With Walmart unofficially set to close Q1 earnings season, which despite being the strongest in 7 years failed to boost the S&P500, all attention will remain glued on the interplay of the rates-dollar-oil trio, and judging by the somber overnight market action, traders are not too excited with the ongoing meltup in all three.
U.S. stock index-futures inched lower driven by contracts on the Nasdaq 100 as Cisco’s forecasts fell short of Wall Street’s most optimistic projections. European stocks are mixed although concerns about Italy's new government are rising again, while Asia was modestly in the red.
In the early session, U.S. 10-year TSY yields extended their advance to over 3.1%, rising as high as 3.12%. The 5s30s curve pared an earlier steepening move to flatten slightly.
Focus remains on 3.22% level in 30-year bond, which is this year’s highest closing level and has also has been highlighted by market commentators. Rising just shy of 3.25%, the 30Y rose to its highest level since 2015, showing that this year’s selloff has spread to the most-resilient part of the world’s biggest bond market.
The other main driver of risk, the Dollar index (in this case the BBDXY), slipped initially as talk on the probability of U.S. yield-inversion prompted some profit-taking, but it then quickly erased the drop as the yield on 30-year notes hit fresh cycle highs after the London open.
Sterling provided intraday traders with the volatility they were looking for amid conflicting reports over the U.K.’s intentions to stay in the EU customs union, while the euro stayed in a lower-highs pattern as leveraged names fade rallies given Italy risks remain. Buoyed by the sinking Euro, European stocks edged higher.
As Bloomberg notes, there were three moving parts within European session;
- Firstly, U.K. markets react to Telegraph story of extended customs union, despite further reports tempering impact. Short Sterling curve bear steepens, gilts gap lower at the open and GBP outperforms other G-10 FX.
- Secondly, BTP/bund spread tightens marginally as debt write-off fears from Italy subside, however BTP futures still weak as damage to sentiment from eurosceptic/fiscally loose govt. is already done.
- Finally, USTs curve snaps steeper in early trading, 10y yield hits 312bps before fading back slightly; overall leading to underpinning of USD, USD/JPY accelerates higher after breaking above 110.50. UST/bund spread tightens as block trades print, large German 5s30s steepener also blocked.
The energy sector will also be in focus after oil rose to $80 a barrel in London for the first time since November 2014 as U.S. crude inventories fell and traders braced for the impact of renewed sanctions on OPEC member Iran. Money managers who are reducing their bullish bets on oil are following a “dangerous” strategy, according to Goldman Sachs which today released its latest bullish note on oil, suggesting that just like in the summer of 2008 Goldman is selling the hell out of crude. Demand will remain strong and concerns over economic growth will probably prove temporary, analysts including Jeffrey Currie wrote in a May 16 note
In Europe, all eyes are on Italy, and especially its bond and stock market, and where the early rebound in the benchmark FTSE MIB fizzled out, with the index now falling as much as 0.5% amid volatile trading as investors await news on a potential final deal between Five Star and League to form government. Italia stocks initially rose at the open after newspaper Corriere della Sera reported populists had dropped a request for a €250BN writeoff by the ECB. Overnight, the two anti-establishment parties said they have virtually completed a government program.
Ahead of today's announcement, analysts remain largely sanguine: Italian concerns at the current juncture will likely not “prove sufficient enough to trigger sustained selling pressure on the euro in the near-term, although they could contribute to more volatility,” Lee Hardman, a currency analyst at MUFG, told Bloomberg.
In Central Bank news, Fed's Bullard said additional rate increases may depress inflation expectations and that Fed action which inverts yield curves is a very negative signal. Across the Atlantic, ECB's Constancio said there must be acceptance the ECB has no excuses not to intervene in the sovereign bond market to deal with acute liquidity stress.
In other news, Treasury Secretary Mnuchin, Commerce Secretary Ross and Trade Representative Lighthizer will be meeting with the Chinese delegation, while there were conflicting reports on whether Trump trade adviser and China-hawk Navarro will be attending.
Elsewhere, Mexican Economy Minister Guajardo said it is basically impossible to have a NAFTA deal by the 17th and that NAFTA ministers are exploring the possibility of meeting again. Guajardo added that the soft deadline has some margin of flexibility and does not rule out reaching a NAFTA deal from end of May onwards. Elsewhere, US Trade Representative Lighthizer is said to not be optimistic for an imminent NAFTA agreement.
