Slow Start As Traders Brace For Huge Week For Global Markets

With the most important 2 weeks of the year looming dead ahead, on Monday U.S. equity futures drifted without conviction along with European stocks following a mixed session in Asia as a huge week for central-bank decisions and policy gets underway, to be followed by the highly anticipated G-20 meeting in Osaka at the end of the month. Treasuries and gold dropped, the dollar was steady and cryptos surged to new 2019 highs.

As the Federal Reserve prepares to signal on Wednesday whether it is readying its first interest rate cut since the financial crisis (or isn't, and sends stocks plunging as the gap between market expectations and Fed signalling is the widest it has ever been...

... and oil still choppy after last week’s Gulf tanker attacks, most markets are in a holding pattern.

The Fed’s “overall tone will be dovish but there’s a fair bit priced into the market already,” Sally Auld, senior interest-rate strategist at JPMorgan Chase & Co., told Bloomberg TV in Sydney. “It’s probably going to be hard for the Fed to exceed what is already priced in.”

For now, traders are focusing on the dollar’s surge on Friday after above-forecast U.S. industrial output and sharp upward retail sales revisions, as well as upbeat consumer confidence, pushed back futures markets expectations of any quick Fed rate cut.

“A (U.S.) rate cut this week seems extremely premature,” said Royal Bank of Canada’s Global Head of FX Strategy Elsa  Lignos. “But the Fed can make some communications tweaks that at least open up the possibility for a cut in July. The question is how flexible that messaging will be.” Traders are pricing a high probability of a July rate cut, despite there being unusually high uncertainty, particularly around trade, Lignos added. She said a G20 meeting late this month could also change the narrative again.

Futures on the S&P 500 were unchanged, while Europe's Stoxx 600 Index was little changed even as a profit warning from Germany’s Lufthansa hit airlines and canceled out a 0.8% rise in banking stocks. Deutsche Bank stock rose and boosted lenders on reports that it’s considering creating a “bad bank” to wind down legacy assets as part of a broader overhaul.

Earlier in the session, Asian equities fell 0.4% as a rebound in Hong Kong stocks failed to offset declines in Japan’s market. Japan’s Topix index dropped 0.5%, led by Ateam Inc. and Japan Communications Inc. Hong Kong’s Hang Sang Index pared earlier gains and closed 0.4% higher after the city’s chief executive suspended a controversial extradition bill. The Hang Seng fell for three sessions in a row through Friday, after the extradition bill triggered mass protests and some of the worst unrest seen in the territory since Britain handed it back to Chinese rule in 1997. Over in the Mainland, Chinese shares traded within a tight range, with the benchmark Shanghai Composite up 0.2% and the blue-chip CSI 300 barely budging.  The region’s chipmakers declined as Broadcom triggered a global sell-off after it slashed its full-year revenue forecast Friday amid escalating trade tensions.

“Last week the issue looked as if it would become another thorny point between the United States and China. As the bill is now being postponed indefinitely, things will likely calm down, which is good for markets,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.

Emerging-market stocks and currencies declined for a fourth day as investors refrained from making any major judgement calls ahead of central bank meetings this week.

In rates, with long-term inflation expectations at an all-time low again, euro zone bond yields held close to their multi-year trough, despite inching fractionally higher early on. ECB board member Benoit Coeure said in an interview that the bank’s already sub-zero interest rates could be cut again if needed. It could also restart the quantitative easing program it wound down at the end of last year. In short: it can do everything - and more - that led to European inflation expectations hitting all time lows and leaving Deutsche Bank on the verge of insolvency.

“The question is not whether we have instruments; we do have instruments. We can change our guidance. We can cut rates. We can restart QE,” Coeure told the Financial Times. “The question is which instrument, or combination of instruments, would be best suited to the circumstances.”

No, the real question is when do the peasant finally rise up and put an and to the ECB. But we digress.

In FX, the dollar was steady after jumping on Friday, rising to the highest level in almost two weeks, after the U.S. retail sales data eased fears that the world’s largest economy is slowing sharply. Investors awaited clues from the Federal Reserve on the outlook for monetary policy, after solid U.S. economic data on Friday cast doubts about a more dovish position from the central bank. Asia’s currencies led declines after U.S. Commerce Secretary Wilbur Ross downplayed the prospect of a major trade deal emerging from a possible meeting between President Donald Trump and Chinese President Xi Jinping at the Group of 20 summit this month. “Weighing on investors’ collective mind is whether the Fed can live up the dovish expectations of the market, especially following firm U.S. data on Friday,” Credit Agricole SA strategists led by Valentin Marinov wrote in a report.

