While markets remain relatively subdued ahead of tomorrow's nonfarm payrolls report, after several days of losses in US stocks, which have taken "sell in May" to heart and pushed the S&P500 to three week lows, overnight markets ignored the latest weak data out of China where the Caixin Services PMI was the latest indicator to disappoint (dropping from 52.2 to 51.8), and instead focused on crude, which rebounded from yesterday's post inventory-build lows and briefly printed above $45/bbl over uncertainty related to the impact of Canada wildfires on production and how long will last. The bounce in WTI has meant Brent briefly traded at parity with West Texas for the first time in 6 weeks.
It "would appear to be related to outages in production related to the wildfires in Canada - uncertainty of the extent of the outages and how long they will persist," says BNP Paribas energy strategist Gareth Lewis-Davies.
"Move today has to be seen in the context of the last 5 days and we have only recovered half the losses we have seen in that period."
Emboldened by the rise in oil, European stocks rose for the first time in a week as commodity, energy producers lead the rebound from the biggest four-day drop since February, while S&P500 futures rose 0.3%, and was back over 2,050.
As we noted yesterday, Turkish equities and bonds continued to fall amid a political showdown between the president and prime minister. Turkey’s 10-year bond yields climbed to a one-month high, while the Borsa Istanbul 100 Index dropped 1.6 percent, declining for a fifth day. The clash between Davutoglu and Erdogan threatens to usher in an era of political uncertainty, raising questions ranging from the president’s bid to coalesce power through a constitutional amendment or early elections to the future path of economic policy. The lira gained 1.4 percent after the steepest selloff in eight years yesterday.
Despite the attempt at a rally, sentiment was mixed: "There’s still a very cautious feeling to markets," said William Hobbs, who helps oversee about $150 billion as head of investment strategy at the wealth-management unit of Barclays Plc in London. “The world is growing and is likely to grow a bit quicker as we go through the year and inflation returning and that’s simply not priced in at these levels.”
"The market has been in a consolidation phase as its previous rally, which was based on a rebound in commodity prices and signs of economic stabilization, is starting to taper off,” Audrey Goh, a strategist at Standard Chartered, told Bloomberg. "We are also going into the summer months, when the market tends to be weaker."
Among companies moving in early U.S. trading, Tesla Motors Inc. climbed 3.6 percent after the electric-car maker reaffirmed its deliveries forecast and pulled ahead its plans to produce 500,000 autos annually. Fitbit Inc. tumbled 13 percent after the maker of wearable fitness trackers gave a profit forecast that fell short of the lowest analysts’ estimates.
Market Wrap
- S&P 500 futures up 0.3% to 2052
- Stoxx 600 up 0.3% to 333
- FTSE 100 up 0.2% to 6127
- DAX up 0.3% to 9862
- German 10Yr yield up 1bp to 0.22%
- Italian 10Yr yield up 1bp to 1.52%
- Spanish 10Yr yield up less than 1bp to 1.61%
- S&P GSCI Index up 1.3% to 352.2MSCI Asia Pacific down 0.2% to 128
- Nikkei 225 closed
- Hang Seng down 0.2% to 20485
- Shanghai Composite up 0.2% to 2998
- S&P/ASX 200 up 0.2% to 5279
- US 10-yr yield up 2bps to 1.8%
- Dollar Index up 0.17% to 93.34
- WTI Crude futures up 2.9% to $45.07
- Brent Futures up 2.4% to $45.70
- Gold spot down less than 0.1% to $1,279
- Silver spot up 0.3% to $17.42
Top Global News
- Tribune Board Rejects Gannett’s $815 Million Takeover Bid: Company unveils standalone plan to bolster LA Times globally
- Goldman, HSBC Said Among Banks on Saudi Exchange IPO Shortlist: JPMorgan, Morgan Stanley also said to be considered for IPO that could raise more than $500m for 30% stake
- Tesla’s Musk Sleeping Near Factory Floor to Spur Manufacturing Progress: Co. now sees reaching 500,000- vehicle production in 2018, two years earlier than before
- Turkey PM Said to Give Up as Erdogan Pressure Insurmountable: Prime Minister Ahmet Davutoglu is expected to step down this month after losing power struggle with President Erdogan
- Synacor More Than Doubles After Winning AT&T Web-Hosting: Contract with carrier will be worth $100m annually
- Camping World Said to Aim to Raise $350m in IPO: New York Times
Looking at regional markets, Asia stocks traded mostly lower amid holiday-thinned trade and following the losses seen on Wall St. where US stocks declined to 3-week lows, while the region also digests further softer data from China. However, outperformance in energy and financials have capped losses in ASX 200 (-0.2%) after WTI crude futures reclaimed USD 44/bbl while banks were underpinned following NAB's earnings. China saw mild pressure with the Shanghai Comp (-0.2%) negative after Chinese Caixin Services & Composite PMI figures were weaker than prior, although further liquidity injections by the PBoC helped stem losses. As a reminder, Japanese and South Korean markets are closed for public holiday.
