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Asia Jumps, Europe Stutters As Political Rumblings Return; Oil Nears $51

Global stocks were mixed to start the week, with Asian stocks higher, European stocks initially advancing then fading gains, while S&P futures are little changed after the biggest weekly drop since April (which for those keeping record was -0.4%). European shares, the euro and the pound all stumbled on Monday as rumblings in Spain, Britain and Brussels reminded investors that the region still has plenty of political uncertainty left in the tank.

Oil continued to rise amid short covering and the latest round of "pricing in" that cuts to crude supplies will be extended by up to 9 months when OPEC meets on Thursday. The pound initially fell as the UK threatened to quit talks on its departure from the European Union, however it has since regains most of the overnight losses.

In early trading, a one-month high for oil and bounce in the dollar triggered Asia's best session in weeks overnight but Europe struggled to maintain the momentum early on. Most Asian stocks and currencies benefitted from positive risk appetite with sentiment buoyed by Wall Street gains and the Indonesia upgrade which has sent local stocks on their best 2-day rally this year.

A rally in Tencent Holdings Ltd. helped send Hong Kong shares back toward a 22-month high. The Hang Seng China Enterprises Index jumped 1 percent while the Shanghai Composite slipped 0.5 percent. Japan’s Topix rose 0.5 percent. The Kospi and won rally despite yet another North Korean missile test on Sunday, which however has now faded largely into the background. Australian bond futures drift lower; 10-year yield briefly climbs three basis points to 2.50%.

Also in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan enjoyed its best session in a month helped by gains in Australia and Hong Kong stocks despite a mass downgrade of bank credit ratings in the former and new property market regulations in the latter. Chinese stocks were the only laggards in the region with mainland indices ending 0.5 percent in the red as concerns also simmered about another dip in the economy there. The bounce in Asian stocks this year has helped MSCI's closely followed emerging stocks index notch up gains of more than 17 percent compared to 8 percent for the wider 'all-world' index which is near a record high.

European bourses have been mixed with no material moves except for Spain where government bonds, stocks underperform most European peers after Socialists elected a party leader who is a more strident critic of Prime Minister Mariano Rajoy and opposed his party’s 2016 abstention to let Rajoy govern.

"Last week was all about U.S. uncertainty but we have had a reminder that Europe still has plenty of uncertainty too," said Alvin Tan at Societe Generale.

Spanish 10Y spreads to German bonds rose as much as 4bps to 125 bps on the news, while the Ibex 35 index -0.3%, versus an unchanged print for the Stoxx Europe 600 index.

“There are new uncertainties in the Spanish market,” said Javier Ferrer, head of global rates at Ahorro Corp. brokerage in Madrid. “Basically the question is what road will the Socialist party take, now that Pedro Sanchez returns as leader? You can see the reaction in the Spanish spread to Italian bonds.... We’re not going to see him attempt any complex changes nationally in the short term, because he’ll have to try to fix the problems of his party first. But over the medium term, yes, would could see changes -- even the Socialists trying to call a vote of confidence in this government.”

Another familiar European story was also back on the radar. Euro zone finance ministers and the IMF will meet later on Monday to try and nail down a deal on Greek debt relief that balances the IMF's demand for a clear "when and how" with Germany's preference for "only if necessary" and "details later". Without the loans, Athens would be likely to default whereas country wants a deal to help it return to market financing next year when its latest bailout, the third since 2010, ends in mid-2018.

Overall, the Stoxx Europe 600 Index was little changed after the worst week since November.

Looking at the bigger picture, oil advanced a fourth day in the build-up to OPEC’s gathering in Vienna this week, as speculation grew that production cuts will be extended into next year. WTI rose just shy of $51, while Oman's Al Rumhy said that oil can reach $55 if the oil cuts are extended, as they will be for the simple reason that the first 6 month cut failed to rebalance the market. The hope now is that a second, 9 month cut will succeed.

U.S. Treasuries were also better offered. The cable was volatile amid hardening Brexit rhetoric. On Monday morning, the PBOC injected a modest net 30 billion yuan in open market operations, strengthens daily CNY reference rate; 7-day repo rate drops 14 basis points.

Futures on the S&P 500 fell 0.1 percent after the underlying gauge increased 0.7 percent Friday.

As Bloomberg writes this morning, the relative tranquility across markets suggests investors are betting that global growth can weather political turmoil in the U.S. and Brazil, even as the world’s largest economy edges closer to another increase in borrowing costs. Meanwhile, Trump is trying hard to deflect attention from the domestic political crisis surrounding former FBI Director James Comey. Earlier today trump arrived in Israel after spending two days in Saudi Arabia where he signed arms contracts totallying $350BN over ten years, before continuing on to Europe.

“With Trump on a tour, the hope is we see less news over the next couple of days -- a chance for the waters to settle,” said Andrew Sullivan, a managing director for sales trading at Haitong International Securities Group Ltd. in Hong Kong. “It’s another overhang on the market. We’ve got all these markets trading at highs and people don’t want to miss out, but they don’t want to be caught out.”

