It will be fitting, not to mention symmetric, if stocks which yesterday closed at 7 weeks lows and red for the year, end the week the same way they started it: with a rally on no news, just more hopes that oil (which as recently as two years ago none other than Chair Yellen said said would be be "unambiguously good" if lower) will continue rising. While US markets ended yesterday's trading on a sour note, that weakness has failed to spread to the rest of the world, and global shares rebounded from a six-week low as crude and commodity prices recovered, while the yen weakened on reduced demand for haven assets.
And just like on Monday, the rebound was once led by the commodity sector, where raw-materials producers and energy companies outperformed on the Stoxx Europe 600 Index as shares in the region rebounded from their biggest decline in two weeks. Crude rose toward a seven-month high and copper rebounded from levels last seen in February.
Concerns remained about the Fed's June/July hike although the goalseeked narrative has bifurcated.
According to some, such as Thorsten Engelmann, a Frankfurt-based trader at Equinet Bank, the market has now priced in a summer hike: "After the losses of the last few days, bargain hunters are re-entering the market. The market seems to be able to deal with the Fed raising rates, and next week should be quieter now that the earnings season is over."
Others, like David Gaud, a fund manager at Edmond de Rothschild Asset Management, told Bloomberg TV in Hong Kong, that there simply won't be a rate hike in the first place: "There will be no rate hike in June, it’s probably a bit too early. The Fed will further prepare the markets for a hike probably in September and maybe a second one in December. That’s going to create more volatility, but more than anything that’s going to be a positive in the end for the markets."
Meanwhile, the levitation in oil continues, even if WTI trades little changed as of this moment after paring earlier gain with focus moving to supply disruption. June contract expires today. "Supply disruptions” are back in focus, “the market has fairly quickly shrugged off the dollar strength that caused a bit of a stir yesterday and triggered some profit- taking,” says Saxo Bank head of commodity strategy Ole Hansen. "If we had supply disruptions from places like Canada, Nigeria, Venezuela and Libya like this 5 years ago we wouldn’t be up $5, we’d be up $25 - that is probably a testament to the oversupply still in the market."
The MSCI All-Country World Index of shares rose 0.4 percent as of 10:57 a.m. London time, climbing for the first time in four days. In Europe, the Stoxx 600 climbed 1 percent and futures on the S&P 500 added 0.2 percent. The MSCI Emerging Markets Index rose 0.4 percent, paring its weekly decline to 1.4 percent. The gauge is headed for its fifth weekly drop in the longest run of losses since August. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose 0.7 percent.
Market Snapshot
- S&P 500 futures up 0.3% to 2044
- Stoxx 600 up 0.8% to 337
- FTSE 100 up 1.3% to 6132
- DAX up 0.7% to 9864
- German 10Yr yield down less than 1bp to 0.17%
- Italian 10Yr yield down 2bps to 1.48%
- Spanish 10Yr yield down 2bps to 1.57%
- S&P GSCI Index up 0.3% to 368
- MSCI Asia Pacific up 0.3% to 126
- Nikkei 225 up 0.5% to 16736
- Hang Seng up 0.8% to 19852
- Shanghai Composite up 0.7% to 2825
- S&P/ASX 200 up 0.5% to 5351
- US 10-yr yield down less than 1bp to 1.85%
- Dollar Index down less than 0.01% to 95.28
- WTI Crude futures up 0.3% to $48.29
- Brent Futures up 0.1% to $48.86
- Gold spot up 0.3% to $1,258
- Silver spot up 0.5% to $16.58
Top Global News
- Yahoo Bids May Fall Short of $4b-$8b Expected Range: WSJ
- Gameloft Rises as Vivendi Ups Hostile Bid Through Stake Purchase
- Total, Oil Search Divvy InterOil Assets in $2.2 Billion Deal
- Vale Blending Optimism With Caution on Iron’s Biggest Tie-Up
Looking at regional markets, we start in Asia which managed to put the US concerns about a Fed rate behind it with risk-appetite improving alongside the gains in the energy complex. ASX 200 (+0.5%) traded higher as the index coat-tailed on oil after WTI crude futures rose above USD 49/bbl, while Nikkei 225 (+0.5%) was underpinned following a rebound in USD/JPY which edged above 110.00. Hang Seng (+0.8%) and the Shanghai Comp (+0.7%) conformed to the improving sentiment in the region after the PBoC returned to a net weekly injection of CNY 50bIn from the recent consecutive weekly net drains, with retailer earnings also boosting optimism. 10yr JGBs traded higher despite the risk-on sentiment seen in Japanese equities with the BoJ in the market to acquire around JPY1.2trl in government debt.
