"Tech Wreck" Goes Global Dragging Worldwide Markets Lower; Cable, USDJPY Slide

First the bad news: following Friday's "tech wreck" European equity markets have opened lower, with the Stoxx 600 sliding 0.9% and back under the 50DMA for the first time since December, dragged by selloff in tech shares, mirroring Asian markets as Friday’s "FAAMG" volatility in U.S. markets spreads globally, battering shares from South Korea to the Netherlands. European banks lag as the Spanish regulator stepped in to prevent another bank collapse, this time of LiberBank which we profiled yesterday, by banning short-selling in the regional commercial bank to mitigate Popular-related contagion.

Samsung Electronics, ASML Holding and Tencent Holdings led declines in Europe and Asia, dragging down benchmark indexes according to Bloomberg. U.S. stock futures, which ignored Friday's tech move, also fell as markets continue to digest the Nasdaq 100’s plunge on Friday. Europe's tech index fell as much as 2.8% to put it on track for its biggest one-day loss since October. The index had reached a 15-year high earlier this month and has soared around 40 percent over the last year

As discussed over the weekend, the sudden slide in tech stocks, which was responsible for nearly half the YTD gains in the S&P helped send global equities to repeated record levels this year, blindsided many investors after markets largely brushed aside last week’s trio of risk events. The question now, according to BBG, is whether the drops represent merely a pause or a more fundamental crack in the U.S. stock bull market.

“There’s a chance U.S. internet technology stocks that have propelled a global stock rally will now serve as a buzz kill,” said Mitsuo Shimizu, deputy general manager at Japan Asia Securities in Tokyo.

In an ominous note over the weekend, Goldman warned that "The Last Time The Market Acted Like This Was At The Tech Bubble Peak" suggesting more pain may be in store for tech stocks.

Now the good news: Italian BTPs rally from the open, with the spread to bunds tightening 6bps due to poor performance from populist party in Italian local election, further reducing chances of early national elections. It spurred on debt markets. Italian government bond yields fell to their lowest since January.  "Macron doing well in the first round of the French parliamentary elections bodes well for him getting a majority," said Lyn Graham-Taylor, fixed income strategist at Rabobank. "The fact that 5-Star did poorly in local elections in Italy also suggests a setback for populism in Europe."

A similar reaction was observed in French bonds, where the spread to Bunds has dropped to 36 bps after yesterday's landslide victory for Macron's party in the first round of the French presidential election.

In other key moves, the USD/JPY has broken back below 110.00 as USD weakens, AUD/USD also supported by overnight rally in iron ore futures +2.6%. The short sterling strip bull flattens, with cable finally cracking below 1.27 after some initial support as markets continue to re-evaluate political certainty and Brexit implications of U.K. election.

Meanwhile, the Washington drama continues, with reports over the weekend that AG Jeff Sessions offered to speak to the Senate Intelligence Committee to answer questions about alleged Russian meddling in the 2016 presidential election. On Wednesday the Federal Reserve is set to lift rates, leading a pack of central banks that are mostly nodding in the direction of removing ultra-accommodative policy.

The euro rose back to $1.1225 in the currency markets before fading modestly, where anticipation is also building ahead of Wednesday's conclusion of a two-day FOMC meeting. The central bank is widely expected to nudge up U.S. interest rates by another quarter point, but economists will be watching to see whether the recent dip in economic data and wave of uncertainty surround Donald Truump has weighed on confidence.

Britain's sterling also remained in focus as it began to backslide again. It was hovering at $1.2730 and 88.08 pence per euro as Prime Minister Theresa May attempted to prop up her position after her party's last week's damaging election. "The political risks are mounting," said Kathleen Brooks, head of research with City Index in London.

