Futures Slide As 10Y Breaks Above 3%; Dollar Surge Resumes

After closing Tuesday just a fraction away from 3.00% (2.9995% to be precise), the drama over the 10Y yield continuedovernight, with a block seller appearing in early trading, pushing the yield as high as 3.03%. Then gamma hedgers emerged around 119-00 in 10Y TSY futures according to Bloomberg, due to large put open interest at that strike, pinning the yield around 3.01% for now.

Meanwhile, in the absence of any real data or speakers, the market decided to stick with what it knows, and the USD buying has resumed in earnest; sending the USD to the highest level in three months. The euro was among the losers a day before the ECB's next rate decision, however Euro weakness was no tonic for equities, and the Stoxx Europe 600 Index fell along with U.S. futures and the MSCI Asia Pacific Index. European equity markets sell-off led by miners and industrial stocks, mirroring yesterdays move on Wall St. sparked by Caterpillar warning.  European stocks fell along with U.S. equity-index futures following the slide in stocks across Asia as technology shares faltered.

Positions are being lightened up across the board ahead of the week’s crunch events tomorrow and Friday (US data, ECB, Riksbank, BoJ etc.). The symbiotic relationship means that US fixed income also continues to be sold off, with yields pounding higher and sitting once again on the brink of some major levels. As NY walks in, as we have so often seen before, some of the moves are retracing a little, but USD remains higher on the day.

The Bloomberg Dollar Spot Index climbs 0.4% to its highest level since mid-January as the dollar gains against all major peers. Elsewhere in FX, the biggest declines were seen in the Australian and New Zealand dollars while the yen touched its weakest level in two and a half months. Emerging-market currencies mostly weakened, led by South Africa’s rand, but Turkey’s lira gained ahead of a key rate decision by the country’s central bank.

As Bloomberg notes, the upward momentum in the dollar looks set to force a rethink on many of the most popular trades just now: most notably, it may spell more turmoil for equity markets, which have been roiled by rising yields and threats to global trade in recent weeks and had been looking to earnings for some cheer. Instead, a mixed bag of results across market-driving tech shares and industrial bellwethers is doing little to calm Wall Street nerves over the fate of global growth.

Still, there was a silver lining for the bulls, as Wednesday’s moves weren’t entirely risk-off and established safe-haven assets including gold and the yen retreated.

Crude futures and metals markets trade with small losses within tight ranges.

While there is nothing on the economic calendar today, it is extremely busy among companies reporting earnings with Boeing, Twitter, AT&T, eBay, Facebook, Ford, Las Vegas Sands, PayPal, Qualcomm, and Visa all on deck.

Bulletin Headline Summary From RanSquawk

  • Treasury yields continue rise putting pressure on European bourses
  • Oil prices consolidate after Tuesdays highs
  • Looking ahead, highlights include, the Turkish rate decision, DoEs and a slew of speakers

Top Overnight News

  • The European Union would be prepared to offer Britain a better trade deal than the one it gave Turkey if it decides to stay in the customs union after Brexit, and would listen to U.K. views on trade policy, according to an EU official
  • Bloomberg calculations show the ECB’s prediction for a 2.4 percent economic expansion this year already factors in weaker underlying momentum, a likely reason why officials including President Mario Draghi have done nothing to counter market expectations that their bond-buying program will end this year
  • French President Emmanuel Macron is discovering the limits of cooperation with Donald Trump on foreign policy, as his last- ditch appeal to salvage the Iran nuclear deal was met with intransigence by the U.S. president
  • ECB’s Mersch: confidence on inflation has risen recently; inflation has not weakened as much as ECB predicted
  • China raises amount domestic funds can invest overseas by ~$8b to total of $98.3b, first increase since March 2015
  • Japan’s LDP official says dissolving lower house is an option if the motion on no confidence against the Cabinet is submitted; Cabinet Secretary Suga declines to comment on snap election
  • China official expects RRR cuts of 6-8% in 3 years: 21st Century
  • As Trump says Nafta talks are “doing very nicely,” negotiations between ministers from the U.S., Mexico, Canada are ramping up in Washington in a redoubled push for a deal
  • Tidjane Thiam is reaping the rewards of Credit Suisse Group AG’s pivot to wealth management after the bank attracted new assets at the fastest pace in seven years
  • Takeda Pharmaceutical Co. reached a preliminary agreement to buy Shire Plc with a sweetened takeover offer of about 46 billion pounds ($64 billion), closing in on a takeover that would vault it into the ranks of the world’s top pharma companies

