After breaking a multi-year stretch of 9 daily record highs in the Dow Jones, overnight global markets saw some early weakness with Asian stocks retreating after BOJ chief Kuroda dashed hopes for so-called helicopter money, triggering yen’s steepest rally in a month and pulling the Nikkei lower by 1.1%. This however did not last long, and around the European open the traditional ramp in the USDJPY helped European equities shrug off early downside, while US equity futures have already recovered half of yesterday’s losses.
In another case of bad news is good news, Europe indices were led higher by the FTSE 100, which strengthened in the wake of terrible UK PMIs, which saw the Service PMI tumble from 52.3 to 47.4, missing expectations and printing at the lowest in 87 months, while the manufacturing PMI dropped from 52.1 to 49.1, the worst in 41 months. The poor figures increased the call for stimulus from the Bank of England, and pushed the FTSE 100 higher by 0.3%.
“The concern about global central banks withdrawing from providing further stimulus definitely affects markets across the board,” Ang Kok Heng, chief investment officer at Phillip Capital Management told Bloomberg. “That’s why we see some investors selling down their assets. Profit-taking that happened in the U.S. also triggered selling.”
Equity markets had been on a roll, gaining more than $4.5 trillion in three weeks amid speculation central banks in Asia and Europe will add stimulus to stoke inflation and growth, while positive surprises in U.S. corporate results also supported the rally. The gains drove global stock valuations to a one-year high, leaving the securities vulnerable to disappointments on the policy and earnings fronts. A growing number of officials at the Bank of Japan are said to be concerned about the use of massive monetary easing and traders are pricing in a growing likelihood of a U.S. interest-rate increase this year.
As noted yesterday, with conventional valuations already massively stretched, and allowing little upside to stocks, analysts are increasingly pointing to the last “model” they have, the “Fed Model”, and namely the equity risk premium upside as implied by near record low global bond yields: “Extraordinary monetary policy has compressed risk premia in global fixed income markets, but it has not done the same for equities,” Citi says in global equity strategy note. “We estimate that the current ex-ante global equity risk premium is 5.3%, which is high compared to the historic median of 3.0%”
Meanwhile, ignoring the soft tone in global stocks, US equity futures recovered half of their yesterday’s losses, rising 0.2% after the index lost 0.4% in the last session. So far, 115 of the benchmark’s members have
released quarterly results and 81 percent of those beat analysts’
profit estimates. Earnings are nonetheless falling for the fifth quarter
in a row, the longest streak since 2009.
U.S. Treasuries stabilized this week with the 10-year yield hovering around 1.55 percent. That compares with an all-time low of 1.32 percent on July 7. Ten-year sovereign bonds in Australia and New Zealand extended their weekly gains on Friday as prospects for monetary easing bolstered demand for the securities. Australia’s yield dropped by seven basis points this week to 1.91 percent and New Zealand’s slid 14 basis points to 2.22 percent.
Market Snapshot
- S&P 500 futures up 0.2% to 2162
- Stoxx 600 little changed at 340.7
- FTSE 100 up 0.3% to 6718
- DAX down less than 0.1% to 10149
- German 10Yr yield up 1bp to -0.01%
- Italian 10Yr yield up 1bp to 1.26%
- Spanish 10Yr yield up 2bps to 1.15%
- S&P GSCI Index down 0.5% to 349.2
- MSCI Asia Pacific down 0.5% to 134
- Nikkei 225 down 1.1% to 16627
- Hang Seng down 0.2% to 21964
- Shanghai Composite down 0.9% to 3013
- S&P/ASX 200 down 0.3% to 5498
- US 10-yr yield up less than 1bp to 1.56%
- Dollar Index up 0.02% to 97.02
- WTI Crude futures down 0.6% to $44.48
- Brent Futures down 0.2% to $46.09
- Gold spot down 0.5% to $1,325
- Silver spot down 0.6% to $19.67
Top Global News
- Goldman Said to Plan Buyout Fund Wielding Up to $8 Billion: Some employees may participate, helping align interests
- Boeing Sees $2.1 Billion Cost on 787 Dreamliners, Air Tanker: Dimming prospects for 747 freighter also contribute to loss
- PayPal and Visa End Battle, Unveiling Pact on Fees and Data: PayPal agrees to stop steering business away from Visa, Visa offers some certainty on what fees it will charge PayPal
- Brexit Vote Wreaks Havoc on U.K. Economy, Flash Estimates Show: Purchasing Managers’ Index combining flash estimates of services and manufacturing slumped to 47.7 in July, its lowest since April 2009
- Schlumberger Joins Halliburton in Calling Bottom of Oil Downturn: Paal Kibsgaard says worst is over for oil services industry
- Trump’s America Grows More Ominous Over 13-Month Run
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Looking at regional markets, we start in Asia which opened in negative territory and tracked US losses following the ECB’s decision to hold fire on any further action. ASX 200 (-0.3%) and Nikkei 225 (-1.1%) both traded in negative territory with the latter underperforming in reaction to yesterday’s BoJ Kuroda comments regarding the lack of interest in helicopter money, whilst reservations over current policy measures from some current BoJ members also dampened sentiment. Elsewhere, Chinese markets were weighed by renewed reports of debt concerns in the property sector and SMEs as the Hang Seng (-0.2%) & Shanghai Comp (-0.9%) completed the negative picture. Finally, 10yr JGBs have seen muted price action overnight in spite of the risk-averse sentiment in Japanese equities.