Trump legal adviser Giuliani said Special Counsel Mueller told the Trump team that he will adhere to Justice Department guidance that a sitting president cannot be indicted.
On Brexit, there were initial reports from the Telegraph that the UK is to tell EU it is prepared to remain in customs union arrangement beyond 2021. However, this was then dismissed by sources at PM May’s office. UK PM May said they are considering amendments to the EU withdrawal bill, it is right to take their time on that, and negotiations on a workable backstop arrangement are being negotiated with the EU.
As noted above, oil is trading marginally higher today with Brent breaching USD 80/bbl, supported the prospect of a sharp drop in Iranian crude supply. There has been little oil news flow following the larger than expected DoE crude inventory drawdown. Barclays raised their Brent oil assumptions to USD 73/bbl in 2018 and USD 70/bbl in 2019, following suit from other analysts. Yesterday, Iran Oil Minister Zanganeh stated Iran will be doing its best to maintain production and continue exports, while he also commented that oil prices at USD 60-65/bbl are 'logical' and the US wants to see high prices to boost shale production. Elsewhere, gold and copper trade lower on the day as the yellow and red metal track the current risk tone.
Today, traders will focus on jobless-claims data and the Philadelphia Fed Business Outlook. Walmart, Applied Materials, and Nordstrom are among companies reporting earnings
Bulletin Headline Summary from RanSquawk
- European bourses mostly higher as markets await further updates from Italy’s populist parties
- US Treasury yields underpins the Greenback and offers protection against global tariff headwinds
- Looking ahead, highlights include US weekly jobs, Philly Fed, ECB’s Constancio, Fed’s Kashkari, Kaplan and BoE’s Haldane
- S&P 500 futures down 0.2% to 2,718.25
- STOXX Europe 600 up 0.08% to 393.53
- MXAP down 0.1% to 174.42
- MXAPJ down 0.3% to 568.49
- Nikkei up 0.5% to 22,838.37
- Topix up 0.5% to 1,808.37
- Hang Seng Index down 0.5% to 30,942.15
- Shanghai Composite down 0.5% to 3,154.28
- Sensex down 0.3% to 35,279.96
- Australia S&P/ASX 200 down 0.2% to 6,094.26
- Kospi down 0.5% to 2,448.45
- German 10Y yield rose 2.8 bps to 0.634%
- Euro up 0.05% to $1.1814
- Italian 10Y yield rose 16.0 bps to 1.858%
- Spanish 10Y yield fell 0.7 bps to 1.405%
- Brent futures up 0.7% to $79.80/bbl, highest since 2014
- Gold spot down 0.1% to $1,289.39
- U.S. Dollar Index down 0.1% to 93.26
Top Overnight News from Bloomberg
- Italy is still waiting for its next government after talks between two populist leaders dragged on Wednesday night. More than two months after an inconclusive election, the two sides have repeatedly blown deadlines set by President Sergio Mattarella as they try to find a deal
- U.K. PM Theresa May’s inner Cabinet has drawn up a plan to fix the intractable Irish border problem: keeping some EU customs rules for years after Brexit. It’s an idea that still faces obstacles but the proposal is to keep the U.K. aligned with tariff and customs rules for longer as a last resort, according to people familiar with the matter
- Key Fed staff members are pushing back against the idea of asking U.S. banks to institute countercyclical capital buffers, according to people familiar
- Fed’s Bullard: if rates rise too aggressively and yield curve inverts, would be taken as a very negative signal and risk of recession would go up
- EU Budget Commissioner: Tariffs on U.S. goods one option EU is considering in response to U.S. decision to reimpose sanctions on Iran
- EU leaders presented a determined front to stand up to U.S. President Donald Trump’s threats to penalize EU businesses and scupper the Iran nuclear deal. The bloc made a rare demonstration of unity in the face of what EU President Donald Tusk called the “capricious assertiveness” of the Trump administration
- The White House distanced itself from the hard- line North Korea stance of President Trump’s top security adviser, indicating his administration is committed to keeping next month’s summit with Kim Jong Un on track
- Cable rises back above 1.35 handle in Asia and toward 200-DMA on the customs union report. New Zealand dollar’s advance of as much 0.6% is also elevating the Aussie as cross-related bids come into play, according to a trader. Euro gains against greenback after weakening Wednesday amid concern about a potential proposal to write off some Italian debt
- U.S. treasuries are slightly higher changed in Asia; had weakened in New York trading, with 10Y yields rising as much as 3bps to just above 3.10%; the 5s30s curve pared an earlier steepening move to flatten slightly; Focus remains on 3.22% level in 30-year bond, which is this year’s highest closing level and has also has been highlighted by market commentators
