The main risk over the weekend was that markets, which have now dropped for three consecutive weeks the longest negative streak since January, would focus their attention on the latest batch of negative Chinese economic news released over the weekend, which missed expectations across the board, most prominently in Retail Sales (10.1% vs. Exp. 10.6%, down from 10.5%) and Industrial Production (6.0% vs. Exp. 6.5% down from 6.8%), and following Friday's disappointing new credit loan data, would sell off as the Chinese slowdown once again becomes a dominant concern. However, after some initial weakness, the risks were all but gone when first the USDJPY jumped on another round of deflationary Japanese economic data (PPI Services -4.2%, Exp. -3.7%) which led to renewed hopes of more BOJ easing and a jump in the USDJPY and thus US futures.
Shortly thereafter a bearish report on oil by Goldman was misreported as bullish on oil prices (Goldman explicitly stated that the global rebalancing is taking longer than expected, but recent supply disruptions have taken off more oil from the market than expected, as a result of which Goldman cut its 2017 forecast prices while pushing up near-term expectations, a move that will also assure that 2017 prices are lower as more near-term production comes online.
With few upside anchors, traders and analysts quickly focused on oil as the driver of risk on strength: "The firmer oil price is helping emerging-market equities today despite the weaker China data over the weekend," said Michael Wang, a strategist at hedge fund Amiya Capital LLP. "Oil is being driven by what’s happening in Nigeria at the moment - that’s changed sentiment towards Brent and has brought an expected recovery forward,” said John Meyer, an analyst at broker SP Angel Corporate Finance LLP in London. “Rising oil prices tend to support the commodities complex.”
As a result of the confusion, Brent rose to a six-month high, leading a rebound in commodities and boosting the ruble and mining companies, as supply disruptions in Nigeria added to production woes, while WTI was trading above $47 for the first time since November. Precious metals rallied with aluminum and commodity producers climbed, while almost all of the other industry groups in the Stoxx Europe 600 Index fell. Irish bonds advanced, outperforming their euro-area peers, while the Polish zloty strengthened after favorable reports from Moody’s Investors Service. Asian stocks rose from a one-month low.
And so, after last week's US market losses and renewed recession concerns, the selloff was halted courtesy of the pickup in raw-materials prices which, as Bloomberg wrote, provides support for global equities after about $1.8 trillion was wiped off the value of the securities in the first two weeks of May amid weaker economic data and disappointing earnings reports.
"Concerns over the strength of the global economy are back on investors’ minds," said Jasper Lawler, a London-based analyst at CMC Markets Plc. "The resources and oil sectors have been outperforming since the February low and both of them are performing OK today. But they need to continue to outperform for us to have a sustained rally."
Elsewhere, China’s central bank issued a weekend statement saying monetary policy would continue to support growth, after data on new lending, retail sales, industrial production and fixed-asset investment missed economists’ estimates. A Friday report showing a jump in American retail sales bolstered the case for the Federal Reserve to raise interest rates.
Across global stock markets, the Stoxx Europe 600 Index declined 0.4 percent, falling for a third time in four days. German and Swiss markets were among those shut for the Whit Monday holiday, and volume of shares changing hands was about 45 percent lower than the 30-day average. Almost all industry groups in the Stoxx Europe 600 Index dropped after Chinese reports on new lending, retail sales, industrial production and fixed-asset investment missed economists’ estimates. The volume of Stoxx 600 shares changing hands was 44 percent lower than the 30-day average as German and Swiss markets were among those shut for a holiday
The MSCI Emerging Markets Index added 0.2 percent after falling as much as 0.4 percent. Benchmark gauges in Russia, Poland, South Africa and the Philippines climbed at least 0.9 percent. Shenzhen and Hong Kong stocks climbed amid speculation the start date of an exchange trading link between the two cities will be announced this week.
Futures on the S&P 500 Index expiring next month added 0.1% after the gauge completed a third weekly decline, its longest streak since January. Announced stock buybacks dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show. Is the buyback spree officially coming to an end?