Top Asian News
- Singapore Puts 1MDB-Linked Banks on Notice: We’re Not Done: Regulator says it’s still examining other financial cos.
- China Sovereign Fund Posts Loss on Commodities, Negative Rates: CIC had loss of 2.96% in year ended Dec.
- Hong Kong Bears Pile Record Short Bets on China Consumer Stocks: Bearish wagers in Tingyi, Want Want have risen to record
- Yen Bulls Dig In Seeing Fed Outweigh BOJ Helicopter Money Debate: Strategists turned bullish on the yen for the first time in more than a year
- Pokemon Go Debuts in Japan as Viral Monster-Hunt Game Comes Home: Game is available for download in Android, Apple stores
- Samsung Invests $449 Million in Buffett-Backed Carmaker BYD: Chinese co. to use proceeds from placement to fund battery production
European equities shrugged off early downside to head into the North American crossover in positive territory. Europe indices were led higher by the FTSE 100, which strengthened in the wake of downbeat UK PMIs as the poor figures increases the call for stimulus from the data dependent Bank of England. However, gains have been capped amid single stock earnings, with Banca Sabadell and Dassault Aviation among the worst performers in Europe. In Fixed income markets, Bunds have pared the entirety of its gains amid the better than expected PM! readings from Germany and France, while the German 10-yr benchmark has also been weighed by the rise in yields. In tandem with the move higher in equities amid expectations for easing, Gilts outperform their European counterparts in the wake of the aforementioned data.
Top European News
- Vodafone Service Revenue Beats Estimates on European Rebound: Shares gain after organic service revenue increases 2.2%
- ‘Sluggish’ Euro Area Sees Initial Brexit Fallout in Services: PMI for service sector slipped to to 52.7, an 18- month low
- Syngenta Says U.S. Talks Over ChemChina Bid ‘Constructive’: CEO confident in closing the transaction by end of the year
- Anglo American Coal Bidders Said in Talks for Acquisition Loans: Coking coal mines in Queensland may fetch up to $1.5 billion
In FX, The yen fell 0.4 percent to 106.20 per dollar. It surged 1 percent in the last session as Kuroda, in a BBC Radio interview recorded on June 17 and aired on Thursday, said there was no possibility of introducing helicopter money, which would involve the BOJ’s direct financing of government spending. Kuroda’s “comments will disappoint investors who had been selling the yen in anticipation of the Bank of Japan announcing helicopter money at its meeting next week,” said Jasper Lawler, a London-based analyst at CMC Markets Plc. “After the failure of its current quantitative easing program to boost inflation, helicopter money is one of the few remaining tools in the Bank of Japan’s arsenal,” he said, noting that Kuroda may have changed his opinion since he made the remarks on June 17.
The Bloomberg Dollar Spot Index was poised for a third weekly gain as signs of improvement in the U.S. economy revive expectations for interest-rate increases. A report on Thursday showed sales of previously owned homes climbed to a nine-year high and futures traders are pricing in a 45 percent chance the Federal Reserve will increase borrowing costs by December, up from 12 percent at the start of the month.
The yuan strengthened 0.1 percent, headed for its first weekly gain in seven weeks amid speculation the central bank was seeking to limit losses. Chinese Premier Li Keqiang said Friday the nation’s economy is growing steadily and the exchange rate will be kept stable at a reasonable level. The Australian and New Zealand dollars were headed for weekly declines amid speculation central banks in both countries will cut interest rates from record lows. The Reserve Bank of New Zealand said Thursday further monetary easing is probably needed to boost inflation, while the Reserve Bank of Australia noted on Tuesday that the economy probably cooled last quarter and inflation is set to remain weak. The Aussie and the kiwi retreated at least 1.4 percent this week, the biggest declines among 16 major currencies.
