Tuesday, 22 August 2017
S&P futures are modestly in the green, following gains in European and Asian shares, after the cash index climbed on Monday for the first time in three days as volatility tumbled amid abysmal trading volumes. Meanwhile, European stocks joined an Asian stock rally following three days of losses, pushed higher again by mining shares as Antofagasta rose 5.5%, hitting a 4 year high on strong H1 earnings. Safe havens such as bonds, gold, and the yen declined despite the latest warning from Bridgewater's Ray Dalio who said yesterday he was "reducing risk", although not even he could offset the return of the VIX clubbing.
Despite increasingly cautious rhetoric from iconic market investors, traders have again gotten over some of the sensitivity that characterized the past few days following political turmoil in Washington, fresh terrorist attacks in Europe and ongoing tension between the U.S. and North Korea. Nonetheless as discussed yesterday Dalio said he’s “tactically reducing” risk because he’s concerned about growing internal and external conflict “leading to impaired government efficiency” in the U.S., according to a LinkedIn post Monday.
Back to Europe, where the Stoxx Europe 600 Index rebounded from the lowest in more than a week as miners and chemical makers led gains across almost every sector. Even with today's rally, the Stoxx 50 is nearly 200 points below Wall Street's year-end consensus target just above 3,600.
The broad index of European stocks was up 0.4 percent on the day. The surge in European stocks pushed up the MSCI world equity index, which is now up 0.1 percent on the day, its second day of gains after sharp falls last week. The performance comes on the back of strong sentiment towards Europe that saw the euro record its biggest one-day gain in a month on Monday. Though the single currency dipped slightly on Tuesday, it is still around the $1.18 mark which analysts believe might prompt policymakers to consider action.
Meanwhile over in Germany, we got another indication that Europe's strongest economy has topped, after the 3rd ZEW decline in a row (August ZEW economic sentiment at 10.0, Exp. 15.0, Last 17.5) perhaps not surprising considering the poor DAX performance in recent weeks. The DAX pared gains to 0.5%, after earlier rising as much as 0.8%, after the Zew showed investor confidence fell more than expected. As a reminder, the DAX has dropped 1.6% so far this quarter, vs 0.2% dip for Euro Stoxx 50, 0.3% fall for CAC 40, and 5.7% rise for FTSE MIB. *Is Germany getting sick again?*
In Asia, equity markets were mostly higher although news flow was remarkably light amid a lack of central bank speakers and macroeconomic data. Focus was on last night's speech by US President Trump in which he highlighted US plans to continue sending troops to Afghanistan to fight the terror threat emanating from the country. Japan’s Topix index fluctuated before ending the local session less than 0.1 percent higher while the Nikkei 225 fell -0.05%, entering the longest losing streak since April 2016, while the ASX 200 was up 0.42% after numerous earnings, including from BHP Billiton. Korea's Kospi index gained 0.4% while the Shanghai Composite rose 0.1%. Hong Kong’s Hang Seng Index rose 0.9 percent, outperforming other equity markets in Asia, on strong earning results.
In macro, the DXY dollar index retraced yesterday’s entire push lower as EUR, GBP and AUD all continuously grind lower against USD amid little news. *Dalian iron ore futures close above 600 yuan/ton for first time since March as rally in metals markets extends further. *Italian BTPs sell off aggressively, with some noting summer related carry trades being unwound; UST curve bear flattens with focus on the strength in the USD, Bloomberg notes.
The US dollar rose against most Group-of-10 peers amid profit-taking on short positions and as fresh long exposure was added before the Jackson Hole symposium later this week. The Bloomberg Dollar Spot Index rose by 0.3 percent in early trading, following a drop of 0.6% since Friday. Some investors trimmed their short exposure in the greenback after the gauge hit a three-week low on Monday, according to traders in Europe quoted by Bloomberg, looking to add again should the rebound in place start losing steam. Leveraged accounts were also seen adding fresh long positions as they see upside risks into Federal Reserve Chair Janet Yellen’s speech at Jackson Hole, Wyoming on Friday. Even as the dollar gauge looks to erase Monday’s losses, the medium-term outlook was little changed. The downtrend this year remains firmly in place, with August’s trading pattern resembling more of a consolidation phase than a significant rebound. Bloomberg’s fear and greed indicator suggests bulls are in control this month, yet the U.S. currency trades just 0.4 percent higher.
In China, the offshore yuan closed at the highest since September 16, boosted by a stronger central bank reference rate after the dollar fell overnight. State media cited senior PBOC adviser as saying the Chinese currency’s advance may continue this year.
In commodities, London copper echoed moves in China, and rose to a three-year high while zinc held close to its highest level in a decade while nickel logged a fresh annual peak. BHP Billiton, the world's largest miner, reported a surge in underlying full-year profits and said it would exit its underperforming U.S. shale oil and gas business.