In commodities, crude oil prices extended gains after rising on Friday when a pipeline leak in major producer Nigeria overshadowed supply worries weighing on the market. U.S. crude and Brent were both 0.6 percent higher at $46.10 and $48.45 a barrel, respectively, while copper rose for a fourth straight session and gold XAU= snapped a three-day losing streak to climb to 1,269 an ounce

Bulletin Headline Summary from RanSquawk

  • European equities softer amid the fall in tech names post the sell off late on Friday's session
  • Italian and French spreads tighten against their German counterpart amid alleviating political concerns in Europe
  • Today's session sees a lack of tier 1 data releases

Market Snapshot

  • S&P 500 futures down 0.3% to 2,424.25
  • STOXX Europe 600 down 0.7% to 387.87
  • MXAP down 0.3% to 154.36
  • MXAPJ down 0.8% to 500.82
  • Nikkei down 0.5% to 19,908.58
  • Topix down 0.01% to 1,591.55
  • Hang Seng Index down 1.2% to 25,708.04
  • Shanghai Composite down 0.6% to 3,139.88
  • Sensex down 0.7% to 31,048.15
  • Australia S&P/ASX 200 up 0.02% to 5,677.80
  • Kospi down 1% to 2,357.87
  • German 10Y yield fell 1.6 bps to 0.248%
  • Euro up 0.2% to 1.1218 per US$
  • Brent Futures up 0.4% to $48.32/bbl
  • Italian 10Y yield fell 9.0 bps to 1.794%
  • Spanish 10Y yield fell 3.3 bps to 1.411%
  • Brent Futures up 0.4% to $48.32/bbl
  • Gold spot up 0.2% to $1,269.07
  • U.S. Dollar Index down 0.2% to 97.12

Key Overnight Headlines

  • President Donald Trump called James Comey “cowardly,” days after the fired FBI director’s testimony to a Senate committee and as Attorney General Jeff Sessions offered to speak to the same panel to answer questions about alleged Russian meddling in the 2016 presidential election
  • A day after she was forced to promote prominent Brexit hardliners in her bid to cling to power, U.K. Prime Minister Theresa May is set to face furious lawmakers from her Conservative Party in a showdown that could signal the end of her premiership
  • The Federal Reserve will increase interest rates twice more in 2017 and begin shrinking its balance sheet before year’s end despite a clear downturn in the outlook for inflation, according to 43 economists surveyed by Bloomberg
  • Citrix Systems Inc., the cloud-computing enterprise software company, has so far failed to find a buyer as discussions with private equity firms have become bogged down
  • Qatar has enough financial firepower to defend its currency and economy, Finance Minister Ali Shareef Al Emadi said, as a Saudi-led campaign to isolate the small Gulf Arab country entered its second week
  • Italy: populist Five Star Movement suffers heavy setbacks in local mayoral elections; fails to even make runoffs in the four top races
  • France: strong performance for Macron’s party in French parliamentary elections, wins 32.3% of the vote, 13ppts ahead of the Republicans
  • Spain: government sees 2017 GDP at least 3.2%, consensus is growing that official growth forecast of 2.7% is too cautious: El Mundo
  • Spanish Banks: market regulator bans short-selling in Liberbank stock to avoid market contagion after Banco Popular rescue
  • U.S. Banks: U.S. Treasury Department to propose modest revisions to post-crisis banking regulations; calls for the removal of the Consumer Financial Protection Bureau’s authority to directly examine banks: Politico
  • U.S. Stocks Still Best for Vanguard Founder After 400% Gains
  • Microsoft Aims Xbox One X at Hardcore Gamers for Holidays
  • Uber to Add Independent Director as Board Responds to Crises

Asia equities traded subdued following a mixed US close on Friday, in which tech underperformed as Apple and FANG stocks dropped over 3%, with participants also cautious ahead of this week's FOMC meeting where the Fed are expected to hike rates by 25bps. In Asia, ASX was closed for public holiday while Nikkei 225 (-0.5%) was dampened by a mildly stronger JPY and after disappointing machinery orders. Shanghai Comp. (-0.5%) and Hang Seng (-1.1%) conformed to the downbeat risk tone with underperformance also seen in HK's tech stocks and after a lacklustre CNY 40bIn injection by the PBoC. Finally, 10yr JGBs were lower to track losses in T-notes and amid an absence of a BoJ Rinban announcement today, while the curve was mixed with underperformance in the belly. PBoC injected CNY 10bIn in 7-day reverse repos and CNY 30bIn in 28-day reverse repos. PBoC set CNY mid-point at 6.7948 (Prey. 6.7971)