Top Asian News:
- Japan Lawmakers Discuss Big Stimulus to Accompany 2017 Tax Hike: Debate may now shift to size, shape of fiscal packages
- Hong Kong’s SFC Said to Survey Participants on Investor Codes: Brokers seek clarity on how identity codes would be assigned
- Morgan Stanley Said to Move 75 Shanghai Jobs to Hong Kong, India: Co. seeks to improve back-office efficiency
- Hotel Lotte’s $4.8 Billion IPO Is Big But Comes With Baggage: Sale comes in wake of power struggle atop Lotte Group
- Total, Oil Search Divvy InterOil Assets in $2.2 Billion Deal: Total to buy ~60% of InterOil’s assets from Oil Search
- Taiwan’s New President Resists China ’One-Country’ Pressure: Tsai focused on domestic agenda in first presidential address
Like in Asia, risk-on sentiment has dominated the state of play in Europe with the Eurostoxx (+1.3%) firmly in the green underpinned by upside in commodity prices. As such, energy names outperform this morning as both WTI and Brent break back above USD 49/bbl. In stock specific news, Richemont underperforms following their earnings update in which FY operating profit missed expectations subsequently dragging related consumer discretionary names lower. However, some selling pressure has crept in to price action in recent trade ahead of the North American crossover.
Top European News:
- Deutsche Bank May Punish Employees for Personal Trade With Firm: halted bonus payments to a group of employees while examining whether they improperly traded with the firm
- Richemont Sees Challenging Market After April Sales Plunge: Full-year operating profit falls more than analysts expected. Cartier owner forecast difficult comparisons in first half
- Monsanto’s #Monsatan Factor and What Bayer Needs to Do About It: if the takeover succeeds, Bayer will likely find itself in the crosshairs of Monsanto’s army of critics
In FX, a mostly consolidative trading session in FX this morning, though GBP has come back a little, with Cable testing the mid 1.4500's , but the fall-back initially led by a ramp up in EUR/GBP. Despite taking out some support levels yesterday, alongside EUR/USD, the cross rate found buyers at .7650, and from there, we have seen a spike up to .7700+, but the move since running out of steam. M&A flow may have contributed to the random hit on GBP, with reports in the papers suggesting a Reckitt Benckiser takeover bid for Church and Dwight. Similarly EUR/USD falters ahead of 1.1230, where USD bulls continue to press for a deeper decline through yesterday's 1.1180 level.
The overnight session was once again all about commodities, where WTI and Brent have just started to fall off after trying to attack the USD 50.00/bbl level and falling short. Of note we are still seeing some refinery closures in Nigeria. Crude oil rose 0.3 percent to $48.30 a barrel in New York, headed for a weekly advance of about 4.5 percent. Prices were boosted this week as data showed U.S. output slid to the lowest since September 2014 and wildfires in Canada expanded. “We’ve got U.S. demand picking up and combining with bullish supply news filtering through the market,” said Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney. “Unless there is a clear new fundamental reason to buy oil, I think $50 is a hard psychological level to break through.”
Gold and Silver have been bullish in European trade after selling off in in the Asian session and spot Gold currently resides around the USD 1258.00/oz level. Elsewhere copper and iron ore traded higher reflecting the improved risk appetite in China. Copper rose 1.3 percent in London, while nickel rebounded from a six-week low. Gold was headed for a third weekly decline, its longest losing streak of the year. Soybeans in Chicago were set for a sixth weekly advance, the longest run of gains since 2013. The U.S. Department of Agriculture estimated last week that global inventories will fall 8.1 percent by the end of September next year.
On the US calendar, the only release of note is the existing home sales reading for April which is expected to show some modest growth. Fedspeak wise the only scheduled talk is from Tarullo who is due to talk in Washington at 2pm BST. It might also be worth keeping an eye on anything interesting out of the G20 finance ministers and central bank governors meeting in Japan over the weekend.
Bulletin Headline Summary From RanSquawk and Bloomberg
- European equities enter the North American crossover in positive territory as energy prices help guide price action
- A predominantly consolidative trading session in FX this morning, though GBP has come back a little, with Cable testing the mid 1.4500's
- Looking ahead, highlights include Canadian Retail Sales, CPI, US Existing Home Sales, ECB's Draghi and Coeure
US Event Calendar
- 10am: Existing Home Sales, April, est. 5.40m (prior 5.33m)
- 1pm: Baker Hughes rig count
DB's Jim reid completes the overnight wrap
A more hawkish tone from the Fed and subsequent repricing
of interest rate risk as a result is dictating much of what’s going on at
the moment. That’s putting pressure on risk assets and equities suffered again
yesterday with the S&P 500 closing -0.37% and in the process falling to the
lowest level in seven weeks, as well as slipping back into negative territory
year-to-date. Treasuries were actually little changed yesterday with the 10y
benchmark stalling around 1.850% seemingly with the latest soft
manufacturing data giving some food for thought. More on that shortly. It was
comments from the NY Fed President Dudley which was arguably the biggest
event yesterday though. Seen as having views closely aligned to those of Fed
Chair Yellen and usually leaning towards slightly dovish of centre in nature,
Dudley opined in the Q&A session that ‘if I’m convinced that my own forecast
is on track, then I think a tightening in the summer, the June-July time frame,
is a reasonable expectation’. He did cite risks from the timing of the UK EU
referendum in the context of the meeting next month but the overall takeaway
was one of a feeling of continuing the recent party line of talking up market
expectations closer to that of the Fed.