Asian equity markets were mostly subdued as the initial tailwind from a rebound in US stocks gradually waned after trade protectionism concerns were stoked overnight. ASX 200 (-0.2%) and Nikkei 225 (+0.5%) both opened higher as they took cue from Wall St where markets shrugged off rising Treasury yields and US data including Industrial Production provided some encouragement. However, Australian stocks then retreated amid heavy losses in the Industrials sector and a deterioration in both Shanghai Comp. (-0.5%) and Hang Seng (-0.5%) in which the latter wiped out gains of over 1%. This was due to trade concerns after China’s Mofcom released its statement on previously announced tariffs in which it is to levy reciprocal taxes on some US products and halt tariff concessions on imports of US fruit and pork, which doesn’t bode well ahead of today’s US-China trade talks. Furthermore, Japan was also said to inform the WTO regarding its own trade response and that it is ready to retaliate against US tariff actions, although Chief Cabinet Secretary Suga later downplayed it and stated that nothing yet has been decided. Conversely, not all was not all was gloomy in the region as Tencent outperformed in Hong Kong with gains nearly 5% after it posted an over 60% increase in Q1 net. Finally, 10yr JGBs were lacklustre as yields played catch up to their US counterparts, while a 5yr JGB auction also failed to support as the b/c and accepted prices slipped from prior. China is to levy reciprocal tax on some US products and will stop tariff concessions on imports of US fruits and pork, according to statement posted by China Mofcom regarding previously announced tariffs, although Mofcom also reiterated China doesn't want to see trade tensions with US to escalate
Top Asian News
- Emerging Markets Under Pressure to Boost Borrowing Costs
- Malaysia Police Seize Items From Ex-Premier Najib’s House
- Santos Sinks as $10.4 Billion Harbour Bid Ignores Oil Rally
- Kakao to Merge With Music Streaming Unit Kakao M Via Stock Swap
In European markets, discounting the SMI (-0.3%) being weighed on by major component underperformance all major bourses are trading in positive territory for the day with the Euro Stoxx 50 up 0.2%. In an earnings heavy morning, Altice (+10.5%) Lagardere (+2.3%) and National Grid (+1.6%) posted positive results and are currently trading positive for the day, with AP Moeller-Maersk (-9.4%) Investec (-4.5%) and Royal Mail (-5.4%) coming in under expectations and trading in negative territory. Pervasive news for the UK gambling sector with the UK cutting the maximum stake in FOBTs to GBP 2.00 has led to gambling names such as William Hill (-3.0%) and Paddy Power (-0.7%) being down for the day on the announcements that revenues will be impacted negatively.
Top European News
- Italy’s Populists Drop Debt Writeoff in Almost-Final Policy Plan
- Euro Bearish Sentiment Climbs to Two-Month High on Italy Risk
- U.K. Sees Extended EU Customs Ties as Irish Border Fix
- EU Hardens Against Trump With United Stand on Trade and Iran
- William Hill, Paddy Power See Sales Hit From U.K. Betting Limit
In FX, the dollar has seen volatile trade on conflicting drivers as the ongoing rally in US Treasury yields underpins the Greenback and offers protection against global tariff headwinds. The index is meandering between circa 93.100-450, vs yesterday’s marginal new high for the year around 93.640, and also subject to choppy moves on the back of fluctuating fortunes in basket currencies. GBP/EUR: The Pound has been buffeted by latest Brexit reports suggesting a customs union back-stop in some shape or form, with an initial boost on paper talk that the UK may stay in the current EU fold until 20121 or longer and then a downturn on denials via a spokesperson for PM May. However, Cable has recovered to 1.3500+ and Eur/Gbp is back below 0.8750 after subsequent headlines essentially pointing to a halfway house, while Eur/Usd remains leggy above 1.1800 after weakening to a fresh ytd low on Wednesday around 1.1761. CAD/AUD/NZD: Both holding a firmer line vs their US counterpart, the Loonie still getting some support from elevated oil prices and not giving up on a NAFTA deal before the day is out even though the prospects are waning – Usd/Cad currently nearer the bottom of a 1.2795-50 range, above hefty option expiries at 1.2700 (running off today and more for Friday’s NY cut) and well within barriers from 1.2925-1.2625. The Aud saw 2-way price action after a mixed Aussie jobs report overnight and has settled towards the middle of a 0.7505-45 band as some elements of the labour data were encouraging, while cross flows were also bullish as Aud/Nzd rebounded over 1.0900 again. Note, the Kiwi has also struggled above 0.6900 vs the Usd even though the NZ budget balance and forecasts improved overnight.