Top Asian News

  • China Holds Firm to $5 Trillion Anchor as Fed, ECB Seek Exit
  • Banks to Lose Sway Over China Index Just as Stocks Recover
  • Tokyo Needs More Hedge Funds to Become Global Financial Hub: CS
  • Economists See Strong Chance of Second Term for BOJ’s Kuroda
  • Oasis Says Amended Panasonic Offer for PanaHome Still Unfair
  • Chinese Brokerages Fall Amid Slowing Pace of IPO Approvals
  • Sun Hung Kai Halts Sales of Service Apartments in Shanghai: SCMP
  • Freeport Calls Talks With Indonesian Government ‘Constructive’

In Europe, exit polls from the first round of France's parliamentary election suggest Macron's La Republique En Marche party is to win between 415-455 seats (out of 577), Republicans 70-110 seats and National Front with 1-5 seats. (Newswires) Note, 289 seats are require for an absolute majority. These results also exceed those expected by pollsters with the Sopra Steria poll forecasting 385-415 seats.
Italy's maverick 5-Star Movement looked set to suffer a severe setback in local elections on Sunday, failing to make the run-off vote in almost all the main cities up for grabs, early results and exit polls said

European trade has seen a quiet morning this morning, as traders look ahead to a week of central banks. Following Friday's sell off in tech names late in the US session, European suppliers of Apple have notably underperformed this morning. Politics continue to influence markets, as fallouts from the UK election continue, noticeably, UK PM May has stated that she intends to stay as Prime Minister despite the cabinet reshuffle. The cabinet shake up has seen Michael Gove back to an influential position, as the new environment secretary. The uncertainty continues in regards to Brexit negotiations are evident in Moody's commentary, stating that the election results open up consideration for a softer Brexit. However, did state that the outcome will complicate and possibly delay negotiations.

Politics also dictate fixed income markets, as the German-Italian spread falls around 14.8bps with the 10yr BTP yield at its lowest since January, as 5-star movement party suffers a severe setback. Elsewhere, the German-French spread slips 4.5bps as exit polls show Macron's party winning a large majority of 415-455 in the parliamentary elections.

Top European News

  • Macron Tightens Grip on French Assembly as Old Guard Ejected
  • U.K.’s Davis: I’M Getting on With Leaving EU Single Market
  • Anti-Euro Five Star Movement Suffers Italian Election Setbacks; Italy Stocks Outperform; Local Vote Provides Big Surprise: Citi
  • Popular Takeover Turns Attention to Weak Spanish Bank Rivals
  • Auto Trader Falls Amid Report Amazon to Sell Cars in Europe
  • VW Is Considering Rehiring Opel’s Neumann, Reuters Reports
  • K+S Rises After Report on Belaruskali-Uralkali Talks
  • Spain’s Liberbank Rebounds After Regulators Ban Short Sales
  • Italy’s Industrial Production Declines, Dimming Year’s Outlook
  • U.K. Consumer Spending Drops for First Time in Four Years

In commodities, oil prices continue to flounder, but amid some reports of decent selling interest this morning, buyers have contained the move ahead of the lower half of the USD45.00's in WTI, but there looks to be limited prospect of a notable recovery as the demand and supply dynamics continues to dictate. Russia’s energy minister said the market to re-balance by 1Q 2018 after meeting with Saudi Arabian counterpart over weekend. Hedge funds boost bullish WTI bets ahead of flat price crash, with Brent data due later Monday. The overhang of US shale production eats away at the prospective imports, and this will weigh on prices for the foreseeable future. Against this, we have seen a strong showing in Copper this morning, moving back into the mid USD2.60's. Nothing fresh to note from the demand side, ie China, so this may be a period of technical relief/recovery more than anything else. Gold consolidates the recent pullback from near USD1300.00 levels, while Silver is underperforming and looking a little heavy in the low USD17.00's.