Global Market Snapshot
- S&P 500 futures up less than 0.1% to 2045
- Stoxx 600 down 0.4% to 333
- FTSE 100 down 0.3% to 6121
- S&P GSCI Index up 0.9% to 364.9
- MSCI Asia Pacific up 0.4% to 126
- Nikkei 225 up 0.3% to 16466
- Hang Seng up 0.8% to 19884
- Shanghai Composite up 0.8% to 2851
- S&P/ASX 200 up 0.6% to 5359
- US 10-yr yield up 1bp to 1.71%
- German 10Yr yield down less than 1bp to 0.12%
- Italian 10Yr yield up less than 1bp to 1.48%
- Spanish 10Yr yieldunchanged at 1.6%
- Dollar Index up 0.02% to 94.63
- WTI Crude futures up 2% to $47.13
- Brent Futures up 1.9% to $48.74
- Gold spot up 0.7% to $1,282
- Silver spot up 1.2% to $17.32
Top Overnight News
- Konecranes Soars After Deal to Buy $1.3 Billion Terex Unit
- Uber China Rival Didi Said to Consider U.S. IPO in 2017
- Oil Climbs to Highest Since November as European Shares Retreat
- Fed May Push Back Rate Hike With Brexit, U.S. Election: Pimco
- Lawsuits Mount as Energy Transfer’s Williams Takeover Unravels
- Saudi Arabia, Bahrain Ratings Cut by Moody’s on Lower Oil Prices
Looking at the overnight regional markets, Asia shrugged off the early cautious tone from Friday's losses on Wall Street and poor Chinese data over the weekend, with Nikkei 225 (+0.3%) initially outperforming on reports that PM Abe will postpone the April 2017 sales tax hike despite Chief Cabinet Secretary Suga later denying these claims. Japanese exporters were also bolstered by JPY weakness amid increased hopes for BoJ action after declining PPI figures, however the Nikkei pared gains as JPY reclaimed some ground against the USD. ASX 200 (+0.6%) was led higher by the health care sector after PM Turnbull announced a resolution to the funding dispute with pathologists. Shanghai Comp (+0.8%) was in positive territory Industrial Production, Retail Sales & lending figures missing expectations as the data increases hopes for future measures. 10yr JGBs saw subdued trade with prices in mildly negative territory amid the risk-on sentiment in Japan with participants side-lined ahead of this week's key Japanese GDP data and the upcoming 5yr/20yr bond auctions.
Top Asian News
- China Slowdown Shows Debt Addiction Will Be Tough to Shake: Industrial output, retail, investment all missed estimates
- Singapore Home Sales Fall as Mortgage Curbs Cool Housing Demand: Developers sold 745 units last month versus 843 in March
- Bank of Singapore Sees Asia Rich Shift to Paying Fees for Advice: Wealth managers to rely less on transaction-based fees
- Thailand’s Economy Expands More Than Expected in First Quarter: 1Q GDP Expands 3.2% y/y vs est. +2.8%
- Emerging Currencies at March Low on Rallying Dollar, Weak China: S. Korean won leads decline followed by Malaysia’s ringgit
- Bonds Trounce Stocks as Aussie Yield Latest to Drop to a Record: Australian 10-year bond yield drops to record 2.22%
- Uber China Rival Didi Said to Consider U.S. IPO in 2017: Didi said to raise $3 billion in current round of funding
- Konecranes Buys Terex Unit for $1.3 Billion After Merger Dropped: Zoomlion interested in buying remaining Terex business
In Europe, the week has kicked off in a subdued fashion in terms of both newsflow and volumes with much of Europe away for Whit Monday. The European equity indices that are open this morning (with the likes of DAX and SMI closed) have spent the morning in the red, weighed on by the downside seen in the US on Friday, combined with the miss on Exp. seen from Chinese data over the weekend Despite the negative trade seen in much of Europe, the energy and materials sectors trade in the green, with the former benefitting from the upside seen in WTI and Brent. Fixed income markets have also been impacted by low liquidity, with Bunds relatively unchanged on the day. However, today has seen the long end underperforming, with the steepening in the yield curve attributed by some to the upside seen in oil.