In commodities, oil is trading marginally higher today with Brent breaching USD 80/bbl, supported the prospect of a sharp drop in Iranian crude supply. There has been little oil news flow following the larger than expected DoE crude inventory drawdown. Barclays raised their Brent oil assumptions to USD 73/bbl in 2018 and USD 70/bbl in 2019, following suit from other analysts. Yesterday, Iran Oil Minister Zanganeh stated Iran will be doing its best to maintain production and continue exports, while he also commented that oil prices at USD 60-65/bbl are 'logical' and the US wants to see high prices to boost shale production. Elsewhere, gold and copper trade lower on the day as the yellow and red metal track the current risk tone.
Looking at the day ahead, we’ve got the latest weekly initial jobless claims print (215k expected) along with the May Philly Fed PMI (expected to soften slightly to +21.0 from +23.2) and April leading index (+0.4% mom expected). Away from the data the ECB Vice-President Constancio is scheduled to speak at two separate events in Frankfurt at 11.30pm BST and 1.00pm BST, while the BoE’s Haldane speaks at 5pm BST. Over at the Fed, Kashkari is due to speak at 3.45pm BST and Kaplan is scheduled to speak at 6.30pm BST
US Event Calendar
- 8:30am: Initial Jobless Claims, est. 215,000, prior 211,000; Continuing Claims, est. 1.78m, prior 1.79m
- 8:30am: Philadelphia Fed Business Outlook, est. 21, prior 23.2
- 9:45am: Bloomberg Economic Expectations, prior 52.5; Consumer Comfort, prior 55.8
- 10:45am: Fed’s Kashkari Speaks at Moderated Q&A in Minneapolis
- 1:30pm: Fed’s Kaplan Speaks in Moderated Q&A
DB's Craig Nicol concludes the overnight wrap
While the rout across bonds may have slowed slightly, or in some cases reversed, over the last 24 hours for most markets, no one appeared to pass on the invite to Italy with the main story in markets being the surge for BTP yields yesterday following leaks of some of the details of a draft coalition agreement between the 5SM and League. Indeed, 10y BTPs touched a high of 2.112% intraday yesterday (+16.4bps) before eventually finishing just off that at 2.107% and +16.2.bps on the day for the biggest one-day selloff since June last year. The yield is the highest now since October last year and up 40bps from the April lows. The spread to Bunds also reached 151bps and the widest post-election after an eye opening +20.2bps move. That’s the biggest one-day spread move between BTPs and Bunds since the Brexit-impacted widening on 24th June 2016.
So, some impressive price action. What really grabbed the market’s attention was the comment in the leaked draft which came through early yesterday morning that the new government planned to ask the ECB to write-off €250bn in Italian debt. Subsequent comments throughout the day appeared to downplay the statement with League economic advisor Claudio Borghi saying that there was no such proposal to cancel part of Italy’s debt, but that instead there is “simply the request for a change in accounting rules” which appeared sufficiently vague to keep the market guessing. Other snippets of the draft proposal included a mechanism to move away from the single currency (which has also since been downplayed) and also to reassess the country’s EU budget contributions. A separate statement from the two parties which was picked up by the FT also revealed that the nation’s desire “must be to return to the pre-Maastricht setting”. According to Bloomberg the two leaders of the 5SM and League are said to still be putting finishing touches to their program after talks dragged on late into last night.