Market Snapshot

  • S&P 500 futures down 0.4% to 2,625.25
  • STOXX Europe 600 down 0.8% to 380.25
  • MXAP down 0.6% to 172.03
  • MXAPJ down 0.8% to 558.60
  • Nikkei down 0.3% to 22,215.32
  • Topix down 0.1% to 1,767.73
  • Hang Seng Index down 1% to 30,328.15
  • Shanghai Composite down 0.4% to 3,117.97
  • Sensex down 0.3% to 34,513.22
  • Australia S&P/ASX 200 up 0.6% to 5,921.55
  • Kospi down 0.6% to 2,448.81
  • German 10Y yield rose 2.1 bps to 0.652%
  • Euro down 0.3% to $1.2201
  • Italian 10Y yield fell 2.7 bps to 1.513%
  • Spanish 10Y yield rose 1.1 bps to 1.31%
  • Brent futures up 0.2% to $74.04/bbl
  • Gold spot down 0.4% to $1,325.60
  • U.S. Dollar Index up 0.2% to 90.95

Asian stocks traded negative across the board as the region followed suit from the broad weakness on Wall St amid rising US yields, in which the Nasdaq 100 underperformed with losses of over 2% and industrials led the DJIA lower after Caterpillar suggested that Q1 could be the apex for the year. Nikkei 225 (-0.3%) and KOSPI (-0.6%) were lower with participants also digesting earnings releases, while Takeda was among the worst performers in Japan after the Co. further sweetened its offer in pursuit of Shire. ASX and NZX were shut for ANZAC Day, while Shanghai Comp. (-0.3%) and Hang Seng (-1.0%) conformed to the downbeat tone after the PBoC skipped open market operations which resulted to a net daily drain of CNY 150bln, However, the losses in the mainland were contained amid continued chatter regarding further RRR cuts and as the previously announced cut took effect from today. Finally, 10yr JGBs were uneventful and have failed to benefit from the broad risk averse tone as well as the BoJ’s presence in the market for JPY 710bln in the belly to super-long end, while USTs were choppy overnight with early pressure seen after the US 10yr yield continued to test the 3.000% level which it had earlier reclaimed for the 1st time since January 2014. China researcher noted that deflation in China is possible as soon as Q4 this year and added that further reductions in RRR are expected, while there were also reports that a Chinese official sees large room for RRR reductions and sees it lowered by between 600-800bps in 3 years. PBoC skipped open market operations for a daily net drain of CNY 150bln.

Top Asian News

  • CEFC China May Cut Half Its Workers But Rosneft Deal Still Alive
  • China Loosens Grip on Outflows, Raises Outbound Investing Quota
  • Noble Group Creditors See ‘Irreparable Damage’ If Deal Drags
  • China is Taking on the U.S. to Fill its $1.4 Trillion Stock Hole

European equities are seeing a lacklustre start following on from the sentiment seen yesterday on Wall Street and overnight during Asia-Pac trade. In terms of stock specifics, Shire (+0.2%) shares have been supported after recommending Takeda’s revised GBP 46bln takeover offer to its shareholders. In the earnings scope, markets have seen positive results from Kering, (6.4%) and Credit Suisse (+3.3%) with negative reports from Mediaset (-0.8%). Significant news later in the session from Comcast (CMCSA) whom make a superior cash offer for Sky (SKY LN), implying a value of GBP 22.0bln.