Top European News
- Philips Lighting IPO Could Raise as Much as $1.1 Billion: To sell stock at EU18.50-EU22.50 a share, values business at as much as EU3.38b, expected to start trading May 27
- Telecom Italia Raises Cost-Cut Target to $1.8 Billion by 2018: Almost tripled its target for reducing expenses to EU1.6b by 2018; cuts will include EU800m in operating costs and EU800m in capital spending
- Lonmin Turns Cash-Positive as Cost Cuts Meet Higher Platinum: Net cash was $114m at March 31, compared with net debt of $185m at Sept. 30; has cut 5,400 jobs to stay alive
- ICAP to Become NEX Group to Begin Life After Voice Broking: Will be called NEX once it completes the sale of its voice- broking business to Tullett Prebon, transforming itself into a specialist in electronic markets and post-trade services.
- Carney Defying Brexit Critics Sees U.K. in Early 1990s Quandary: Defended the Bank of England against critics furious at his warnings about the dangers posed by a European Union exit; British Business Sees Brexit Effect as Growth Forecasts Cut
In FX it is a very quiet start to the week, with plenty of data ahead. The Bloomberg Dollar Spot Index held near its highest close since March as the greenback gained 0.3 percent versus the Japanese yen. U.S. retail sales climbed in April by the most in 13 months and a gauge of consumer confidence surged in early May to an almost one-year high, reports showed Friday. Perhaps due to market holidays in Europe, both Asia and early London have seen some extremely range bound trade in the FX majors, but the fact that we have seen limited follow through from the strong US retail sales number on Friday suggests the USD may be in for some consolidation ahead of the FOMC minutes on Wednesday.
AUD/USD has found a base in the mid .7200's ahead of the RBA minutes in the overnight session ahead, but USD/CAD has seen limited downside despite WTI piercing $47.0. EUR/USD lows under 1.1300 have held in today's session so far, as has the Cable zone from 1.4350-20, though we did eat into this a little either side of the weekend. EUR/GBP is threatening to push higher though, but this is more likely to send EUR/USD higher again rather than Cable lower in the current climate. USD/JPY is a trade many are staying away from given the erratic risk sentiment in the market. The mid 108.00's holding for now, but the quest for 110.00 held off as equities struggle.
In Commodities, Brent rose 1.8 percent to $48.70 a barrel at 10:48 a.m. in London, reaching the highest since November, after Friday’s 0.5 percent loss. China’s refineries processed crude at record rates in April, helping ease a supply glut as the number of active rigs in the U.S. declines. West Texas Intermediate climbed 1.8 percent to $47.06. Goldman Sachs raised its oil-price forecast for the second half to $50, from a March estimate of $45.
Aluminum rose 0.3 percent in London after weekend data showed China’s primary output of the metal slipped 1.2 percent in April from a year earlier. Gold added 0.6 percent after data showed holdings in exchange-traded funds increased to the highest since 2013. Silver gained 1.1 percent. Platinum gained 0.3 percent to $1,054.92 an ounce as the industry gathered in London for the annual Platinum Week meeting. The metal may climb 20 percent by the end of next year, according to a Bloomberg survey of 12 traders and analysts.
It’s a particularly quiet start to the week today with no data of note due out of Europe and just Empire manufacturing and the NAHB housing market index of note in the US session this afternoon.
Overnight Media Digest from Bloomberg and RanSquawk
- European market closures for Whit Monday have led to subdued trade in the region with equities lower in what has been a relatively quiet session
- WTI crude futures have reclaimed USD 47.00 while Brent eyes USD 49.00 alongside GS backtracking on some of their bearish oil calls
- Looking ahead, highlights include US Empire Manufacturing Data and Fed's Kashkari (Non Voter, No Stance)
- Treasuries slip during overnight trading, led by 2Y, with rise in Asian equities amid report Japanese Prime Minister Abe will postpone a 2 percentage point increase in the sales tax and Chinese data missed estimates, creating the possibility of more stimulus.
