With the Fed decision just one day away, followed the very next day by the increasingly more irrational BOJ, stocks had no desire to make significant moves and overnight’s boring session was the result, as European stocks and U.S. index futures rose modestly but mostly hugged the flatline while Asian declined 0.2% for a third day as raw-material shares declined and Tokyo equities slumped before central bank meetings in the U.S. and Japan this week. China’s stocks rose the most in almost two weeks, up 0.6% but failed to rise above 3000 on the Shanghai Composite, in thin trading.
The reason why no breakout is possible in any direction is because confusion reigns about the most basic issue: earnings. Take these two quotes for example:
“While policies are supportive of equities, valuations look expensive,” Hans Goetti, the Dubai- based chief strategist for the Middle East and Asia for Banque Internationale à Luxembourg told Bloomberg. “First-half earnings don’t really look great. Unless you have very good earnings coming through in the second half, I think valuations could be on the high side.”
And then this: “Earnings are doing pretty well,” Michael Woischneck, a fund manager who oversees the equivalent of $190 million at Lampe Asset Management in Dusseldorf, Germany told Bloomberg. “But that’s something that could change with just one word from a Fed governor. Although no changes are expected, wording at this week’s meeting is key.”
Peraps one was looking at GAAP while the other one was focused on non-GAAP?
In any case, European stocks climbed for the first time in four days as BP Plc and Standard Chartered Plc rose after the companies reported earnings. The Stoxx Europe 600 Index rose 0.5 percent as of 10:37 a.m. London time. BP rallied 4.2 percent and Standard Chartered jumped 10 percent in London. The pound strengthened against all of its major counterparts on speculation that the U.K. is less likely to leave the European Union. Banks led gains in Europe and Asian equities pared their decline. The yen and Treasuries advanced before central bank meetings this week. Malaysia’s ringgit dropped to a one-week low after a state-owned investment fund withheld an interest payment on its bond. Copper fell for a second day and crude oil traded below $43 a barrel. Day ahead natural gas in the U.K. rose to the highest since mid January as colder-than-usual weather boosted demand.
BP, the first oil major to report quarterly earnings, posted a surprise profit as a stronger-than-expected refining and trading performance helped mitigate the lowest crude prices in more than a decade. In the U.S., Apple Inc. releases results Tuesday that may shed more light on the state of the technology sector. The Federal Reserve concludes its meeting Wednesday, with investors pricing in no chance of an interest-rate increase. The Bank of Japan’s outcome is a day later and most analysts predict Governor Haruhiko Kuroda will unveil a stimulus boost.
Futures on the Standard & Poor’s 500 Index added 0.3 percent. Apple, the world’s most valuable company, forecast in January that quarterly revenue would drop for the first time in more than a decade as iPhone sales slowed. The company’s projection of $50 billion to $53 billion for the three months through March compares with an average estimate of $52 billion in a Bloomberg survey of analysts.
The MSCI Emerging Markets Index rebounded 0.1 percent, after losing 0.4 percent, as stocks in China, India and South Korea advanced. The Hang Seng China Enterprises Index of mainland shares in Hong Kong rose 0.3 percent after sliding 1.4 percent. The Shanghai Composite Index added 0.6 percent, rebounding from the lowest since March.
