The single biggest event overnight was the PBOC's devaluation of the Yuan to the lowest since March 2011, setting the fixing at 6.5693, the highest in over 5 years and in direct response to a stronger dollar, which however if one looks at the DXY remains well below the recent highs in the 100 range, suggesting for China this is only just beginning.
However, the fact that there was not more volatility in onshore and offshore overnight FX also comforted the market that at the same time as its was devaluing the PBOC was also intervening in the FX market, thus providing some assurance it would not allow runaway "risk off" sentiment prevail, nor would it promote another blitz round of capital outflows, leading to another gradual levitation in overnight risk.
Whether the PBOC is successful this time happens remains to be seen, but for now algos and traders decided to ignore the loud warning signal by China, and focused on oil instead which after yesterday's sharp API inventory drop has pushed to fresh 7 month highs, higher by another 1% as the likely resumption of production by domestic producers is widely ignored. Instead, the market also focused on yesterday's new home sales, a data point with a 15% interval of confidence, as confirmation that the US economy is back on the mend, and thus any imminent rate hike by the Fed would be justified... just like in December.
Trader sentiment confirmed as much: "Strong U.S. new home sales have added credence to the Fed’s claims that the U.S. economy may be strong enough for another rate hike in June or July,” said Angus Nicholson, a Melbourne-based market analyst at IG Ltd. “Japanese equities in particular are relishing the strong U.S. dollar."
As a result, global equities rose to a two-week high amid increasing investor optimism that the world economy can withstand higher U.S. interest rates. Oil advanced and gold fell amid a retreat in the dollar. The MSCI All Country World Index climbed for a second day, European equities jumped, and futures signaled a higher opening for U.S. shares. Emerging-market stocks rose the most in six weeks, while South Korea’s won led currencies higher even as China set the yuan’s reference rate at the weakest level since 2011. Crude rallied above $49 a barrel as gold slid for a sixth day. Greek bonds increased, pushing the 10-year yield below 7 percent for the first time since November, after its creditors agreed to release bailout funds. The cost of insuring corporate debt against default fell to the lowest in almost a month.
Traders are now pricing in a one-in-three chance of higher borrowing costs in June. That’s up from 4 percent last Monday. July is the first month with more than even odds for a rate hike. Fed Chair Janet Yellen is scheduled to speak on Friday after European markets close.
While recently the market was spooked by the prospect of an imminent rate hike, as Bloomberg adds "improving confidence in financial markets is tempering anxiety over the Federal Reserve’s plans to raise U.S. interest rates, potentially as soon as next month." Adding to the confidence, recent polls show growing support for the U.K. to remain in the European Union, the rally in commodities is damping the risk of deflation, and a measure of economic surprises in the world’s largest economies hit its highest level this year. Still, faith in global growth prospects has been easily shaken, with global equities failing to make any gains in 2016.
"U.S. data is supporting the view that if we don’t see stellar growth, at least we don’t see a recession, and that’s a good thing," said Michael Woischneck, who oversees about 300 million euros at Lampe Asset Management in Dusseldorf, Germany. "If the Fed has the chance to hike again then it should take this opportunity as the market is very prepared. We also have a deal for Greece that has helped perceptions change in the European market."
The Stoxx Europe 600 Index added 1.1% in early trading, with almost all industry groups climbing. Carmakers, insurers and banks posted the biggest gains. The equity measure closed above its 50-day moving average on Tuesday for the first time after slipping below it earlier this month. That sends a short-term bullish signal in technical analysis, according to Saxo Bank A/S trader Pierre Martin.
The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong surged 2.8 percent, the most in more than a month. Benchmark gauges in South Korea, Taiwan, the Philippines, Russia and Dubai increased at least 1 percent.
Futures on the S&P 500 added 0.5 percent, indicating U.S. equities will extend gains after rising 1.4 percent on Tuesday. Investors will look to data on services output and house prices due Wednesday for signs of the health of the world’s biggest economy amid increasing bets that the Fed is confident enough to raise rates.
The yield on 10-year U.S. Treasuries increased by one basis point to 1.87 percent, matching its average level for 2016. The U.S. is selling $34 billion of five-year securities on Wednesday after investors snapped up a $26 billion auction of two-year notes on Tuesday, leaving primary dealers with the lowest award at a sale of the debt in data going back to 2003.
“The Treasury yield could end up a little bit above 2 percent” as the Fed raises rates, said Stephen Roberts, an economist at Laminar Group Pty, a Melbourne-based fixed-income adviser. “The U.S., of developed economies, has had the best of the economic recovery we’ve had since the global financial crisis.”