"Commodity prices are holding firm, particularly base metals," said Sue Trinh, FX strategist at RBC Capital Markets. She cautioned that commodities have mostly firmed "on speculative Chinese investment flow from the wealth management industry, so we question the real demand."
In rates, European government bond yields followed Treasuries higher. The yield on 10-year Treasuries gained two basis points to 2.20 percent. Germany’s 10-year yield climbed less than one basis point to 0.40 percent. Britain’s 10-year yield increased one basis point to 1.076 percent.
Crude advanced before U.S. government data forecast to show stockpiles fell. West Texas Intermediate crude climbed 0.3 percent to $47.38 a barrel. Gold fell 0.5 percent to $1,285.18 an ounce, the largest fall in a week.
Economic data include FHFA House Price Index and Richmond Fed Manufacturing Index. Salesforce, Intuit, Coty and Toll Brothers are among companies reporting earnings.
*Bulletin Headline Summary from RanSquawk*
· Soft German ZEW data sees EUR trend lower.
· Improving risk tone has led EU Bourses higher.
· Looking ahead, highlights include: US API data, Richmond Fed Manufacturing Data and Canadian Retail Sales
· S&P 500 futures up 0.1% to 2,431.00
· STOXX Europe 600 up 0.5% to 374.68
· MSCI Asia up 0.1% to 159.52
· MSCI Asia ex Japan up 0.5% to 526.81
· Nikkei down 0.05% to 19,383.84
· Topix up 0.06% to 1,596.12
· Hang Seng Index up 0.9% to 27,401.67
· Shanghai Composite up 0.1% to 3,290.23
· Sensex up 0.2% to 31,305.32
· Australia S&P/ASX 200 up 0.4% to 5,750.12
· Kospi up 0.4% to 2,365.33
· Brent futures up 0.8% to $52.07/bbl
· German 10Y yield rose 1.2 bps to 0.412%
· Euro down 0.4% to $1.1774
· US 10Y yield rose 2 bps to 2.20%
· Italian 10Y yield unchanged at 1.742%
· Spanish 10Y yield rose 3.7 bps to 1.584%
· Gold spot down 0.5% to $1,284.90
· U.S. Dollar Index up 0.4% to 93.44
*Top Overnight News*
· Donald Trump vowed as a presidential candidate to reduce America’s military involvement abroad and quickly defeat Islamic State terrorists. His announcement of an open-ended commitment to Afghanistan to battle jihadists is a concession that as president he cannot meet either promise
· Provident Financial slumped the most on record as Chief Executive Peter Crook stepped down and the subprime lender forecast a full-year loss and scrapped its dividend
· BHP Billiton Ltd. is in talks with potential buyers of its U.S. shale assets -- acquired in a contentious $20 billion deals spree in 2011 -- and will delay a move into potash after months of public skirmishes with activist investors led by Paul Singer’s Elliott Management Corp
· OPEC will have little choice but to extend oil output cuts at current levels when they expire in March, according to Bank of America Merrill Lynch
· Just as the world was put on notice that the end is nigh for the scandal- plagued London interbank offered rate, Janus Henderson Group Plc has started two new exchange-traded notes linked to the doomed benchmark
· German investor confidence declined for a third month amid concern that the widening diesel scandal and the strengthening euro will weigh on Europe’s largest economy
· North Korea Says U.S. Faces ‘Merciless Revenge’ Over Drills
· World’s Biggest Wealth Fund Gains $26 Billion on Stock Rally
· HSBC Currency Conspiracy May Have Involved 11 Others, U.S. Says
· Court Square Said to Be in Talks to Buy PlayCore for $1 Billion
· KKR Is Said to Near $3 Billion New York City Pension Pledge
· Provident Financial Drops Most Ever After CEO Peter Crook Quits
· Pratt’s $10 Billion Jet Engine Lags GE by 10- to-1 on New Orders
· Japan Tobacco to Acquire Philippines No. 2 Cigarette Maker
· Corporate Bonds Have Plenty of Fans Even After Comedown
· Trump Adds Afghanistan to Long List of Issues That Defy Easy Fix
· Broadcast News Misses Ratings Bonanza With Too Little Trump
· EU Insists on Orderly Brexit as U.K. Battles for Upper Hand
· Wanda Scraps Central London Purchase as China Toughens M&A Rules
*Asian equity markets were mostly higher *although news flow was remarkably light amid a lack of central bank speakers and macroeconomic data. Focus was on a speech from US President Trump where he
highlighted US plans to continue sending troops to Afghanistan to fight the terror threat emanating from the country. The Nikkei 225 fell -0.05% while the ASX 200 was up 0.42% after numerous earnings, including from BHP Billiton. 10Y JGBs were lower despite a strong 20Y JGB auction as participants move into the long-end following the well-received issuance, leading to curve flattening. The line was sold with the lowest tail of 2017 and highest cover since January 2014.