- China’s run of disappointing April data underscore the bind facing policy makers seeking to cut capacity from the worst- performing sectors and curb credit excesses in recovering ones without stalling the economy
- A sudden plunge by Chinese stocks in Hong Kong had traders scrambling to find a trigger for the slump that coincided with a surge in futures volumes.
- Holdings in gold exchange-traded funds have now surged by a quarter, with investors taking advantage of lower prices over the past two weeks to enlarge stakes on rising concern about central bank policy making worldwide
- Investors are fleeing and volumes are falling due to extreme valuations amid global uncertainties related to monetary policy and political decisions made in wake of the 2007-2009 financial crisis. It’s a flight that’s creating a negative feedback loop
- Swedish hedge fund Informed Portfolio Management is disregarding risks from a potential Brexit and political turmoil from Brazil to South Africa, instead using an approach of looking at fundamentals and placing narrow bets on how assets perform against each other
- Mark Carney defended the Bank of England against critics furious at his warnings about the dangers posed by a European Union exit, and described the British economy as facing similar uncertainty to the early 1990s.
- Sovereign 10Y yields mixed; Asian equities higher while European stocks mostly lower; U.S. equity-index futures higher. WTI crude oil and precious metals rise
US Event Calendar
- 8:30am: Empire State Mfg, May, est. 6.50 (prior 9.56)
- 10am: NAHB Housing Market Index, May, est. 59 (prior 58)
- 4pm: Total Net TIC Flows, March (prior $33.5b)
- 7pm: Fed’s Kashkari speaks in Minneapolis
DB's Jim reid concludes the overnight wrap
China will dominate the headlines for different reasons this morning after a soft monthly batch of data released over the weekend. Industrial production grew +6.0% yoy in April (vs. +6.5% expected) and +5.8% ytd (vs. +6.8% yoy in March and +5.8% in Jan-March). Growth of fixed asset investment edged down from +10.7% for Jan-March to +10.5% (vs. +11.0% expected) for Jan-April, with implied monthly growth slowing from +11.2% yoy in March to +10.1%. Nominal growth of retail sales also dropped to +10.1% yoy (vs. +10.6% expected), from +10.5% in March and +10.2% in Jan-Feb.
The property market remained firm though and DB's Zhiwei Zhang suggests that Q2 growth could still be stronger than Q1 as funds available for investment continued to improve. However net-net (adding in the weak M2 number from Friday), our economists think the risks to their 7% Q2 forecast is to the downside partly because the authorities seems to be shifting from aggressive easing to neutral earlier than expected. Their forecasts for Q3 and Q4 remain at 6.6% and 6.4% respectively.
Markets this morning initially opened a touch weaker in China, but have since bounced back along with other bourses in Asia having been supported by a decent rebound in Oil. Indeed the Shanghai Comp is currently +0.23% after initially falling as much as -0.80%, while elsewhere the Nikkei (+1.33%), Hang Seng (+1.22%), Kospi (+0.10%) and ASX (+0.54%) are also up. Stocks in Japan (Nikkei) are also being helped by a report suggesting that Japan’s government might be considering a delay in the sales tax hike. Meanwhile credit markets are a bit more mixed, while WTI has rallied +1.34% and more than wiped out Friday’s loss to hover just south of $47/bbl. There’s been little in the way of data this morning although it is worth highlighting some rating action from the weekend when Moody’s downgraded a number of Gulf nations including Saudi Arabia (by one notch to A1), in light of lower oil prices.
Moving along. Last week saw markets finish on a somewhat mixed note on Friday. European equities had initially closed with some modest gains (Stoxx +0.47%) which was enough to see the majority of bourses end with a positive return week. That said a bounce for the US Dollar (Dollar index +0.49%) following the much better than expected retail sales data weighed on assets in the US. The S&P 500 eventually closed -0.85% and as a result finished with three consecutive daily declines to take in into negative territory (-0.51%) over the five days.