The Turkish lira added 0.4% to 5.87 per dollar, reversing losses of as much as 0.6%, after the Treasury and Finance Ministry said Moody’s decision to downgrade the nation’s credit rating is incompatible with fundamental indicators, adding that the country will never abandon free-market principles. The currency’s gain on Monday ends a four-day losing streak. Turkey central bank will provide Primary Dealer banks with a liquidity facility within the framework of open market operations. Russia’s ruble adds 0.1% to Friday’s gains after the central bank lowered interest rates and signaled more reductions to come.

In commodities, oil futures dipped as Saudi Arabia expressed hope that OPEC and its allies will agree to extend production cuts into the second half. Bitcoin jumped, heading toward its highest close in more than a year. Geopolitical tensions in the Middle East have added another layer of uncertainty after the United States blamed Iran for attacks on two oil tankers in the Gulf of Oman last week. U.S. Secretary of State Pompeo said Washington will take all actions necessary to guarantee safe navigation in the Middle East, though oil prices slipped again as worries about the broader slowdown in the global economy returned. Brent futures fell 25 cents, or 0.4%, to $61.76 a barrel by 0900 GMT, after gaining 1.1% on Friday while logging their fourth consecutive weekly fall. West Texas Intermediate crude futures were down 22 cents, or 0.4%, at $52.29, having firmed by 0.4% in the previous session.

“Today, oil markets will have to digest more demand concerns as India implemented retaliatory tariffs on a number of U.S. goods yesterday,” consultancy JBC Energy said in a note. Also sapping prices was the dim outlook for oil demand growth in 2019 projected by the International Energy Agency (IEA) on Friday, citing worsening prospects for global trade.

Finally, as reported over the weekend, Bitcoin jumped overnight to $9,391.85, its highest level in 13 months, as institutions are now buying the crypto according to JPM. It was last quoted at $9,195.62, up 2.4%.

Expected data include U.S. Empire State Manufacturing Survey. No major companies are scheduled to release earnings

Market Snapshot

  • S&P 500 futures up 0.2% to 2,899.75
  • STOXX Europe 600 up 0.06% to 379.05
  • MXAP down 0.4% to 154.65
  • MXAPJ down 0.3% to 504.84
  • Nikkei up 0.03% to 21,124.00
  • Topix down 0.5% to 1,539.74
  • Hang Seng Index up 0.4% to 27,227.16
  • Shanghai Composite up 0.2% to 2,887.62
  • Sensex down 0.9% to 39,080.78
  • Australia S&P/ASX 200 down 0.4% to 6,530.91
  • Kospi down 0.2% to 2,090.73
  • German 10Y yield rose 0.3 bps to -0.252%
  • Euro up 0.06% to $1.1215
  • Italian 10Y yield fell 0.8 bps to 1.981%
  • Spanish 10Y yield fell 0.2 bps to 0.498%
  • Brent futures down 0.3% to $61.83/bbl
  • Gold spot down 0.6% to $1,333.45
  • U.S. Dollar Index little changed at 97.53

Top Overnight News from Bloomberg

  • ECB Executive Board member Benoit Coeure said the European Central Bank will act if needed to support the economy and could even be facing such a decision within months
  • One of China’s biggest state-owned infrastructure companies excluded UBS Group AG from a bond deal after the bank’s global chief economist sparked a furor with his use of the phrase “Chinese pig”
  • Iran’s atomic energy agency is expected to brief reporters Monday on the next phase of its retreat from obligations under the 2015 nuclear deal, the Iranian Students’ News Agency reported, as efforts to salvage the accord falter amid rising regional tensions
  • Tory rivals battling to be the next U.K. prime minister traded insults over Brexit in the first TV debate of the party leadership contest, as front-runner Boris Johnson was mocked for refusing to take part
  • Hong Kong rose up in defiance a day after leader Carrie Lam suspended a contentious extradition bill, jamming the streets with hundreds of thousands of people and drawing a formal apology from the embattled chief executive
  • Commerce Secretary Wilbur Ross downplayed the prospect of a major trade deal emerging from a possible meeting between President Donald Trump and Chinese President Xi Jinping at the Group of 20 summit in Japan this month
  • Tory rivals battling to be the next U.K. prime minister traded insults over Brexit in the first TV debate of the party leadership contest, as front- runner Boris Johnson was mocked for refusing to take part
  • Turkey needs to work on a “new and fair” approach to managing the exchange rate that better suits the country’s economy and its people, according to a key ally of President Recep Tayyip Erdogan
  • Financial markets are signaling investors see little risk of disruption from upcoming events, despite the potential for major shifts in the course of Fed policy and U.S.-China trade negotiations