Top Asian News
· China State Construction Seeks $813 Million in Rights Issue
· China’s Metal Frenzy Sparks Investor Rush to Smokestack Debt
· India Fast Food Stocks May Move as McDonald Ends Franchisee Tie
· Booze Ban in the Home of Baijiu Sinks China’s Liquor Stocks
· Shares of China Drug Firms Advance as Results Beat Expectations
· Dollar Demand Drives Yen Lower as Euro, Sterling Reverse Gains
*European equities have kicked off the session on the front-foot *(Eurostoxx 50 +0.5%) with all ten sectors in the green. In terms of sector specifics, material names lead the way higher amid positive earnings updates for Antofagasta (+4%) and BHP Billiton (+3.2%) amid positive pre-market earnings updates, subsequently dragging the sector higher. Elsewhere, Provident Financial (-50%) are the notable underperformer amid their CEO resigning, second profit warning and scrapping of dividend. Finally, Fiat (+1.2%) remain supported by ongoing interest from Great Wall Motor. Fixed income markets trade lower amid the apparent
return of risk-sentiment to the market with today's sovereign bond-slate once again void of supply. Bunds have somewhat ran out of steam after yesterday failing to target the Aug 11 high with fixed income markets not showing much reaction amid the soft ZEW data release this morning, now awaiting the GE 10yr supply tomorrow. Additionally, some are attributing the pressure on peripheral markets to ongoing speculation about a potential parallel currency in Italy but details are yet to emerge on this front.
Top European News
· U.K. Sees First July Budget Surplus Since 2002 on Tax Boost
· European Miners Climb for a Second Day; Antofagasta Leads Gains
· Tesco Leads U.K. Supermarket Pack as Lewis’s Revival Continues
· Millennium Credit Manager Forgash Is Said Departing Hedge Fund
· What Ails Central Banks May Cure Russia’s Inflation Angst
· BTP Futures Slip, Bonds Underperform as Strategists Turn Bearish
· Euro’s Hot Streak May Survive Any Draghi Jackson Hole Jawboning
· Bank of Cyprus Slumps After Provision Changes Produce 1H Loss
*In currencies, *overnight the Asian trading session saw a somewhat risk on tone, which saw JPY and CHF ease off against the greenback with the JPY also consolidating above 109. Of note, large expiries in USD/JPY are set to roll off at the NY cut with lbln at 108.50 and 798MM at 109.00. The EURUSD move above 1.18 had been brief after the currency ran into resistance at 1.1825. Again, it has been a relatively quiet morning with participants eagerly awaiting President Draghi's speech in Frankfurt. Although EUR has extended on losses following the release of soft ZEW data from Germany, with the currency approaching 1.1750.
*In commodities, *WTI and Brent crude futures trade higher, paring back some of yesterday's losses which were in part triggered by the resumption of operations at the Deere Park refinery OPEC/Non-OPEC JTC reportedly sees July production deal compliance at 94%. (Newswires) However, this appears to be very much at odds with recent numbers produced by IEA, stating a compliance level of just 74% Kuwaiti oil minister said that OPEC will discuss ending or extending cuts at its November meeting. He also noted that OPEC is still working to push oil stocks below 5-year average. Elsewhere, the risk-appetite has taken the shine modestly off gold prices while Chinese iron ore futures were seen higher by over 5% during Asia-Pac hours.
*Looking at the day ahead, *the FHFA house price index and Richmond Fed manufacturing index are due. Onto other events, the ECB’s Vice President Constancio speaks on inequality and the distributional impact of macroeconomic policies
*US Event Calendar*
· 9am: FHFA House Price Index MoM, est. 0.5%, prior 0.4%; House Price Purchase Index QoQ, prior 1.4%
· 10am: Richmond Fed Manufact. Index, est. 10, prior 14
*Jim Reid concludes the overnight wrap*
Well I hope some of you in the US saw the solar eclipse yesterday. Here in the UK we had our own solar eclipse and instead of it only lasting 3 minutes it lasted the whole day. It was a total eclipse by thick, gloomy and generally foreboding cloud! One would have to say that clouds continues to hover over financial markets at the moment without necessarily unleashing heavy precipitation. There was a lot of chatter in the market yesterday about what Jackson Hole will bring. On balance I would say investors are much more set up for a non-event than they were 1 or 2 months ago. The general feel is that recent events (softer inflation and softer sentiment in markets) will ensure that both the Fed and the ECB will tread carefully. That likely implies that a non-event (or dovish comments) will have limited impact on the market whereas evidence of tighter policy relative to expectations from either could lead to a bigger reaction. As we said yesterday don't forget Mr Draghi's speech at the Lindau symposium in Germany tomorrow. If he is going to say something market moving this week it might be there rather than stateside.