There was a fair bit of focus going into that retail sales data given some of the soft department store earnings from earlier in the week, so it came as a bit of a surprise to see headline sales print at +1.3% mom for April, a big gap over the +0.8% consensus. All of the other component groups beat as well. Ex autos printed at +0.8% mom (vs. +0.5% expected), ex auto and gas at +0.6% mom (vs. +0.3% expected) and the control group an impressive +0.9% mom (vs. +0.4% expected). The surge in headline sales was actually the most in a single month in 13 months (and included upward prior month revisions) with auto sales a big contributor to the surge, although in fairness the vast majority of categories did report growth.In terms of how markets responded, that data kick-started the rally for the Dollar while US 2y Treasury yields also marched higher, at one stage touching 0.784% (and 4bps off the lows) before giving up that move into the close to finish close to unchanged on the day at 0.746%. 10y yields, while also temporarily moving higher, actually closed 5.2bps lower at 1.701% meaning the yield curve had interestingly bull flattened by the end of the day. Meanwhile, the odds of a June rate hike ended the day unchanged at 4% based on futures pricing (did get up to 6% at one stage) with a July hike currently at 17% which is also unchanged relative to prior to the data. Those moves also came despite comments from the Fed’s Williams who said that 2-3 rate hikes this year may still make some sense. That said the data did, however, help to lift the Atlanta Fed’s Q2 GDP forecast up to 2.8% from 2.2%, although in contrast the NY Fed’s Q2 GDP forecast is sitting at a much lower 1.2% (from 0.8%).
That wasn’t the only other data out on Friday however. There were also some positive signs to take from the provisional May reading for the University of Michigan consumer sentiment data. The headline index rose an impressive 6.8pts to 95.8 (vs. 89.5 expected) which is the highest level since June last year. The expectations component was actually up 9.9pts at 87.5 (vs. 78.0 expected) while the current conditions component rose 1.9pts to 108.6 (vs. 106.0 expected). That said the data did show a decline in 1y inflation expectations to the tune of three-tenths to 2.5%, although 5-10y inflation expectations nudged up one-tenth to 2.6%. Elsewhere, headline PPI came in a touch lower than expected at +0.2% mom (vs. +0.3% expected) with the core up +0.1% mom as expected. Finally business inventories rose a greater than expected +0.4% mom in March (vs. +0.2% expected).
Prior to this in Europe it was all about the GDP reports. Regionally we saw Germany print a slightly better than expected +0.7% qoq for Q1 (vs. +0.6% expected) with YoY growth now slated at +1.3%. Italy’s Q1 GDP growth came in in-line at +0.3% qoq although the reading for the wider Euro area was revised down a modest one-tenth to +0.5% qoq (in actual fact from 0.55% to 0.52%), with Spain producing the fastest rate of growth (+0.8% qoq) of the core countries.
Last week was a bumper one for new issuance in credit markets. Indeed over the five days last week just over €21bn of corporate issuance was priced in the European market across 30 tranches. Adding in a further €8bn of financials and just over €12bn of SSA issuance meant the €42bn of issuance was the fourth busiest week this year. This week looks set to be a tad lighter in Europe but the forecast range is still €8bn-€12bn. It was much the same in the USD market too where some $50bn was priced. With a bumper deal from Dell already announced and expected to price this week, it’s expected to be another busy week. While we’re with credit, a reminder that we published a Credit Bites at the back end of the week on whether there is now a resistance at zero yields for corporate bonds in Europe.
It’s a particularly quiet start to the week today with no data of note due out of Europe and just Empire manufacturing and the NAHB housing market index of note in the US session this afternoon. In terms of the Fedspeak this week we’ve got Kashkari scheduled to speak late this evening. Earnings season draws pretty much to a conclusion with just 23 S&P 500 companies set to report with some of the retailers the bigger interest including Target, Home Depot, Lowe’s, Wal-Mart and Staples. In Europe we’ll hear form 27 Stoxx 600 companies including Vodafone and Merck.