Global Market Snapshot
- S&P 500 futures up 0.2% to 2087
- Stoxx 600 up 0.2% to 347
- FTSE 100 up 0.3% to 6279
- DAX up less than 0.1% to 10295
- German 10Yr yield up 1bp to 0.28%
- Italian 10Yr yield up 1bp to 1.54%
- Spanish 10Yr yield up 1bp to 1.65%
- S&P GSCI Index up 0.2% to 346
- MSCI Asia Pacific down 0.2% to 133
- Nikkei 225 down 0.5% to 17353
- Hang Seng up 0.5% to 21407
- Shanghai Composite up 0.6% to 2965
- S&P/ASX 200 down 0.3% to 5221
- US 10-yr yield down 1bp to 1.9%
- Dollar Index down 0.3% to 94.56
- WTI Crude futures up 0.7% to $42.94
- Brent Futures up 0.7% to $44.80
- Gold spot down 0.3% to $1,235
- Silver spot up less than 0.1% to $17.01
Global Top News
- DuPont Boosts Outlook as First-Quarter Sales Top Estimates: Boosts yr oper. EPS forecast to $3.05-$3.20, had seen $2.95- $3.10; 1Q oper. EPS $1.26 vs est. $1.04; says on track for $730m cost reductions
- BP Reports Surprise Profit on Strength in Refining, Trading: Profit adjusted for one-time items and inventory changes was $532m vs analyst ests. for loss of $244.9m; co. says it can balance books w/ oil at ~$50-$55/bbl
- Sarepta Fails to Win FDA Panel Backing for Muscle Disease Drug: Panel votes 7-3 that drug wasn’t shown to be effective
- U.S. to Require Large Banks to Have Year Worth of Liquidity: WSJ; Details of rule crafted by Federal Reserve, FDIC, Office of the Comptroller of the Currency to be released Tuesday at FDIC board meeting
- Toyota Cedes Global Sales Lead to VW as Shutdowns Trump Scandal: Toyota sales fell 2.3% in 1Q to 2.46m in Jan.- March, Volkswagen deliveries rose 0.8 percent to 2.5m
- Fed to Keep Options Open for June Rate Hike: Decision-Day Guide: Officials to debate whether to reinstate risk assessment
- Toshiba Books $6.2 Billion Loss After Westinghouse Writedown: Yr prelim Oper. loss 690b yen; had forecast 430b yen loss; nuclear business results in 260b yen impairment
- Oil’s Recovery Inches Higher as Fracklog Awaits Price Trigger: Drilled, uncompleted wells could return 500,000 b/d to market
- New Valeant CEO Papa Trades Challenge at Perrigo for Fresh One
- Verisk to Sell Health-Care Services Ops to Veritas for $820m: Sale prices includes $720m cash, $100m L-T promissory note with interest paid in kind, other contingent consideration
- Perella Weinberg Said In Merger Talks With Tudor Pickering: Considering a tie-up with Tudor Pickering in a push into the energy sector
- Alere Said to Get Default Notice From Creditors on Filing Delay: Received notice of default from group of bondholders after company delayed filing 2015 financial statement
- McDonald’s Said to Market Euro Bonds After ECB Expands Stimulus: Offering the securities in 3 parts, with notes maturing in January 2021, November 2023 and May 2028, according to person familiar with matter
- Earnings Blowups Send Tech Traders to Options Market for Hedges: Ratio of Nasdaq VIX to S&P 500 gauge near highest since August
- Landry’s, Jefferies CEOs Plan IPO for New SPAC: Reuters: Landry’s CEO Tilman Fertitta, Jefferies/Leucadia CEO Richard Handler to start special purpose acquisition co. through their cos. called Landcadia, plans to raise as much as $300m in IPO
Looking at regional markets, Asian stocks traded lower following the subdued lead from Wall St. as participants remained cautious ahead of the week’s key policy decisions. ASX 200 (-0.3%) opened from its long weekend to trade in minor-positive territory, underpinned by a rebound in the commodities-complex in which WTI briefly reclaimed USD 43/bbl, but failed to hold onto gains as commodities pulled back and the downbeat tone persevered. Nikkei 225 (-0.5%) extended on losses with participants tentative as they contemplate on whether the BoJ will ease further this week, while Chinese markets (Shanghai Comp +0.6%) initially outperformed following another substantial liquidity injection and expectations outflows are to improve this year, before sentiment later soured on commodity weakness with Dalian iron ore prices falling over 4%. 10yr JGBs traded mildly higher as the risk-averse tone in Japan supported safe-haven assets, while the BoJ were also in the market to acquire around JPY 1trl in government debt.