Asian equity markets began mixed with the region cautious ahead of the upcoming slate of central bank activity and after last Friday’s losses on Wall St, where the tech sector underperformed as chipmakers suffered from losses in Broadcom. ASX 200 (-0.4%) and Nikkei 225 (Unch) were varied with Australia subdued by losses in telecoms, while Tokyo trade was underpinned as exporters benefitted from a weaker JPY. Hang Seng (+0.4%) and Shanghai Comp. (+0.2%) were both positive for most of early trade after the PBoC conducted a substantial liquidity injection and as the 2nd phase of its RRR cut took effect today which releases CNY 100bln of funds. However, momentum in the mainland eventually waned while Hong Kong outperformed after Chief Executive Lam postponed the extradition bill indefinitely. Finally, 10yr JGBs were lower amid the gains in Japanese stocks and following the bear flattening seen in US on Friday, with demand also dampened by the absence of BoJ Rinban operations in the market today.

Top Asian News

  • Huawei Warns Trump’s Ban to Wipe Out $30 Billion of Sales Growth
  • Adnoc, OCI to Form $1.7 Billion Middle East Fertilizer Giant
  • Japan Opposition Prepares No-Confidence Vote in Finance Minister

European stocks are mixed in a continuation of the cautious tone seen in Asia, ahead of the central bank-packed week. Sectors are mixed with underperformance in the energy sector amid price action in the complex, whilst financial names lead the gains as banks benefit from the higher yields. In terms of movers, airline stocks took a hit after Lufthansa (-11.3%) cut its revenue and adj. EBIT margin guidance, citing increased competition in the market, and as such, Ryanair (-5.9%), easyJet (-5.3%) and Air France (-3.6%) all slipped in tandem. Elsewhere, Airbus (+1.0%) shares are buoyed as the Paris Air Show gets underway with reports noting the Co. has won a major 100-plane order over Boeing. Finally, Deutsche Bank (+2.2%) shares are feeling some reprieve after sources stated that the bank is mulling holding EUR 50bln of assets in a “bad bank” whilst also shrinking or shutting its US equity trading business.

Top European News

  • H&M Sales Growth Decelerates in Gloomy Clothing Retail Market
  • Kier Turns to ‘Self Help’ by Shedding 1,200 Jobs, Exiting Units
  • Tories Spar Over ‘Dictator’ Brexit Plan With Johnson Absent

In FX, the Dollar has maintained its post-US data positivity and the DXY is pivoting 97.500 with resistance close by in the form of a 61.8% Fib retracement of the relatively pronounced pull-back from May 23 ytd highs of 97.373 to June 7 lows at 96.451, and support sitting around 97.457-6 where 21 and 55 DMAs converge. In terms of fundamentals, the looming FOMC will be paramount as markets widely if not unanimously anticipate another dovish shift from the Fed and signal that rates will be cut in July. However, ongoing global trade wars and geopolitical developments are propping up the Greenback and other safe-havens to varying degrees.

  • NZD/AUD - Bucking the broad consolidative G10 trend and largely rangebound Usd/major trade, the Kiwi has bounced back to straddle 0.6500 and appears to be deriving some impetus from firmer NZ inflation metrics ahead of Westpac’s Q2 consumer survey tonight. Moreover, Aud/Nzd cross-flows may be supportive as the Aussie remains depressed around 1.0550 and 0.6875 vs its US counterpart amidst more dovish RBA calls (Macquarie now expecting the OCR to decline to 0.5% by year end) in advance of June policy meeting minutes in the early hours on Tuesday.
  • EUR/CAD/JPY/GBP/CHF - As noted above, narrow parameters vs the Buck for the most part as the single currency holds within a 1.1205-25 band and just above decent option expiry interest at the 1.1200 strike (1 bn). Contacts also believe that reserve managers are lurking at the big figure on the buy-side, while nearest chart levels are seen at 1.1171 (76.4% Fib of the move from 1.1116 to 1.1348) and 1.1250 (latter more psychological than technical). Meanwhile, aside from the aforementioned Fed meet, the Euro may get some independent direction from the ECB’s annual Sintra conference that kicks off today with an opening speech from President Draghi. Elsewhere, the Loonie is also sitting tight between 1.3405-20 and awaiting a speech from BoC’s Schembri, but Deutsche Bank expects the headline pair to spike on FOMC disappointment given overly dovish expectations and some BoC catch up, targeting 1.3665 with a 1.3225 stop (recent low). The Yen is holding in a 108.43-70 range ahead of the BoJ on Friday and Cable is hovering just below 1.2600 pre-BoE, UK CPI and retail sales with Pound bears aware that 1.2560 is last month’s trend low. Finally, the Franc is holding just above parity post-last Thursday’s SNB and Eur/Chf remains confined either side of 1.1200.
  • EM - The Lira has pared some losses from 5.9250+ lows vs the Dollar after Moody’s downgraded Turkey’s credit rating deeper into junk with the aid of a much needed improvement in unemployment, while the CBRT has enhanced liquidity provisions for primary banks via a facility discounted by 1% vs the 24% benchmark rate and based on government bond holdings.

