&P/ASX 200 down 0.2% to 5,760.19
  • Kospi up 0.3% to 2,311.74
  • German 10Y yield rose 1.6 bps to 0.413%
  • Euro up 0.2% to 1.1259 per US$
  • Brent Futures down 0.7% to $53.47/bbl
  • Italian 10Y yield unchanged at 1.845%
  • Spanish 10Y yield rose 0.7 bps to 1.63%
  • Brent Futures down 0.7% to $53.47/bbl
  • Gold spot down little changed at $1,260.08
  • U.S. Dollar Index down 0.1% to 96.84

Top Headline News

  • Britain is reeling from last night’s terror attack that killed 22 people at a concert by U.S. pop star Ariana Grande in the northern city of Manchester
  • OPEC and its allies were poised to continue their production cuts for another nine months after Iraq backed an extension, removing one of the last remaining obstacles to an agreement
  • President Donald Trump would dramatically reduce the U.S. government’s role in society with $3.6 trillion in spending cuts over the next 10 years in a budget plan that shrinks the safety net for the poor, recent college graduates and farmers
  • Noble Group Ltd.’s crisis deepened after S&P Global Ratings flagged a risk of default for the commodity trader within a year, triggering a rout in the company’s shares before they were suspended in Singapore ahead of a company statement
  • Nokia Oyj, the latest technology company to do battle with Apple Inc. over patents, secured a licensing agreement that is likely to boost its revenue in an underdog victory that sent the Finnish company’s shares soaring
  • Details of the closed-door discussion that Federal Reserve officials held during their most recent policy gathering are expected to keep the odds of a June interest-rate increase high

Asia equity markets traded with a cautious tone amid terror fears following the explosion in Manchester, UK where 19 people were confirmed dead and over 50 others injured, which police are treating as a terrorist attack. This dampened the risk tone in ASX 200 (-0.3%) and Nikkei 225 (-0.3%), although markets in Australia attempted to recover as gains in commodities-related sectors provided support. Hang Seng (+0.1%) and Shanghai Comp. (-0.5%) were mixed with downside stemmed after the PBoC conducted a firm liquidity injection of CNY 140bIn. Finally, 10yr JGBs were relatively flat with only mild upside observed despite the cautious risk tone observed in equities, while the enhanced liquidity auction also saw a muted reaction and failed to drive any significant demand.

Top Asian News

  • China Boosts Zinc Imports to 13-Month High on Local Shortage
  • Noble Group ‘Fighting for Its Life’ as S&P Sees Default Risk
  • Sun Pharma Weighs on Indian Drugmakers as U.S. Competition Bites
  • Fortescue CEO Says Iron-Ore Price May Need to Fall More: FT
  • Tongda Didn’t Get Oppo’s R11 Model Order, Tongda CFO Says
  • China Spins a Worldwide Web of Food From Mozambique to Missouri

In European markets, Strong PMI and IFO surveys across the Eurozone have supported EU bourses this morning to trade risk-on, following stellar readings from France and Germany in particular, where the Mfg. figure rose to 59.4, ahead of the exp. 58. Subsequently, offsetting the slip in crude oil futures which stemmed from comments by the Kuwait Oil Minister who stated that not everyone is on board with 9-month extension. This is somewhat of a contrast to rhetoric from the Saudi Energy Minister, who kept alive hopes by stating that there is no objection to a 9-month deal. Of note, equities have pulled off highs amid reports that South Korea have fired warning shots following an unidentified object flying south from North Korea. In credit markets, government bonds have reversed their in FTQ amid the risk on sentiment. Notable underperformance observed in the Greek short end after reports that Greece's creditors failed to reach an agreement on Greek debt measures and held off releasing new funds to Greece. Additionally, Belgium have now opened books for their EUR 20yr with reports noting that demand has exceeded EUR 8.85b1n. Elsewhere, supply from the UK and Germany has been well digested.

Top European News

  • German Upswing Takes Business Sentiment to Highest Since 1991
  • Greek Deal on Debt Relief Founders as Talks Stretch to June
  • U.K. Began New Fiscal Year With Higher-Than-Forecast Borrowing

In currencies, the Bloomberg Dollar Spot Index dropped for a third day, falling 0.1 percent to head for the lowest level since Nov. 4. The yen rose 0.2 percent to 111.13 per dollar. The pound was little changed at $1.2996 after weakening as much as 0.4 percent. The euro rose 0.2 percent to $1.1258. Across FX markets, the news of the terror attack in Manchester has dominated the headlines, which prompted some mild GBP selling to trip below 1.30, although, bids layered in 1.2950 curbed further downside. EUR still feeling the upward momentum, now helped by the strong Eurozone PMI readings. NZD remains on the front foot off the back of optimistic expectations from the budget later this week. The local press have been shedding a positive light on some of the economy friendly measure. We have the Fonterra dairy auction later today, so this may test the NZD resolve which sees the spot rate above 0.7000 and AUD/NZD back in the mid 1.0600's. As can be said of a number of pairings in the majors, there look to be over-extensions of note, and some will be justified in attributing this to USD/JPY given the marginal price action see in Treasury yields. Sub 111.00 looks to be running into demand as we cannot ignore the prospect of a Fed rate hike in June. As we have spoken of in recent weeks, the market is also looking at the longer term perspective of the US rate path, but in light of this, the data has faded at best, so we expect some consolidation in the USD at these levels as we await more data.