Ahead of these events, US equities were mixed but little changed on light volume yesterday. Both the S&P and the Dow edged up 0.1%, while the Nasdaq dipped 0.05%. Within the S&P, the real estate sector was up +1.07%, but gains were largely offset by losses in other sectors including energy and financials. European markets broadly softened, with the Stoxx 600 down -0.40% alongside the Dax (-0.82%) and the FTSE 100 (-0.07%). Elsewhere, the Vix fell 1.1 points to 13.19.
This morning in Asia, markets have broadly strengthened. Despite North Korea warning that the US / South Korea will face “merciless revenge” for its annual military drills, the Kospi advanced +0.40%. Elsewhere, Hang Seng was up +1.04% on solid company results and the Nikkei up +0.07% as we type.
Back to yesterday and following data last week that showed Germany’s economy grew 2.5% yoy in 2Q, the Bundesbank was relatively upbeat overnight, noting “the strong economic upturn in the German economy is expected to continue in 3Q, with industrial output probably continuing to play an important role, thanks to a substantial expansion in exports..." That said, these comments seem to have little impact on bunds as bonds remain well bid. Yields fell modestly in both US and Europe. Core European bond yields were down 1-2bp across the curve, with bunds (2Y: -1bp; 10Y: -2bps), Gilts (2Y: -1bp; 10Y: -2bps), and French OATs (2Y: -1bp; 10Y: -1bp) all slightly lower in yield while UST 10Y (2Y: -0.5bp; 10Y: -1bps) yields also dipped yesterday but have largely reversed the move in Asia this morning.
Turning to currencies, the USD dollar index weakened 0.4% while the Euro/USD had a solid session, up 0.5% yesterday. The Euro is now back above last week’s level and only c0.6% away from the CY17 high of 1.1870. So we've cleared levels from last week before the ECB minutes noted that “concerns were expressed about the risk of the (Euro) overshooting in the future”. Elsewhere, Sterling/USD was up 0.2% and the Euro/Sterling was up 0.3%.
In commodities, WTI oil fell 2.4% following an OPEC meeting that ended yesterday with no decision on the future of supply cuts. Iron ore continued to increase for the third consecutive day (up c9% in total), following reports of stronger Chinese steel demand. Precious metals were slightly up (Gold +0.6%; Silver +0.3%) and base metals broadly strengthened with Copper (+0.6%). Aluminium (+0.6%) and Zinc (+1.4%).
Away from the markets and onto the looming US debt ceiling limit issue, both the US Treasury Secretary Mnuchin and S enate majority leader McConnell believe it will be lifted. Mnuchin noted "everybody understands, this is not a Republican or a Democrat issue, we need to be able to pay our debts", while McConnell said "there is...no chance we won't raise the debt ceiling....America is not going to default.."
Elsewhere, the UK government has published two more Brexit position papers (a total of five expected this week), reiterating that the country wanted the “freest and most frictionless trade possible” and would seek to preserve existing rules on confidentially.
The latest ECB CSPP holdings were released yesterday. They bought a lowly €0.8bn last week which compares to €1.1bn, €1.54bn, €0.79bn, €0.72bn, €1.43bn over the previous five weeks. These continue to be weak summer influenced numbers and this week's equate to an average of €160mn per day (vs. €351mn/ day since CSPP started). The CSPP/PSPP ratio was 9.6% (previous weeks 11.4%,12.8%, 8.1%, 6%, 10.4%) which is below the average since the April taper begun but the average since this point of 12.7% is still higher than the pre-taper ratio of 11.6%. So the evidence is still in favour of CSPP having been trimmed less than PSPP since April even if there have been some softer weeks of late. As we’ve discussed in recent weeks the ECB probably did a little front loading ahead of the summer to account for summer credit liquidity being worse than in govt. bonds. We’ll have a better idea of where things stand in September.
Before we take a look at today’s calendar, we wrap up with the other data releases from yesterday. In the US, the Chicago Fed national activity index for July was lower than expected at -0.01 (vs. 0.10 expected), although the weakness was partly offset by an upward revision to the prior reading. The three-month average stands broadly flat, suggesting an economy growing at around its implied trend. Elsewhere, Canada’s wholesale trade sales for June was in line at -0.5% mom. In the UK the Rightmove house price index (which measures asking prices) fell 0.9% mom in August but remained up 3.1% yoy.
Looking at the day ahead, the ZEW survey on economic expectations for the Eurozone and Germany are due. Then the UK will release various data including: the July net private sector borrowing and July public finances data as well as the CBI full volume of total order book balance. Over in the US, the FHFA house price index and Richmond Fed manufacturing index are also due. Onto other events, the ECB’s Vice President Constancio speaks on inequality and the distributional impact of macroeconomic policies