Top Asian News
- Mitsubishi Motors’ Improper Mileage Tests Date Back to 1991: Formed a panel of three former prosecutors to investigate improper testing that goes back as far back as 1991, including the falsification of fuel efficiency data
- 1MDB Defaults on Bond After Missing $50 Million Payment: 1MDB in disagreement with IPIC over debt obligations
- Hyundai Posts 9th Successive Profit Drop as China Sales Fell: Deliveries in South Korea rose 3.7%, while in China fell 9.6%; 1Q oper. profit 1.34t won; est. 1.42t won; 1Q net income, excluding minority interests, 1.69t won; est. 1.5t won
- Obscure Chinese Hedge Fund Is Making Big Enemies in Stock Market: Activist investor in the making takes on Internet firms
- UBS Says Hong Kong Traders Should Be Worried Amid China Defaults: End of implicit state support to drive up funding cos
- Alipay Owner Raises Record $4.5 Billion to Fund Global Expansion: China’s sovereign wealth fund joins as new investor
- Mallya Faces Expulsion From India Parliament by Ethics Panel: Businessman said to be overseas as creditors seek debt dues
- India’s Energy Minister Wants to Cut Coal Imports to Nothing: Goyal says India increasing domestic output to cut imports
Sentiment today has kicked off in a more upbeat fashion in Europe, with equity indices higher across the board (Euro Stoxx: +0.4%). In terms of the notable outperformers, the likes of BP (+3.8%) and Standard Chartered (+10.0%) have both seen strength in the wake of their earnings updates, while Italian banks are once again among the best performers in Europe. In tandem with the uptick in sentiment, WTI futures remain near their highest levels of the day, although still slightly lower than the USD 43.00/bbl level.
In fixed income, Bunds have ebbed lower throughout the morning to break below 162.00 to the downside and approach the April 25th low at 161.90 in what appears to be more of a technically driven move and also in tandem with the move higher in stocks. Separately, orders for the UK 2065 Gilt syndication exceed GBP 19bIn with price guidance unchanged according to bookrunners with price guideline at 0.25-0.5bps above 3.5% 2068 Gilt. Looking ahead, highlights still to come include US durable goods orders, flash services PMI, comments from ECB’s Constancio and Fed’s Mester and Lockhart.
Top European News
- Standard Chartered Jumps on Surprise Drop in Loan Impairments: 1Q pretax adj. profit fell 64% to $539m, capital ratio climbs, costs fall 12% y/y, losses on bad loans fell 1% to $471m
- Diamond’s Atlas Mara Interested in Barclays Africa Takeover: Said it’s held talks with investors on a potential bid for or the U.K. lender’s operations in Africa to boost its presence across the continent
- Bayer Profit Beats Estimates as Newest Drugs Buoy Demand: 1Q Ebitda before special items EU3.4b, est. EU3.1b, top-selling drugs Xarelto and Eylea continued to soar
- Orange Quarterly Sales Rise 0.6% as Growth Resumes in Spain: 1Q rev. EU10b vs est. EU10b; keeps guidance, targets 2016 restated Ebitda higher than in 2015 on comparable basis
- BAT Revenue Beats Estimates on Gains Across Western Europe: Reported a surge in cigarette sales in western Europe that helped 1Q revenue beat analysts’ estimates
- EON Sees Profit of Up to 1 Billion Euros After Uniper Split: Utility plans to pay dividend of 40%-60% of underlying income
- Merkel Said to Weigh $1.4 Billion in Electric-Car Incentives: Will meet with German automotive CEOs on Tuesday evening to discuss a plan to spend as much as EU5,000 per vehicle,
- Pound Shows How Brexit Concerns Are Starting to Look Overdone: Implied pound volatility falls most since 2015 U.K. election
In FX, nothing other than GBP buying behind the USD moves this morning, as ($) index has turned lower aggressively and is now testing support in the 94.50 area. Brexit repositioning said to be largely behind the sharp turn in the tide of UK sentiment, but we sense specs are now pushing for further stops with pre 1.4600 offers set to be tested. Nevertheless, mid Feb highs now achieved. EUR/GBP losses have slowed though as EUR/USD has turned higher in tandem, touching on 1.1300. AUD and CAD gain on follow on moves, but .7750 and 1.2630 levels contain respectively for now.