In commodities, The Bloomberg Commodity Index fell for a sixth day, its longest losing streak in three months. Oil dropped to a two-month low as the U.S. heads toward the end of its summer-driving season with ample crude and motor fuel stockpiles. The price dropped 0.8 percent to $44.40 a barrel in New York. “It’s an inventory story,” said Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney. “The summer drive-time hasn’t been as strong as some had expected. There’s more supply coming on and there are indications that the strength of the global economy is not there.”Copper fell 0.6 percent, trimming its weekly advance to 0.5 percent, and nickel retreated 1.8 percent from an 11-month high on the London Metal Exchange, where the start of trading was delayed owing to a technical problem. Gold fell 0.6 percent, set for a second weekly loss. Iron ore in China had its biggest weekly drop in two months, sliding 7.2 percent on concern a global supply glut will endure.
On today’s US calendar we’ll get the flash manufacturing PMI which is expected to nudge up to 51.5 from 51.3. On the earnings front we’ve got just 10 S&P 500 companies due to report including American Airlines and General Electric.
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Bulletin Headline Summary from RanSquawk and Bloomberg
- Downbeat UK PMI’s dictate play in Europe, sending GBP/USD below 1.3150 and supporting FTSE and Gilts
- USD/JPY retakes 106.00 as participants await official details of any fiscal stimulus package
- Highlights include US PMI’s, Canadian Retail Sales and CPI as well as earnings from General Electric
- Treasuries lower in overnight trading, European equities rise, Asia’s drop along with WTI crude oil and gold; in Japan it seems as if hopes for “helicopter money” are for naught.
- The U.K.’s decision to leave the European Union inflicted an immediate blow on the economy as business activity shrank at its fastest pace since the last recession seven years ago as a gauge of the private-sector economy plunged to 47.7
- Germany’s manufacturing output reached the highest level since early 2014 in a survey of purchasing managers this month as the economy was supported by a strong labor market and increasing demand
- Mario Draghi is part of a growing club of central bankers who are just fine with admitting they’re uncertain what’s going on right now — and that’s no barrier to action
- The cost of trading Europe’s corporate debt is higher than at any time since April 2013, according to a gauge of the difficulty traders have in buying and selling, likely a result of Mario Draghi’s buying spree
- Don’t count on the world’s No. 2 economy to ride to the rescue. That was the message from China’s Premier Li Keqiang on the eve of a gathering of finance chiefs from the top emerging and developed economies
- China’s weakening currency has triggered an increase in the amount of cash leaving the country, to $49 billion in June compared to $25 billion in May, according to Goldman Sachs estimates
- Goldman Sachs is about to start raising money for its first private-equity fund since the financial crisis, potentially gathering $5 billion to $8 billion, according to a person with knowledge of the matter
- HSBC Holdings is selling $2.7 billion of loans as part of a plan to cut risk-weighted assets by $290 billion over the next three years, according to two people with knowledge of the sale
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US Event Calendar
- 9:45am: Markit US Manufacturing PMI, July P, est. 51.5 (prior 51.3)
- 1pm: Baker Hughes rig count
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DB’s Jim Reid concludes the overnight wrap
In markets we’re all obsessed with the next round of global stimulus at the moment but the more markets rally and the more the immediate post Brexit fall out risk recedes the less in a hurry central banks seem to be. Last week the BoE held steady while it reviewed the landscape and yesterday the ECB replicated the move. It’s fair to say the above two are likely to ease further in 2 weeks and 7 weeks respectively but stable markets confuses the issue a little. Also confusing yesterday were comments from Japan. In an interview on BBC’s Radio 4, the BoJ’s Kuroda ruled out the idea of using helicopter money, or directly underwriting the budget deficit in a bid to combat deflation. Kuroda said instead that the BoJ has ‘three options with quantitative and qualitative easing with negative interest rates’ and that these current policies can be expanded if needed. The Yen immediately strengthened nearly 2% with the news before there was a bit of confusion in markets as it turned out that the interview was actually recorded on June
17th and prior to Bernanke’s visit this month which of course reignited the helicopter money chatter. Anyway the 1 week countdown to the BoJ meeting starts today.