In FX, the Bloomberg Dollar Spot Index fell less than 0.1 percent after its worst weekly performance since July. The pound lost 0.3 percent to $1.3003. The euro added 0.1 percent to $1.1218. The Russian ruble strengthened 0.6 percent.

In rates, 10Y Treasury yields rose two basis points to 2.25 percent following their best week in a month. Benchmark yields in the U.K. were little changed at 1.09 percent.

For those who missed it, here are the main news from the weekend:

  • Panel officials announced on Friday that Former FBI Director Comey is to testify at the Senate intelligence committee after Memorial Day, while there were also reports that Comey now thinks that President Trump tried to influence him according to a source.
  • Source reports indicate that Germany is said to see no Greek payout at this week's Eurogroup meeting.
  • Spain's main opposition Socialist party (PSOE) voted for former party leader Pedro Sanchez as its leader by a projected margin of 49.6% vs. 40.2% for Susana Diaz. Focus now turns to the party Congress on June 16-18th which is aimed at uniting the party. Ideologically, Sanchez is closer than Diaz to Podemos, and the PSOE and Podemos together control 156 seats in parliament, more than the PP, which would enable them to form a blocking minority.YouGov/Sunday Times poll showed the Conservatives at 44% (-5pts) and Labour at 35% (+4pts), while the latest Survation UK election poll showed Conservatives at 43% (-5pts) vs. Labour at 34% (+5pts).
  • UK Brexit Minister Davis stated that UK will quit Brexit talks unless EU drops its demand for a divorce bill of as much as EUR 100bIn. Brazilian President Temer stated that an audio recording at the centre of a bribery scandal was doctored and therefore asked the Supreme Court to suspend investigations on him until the authenticity of recording can be verified.
  • North Korea conducted another missile test over the weekend which landed off its east coast, with the missile said to be a medium range missile but with a shorter range than its past recent launches. There were also reports that Kim Jong-Un ordered the deployment of a 'missile for combat', while a South Korea Unification Ministry official stated that cut-off between South and North Korea is not desirable for stability and added they are to consider approving contacts and visits to North Korea.

On Monday, Agilent, Nordson and Booz Allen Hamilton are among companies set to report earnings. Further in the week, money managers will be scrutinizing minutes released this week from the Federal Reserve’s latest meeting to gauge the chances of a rate hike next month.

Bulletin headline summary from RanSquawk

  • European bourses have reversed their earlier gains (Eurostoxx 50 -0.1%) with losses in tech names offsetting the rise in the materials sector
  • Mixed flow in the FX markets this morning, with some light inferences on how the week may play out from here.
  • Looking ahead, highlights include Fed's Kashkari and Harker

Global Market Snapshot

  • S&P 500 futures little changed at 2,381.70
  • STOXX Europe 600 up 0.2% to 392.35
  • MXAP up 0.8% to 151.92
  • MXAPJ up 0.8% to 496.05
  • Nikkei up 0.5% to 19,678.28
  • Topix up 0.5% to 1,567.65
  • Hang Seng Index up 0.9% to 25,391.34
  • Shanghai Composite down 0.5% to 3,075.68
  • Sensex up 0.5% to 30,619.98
  • Australia S&P/ASX 200 up 0.8% to 5,771.21
  • Kospi up 0.7% to 2,304.03
  • German 10Y yield rose 0.3 bps to 0.371%
  • Euro down 0.3% to 1.1170 per US$
  • Brent Futures up 1% to $54.14/bbl
  • Italian 10Y yield fell 1.1 bps to 1.844%
  • Spanish 10Y yield rose 1.1 bps to 1.59%
  • Gold spot down 0.1% to $1,254.69
  • U.S. Dollar Index up 0.3% to 97.38

Key Overnight Headlines from Bloomberg

  • U.K. threatens to quit Brexit talks unless EU drops its massive divorce payment demand
  • Conservatives 43%, Labour 34%, Liberal Democrats 8%: Survation/GMB poll
  • Clariant to Buy Huntsman Creating $14 Billion Chemical Giant
  • Trump Sticks to Script in Mideast, Trying to Turn Page on Russia
  • EU Discusses Brexit Position as U.K. Threatens to Quit Talks
  • Oil Extends Gain Toward $51 as Saudis See Output Curbs Into 2018
  • HNA Said in Talks to Buy Stake in Hong Kong’s Value Partners
  • Rupert Murdoch’s Grip on Power Put to the Test in Fox Upheaval
  • SoftBank’s Son Chases Boyhood Dreams With $100 Billion Fund
  • UCB Plunges Most Since 2008 on FDA Delay Osteoporosis Drug
  • Aegon to Divest Majority of U.S. Run-Off Businesses to Wilton Re
  • German April tax revenue rises 5.8%; economy ’solid’: Finance Ministry report
  • Saudi energy minister: All ’on board’ for 9-month supply cut extension
  • S&P downgrades 23 smaller Australian banks, cites risk of sharp property correction
  • North Korea conducted ballistic missile test on Sunday; Japan considers new sanctions
  • Ford CEO Mark Fields Said to Be Replaced by Hackett: Forbes
  • Goldman Said to Hire in Asia to Expand Quantitative Products: FT
  • Italy May Seek Damages From VW on Diesel Case: Corriere
  • Facebook to Speed Up Process of Removing Objectionable Posts