In commodities, WTI and Brent crude futures enter the North American crossover in negative territory as concerns continue to mount regarding the factions within the cartel and whether all players are on board with output curbs. More specifically, the Kuwait Oil Minister says that not everyone has agreed to a 9-month output extension but is agreed on a 6-month extension, while adding that deeper cuts are not being discussed. Crude oil prices also took a hit after the Chinese customs highlighted that China's crude imports from Russia and Saudi Arabia fell 1.9% and 3.9% respectively in April. In metals markets, gold prices are mildly higher due to a weaker USD and safe-haven flows in the wake of the Manchester Arena explosion, while copper prices failed to maintain traction as risk sentiment in the region turned cautious.

Looking at the day ahead, in the US we’ll get the flash May PMIs along with April new home sales and May Richmond Fed manufacturing index. Away from the data, the Fed’s Kashkari is scheduled to speak again at two separate events while the Fed’s Harker speaks at 5pm ET. The other big focus for today will be the Trump’s administration budget request where we are expecting to get alot more details on the back of the skinny budget released back in March and some of the leaks this morning.

US event calendar

  • 9:45am: Markit US Manufacturing PMI, est. 53, prior 52.8; Services PMI, est. 53.3, prior 53.1; Composite PMI, prior 53.2
  • 10am: New Home Sales, est. 610,000, prior 621,000; MoM, est. -1.77%, prior 5.8%
  • 10am: Richmond Fed Manufact. Index, est. 15, prior 20
  • 9am: Fed’s Kashkari Speaks with Reporters in Minneapolis
  • 3pm: Fed’s Kashkari Speaks in Minneapolis
  • 5pm: Fed’s Harker Speaks in New York

DB's Jim Reid concludes the overnight wrap

Awful news this morning for those of us in the UK after a suspected terrorist attack at a concert in Manchester late last night which has taken the lives of 19 people and left another 50 injured. If confirmed as a terrorist attack it will be the largest such atrocity on these shores since the 2005 London bombings. Safe haven assets are a little stronger this morning with 10y Treasury yields -1.7bps and Gold +0.15%. Sterling (-0.10%) is slightly weaker. The Nikkei (-0.12%) is a touch softer but most other markets in Asia are flat to slightly higher. Indeed the ASX is +0.03% while the Hang Seng (+0.30%), Shanghai Comp (+0.18%) and Kospi (+0.92%) are firmer.

Also worth highlighting overnight is the news that S&P had moved to place Brazil’s sovereign BB rating on credit watch negative. Brazilian assets had resumed their selloff yesterday with the Bovespa down -1.54%, Brazilian Real weakening -0.38% and local currency bond yields 30bps higher. Also Bloomberg is reporting that President Trump is to announce $3.6tn in tax cuts over the next 10 years at today’s much anticipated budget plan. The proposal will supposedly claim to balance the budget within a decade. As we’ve noted before however it appears that the Republican-led Congress is likely to largely ignore the proposal. Today's main market story outside of the UK attack are the global flash PMIs. The strong YTD performance in equities has matched the strong recent performance of global PMIs so on this measure the rally is not out of line with the data. Of the main regions, China has perhaps seen the weakest PMI readings and it's notable that whilst US/European equities are up around 10-25% YTD, Chinese equities are slightly down. With this in mind today's flash PMIs from around the globe will give us an early sign to whether momentum is continuing at an elevated pace. In Europe the expectations are for broadly unchanged numbers for services and manufacturing with a 55 or 56 handle. In the US also broadly unchanged with a 53 handle for both. A sizeable move in either direction around this consensus would likely drive equities over the next few weeks. We’ll actually have to wait until next week to receive China’s PMIs but this morning Japan released its manufacturing PMI which came in at 52.0 for May versus 52.7 in April.

This comes after market sentiment continues to improve after the US political shocks of last week. The S&P 500 (+0.52%) rose for the third consecutive session yesterday and is now up 1.76% from last week’s intraday lows and also back to within half of a percent of the all time high mark again. The Dow (+0.43%), Nasdaq (+0.82%) and Russell 2000 (+0.72%) indices also had a decent session despite there not really being much news. In fact the lack of any Trump-related headlines was probably a positive for sentiment although some of the deals struck with Saudi Arabia over the weekend were seen as a boost for markets. The VIX also plunged over 9% and closed back below its YTD average at 10.93. Markets in Europe were a bit more benign (Stoxx 600 -0.09%) with banks down for the fourth time in five days.