In currencies, there is not too much conviction in the FX markets this morning, and we include GBP in this given the heightened uncertainty over the next government make up, their stance going into the EU negotiations and the bargaining talks themselves. We pay little attention to the overhyped soft and hard Brexit scenarios being touted by all and sundry, and the tight price action is testament to this.
Cable is testing the lows ahead of 1.2700 as NY traders filter in, but early London has been happy to maintain steady ranges a little higher up, preferring to express any weak GBP sentiment through the EUR cross rate. The latter stalled just ahead of 0.8860 last week, and this looks to be the next port of call, with pre 0.8900 expected also at some point. This is also down to the buoyant tone in the EUR/USD, which has re-establised a foothold above 1.1200 as the resistance ahead of 1.1300 is still the target. A breach looks unlikely ahead of the FOMC this week, and much of the hesitation to commit this morning is largely down to this.


US Event Calendar

  • 2pm: Monthly Budget Statement, est. $87.0b deficit, prior $52.5b deficit

* * *

DB's Jim Reid concludes the overnight wrap

If a working lifetime starts from leaving university at 21 and ends with retirement at 65 then today's birthday marks the halfway stage of my career which seems quite daunting. My wife informed me last night that she hasn't managed to get me a birthday card or present yet as she's been exhausted. She was 25 weeks pregnant yesterday and is already bigger than when she delivered at full term with Maisie. While I'm clearly hoping for a hot summer, I'm not sure it'll be worth it for me given the extra work i'll have to do!

Anyway, talking of university and linking it into the political shockwave that the UK delivered last week. I distinctly remember being at university back in the early 1990s and seeing pictures on the walls of students marching en masse on our campus at various causes in the 1970s. Some pictures saw them occupying buildings in huge numbers in some kind of protest or another. Fast forward 15-20 years to my time at uni and none of us had the appetite, enthusiasm or much cause for protest. I always wondered whether this was structural or cyclical. A combination of looking back through history and looking at the early data from last Thursday's election suggests that it was cyclical. In the PDF today we show a graph of voter turnout of 18-24 years olds and over 65 year olds in every election since 1964 in the UK. As you can see the turnout for the eldest demographic has been steady between 70-80% over the 50+ years we have data. Up until 1992, 18-24 year old turnout was a lower but relatively steady 60-68%. Then in 1997, 2001, 2005 and 2010 it was at 54%, 40%, 38% and 52% respectively. Early data from Thursday have put this group's turnout at around 70% - possibly the highest in at least two generations.

If confirmed this has major ramifications for politics and financial markets over the next few years in the UK and possibly further afield. In the UK we have huge intergenerational wealth issues (e.g. young in debt and can't afford to buy a house and the old with large wealth in their house and other asset) but if the young don't vote and the elderly do its difficult to see how this changes. However if the youth are now waking from their apathetic slumbering then policy surely has to be more redistributionary. Given that you can't alienate the grey vote then the real difficulty is that politicians will struggle to tax the old but need to give the young more of a helping hand. This is not a recipe for austerity and debt reduction - both are looking increasingly like political suicide. As we've stated many times before over the last 12 months we think that over a long sweeping cycle we're at an inflexion point. In short Governments can possibly be forced to spend more across the developed world until bond markets rebel at the high level of debts that this implies and then central banks would be forced to monetise this debt. Thursday's election makes helicopter money more likely in my opinion. This is different from QE as its central banks buying bonds that are attached to fresh spending rather than independent of it.

Staying with politics, new French President Macron is set for a big National Assembly majority (as per Reuters) in the first round of the legislative elections held yesterday. The second round will take place next week but markets are likely to be cheered that this will give him a mandate to make the reforms he's campaigned about. It seems mildly ironic that as France moves away from the Socialist party, the UK is a small political mishap from fresh elections at any time and possibly electing the most socialist government for at least 40 years. We'll look at the market reaction to the UK election below but first we should highlight that in two days we have the small matter of the June FOMC to look forward to. The Fed is widely expected to raise interest rates 25 basis points and reiterate its intention to hike again once more before year end. They will also release updated economic and financial forecasts with DB expecting only minor cosmetic changes with perhaps median 2017 headline and core inflation estimates nudged down a tenth but all other estimates, including the trajectory for interest rates likely to remain broadly similar. DB also expect Yellen to discuss tapering of reinvestments in her post-meeting press conference. While she will not likely commit to any specific details DB expect her to guide financial markets toward a September announcement, which would be consistent with the minutes from the May 3 FOMC meeting.