In commodities, WTI and Brent futures continue to decline ahead of a risk-packed week with a number of bearish factors looming over the complex. 1) US crude stocks have been on the rise, with inventory reports via both API and EIA printing surprise builds for two straight weeks. Traders will now be wondering whether these increases will be enough for OPEC+ to possibly revise its output cut pact, with the meeting now seemingly taking place in the first week of July according to the Saudi Energy Minister. 2) Last week saw all three monthly oil reports (EIA, OPEC, IEA) cut their respective global oil growth demand forecasts amid rising threats of trade wars, whilst hopes for a deal between China and the US at the G20 summit seem slim. 3) Last week, speculators trimmed net long positions in Brent longs (-12.3k lots), but WTI saw a more significant reduction (-53.96k lots) as speculators try to balance rising US inventories with Middle-East tensions and potential OPEC+ reaction. WTI futures are hovering just above the USD 52/bbl mark (low USD 52.07/bbl) whiles Brent futures lost the USD 62/bbl handle, albeit remain off lows (USD 61.56/bbl). Elsewhere, precious metals are subdued, potentially on some profit taking ahead of this week’s key risk events including BoJ, BoE and Fed and a slew of ECB speakers. Gold has lost further ground below the USD 1350/oz level after a failed attempt at breaching long-term resistance at USD 1358.50/bbl last week. Meanwhile, copper is little changed amid the indecisive risk tone ahead of the aforementioned risk events.

US Event Calendar

  • 8:30am: Empire Manufacturing, est. 11, prior 17.8
  • 10am: NAHB Housing Market Index, est. 67, prior 66
  • 4pm: Net Long-term TIC Flows, prior $28.4b deficit; Net TIC Flows, prior $8.1b deficit

DB's Jim Reid concludes the overnight wrap

Morning from New York. As much as it’s tough to be away from the family I must admit it was lovely watching the final round of a US golf major in a better time zone last night rather than having to go to bed just before it gets to the final stretch. I was lucky enough to play Pebble Beach last month although to be fair I’ve played it around 200 times before. Yes it was my favourite course on Tiger Woods 2001 on the PlayStation 2. Lots of weekends wasted back then!!

Central banks will be getting their drivers out this week and will try to avoid the rough. The key drive will be that from the FOMC on Wednesday in what will likely be a very narrow fairway. The BoE and BoJ also meet on Thursday with the annual ECB get together in Sintra from tonight through to Wednesday. Data is a little second tier up to the flash global PMIs on Friday. Also by Thursday night we’ll know the final two in the UK Tory party leadership race ready for the ballot of 160,000 members with the winner known by July 22nd. In the background we also have the trade dispute and the political manoeuvrings ahead of the G-20 summit in less than 2 weeks. On that Commerce Secretary Wilbur Ross has again reiterated over the weekend that the most that will come out of the G-20 is “an agreement to actively resume talks”. Our guys in Washington believe there are negotiations occurring behind the scenes to try to set up a Trump/Xi meeting or dinner at the event. It’s possible we’ll hear more on this this week. This follows news that Mr Trump has stepped in again to delay VP Pence’s supposed hawkish speech on China. So it feels like Mr Trump is treading carefully with regards to the Chinese leadership and it’s also noticeable that he’s been quiet on the ongoing situation in Hong Kong.