Ahead of the FOMC, some restraint is likely to kick in soon, but levels are getting stretched despite the focus on whether Yellen and Co will hint/signal at a potential move in June.
The ringgit slid 0.5 percent. 1Malaysia Development Bhd. said it didn’t pay $50 million of interest on a $1.75 billion bond amid a dispute with Abu Dhabi’s sovereign wealth fund on who should be making the payment. The latter is the co-guarantor of the defaulted securities and said this month 1MDB owed it more than $1 billion. 1MDB’s dollar bonds slumped, sending $3 billion of March 2023 securities down 1.76 cents to 88.37 cents on the dollar to yield 6.53 percent .
The yen strengthened 0.3 percent to 110.87 per dollar, having touched a three-week low of 111.91 on Monday. Nikkei newspaper reported that Japan’s $1.3 trillion Government Pension Investment Fund will start hedging to protect its foreign assets against an appreciating yen, a move Bank of America Merrill Lynch strategist Shusuke Yamada said could boost the local currency.
In commoditues, WTI has been trickling lower after reaching highs of USD 45.45/bbl last Thursday. Prices have continuously made lower highs and lower lows (1hr chart) and currently resides at USD 42.94/bbl. Gold has been largely range bound between USD 1240.77/oz to USD 1232.35/oz. Silver was also bearish overnight and on a technical note used the 23.6 fib on the 4 hour chart as resistance for a move up which was at the USD 17.00 level. In industrials we also saw copper and Dalian iron ore futures pressured with the latter retreating further away from 20-month highs amid a widespread cautious tone.
On today’s US docket highlights include US Durable Goods Orders, Flash Services PMI, API Crude Oil Inventories and Fed’s Mester. The early release will be the first reads for durable and capital goods orders: the market is expecting a +1.9% mom headline durable orders print, and +0.9% mom core capex print. Also due out today will be more housing market data in the form of the S&P/Case-Shiller house price index, along with the Conference’s Board’s leading index (expected to decline 0.4pts to 95.8), the flash services and composite PMI, and finally further regional manufacturing data in the form of the Richmond Fed manufacturing activity index. Away from the data there will be more Central Bank speak from the ECB with Constancio scheduled to speak, while BoE Deputy Governor Cunliffe is also due to speak today. Earnings season kicks up another gear meanwhile with 50 S&P 500 companies set to report. The highlights look set to be Proctor & Gamble (before-market), AT&T (after-market), eBay (after-market) and of course Apple (after-market). Meanwhile, the highlight of the European calendar today will likely be results out of BP.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Sentiment today has kicked off in a more upbeat fashion in Europe, with equity indices higher across the board (Euro Stoxx: +0.4%)
- Nothing other than GBP buying behind the USD moves this morning, as ($) index has turned lower aggressively and is now testing support in the 94.50 area
- Looking ahead, highlights include US Durable Goods Orders, Flash Services PMI, API Crude Oil Inventories and Fed’s Mester
- Treasuries little changed during overnight trading amid European equity strength after better-than-expected earnings from BP and Standard Chartered; Treasury auctions continue with sale of $34b 5Y notes, WI 1.385%; last sold at 1.335% in March, 1.169% in February.