Despite the emergence of the two populist parties as the front runners in Italy, markets had become accustomed to a softer stance from the 5SM and League in recent weeks and months so it wasn’t a great surprise to see markets react as they did. Indeed the whole BTP curve was sharply higher with 2y BTPs in fact rising back into positive territory (+14.8bps to 0.064%) for the first time in over a year. Cyprus is the only other Eurozone country to have positive 2y yields. The rest of the periphery seemed to get dragged along with Italy yesterday with Greece in particular finishing +22.6bps higher, while Spain and Portugal were +5.5bps and +6.3bps higher respectively. In contrast, the rest of Europe was a few basis points lower with Bunds actually rallying -4.0bps. Treasuries finished last night +2.4bps at 3.097% with decent industrial data again helping, and is trading around that level this morning. EM currencies and bonds were also generally a bit more resilient with the recently hammered Turkish Lira amongst the top FX performers.
Those Italy developments also resulted in the Euro falling -0.25% and temporarily below 1.180 for the first time this year. The FTSE MIB also tumbled -2.32% and the most since early March with Banks down around 4%. By contrast the Stoxx 600 and DAX finished +0.22% and +0.20% respectively. Weakness spread over into Italian credit too with sub bonds in the Italian Banks between 10bps and 12bps wider.
The weakness was by and large contained in Italy and to a lesser extent the periphery however as across the pond the S&P 500 nudged up +0.41% last night helped by results out of the retail sector of all places with Macy’s posting a second straight quarter of sales gains and also raising full year guidance. That solid industrial production print also appeared to help (more on that below) while the White House appeared little concerned about North Korea’s comments threatening to pull out of talks with President Trump next month. Last night we also got the news that White House Trade Adviser Peter Navarro was to be excluded from trade discussions with China this week, which was taken positively in the sense of it making more likely that an amicable outcome would be met.
Overnight, markets are a bit more mixed in Asia with the Nikkei (+0.63%) and Hang Seng (+0.05%) flat to slightly higher, but the Shanghai Comp (-0.23%) and ASX (-0.27%) in the red. US equity futures are flat while Gold and the rest of the commodity complex is slightly firmer. A headline from the Telegraph newspaper saying that the UK will tell the EU it is prepared to stay in the customs union post 2021 has helped Sterling bounce +0.50% in the early hours.
Moving on. Other news really played second fiddle to the Italy headlines yesterday in markets. Over at the Fed we heard from Atlanta Fed President Bostic with the biggest takeaway perhaps being that he is in the camp of those Fed officials who have some concern about a possible inversion of the yield curve. Indeed he said that it is his job to make sure that it doesn’t happen. After a relatively big move on Tuesday, the 2s10s curve was less than 1bp wider yesterday at 50bps. Later on, San Francisco Fed President Williams said interestingly that he thought forward guidance would at some point be “past its shelf life”. Our US economists have previously hinted that forward guidance is something that could be phased out in the future, with the first part of this being removing the “for some time” phrase from the FOMC statement.
Away from this, the economic data barely played a role yesterday in Europe after CPI reports in Germany and the Euro area failed to throw up any surprises. Indeed the core April CPI reading for the Euro area was confirmed at +0.7% yoy which matched the flash reading, while Germany’s April headline reading was confirmed at -0.1% mom. Staying with Europe, it perhaps wasn’t a surprise to see German Chancellor Merkel’s comments overshadowed by the Italy headlines with the Chancellor reiterating a need for EU states to push for European reform including providing a “common backstop” through the European monetary fund.
Meanwhile, there was a small positive data surprise in the US where April industrial production rose +0.7% mom and the March print was revised up two-tenths. Capacity utilization was also confirmed as rising four-tenths to 78.0%. Prior to that, data in the housing market was more mixed with starts much softer than expected in April (-3.7% mom vs. -0.7% expected) but permits less than soft than the consensus expected (-1.8% mom vs. -2.1% expected).
Looking at the day ahead now, the diary is fairly sparse this morning with the March trade balance reading in Italy and March construction output data for the Euro area the only releases of note. This afternoon in the US we’ve got the latest weekly initial jobless claims print (215k expected) along with the May Philly Fed PMI (expected to soften slightly to +21.0 from +23.2) and April leading index (+0.4% mom expected). Away from the data the ECB Vice-President Constancio is scheduled to speak at two separate events in Frankfurt at 11.30pm BST and 1.00pm BST, while the BoE’s Haldane speaks at 5pm BST. Over at the Fed, Kashkari is due to speak at 3.45pm BST and Kaplan is scheduled to speak at 6.30pm BST