Helping sentiment at the margin were higher Oil prices with WTI Oil (+0.91%) closing above $51/bbl for the first time since April 18th. This comes ahead of Thursday’s OPEC meeting where expectations are seemingly high for an extension to the supply cut agreement. In fact the rest of the commodity complex was generally firmer with Gold (+0.37%), Iron Ore (+0.80%), Copper (+0.37%) and Zinc (+0.67%) all edging up. The one asset which is struggling to recover from the Trump-inspired selloff from last week is the US Dollar (-0.16%) which fell for the 7th time in the last 8 sessions yesterday. That wasn’t helped by the strong day for the Euro though (+0.28%) which bounced after German Chancellor Merkel called the single currency “too weak” (albeit in the context of Germany’s trade surplus).

As a longer term aside on the current and future financing of government debt, yesterday the UK Conservative Party seemed to take a care policy U-turn on their campaign trail. The reforms announced in their manifesto last week basically meant that more people would have to use their home to fund future elderly care down to their last £100,000. However the backlash led to remarks from PM Mrs May yesterday that they would consult on having a maximum amount that any person would be forced to pay. This comes only a couple of months after the same government announced a U-turn on taxing self employees people slightly more to be closer to other employees in the economy. This follows the previous chancellor George Osborne reversing a cut in tax credits (announced in 2015) for millions of low-paid families after immense and very public criticism.

With the UK not seeing a budget surplus since 2001 (only very briefly after many prior years of big deficits) and with the Conservative Party last week delaying a return to a balanced budget to 2025 in their manifesto one wonders how budgets will ever balance again when any tax increases or welfare cuts are very quickly reversed when shown as unpopular. This is not a UK only phenomenon (well done Germany though) but this recent activity in the UK surely is reflective of a wider global issue of how to collect more in tax than you spend, especially as we get older, all have a vote and the working age population shrinks or growth stalls across the developed world. It's one of the reasons we think that helicopter money will eventually be prevalent. Governments can't cut deficits too much without major backlash. In the end it'll be easier to monetise them.

On that note, following another set of marathon talks yesterday negotiations between Greece’s creditors failed to yield a deal on debt relief at last night’s Eurogroup meeting. The IMF and Germany were supposedly in disagreement over the amount of debt relief required to assure economic stability in Greece. Eurogroup Chair Jeroen Dijsselbloem said that it is still a priority to bring the IMF on board and that work will continue in the coming weeks with the hope that a deal can be concluded on June 15th at the next scheduled meeting for Eurogroup ministers. As a reminder Greece faces around €7bn of debt maturities in July. Onto credit, the latest ECB CSPP numbers were out yesterday and I was surprised to see the average daily corporate purchases at €401mn last week, notably above the average daily run rate of €365mn since the program started. So back in April and early May it looked like a broadly equal CSPP/PSPP split but last week's numbers gives us the possibility that CSPP hasn't been tapered as much after all.

Just wrapping up the remaining newsflow yesterday, with no significant data out there was a bit of focus on the Fedspeak yesterday. The Dallas Fed’s Kaplan said that he still favoured two more rate hikes this year and a balance sheet reduction to start later this year. On inflation Kaplan said that “recent readings are likely not indicative of a weakening trend...and as slack continues to be removed from the labour market, headline inflation should reach, or exceed, the Fed’s 2% longer-run objective in the medium term”. Over at the ECB the Bundesbank’s Weidmann reiterated that inflation pressures are currently “muted” but that they should increase “with the continued economic upswing and gradual decline in unemployment in the Euro area”.

Looking at the day ahead, we’ve got a fairly busy diary to get through in Europe this morning. Shortly after this hits your email we’ll get the final revisions to Q1 GDP in Germany (no change to the +0.6% qoq flash print expected) as well as details around the growth drivers. Shortly after that we get May confidence indicators out of France before all eyes turn to those flash May PMIs. Later on this morning we’ll get the May IFO survey out of Germany and public sector net borrowing data in the UK for April. This afternoon in the US we’ll also get the flash May PMIs along with April new home sales and May Richmond Fed manufacturing index. Away from the data, the Fed’s Kashkari is scheduled to speak again at two separate events (2pm BST and 8pm BST) while the Fed’s Harker speaks at 10pm BST. The ECB’s Coeure speaks this afternoon too. The other big focus for today will be the Trump’s administration budget request where we are expecting to get alot more details on the back of the skinny budget released back in March and some of the leaks this morning.

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