Top European News

  • EU Said to Be Ready to Give U.K. a Say on Trade in Customs Union
  • Osram Tumbles Most in More Than Two Years After Profit Warning
  • Handelsbanken Sinks After Weak Results and Nordea Fund Warning
  • Nordea Warns 2018 Goals Looking Tough After ‘Soft’ First Quarter

In FX, the DXY continues to piggy-back rising US Treasury yields after a relatively brief pause for breath as bond bears and bulls tussled for supremacy around the 3% mark in 10s. A more decisive break above has given the Dollar further impetus and the index has reclaimed 91.000+ status as a result, with fair resistance around 91.526 back on the radar ahead of 91.751 and a few more upside chart levels before early 2018 highs. EUR/JPY/CHF: The renowned safe-havens are not deriving any real support, or much from the latest decline in global equity markets against the more compelling Usd ascent, mainly on the aforementioned ratchet up in US rates, but also perhaps amidst some early month-end positioning as rebalancing models point to net Dollar demand. Eur/Usd is pivoting 1.2200 where huge option expiries roll off on ECB day tomorrow (3+ bn), with Fib support around 1.2173 still underpinning the pair, but the upside capped ahead of 1.2250. Usd/Jpy has carved out a fresh multi-month top circa 109.25 after a brief dip below 109.00 and is back above the 100 DMA at 108.98 eyeing offers at 109.50 before a major fib at 109.65. Usd/Chf remains above 0.9800 and Eur/Chf is rebounding towards 1.2000 again with the Franc hardly helped by a sharp deterioration in ZEW’s Swiss Investor Sentiment index

In commodities, oil has pulled back from Q4 2014 highs and remains flat on the day as the bullish market was slowed by US inventories increasing by 1.1mln barrels as according to API and traders taking profits following highs hit on Tuesday. Gold is currently seen around five week lows amid currency effects and rising treasury yields. Aluminium also maintained its recent slide due to the aforementioned effects as well as the Rusal sanctions announcement on Monday, with a fall noted for the 5th session in a row. Libya's oil output at the Waha oil field said to be back up to 300k bpd.

In terms of the day ahead, there’s very little scheduled in terms of data with nothing of note in the US and the only release in Europe being the April consumer confidence print in France. The ECB’s Villeroy, Knot and Lane are all due to speak in Paris this morning at the Bank of France financial stability review. Earnings will likely be the bigger focus for markets with Facebook, Boeing, AT&T, GlaxoSmithKline, Credit Suisse, Ford Motor and eBay all due to report over the course of the day.

US Event Calendar:

  • 7am: MBA Mortgage Applications: -0.2%; prior 4.9%

DB's Jim Reid concludes the overnight wrap

Blink and you may have missed it, but yesterday at exactly 2.48pm BST the 10y Treasury finally passed the much hyped 3% level, topping out at 3.001%. It was certainly brief with the move only lasting a matter of seconds but it was the first time in 1567 days (since January 8th 2014) that 10y yields have gone above 3%. What has perhaps been most interesting about the recent leg higher in yields is the relatively muted level of Treasury volatility still. Indeed the 10y Treasury volatility index is at 3.99 which compares to the 3.44 to 6.07 range in 2018 so far and 4.50 average through 2017.

As well as the 10y move, the 2s10s curve also finished a shade steeper yesterday at 52bps and is now 11bps off its tights last week. The USD index on other hand was a little weaker (-0.20%). Equity markets were a lot more volatile all things considered. The Stoxx 600 (-0.02%) closed little changed but wiped out early gains while last night the S&P 500, Dow and Nasdaq slumped to losses of -1.34%, -1.74% and -1.70% respectively. This now means the Dow is on a five-day losing streak – the longest since March 2017 – and the S&P 500 has joined the Dow in being back to negative year to date again.

Blaming the weakness in US stocks entirely on moves in the Treasury market feels like a stretch and rather it was the busy slate of earnings which really appeared to be dictating sentiment. Indeed Alphabet shares closed down -4.77% after analysts combed through the details in the report which in turn weighed on the wider tech sector. It was industrials which really struggled though in the wake of Caterpillar’s numbers. Shares in the industrial bellwether closed down -6.20% after being up as much as +4.54% following what was a decent set of numbers.  Management actually raised the outlook for the year ahead but on the conference call the comment that Q1 was likely to be the “high water mark” for the year was enough to spook the market and fuel prospects that we’ve seen the peak.  Caterpillar’s results are generally seen as a decent barometer for global growth hence the sensitivity. In any case the industrials sector ended up being the biggest underperformer in the S&P 500 yesterday, falling -2.82%.