Staying with Asia, the Hang Seng is the biggest mover this morning following the decision to suspend the extradition bill yesterday. After advancing +1.42% at the highs following the open the index has pulled back somewhat to be +0.60%. Elsewhere in Asia, other equity markets have also pulled back somewhat from the highs, with the Nikkei (+0.09%), the Shanghai Composite (-0.05%) and the KOSPI (-0.17%) all seeing modest movements in either direction. Meanwhile, S&P 500 futures are +0.26% overnight, while there’s not much to report in FX or bond markets.

Back to this week and the Fed have a very delicate balancing act to contend with as they have a choice of endorsing current dovish market pricing and keeping things calm, or to suggest it’s gone too far too quickly and give risk assets a sharp jolt. Friday’s strong retail sales data (more later) adds to the complexity. It’s hard not to feel that they are being driven into a corner at the moment as markets are now pricing in virtually a full rate cut at the July meeting and a further 2 cuts over the next 12 months. Expectations are much lower for a cut this week, with around an 18% chance. Our US economists recently changed their Fed call and expect 3 cuts of 25bps each at the July, September and December meetings. They also lowered their 2019 growth forecast by 40bps to 1.9%. So all eyes on Wednesday.

The BoE and BoJ meetings are not expected to be game changers but the ECB Sintra meetings have provided market moving events before. Two years ago it was used to highlight the paring back of stimulus and markets then started to price the winding down of QE. Could this forum mark a firm signalling that more stimulus is planned in the autumn? For the record, Draghi is making opening remarks tonight and introductory remarks tomorrow morning, while Guindos, Praet, Lane, Lautenschlaeger and Coeure are all due to take part. The BoE's Carney also takes part in a policy panel with Draghi and former Fed Chair Yellen on Tuesday afternoon. Staying with the ECB we should note that EU leaders also gather in Luxembourg on Thursday for another round of talks about candidates for the European Commission and ECB.

As discussed it’s a fairly light week for top tier data until Friday’s global flash PMIs where we’ll get the latest chance to see how the trade war is impacting real time business sentiment and activity. The rest of the data/events/central bank activity is highlighted in the day by day week ahead at the end.

As for last week, most global equity markets ended in the red on Friday, but ultimately gained on the week, as economic data returned to focus. The S&P 500 ended +0.48% higher (-0.16% on Friday), with similar moves by the DOW and NASDAQ, which ended the week +0.41% and +0.70% (-0.07% and -0.52% Friday), respectively. In Europe, the STOXX 600 index advanced +0.35% (-0.40% Friday) with Italian equities outperforming, as the FTSE MIB gained +1.24% (-0.09% Friday). Banks underperformed in Europe, retreating -0.42% (-0.75% Friday) but outperformed in the US, gaining +1.26% (+0.43% Friday). Semiconductors lagged notably, falling -1.61% (-2.61% Friday) after Broadcom’s earnings report showed weaker than expected revenue guidance, with management citing the US-China trade war as a key headwind.

European banks were negatively impacted by sliding yields and heightened expectations for possible ECB easing, as the five year-five year inflation swap rate fell another -9.9bps (-4.8bps Friday) to a new all-time low of 1.134%. The drop in crude oil prices certainly didn’t help, as WTI crude ended the week -2.70% lower (+0.48% Friday), as continued US inventory increases drove a drop of over 6% early in the week, before geopolitical tensions near the Straits of Hormuz sparked a partial retracement. Collapsing inflation expectations also drove bunds to touch a fresh all-time low of -0.270% intraday on Friday, but they ultimately retraced a touch to end the week -2.3bps lower (-1.8bps Friday) at -0.255%. To see 5 year inflation swaps and 10 year bunds at these levels is not healthy. However can the ECB credibly persuade markets that they still have the tools to reverse these trends?

Over in the US, yields traded flat on the week (-1.2bps Friday), though under the surface there was a -10.9bps drop in the inflation breakeven rate (-4.2bps Friday) offset by a +10.4bps increase in real interest rates (+2.8bps Friday). The former was depressed by soft CPI data earlier in the week and the drop in oil prices, while the latter was supported by stronger real economic data, which turned more positive on Friday. The May retail sales report showed a 0.5% mom increase in activity, while the key “control group” reading which strips out volatile elements and is used to calculate GDP was 0.4% mom, double the 0.2% expected. The prior two months’ control group readings were revised up by 0.4pp and 0.1pp, making the positive signal even stronger. Indeed, the Atlanta Fed now forecasts second quarter real consumption growth at 3.9%, which would match the strongest print since 2014. A nice layer of complexity for the Fed to throw into the mix.