Meanwhile in terms of the ECB, Draghi did seem more concerned about Italian banks than Brexit but he helped the whole banking sector by suggesting that a state backstop was a ‘very useful’ way of dealing with NPLs. He also suggested that there was room to offer state aid thus offering some confidence that a deal in Italy can be done. I was at a big DB macro client dinner on Wednesday night and it’s fair to say the question that came up most was how the Italian banking issues would be resolved so this is a big theme at the moment. Japan was probably the next most discussed topic. Brexit was only discussed a little and China not at all. So this shows the biases at the moment.
Back to Draghi, in terms of further monetary policy he certainly left the door ajar without pre committing. Our economists’ expectations remain unchanged. They feel that post the Brexit vote there are new downside risks to the economic recovery and the normalization of inflation. They don’t think a deposit rate cut is appropriate given the pressures on banks. Instead they expect a 9-12 month extension of the timeframe of the QE programme at the next meeting in September as well as complementary measures to ensure this is credible by making sufficient assets eligible for the programme.
In terms of the market reaction, the bigger moves came in financials and specifically peripheral banks on the back of those NPL comments. The Stoxx 600 (-0.07%) closed marginally lower although the Euro Stoxx Banks index did rise +0.89%. Financials credit also outperformed with the iTraxx Senior and Sub Fins indices 5bps and 14bps tighter respectively, while iTraxx Main closed 2bps tighter.
Back to post Draghi markets and the Euro ended fairly unchanged, while sovereign bond markets were modestly firmer at the margin. Across the pond the tone in markets appeared to be more dictated by a couple of disappointing corporate earnings reports, namely Intel and Southwest Airlines. A drop in energy stocks on the back of a 2% fall for Oil also helped to drag markets lower. The S&P 500 closed -0.36% while the Dow was -0.42%. Amazingly that’s the first daily decline for the Dow since July 7th.
Looking forward, today is global PMI day with the big focus on Europe where we should see the first signs of how Brexit has impacted the wider services and manufacturing sectors in the Euro area. Importantly, the UK will also release its data. Current consensus is for a 3.4pt drop in the UK flash manufacturing print to 48.7, while the services reading is expected to tumble 3.5pts to 48.8. The composite is expected to edge down to 49.0 from 52.4 as a result. The Euro area indicators are also expected to weaken, although not quite to the same extent. The manufacturing and services prints are expected to fall to 52.0 and 52.3 respectively which if true would represent falls of 0.8pts and 0.5pts respectively.
Before we get there, let’s take a look at markets overnight where that weaker tone on Wall Street appears to be setting the pace in Asia. The Nikkei (-0.90%) in particular has dropped reflecting that rally for the Yen yesterday, while the Hang Seng (-0.35%), Shanghai Comp (-0.41%) and ASX (-0.31%) are also in the red. US equity index futures are little changed, with weaker than expected earnings after the closing bell from AT&T and Starbucks offset by quarterly reports from Schlumberger and PayPal. Meanwhile an article released in the Nikkei newspaper suggests that Finance Ministry officials in Japan have briefed PM Abe that a stimulus package worth 20t-30t yen is possible if it includes government guarantees and other off-budget measures.
Before we look at the day ahead, a quick wrap up of yesterday’s economic data which, in a nutshell, was a bit of a mixed bag. In the US initial jobless claims continue to stay at low levels with the 253k print for last week down 1k from the week prior and so taking the four-week average down to 258k. In the factory sector the Philly Fed manufacturing survey was disappointing at the headline after printing at -2.9 (vs. +4.5 expected). That represented a 7.6pt decline from June although we did see improvements in both new orders and shipments components. Meanwhile in the housing market existing home sales rose unexpectedly in June (+1.1% mom vs. -0.9% expected). The FHFA house price index rose a slightly below market +0.2% mom in May (vs. +0.4% expected). The final data came in the form of the Conference Board’s leading index which rose +0.3% mom (vs. +0.2% expected) in June.
Prior to this in Europe we learned that business confidence rose marginally in France this month (+2pts to 102). In the UK retail sales were a little bit softer than expected last month. The ex-fuel sales reading declined -0.9% mom which was three-tenths worse than expected. The statistics office reported that the survey period for the data was between May 29th and July 2nd so some post-Brexit impact will have been captured.
In terms of the day ahead, as we noted earlier the initial focus in Europe this morning will be on those flash July PMI’s where in order of timing we’ll get the data from France, Germany and the Euro area followed by the UK. This afternoon in the US we’ll also get the flash manufacturing PMI which is expected to nudge up to 51.5 from 51.3. On the earnings front we’ve got just 10 S&P 500 companies due to report including American Airlines and General Electric. We’ll also get reports from 5 Stoxx 600 companies.
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