Meanwhile, at the margin President Trump’s comment saying that Iran “will pay a price like few countries have ever  paid” should they threaten the US didn’t appear to help sentiment although Oil did finish the day broadly 1% lower, perhaps helped by French President Macron suggesting that he wants to negotiate a new accord with Iran to curb its development of missiles. Trump was much more conciliatory in his comments about North Korea’s Kim Jong Un, calling him “very honourable” so far and describing conversations as being “very good” between the two sides during a meeting with Macron.

With little in the way of new newsflow overnight, this morning in Asia bourses have taken the lead from the US and are lower across the board. That’s the case for the Nikkei (-0.59%), Hang Seng (-0.82%), Shanghai Comp (-0.31%) and Kospi (-0.99%). The 10y Treasury has passed 3% in the early going again however is failing to break higher, while commodity markets on the whole are little changed.

Moving on. Yesterday’s data highlight in the US was the April consumer confidence print which came in at a much better than expected 128.7 (vs. 126.0 expected) and the second highest reading since 2000. Notably, that was up 1.7pts from March while the expectations component also rose 1.9pts to 108.1. The labour differential reading (difference between jobs plentiful and hard to get) did fall to 22.9 and a three-month low but still remains at overall strong levels. Meanwhile, new home sales in March were reported as climbing +4.0% mom (vs. +1.9% expected) and the Richmond Fed PMI for April fell a surprising 18pts to -3 (vs. +16 expected).

The data in Europe was a bit more mixed. Of most interest for us was the ECB Bank Lending Survey which on the whole was relatively positive. Indeed, credit standards were reported as easing “considerably” for loans to enterprises and housing loans in Q1 while demand also increased across all loan categories. In terms of the details, the net percentage of banks reporting an easing in standards for large enterprises in the Euro area was 7.8% compared to 0.5% in Q4 2017

For house purchases the net percentage of banks reporting an easing rose to 11.4% from 6.2% while consumer credit rose to 3.4% from 0.7%. Also worth highlighting is that banks expect a net easing of credit standards across the three loan categories in Q2. It’s worth noting that the ECB keeps a close eye on this survey and in addition to the stabilising PMIs out on Monday it should help to provide a decent degree of comfort for the market with regards to the Euro area cyclical position right now.

The data that was a slight disappointment yesterday in Europe was the IFO survey in Germany. The April IFO business climate reading fell 1.2pts to 102.1 and a bit more than expected (102.8 expected). That’s now the lowest reading since January last year. Expectations also fell 1.3pts to 98.7 putting it at a 23-month low with the index also down for 5 months in succession now. Despite the softer data, our economists note that the IFO index still indicates positive expansion in Q1 although three consecutive declines in a row are often interpreted as a signal for a cyclical turning point.

Closer to home there was a milestone moment for the UK’s finances as the latest UK government budget deficit figure revealed that the deficit has narrowed to the smallest in 11 years at £42.6bn compared to expectations for £45.2bn. In the last 12 months, the UK actually achieved a small surplus – the first in a full fiscal year since 2002-03. Staying with the UK it’s worth noting that the April CBI data was less supportive with industrial business optimism falling sharply by 17pts to -4.

Away from the data, Italy bucked the trend for bonds yesterday with BTP yields falling 2.7bps after headlines hit the wires (Bloomberg) reporting that the acting leader of the Democratic Party, Maurizio Martina, said that the PD could be open to talks with the 5SM about forming a government as long as the 5SM drops its alliance with the League. The FTSE MIB also closed +0.22% and outperformed most other bourses as the market saw the development as positive given that a government with the participation of the PD would be seen as a moderating influence, compared to a 5SM-League alliance.

In terms of the day ahead, there’s very little scheduled in terms of data with nothing of note in the US and the only release in Europe being the April consumer confidence print in France. The ECB’s Villeroy, Knot and Lane are all due to speak in Paris this morning at the Bank of France financial stability review. Earnings will likely be the bigger focus for markets with Facebook, Boeing, AT&T, GlaxoSmithKline, Credit Suisse, Ford Motor and eBay all due to report over the course of the day.