Onto markets and the big story on Friday outside the UK election was the late sell-off in US tech which saw one measure of the sector down -2.7% with the NASDAQ -1.8%.Apple (-3.9%), Facebook (-3.3%) and Alphabet (-3.4%) were high profile losers on the day. It looked more like rotation than an out and out selloff as the DOW (+0.4%) climbed and the S&P (-0.1%) was nearly unchanged. Asian markets are starting the week on the soft side weighed down by Friday's US tech sell off. The Nikkei is -0.6%, the Hang Seng -1.2% and Shanghai Comp -0.45% lower as we type.

Elsewhere Sterling retreated amid the political turmoil (-1.6% on Friday but flat overnight) with Gilt yields lower across the maturity spectrum (2Y: -2bps; 10Y: -3bps). However UK equities were boosted by the falling currency as the FTSE 100 ended the day up +1.0% to end a string of four days of losses. European indices were higher (DAX +0.8% and the CAC 0.7%) and credit markets saw iTraxx Main and Crossover both tighten by -1bp and -4bps respectively, while CDX IG and HY were flat and -2bps.

Turning to government bond markets, Friday saw German 2Y and 10Y yields both tick up by +1bp, while US Treasury yields rose (2Y +2bps; 10Y +1bps). French 10Y yields were unchanged although the 2Y  yields ticked up by +3bps, while BTPs rallied across maturities (10Y: -8bps). Across commodities markets, oil prices (and energy broadly) caught the risk rally as well (WTI +0.7%). At the other end of the risk  spectrum gold fell for a third straight day (-0.6%). FX markets aside from the moves in GBP saw the US dollar broadly gain by +0.3% while the Euro fell by -0.1%.

While the primary focus on Friday was on the UK election outcome, there was also a bit of data to follow. Over in Europe we got disappointing industrial production prints out of France and the UK. French industrial production numbers unexpectedly turned negative in April (-0.5% mom vs. +0.2% expected) and the UK data was also softer than expected (+0.2% mom vs. +0.7% expected). We also got trade data out of Germany and the UK, where the trade surplus for the former shrunk more than expected to 18.1bn (vs. 23.0bn expected; 25.4bn previous) as imports grew more than expected at 1.2% mom (vs. -0.5% expected).

The trade balance data out of the UK served to temper weak industrial production data as the total deficit narrowed to GBP -2.05bn in April (vs. -3.5bn expected; -3.9bn previous). It was a quiet day on the data front over in the US with the only data of note being wholesale inventories which fell by more than expected (-0.5% mom vs. -0.3% expected).

Turning to the week ahead now. It’s a quiet start to the week for data today with the Bank of France business sentiment for May due this morning, while across the pond this afternoon we’ll get the US monthly budget statement for May. Kicking off Tuesday will be the UK where we are due to receive the May CPI/PPI/RPI prints, followed closely by the June ZEW survey in Germany. Over in the US on Tuesday the early release is the May NFIB small business optimism reading while the May PPI report will be due out later in the afternoon. The early focus on Wednesday morning is in China where the May retail sales, fixed asset investment and industrial production data is due. Japan will also release April industrial production data. In Europe on Wednesday we are due to get the final CPI revisions in Germany in May along with UK employment data for April and May, and Euro area industrial production in April. Over in the US on Wednesday the early focus is the May CPI report and retail sales data for May, followed later on by the outcome of the FOMC meeting. Turning to Thursday, with little of note in Asia the early focus in Europe will be the final May CPI revisions in France. UK retail sales for May and Euro area trade data for April follow, before the BoE meeting at midday. In the US on Thursday we are due to receive the import price index reading for May, initial jobless claims, empire manufacturing for June, Philly Fed manufacturing survey for June, industrial production for May and NAHB housing market index reading for June. We end the week on Friday in Asia with the BoJ policy meeting. In Europe we end with May CPI for the Euro area. In the US the week finishes with May housing starts and building permits, and the preliminary University of Michigan consumer sentiment reading for June.

Away from the data the only Fedspeak this week comes on Friday when Kaplan is scheduled to speak in the evening. The ECB’s Knot speaks tomorrow morning. We’ll also hear from Yellen and Kuroda after their respective policy meetings. Euro area finance ministers are also due to gather on Thursday to discuss Greece debt relief options.