Asia Top News
- China Fertilizer Maker to Default on Bonds Amid Debt Woes: Inner Mongolia Nailun investors opted for early note repayment
- Yuan’s Losing Streak Signals PBOC Break With Stronger Dollar: Chinese currency may have to drop more quickly vs USD: analyst
- Fears of China Unrest See Investment Firms Evicted to Preempt It: >1,000 such cos. have failed, with more to come
- Philip Lowe to Replace Stevens as RBA Governor From Sept. 18: Lowe inherits post with diminished interest rate ammunition
- National Australia Earnings Rise as Bad-Debt Charges Decline: 1H cash profit A$3.31b vs est. A$3.356b
- Packer Cuts Macau Stake, Stoking Crown Buyout Speculation: Australia’s Crown to reduce Melco stake to 27% from 34%
Today has seen a quiet start to the morning amid numerous market closures in Europe due to Ascension Day allied with participants remaining cautious prior to the US jobs report tomorrow. As such, volumes have been somewhat on light side, with equities trading modestly higher while notable outperformance has been observed in the FTSE MIB in the wake of source reports that the Italian Treasury is considering investing in the Italians bank rescue fund. Alongside this, similarly to trade overnight, Europe has been bolstered by gains in energy names with WTI crude breaking above USD 45.00/bbl.
European Top News
- Brexit Uncertainty Drags U.K. Economy to Near Stagnation: Services PMI drops to 52.3 from 53.7, below estimates and weakest since February 2013
- Centrica Falls Most in More Than a Year on Equity Sale Plan: Company plans to sell 350 million shares to fund acquisitions
- Repsol Beats Estimates on Surprise Profit From E&P Business: Results reflect lower exploration costs, efficiency savings
- BT Profit Beats Expectations, Helped by EE Wireless Purchase: Company targets investing GBP6b in network upgrades
- Barclays Sells 12.2% Stake in African Unit for $879 Million: Stake bought by money managers; Barclays now owns 50.1%
In FX, Australia’s dollar strengthened 0.5 percent versus the USD. The nation’s retail sales increased 0.4 percent in March from the previous month, while the trade deficit was smaller than economists forecast. Reserve Bank of Australia Deputy Governor Philip Lowe will replace Glenn Stevens as head of the monetary authority in September.
The greenback strengthened 0.2 percent to 107.21 yen, building on a 0.6 percent advance over the last two days. The Bloomberg Dollar Spot Index held near a one-week high after the probability that the Fed will raise interest rates this year climbed back above 50 percent. U.S. employers added at least 200,000 workers for a third month in April, according to a Bloomberg survey of economists before data on Friday. Russia’s ruble climbed 1 percent and the Mexican peso gained 0.7 percent as oil advanced. South Africa’s rand rose 0.6 percent, rebounding from a four-week low.
In commodities, Heading towards the North American crossover, WTI and Brent crude futures continue to extend on its overnight gains with WTI making a break above USD 45.00/bbl. One factor for consideration in regards to the recent upside in oil prices over the past couple of days, is reports of a Canadian wildfire in the Fort McMurray region in which some of Canada's large oil producers are situated, including Canada Oil Sands. As such, around lmin bpd of Canadian Oil Sands production capacity could be affected.
Additionally, Libyan supply disruptions have also added to the strength in oil prices as officials warned that output may decline to around 120k bpd. To put this in some context, Libya currently produces 310k bpd and have a total capacity of 780k bpd. Elsewhere, gold prices have been pressured by the continued recovery in the greenback allied with the modest upside in European equities, subsequently sapping demand from the safe-haven. Elsewhere, copper and iron ore prices were subdued amid holiday thinned trade overnight.