- Federal Chair Janet Yellen and her colleagues will have a chance this week to signal whether they want to raise rates as soon as June. The message is likely to be it’s still an option, but far from a certainty
- Bond traders aren’t fully pricing in another rate increase until February, while driving a gauge of expected volatility in Treasuries to the lowest since 2014 this month. That’s the sort of hubris that can get them burned, according to Jerome Schneider, a money manager at Pimco
- The ECB’s announcement in March to include corporate bonds in its QE program has sent borrowing costs toward record lows for issuers in the region. That has investors looking beyond senior debt to find bonds that may have been overlooked
- A measure of risks to sterling following the June 23 vote on Britain’s membership in the European Union has tumbled by the most since the country narrowly avoided an inconclusive general election result last year
- If Britain leaves the European Union, it’s going to need negotiators, and lots of them. Parliament’s Foreign Affairs Committee thinks it knows where it can find them: London’s financial sector
- Fitful financial markets and signs of a southwest Florida real estate slowdown so unnerved Canadians Fab and Christa Michetti that they sold one of their two vacation homes there last month. The U.S. presidential election’s isolationist talk provided one more push
- Sovereign 10Y bond yields mostly higher; European, Asian equity markets mostly higher; U.S. equity-index futures rise. WTI crude oil higher while metals drop
US Event Calendar
- 8:30am: Durable Goods Orders, March P, est. 1.9% (prior -3%)
- Durables Ex Transportation, March P, est. 0.5% (prior -1.3%)
- Cap Goods Orders Nondef Ex Air, March P, est. 0.6% (prior -2.5%)
- Cap Goods Ship Nondef Ex Air, March P, est. 0.9% (prior -1.7%)
- 9:00am: S&P/Case-Shiller US HPI m/m SA, Feb. (prior 0.52%)
- S&P/CS 20 City Index NSA, Feb., est. 182.83 (prior 182.56)
- S&P/CS 20 City m/m SA, Feb., est. 0.80% (prior 0.8%)
- S&P/CS 20 y/y NSA, Feb., est. 5.75% (prior 5.75%)
- S&P/CS US HPI NSA, Feb. (prior 175.42)
- S&P/Case-Shiller US HPI y/y NSA, Feb. (prior 5.43%)
- 9:45am: Markit US Services PMI, April P, est. 52 (prior 51.3)
- Markit US Composite PMI, April P (prior 51.3)
- 10:00am: Consumer Confidence Index, April, est. 95.8 (prior 96.2)
- 10:00am: Richmond Fed Mfg Index, April, est. 12 (prior 22)
Central Banks
- Two-day FOMC meeting begins
- 8:40am: BOC’s Poloz speaks in New York
Supply
- 11:30am: U.S. to sell $20b 52W bills, $35b 4W bills
- 1:00pm: U.S. to sell $34b 5Y notes
US Event Calendar
- Two-day FOMC meeting begins
- 8:30am: Durable Goods Orders, March P, est. 1.9% (prior -3%)
- 8:40am: BOC’s Poloz speaks in New York
- 8:55am: Redbook weekly sales
- 9am: S&P/Case-Shiller US HPI m/m SA, Feb. (prior 0.52%)
- 9:45am: Markit US Services PMI, April P, est. 52 (prior 51.3)
- 10am: Consumer Confidence Index, April, est. 95.8 (prior 96.2)
- 10am: Richmond Fed Mfg Index, April, est. 12 (prior 22)
- 4:30pm: API weekly oil inventories
DB’s Jim Reid concludes the overnight wrap
Markets were snoozing a little yesterday ahead of things hotting up in what is a very busy rest of the week. There was some cautiousness around though with the Fed and the BoJ continuing to create lots of debate, especially the latter. The meeting is seemingly on a knife-edge in terms of whether they’ll act now or not and as we highlighted yesterday the consensus split is fairly even as to whether they pull the trigger this time. Our FX colleagues touched upon the topic of the BoJ approving NIP loans yesterday in their daily FX piece. While they ultimately expect no change in policy, they believe that it’s unlikely in their view that NIP loans would provide a major jolt that leads to an increase of banks’ corporate loans.
This morning in Asia, bourses are generally following the lead from the US last night and drifting lower. Leading the way are markets in Japan where the Nikkei is currently -1.08% and the Topix is -1.31%. The Hang Seng (-0.81%), Kospi (-0.09%) and ASX (-0.34%) are also in the red, with China flattish as we go to print. The risk-off tone is being reflected by the strengthening in the Yen this morning too, currently up +0.28%. Despite the near 3% weakening for the currency last week, which is going part of the way to lending support to the BoJ on hold camp, the Yen is still a not too insignificant 6.7% stronger from the day before the January negative rate move, rallying from nearly 119 to the current level of just below 111.