Asia equity markets shrugged off the geopolitical concerns from another North Korean missile test over the weekend, with markets mostly higher following the upbeat close on Wall St. last Friday. ASX 200 (+0.7%) was led by energy and mining names after WTI crude futures reclaimed USD 50/bbl and firm gains in Dalian iron ore futures. Nikkei 225 (+0.5%) remained dictated by JPY weakness, while Shanghai Comp. (-0.5%) and Hang Seng (+0.9%) were mixed after the PBoC resumed liquidity operations, although the amount was at a reserved CNY 40bIn injection. 10yr JGBs were lower with demand subdued amid gains in riskier assets and after the BoJ kept its Rinban operation on the light side, while the curve steepened amid mild underperformance in the long-end.

Top Asian News

  • Japanese Exports Record Fifth Straight Monthly Increase in April
  • A ’Mind-Boggling’ Reform Looms Over India’s $2 Trillion Economy
  • Cogobuy Sinks as Much as 27% Before Halting Trading in Hong Kong

It has been a Quiet start to the week in Europe with the economic calendar on the light side. Nonetheless, European bourses have reversed their earlier gains (Eurostoxx 50 -0.1%) with losses in tech names offsetting the rise in the materials sector. On a stock specific breakdown, among the outperformers this morning is Clariant, trading higher by -4% after announcing a USD 20bIn merger of equals with Huntsman. Elsewhere, National Grid shares have slumped some 15% as they go ex-div. Spanish bonds are on the back foot this morning in the peripheral space with Bonos wider by 4bps against the German benchmark, taking the spread to 124bps. Sanchez is seen as a hardliner who is likely to make life difficult for the PP government, who previously refused to cooperate with the governing minority by way of abstention in a confidence vote back in October. Mild softness in equities has kept Bunds afloat with the German curve showing modest steepening, led by the outperformance in the 2yr. This also comes ahead of tomorrow's auction, where Germany are looking to tap with a new EUR 5bIn Schatz.

Top European News

  • Sanctions No Downer for BlackRock Fund as Russia Plans Eurobond
  • Three Greek Debt-Relief Options Said to Be Weighed by Creditors
  • Italy’s Real GDP Projected to Expand 1% This Year: Istat
  • Paysafe Drops After Short Seller’s Comments on Seeking Alpha

In currencies, mixed flow in the FX markets this morning, with the Bloomberg Dollar Spot Index fell less than 0.1 percent after its worst weekly performance since July. The pound lost 0.3 percent to $1.3003. The euro added 0.1 percent to $1.1218. The Russian ruble strengthened 0.6 percent. Given the muted reaction to yet more missile tests in North Korea and Comey's testimony over alleged interference in FBI investigations stretching into next week, the risk mood is a little more relaxed this morning, and after a mild test on the downside, we see USD/JPY gravitating back towards 111.50. We see little to materially influence a major test on 111.00-113.00 as the broader range, but a push on 112.00 cannot be ruled out as we factor in much tight activity in the current market make up. GBP looks to be giving up some of its resilient tone this morning, and this is more likely down to the Brexit minister's (Davis) comments that the UK are ready to walk away from talks should a exit bill match the higher end of recent estimates. This was always going to be the initial sticking point, and here we are tailing off 1.3000 in Cable, while EUR/GBP is digging in its heals on the 0.8600 handle, but plenty of buying interest now anticipated into the mid 0.8500's.

In commodities, oil prices are in the spotlight this week, and it is fair to say that the market is expecting an extension to the output deal currently in place. Saudi Arabia are convinced that production levels are yet to hit inventory to a significant degree, but if prices are to hold onto, and build on current levels, then the 9 month stretch (out) is what will be required. WTI is now through USD51.00, while Brent has maintained the USD3.00 spread to trip USD54.00. The feel-good factor has spilt over into the leading metals market, led by Copper which is eyeing a move on USD2.60 again. However, Gold and Silver are also pretty steady this morning, so it is not a clear cut case of risk-on, as geopolitical concerns as well as the Trump saga rumble on in the background. Iraq says it has announced readiness to extend OPEC agreement, while Iran state that they have the potential to boost oil output capacity 3mln bpd.

Today's key economic events:

  • 8:30am: Chicago Fed Nat Activity Index, est. 0.1, prior 0.1
  • 10am: Fed’s Harker Speaks in Philadelphia
  • 10:30am: Fed’s Kashkari Speaks at Conference
  • 7pm: Fed’s Brainard to Deliver Keynote Address at Conference
  • 9:10pm: Fed’s Evans Speaks in Shanghai