Following yesterday's data deluge, the sole two events on the US calendar are Jobless Claims and Challenger job cuts, while the Fed's Bullard & Kaplan speak. Earnings wise we’ve got 30 S&P 500 companies set to report including Merck, while in Europe we’ve got 15 Stoxx 600 companies due to release their latest quarterlies
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Bulletin Headline Summary from RanSquawk and Bloomberg
- Today has seen a quiet start for European equities which have spent much of the session in modest positive territory.
- Crude prices remain elevated amid reports of supply disruptions in Libya, alongside wildfires in Canada potentially harming oil production within the region.
- Today's highlights include US Jobless Claims, Challenger Job Cuts, EIA Natural Gas, ECB's Visco, Fed's Bullard & Kaplan.
- Treasuries lower in overnight trading as global equity markets mixed, oil rallies and precious metals drop; economic data today includes jobless claims which are close to four decade lows.
- The European Central Bank will discontinue production of the 500-euro ($575) banknote in a move that risks tensions with euro-area citizens worried the institution is encroaching on their freedoms
- U.K.’s Purchasing Managers Index dropped to 52.3 from 53.7 in April, its lowest level in more than three years; Britain goes to the polls in a series of local and legislative elections that will deliver a new mayor for London, continued nationalist government in Scotland and the voters’ first verdict on Jeremy Corbyn’s leadership of the Labour Party
- China’s authorities, seeking to forestall potential social unrest due to growing failures of investment firms and online lenders, are ordering many to break leases and close their storefronts on busy streets
- Speculators who traded 1.7 trillion yuan ($261 billion) futures in a single day last month have retreated as fast as they advanced. Trading volumes across the nation’s three biggest exchanges are more than half of what they were at their peak on April 22 and back to levels similar to a year ago
- Turkish Prime Minister Ahmet Davutoglu is expected to step down after losing a market-roiling power struggle with President Recep Tayyip Erdogan, clouding the country’s economic prospects and imperiling its relations with the European Union
- Philip Lowe is set to replace Glenn Stevens as governor of Australia’s central bank, inheriting an economy grappling with the onset of disinflation that forced policy makers to cut interest rates to a record low this week
- Sovereign 10Y yields mixed, Greece rallies 19bp; European and Asian equity markets mixed (Japan closed); U.S. equity- index futures rise. WTI crude oil rallies, precious metals lower
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, April, no est. (prior 31.7%)
- 8:30am: Initial Jobless Claims, April 30, est. 260k (prior 257k)
- 9:45am: Bloomberg Consumer Comfort, May 1 (prior 43.4)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11:30am: Fed’s Bullard speaks at Santa Barbara Conf.
- 7:15pm: Fed’s Bullard, Kaplan, Lockhart, Williams speak at Stanford
DB's Jim Reid concludes the overnight wrap
Before we look closer at the rest of the data and price action yesterday, there’s been some data out of China this morning first for us to digest. The private Caixin services PMI for April has softened a touch to 51.8, after printing at 52.2 in March. That largely matches up with the 0.3pt decline in the official reading over the weekend and means that the composite was down half a point this month to 50.8.
Bourses in China have been volatile this morning and have largely swung between gains and losses, but as we type the Shanghai Comp is little changed. Elsewhere the Hang Seng (-0.40%) is in the red for the fourth consecutive session, while the Kospi (-0.49%) is also weaker along with the ASX (-0.25%). Markets in Japan remain shut until tomorrow, while the Yen is unchanged. Just staying with China, overnight our China Chief Economist Zhiwei Zhang published a note highlighting the hidden risks in the financial sector. Zhiwei highlights that China’s recent credit boom has made the financial sector more fragile and monetary policy less effective. He takes a look at what is a widening gap between rapid bank credit growth and moderate M2 growth and that of the credit expansion going to non-bank financial institutions, much of this is in the form of investment rather than loans which are less transparent and potentially more risky. Zhiwei has revised up his probability of the scenario of growth dropping below 6% for 4 consecutive quarters over the period of 2017-19 from 20% to 25%. A link to the note is attached here.