On that, the June probability did actually slip slightly yesterday to 28% from
32% post minutes although that is still a marked re-pricing compared to the
4% earlier this week. The July probability is unchanged at 47% while
December is hovering around 74% and also little changed from the post
minutes level. While a move in June still feels like a stretch there’s no doubt that the meeting is still going to be hugely important in terms of table setting
expectations for July and beyond.
One sector that will see a possible rate rising environment with a bit more
hope is banks. Although you often hear that equity multiples in general can go
up when 10y yields go down, the opposite seems to be true for banks at the
moment with European banks perhaps the most sensitive. In the PDF today we
show a graph of 10y Treasuries and Euro Bank stocks YTD. The correlation has
been very strong in 2016. When yields go down stocks fall and visa-versa as
yields seem to be a proxy for net interest margins. It is a double edged sword
though as if higher yields destabilise global markets that can't be good for
bank equities. Obviously if higher yields represent a move closer towards
normality in the rates market and the global economy then that would be very
supportive for banks. Unfortunately we suspect that this is not a big move
towards normalisation. Abnormal remains the new normal.
Changing tack now and refreshing our screens quickly, bourses in Asia did initially open in the red after reflecting those losses on Wall Street last night, but sentiment has quickly swung back the other way with the majority of markets looking like they’re closing the week on a positive footing. Indeed it’s the Hang Seng (+1.14%) which is leading the way, followed by the ASX (+0.64%), Shanghai Comp (+0.25%) and the Nikkei (+0.19%). A bounce back in Oil since the Europe close yesterday has continued this morning with WTI currently up just over 1% and that appears to be helping sentiment generally. One thing worth noting is that despite markets in China being up, the Shanghai Comp is still on course for its fifth consecutive weekly decline which is the most since 2012.
Moving on, yesterday’s economic data flow in the US was mainly focused on the labour market and manufacturing sector. Initial jobless rebounded last week, declining 16k to 278k after that sharp spike higher that we’d seen in the week prior. The four-week average did however rise 8k to 276k. Meanwhile the Philly Fed manufacturing survey largely backed up that soft NY Fed survey from earlier in the week. The print declined another 0.2pts to -1.8 after expectations had been for a rebound to +3.0. The details of the report were also soft with new orders, shipments, employment and inventories all remaining in contractionary territory. Our US economists noted that their ISMadjusted manufacturing survey is currently suggesting a slip back below 50 for the manufacturing ISM for this month when we get the data on June 1st. Meanwhile the other data of note across the pond later in the session was the Conference Board’s leading index which was a touch above expectations at +0.6% mom (vs. +0.4% expected).
Meanwhile there was also some Fedspeak from Richmond Fed President Lacker to mention yesterday too. A non-voter this year and seen as someone who sits right at the hawkish end of the scale, Lacker said that ‘I certainly supported a rate increase at the April meeting’ and that ‘I think the case would be very strong for raising rates in June’. Lacker also said that ‘I see risks from global and financial developments having virtually entirely dissipated’ and that ‘markets took the wrong signal from us pausing in March and April’ and so ‘overestimated how likely we were to pause for the rest of the year’. Given his hawkish reputation there wasn’t a great deal of surprise in his comments yesterday.
Prior to this in Europe the main data release was out of the UK where after some earlier disappointment this week in the inflation and weekly earnings data, retail sales proved to be a positive surprise last month. Excluding fuel sales we saw a +1.5% rise mom last month, far exceeding the +0.6% expectation and resulting in the YoY rate moving up to +4.2% from +2.6%. Including fuel last month the +1.3% mom reading was also far better than expected (+0.6% expected) with the YoY rate at a similar +4.3%. Away from that we also got the latest ECB minutes although in truth they didn’t offer a whole lot of new information. The text revealed that there was a ‘broad agreement’ that ‘patience was needed for the measures to fully unfold over time in terms of output and inflation’.
Wrapping up the price action yesterday, markets in Europe were playing catch up somewhat from the post-Fed minutes moves with the end result being a broad sell off across risk assets in the region. The Stoxx 600 closed -1.09% with energy stocks being hardest hit while in credit markets we saw Main and Crossover end 2bps and 9bps wider respectively. Oil had actually been particularly weak for much of the day with WTI at one stage dipping as low as $46.73/bbl (down 3% on the day) with the strengthening US Dollar a big factor, before rallying late into the close to actually finish little changed around $48/bbl after more news filtered through about supply disruptions in Nigeria. Looking at the day ahead, it looks set to be a fairly quiet one for markets to finish on. This morning in Europe we’ll get Germany PPI data along with the CBI industrial trends survey in the UK. In the US the only release of note is the existing home sales reading for April which is expected to show some modest growth. Fedspeak wise the only scheduled talk is from Tarullo who is due to talk in Washington at 2pm BST. It might also be worth keeping an eye on anything interesting out of the G20 finance ministers and central bank governors meeting in Japan over the weekend.