As we noted earlier there wasn’t much to write home up about with regards to newsflow and price action in markets yesterday, compounded also by a lack of earnings releases for investors to get stuck into. Some slightly softer macro data and an easing across the energy complex (WTI ended down nearly 2.5% and back below $43/bbl) contributed to a softish day for markets on the whole with the S&P 500 (-0.18%), Dow (-0.15%), Stoxx 600 (-0.51%) and DAX (-0.76%) all ending the session in the red. Its worth noting though that volumes were generally 10-20% lower than the average depending on the index. Credit markets were probably the bigger underperformer yesterday. In Europe, after rallying to the tune of 5bps or so last week, the iTraxx Main gave back about half of that move in yesterday’s session, while across the pond CDX IG ended just over 1.5bps wider following a 7bp rally last week.
Speaking of credit markets, some of the more interesting news yesterday was in the new issue market where Unilever became the latest corporate to price a post ECB-CSPP announcement zero-coupon bond in Euros (4y bonds). The bonds were priced at a discount so as to yield a miniscule 12bps. This comes after Sanofi priced 3y bonds last month also with a zero coupon and it feels like it won’t be the last.
That news came despite it being a broadly weaker day across rates markets. 10y Bund yields edged another 3bps higher yesterday and at 0.263% is now some 19bps off the early April lows. It was a similar story in the US Treasury market where the benchmark 10y ended up 2.5bps higher in yield at 1.914% – the first time it’s closed above 1.9% since March 25th.
Just on that economic data, in the US we learned that new home sales declined unexpectedly last month (-1.5% mom vs. +1.6% expected) to an annualised rate of 511k. In fairness this actually masked what was actually 26k of upward revisions to the prior two months so the headline probably looked softer than the overall details revealed. Meanwhile, the other data released in the US was another regional manufacturing survey, this time from the Dallas Fed. Data for this month was weaker than expected however at -13.9 (vs. -10.0 expected), a slight weakening from the -13.6 in the prior month. Closer to home, the only data of note came out of Germany where the IFO business climate survey was little changed from March at 106.6 (and below hopes for a rise to 107.1). The current assessment component declined 0.6pts to 113.2 which was offset by a modest 0.4pts gain in the expectations component to 100.4
Turning to the micro and a quick update of where we’re standing on the earnings front (ahead of a busy rest of the week calendar). As it stands with 138 S&P 500 companies having reported, 104 have beat EPS consensus (75%) at a weighted average beat of 2.6%. Meanwhile 82 companies have beaten revenue estimates (59%) at a more modest 0.2% average beat. The bottom-up EPS for the index is now over 8% lower on a YoY basis, while DB’s David Bianco made mention in his piece on Friday that analysts have cut their Q1 EPS estimates by a whopping 9.4% since January 1st – with this number likely to increase as we run further through reporting season. This was most evidenced by the Banks last week and looking ahead to Apple’s Q2 results today, the current EPS consensus estimate is $1.98 which has been marked down nearly 17% since the start of the year. So while earnings are tracking at their usual beat/miss ratio, this is being propped up by materially lower consensus earnings expectations while earnings are also down high single digits (in percentage terms) relative to last year.
Taking a look at the day ahead now, this morning in Europe it’s a fairly sparse calendar with only BBA loans data out of the UK of any interest. That all changes this afternoon however where we’ve got a packed afternoon for data in the US. The early release will be the first reads for durable and capital goods orders in March. The market is expecting a +1.9% mom headline durable orders print, and +0.9% mom core capex print, while our US economists are a little less optimistic at +1.0% mom and +0.7% mom respectively. Also due out today will be more housing market data in the form of the S&P/Case-Shiller house price index, along with the Conference’s Board’s leading index (expected to decline 0.4pts to 95.8), the flash services and composite PMI, and finally further regional manufacturing data in the form of the Richmond Fed manufacturing activity index. Away from the data there will be more Central Bank speak from the ECB with Constancio scheduled to speak, while BoE Deputy Governor Cunliffe is also due to speak today.
Earnings season kicks up another gear meanwhile with 50 S&P 500 companies set to report. The highlights look set to be Proctor & Gamble (before-market), AT&T (after-market), eBay (after-market) and of course Apple (after-market). Meanwhile, the highlight of the European calendar today will likely be results out of BP.
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