Back to yesterday. It all felt a bit déjà vu in markets with the price action virtually matching that of Tuesday. In Europe we saw the Stoxx 600 close - 1.12% to finish at the lowest level in nearly a month, while markets in the US also edged lower but slightly less so. The S&P 500 ended -0.59% meaning it’s been down in four of the last five sessions. It felt like it was the same culprits yesterday weighing on sentiment too with energy and financials stocks largely leading the bulk of bourses lower. Indeed the Stoxx 600 Banks index was down -1.48% yesterday and has tumbled 9% now in the space of just four sessions. The S&P 500 Energy index was down -1.30% yesterday and is down 4% over the same period.
Credit markets are also having a tougher month in May so far. In the US CDX IG was another 2bps wider yesterday and has now weakened for five consecutive sessions. The iTraxx Main index is also 5bps wider from where we closed April. Meanwhile there was the usual volatility in currency markets in and around the batch of data releases. Ultimately it concluded with a second consecutive stronger day for the US Dollar though with the Dollar index up +0.25% (it’s now up +1.5% from Tuesday’s 18-month low). The Yen traded in another big range but ended up a touch weaker. Finally the closing level for WTI (+0.30% at $43.78/bbl) masked what was actually an intraday range of nearly 4% (it has rebounded 2% this morning though), while it was another rough day for the majority of base metals too (Copper -1.08%, Zinc -0.53%, Iron Ore -5.24%).
Touching on that US data in a bit more detail, in terms of the components of the ISM services reading, employment, new orders and prices paid all rose last month, although there was a slight decline for business activity and new export orders (albeit from recent highs). The spread between the two ISM series is now back to 4.9pts (after being 2.7pts and 3.9pts in March and February respectively) and the most since January. Meanwhile, the March trade deficit narrowed a touch at $40.4bn (vs. $41.2bn expected) and narrowing nearly $7bn from February. The final services PMI was revised up 0.7pts to 52.8 and so resulting in a composite print of 52.4 which is a gain of 0.7pts from March and the second consecutive monthly increase. Elsewhere, factory orders rose a bit more than expected in March (+1.1% mom vs. +0.6% expected), Q1 nonfarm productivity weakened slightly less than expected (-1.0% qoq vs. -1.3% expected) and unit labour costs rose +4.1% qoq. That fall in productivity is the second consecutive negative quarterly reading and leaves YoY growth in productivity at a fairly subdued +0.6%.
The end result of all that data was for the Atlanta Fed to revise down their Q2 GDP forecast by a tenth to 1.7%. That’s still above the forecast of our US economists however who expect only a mild rebound from the weak first quarter and currently have growth pegged at 1.0%.
Elsewhere, during the European session yesterday the main focus was on the release of the remaining PMI’s. For the Euro area we saw the final April services reading revised down a very modest 0.1pts to 53.1, with the composite print of 53.0 effectively unchanged versus the prior two months. Across countries we saw marginal downward revisions to Germany and France while Italy was the positive surprise as its services reading printed ahead of expectations (52.1 vs. 51.9 expected; 51.2 March) much like its manufacturing data earlier in the week. Wrapping up the data, Euro area retail sales declined sharply in March and by more than expected (-0.5% mom vs. -0.1% expected).
Before we look at today’s calendar and just staying in Europe briefly, political fragility has been a big theme of late and we can add Turkey to that list with the news that the power struggle between Turkey’s PM Davutoglu and President Erdogan looks set to end with Davutoglu giving up his premiership. The FT highlighted that despite Erdogan occupying a largely ceremonial post, he has continued to demonstrate enough power to largely influence most aspects of government. According to Bloomberg, Davutoglu’s AK Party is to hold a leadership contest within two weeks with the current Premier not expected to be a candidate. The Turkish Lira weakened nearly 4% yesterday while equity markets in Turkey were generally off at least 2%.
Looking at the day ahead, after the packed calendar that we had yesterday, today looks fairly sparse by comparison. This morning in Europe the only release of note is the April services and composite PMI’s for the UK which is worth keeping an eye on in light of the soft manufacturing print earlier in the week, while in the US the sole release is the latest weekly initial jobless claims data. Away from the data we’re due to hear from the Fed’s Bullard this afternoon (scheduled for 4.50pm BST), while it might also be worth keeping an eye on Japan PM Abe’s press conference today too (due at 2.00pm BST). Earnings wise we’ve got 30 S&P 500 companies set to report including Merck, while in Europe we’ve got 15 Stoxx 600 companies due to release their latest quarterlies.