Markets snapshot
- S&P 500 futures up 0.4% to 2083
- Stoxx 600 up 0.9% to 347
- FTSE 100 up 0.5% to 6168
- DAX up 0.6% to 9899
- S&P GSCI Index down 0.4% to 363.5
- MSCI Asia Pacific up 1.5% to 127
- Nikkei 225 up 1.6% to 16757
- Hang Seng up 2.7% to 20368
- Shanghai Composite down 0.2% to 2815
- S&P/ASX 200 up 1.5% to 5373
- US 10-yr yield up less than 1bp to 1.87%
- German 10Yr yield down 1bp to 0.17%
- Italian 10Yr yield down 3bps to 1.45%
- Spanish 10Yr yield down 2bps to 1.56%
- Dollar Index up 0.02% to 95.59
- WTI Crude futures up 1% to $49.13
- Brent Futures up 1% to $49.11
- Gold spot down 0.5% to $1,222
- Silver spot up 0.2% to $16.25
Top Global News
- Microsoft May Cut 1,850 Jobs as Nadella Pares Phone Ambitions: Company will incur about $950 million in new charges. Last week Microsoft sold its feature phone business to FIH
- Goldman Sachs Sees Malaysian Deals Evaporate Amid 1MDB Concerns: Once among top banks, Goldman was 18th in 2015 M&A rankings. U.S. authorities said to subpoena ex-Goldman banker in probe
- CYBG Soars in London Trading as CEO Pledges to Eliminate Jobs: Clydesdale and Yorkshire bank owner to reduce expenses. Lender has gained more than 40% since its February IPO
- Exxon, Chevron Oppose Environmental Drive to Cut Big Oil’s Reach: Shareholders will vote on limiting oil and gas exploration. Money saved would be paid to investors in dividends, buybacks
- US Foods Seeks to Shake Off Failed Merger With $1 Billion IPO: Food distributor 1 of 2 national players in fragmented field. Owners KKR, CD&R don’t plan to sell shares in offering
- China Said to Plan Asking U.S. on Timing of Fed Rate Increase: U.S.-China Strategic & Economic Dialogue set for June 6-7. China said to be preparing for potential market, yuan impact
- U.S. Said to Investigate InBev Distribution Incentiv: Investigation over new incentives that encourage independent distributors to sell more of its own beer brands at expense of competing craft brews, Reuters reports, citing 2 unidentified people with knowledge.
Looking at regional markets, we start as usual in Asia where equities tracked the firm gains from Wall Street where strong New Home Sales data and advances in oil bolstered sentiment. Nikkei 225 (+1.6%) benefited from renewed press reports that Japanese PM Abe will delay the sales tax hike, while ASX 200 (+1.5%) was led higher by the uptick in energy in which WTI futures rose above USD 49/bbl to hit YTD highs. Chinese bourses conformed to the upbeat tone in the region with the Hang Seng (+2.8%) and Shanghai Comp (-0.2%) bolstered following another inter-bank liquidity injection and reports CSRC plans to open the futures market to investors abroad. 10yr JGBs traded higherdespite the risk-on sentiment in the region, as the BoJ were in the market to purchase over JPY 1.2trl in government debt. BoJ Governor Kuroda stated the BoJ is to be mindful of the balance sheet and later added they will ease further if FX impacts price goal. Kuroda further stated that there is currently not a big risk of JGB yield volatility.
Asia Top News
- China Weakens Yuan Fixing to Lowest Since 2011 as Dollar Climbs: Reference rate was lowered by 0.3% to 6.5693/dollar
- Singapore Economy Gets Temporary Boost From Manufacturing: 1Q GDP +0.2% q/q vs est. +0.6%
- Mitsubishi Motors Corrects Last Year’s Earnings on Data Scandal: Charge reflects costs to compensate owners, Japan govt
- Toyota to Invest in Uber to Explore Ride-Share Partnership: Cos. enter into MOU
European equity markets have also carried through the overnight risk on sentiment to trade firmly in the green this morning (Euro Stoxx: +1.6%). Financials are among the best performers in Europe, particularly from the periphery given the overnight Greek deal. Elsewhere Marks & Spencer are the worst performers in Europe today after their pre-market earnings and trade lower by around 9%. Fixed income markets have seen Bunds initially fall in tandem with the surge higher in equities, with the German benchmark trading firmly below 163.50 before staging a recovery heading into the North American open . Meanwhile, in the wake of the aforementioned Greek deal, Eurozone periphery yields have declined, with the Greek 10Y below 7% for the first time since November'15.
Top European News
- UniCredit CEO Departure Puts Focus on Bank’s Capital Strategy: Chairman Giuseppe Vita to lead search for new CEO, bank says. Marco Morelli was approached for the role, person says
- Deutsche Bank Trading Woes Exposed in Slide Down Currency League: After topping Euromoney ranking for 9 years, lender slips to 4. Bank’s market share shrinks to 7.9%, from 14.5% a year earlier
- Bayer Says It’s Confident It Can Meet Monsanto Deal Demands: German company says it will address finance, regulatory issues. Monsanto rejected $62 billion offer, which it said was too low
- BASF Feels No Pressure as Rivals Plan $170 Billion of Deals: Chemical maker focused on operations, Asia chief Gandhi says. BASF’s strategy under CEO Bock has been consistent, he says
- Apollo Said to Seek $3.5 Billion to Scoop Up Bad European Debt: No better time for credit investors as banks hampered: Black. Strategy to target bad loans held by institutions under stress
- Greece Wins Pledge for Debt Relief as IMF Bows to Euro Proposal: MF makes ‘major concession’ in Eurogroup negotiations. First aid payment to be made in June to cover debt servicing
- Brexit Vote Could Extend U.K. Austerity by Two Years, IFS Says: IFS says quitting EU might add 40 billion pounds to borrowing. Economic damage would dwarf savings on payments to EU budget
- ECB Officials Say Euro Area Needs Coordinated Economic Policies: France’s Villeroy, Spain’s Linde comment at Madrid conference. Extraordinary monetary stimulus hasn’t yet restored inflation
In currencies, the biggest FX news overnight was China’s central bank weakened its currency fixing by 0.3 percent to 6.5693 per dollar, the lowest since March 2011. However, since the yuan in Hong Kong was little changed at 6.5650 and the onshore rate was down 0.05 percent to 6.5620, many have speculated that despite the sharp easing, the PBOC continues to intervene and will not the currency lead to a resumption in capital outflows. The Bloomberg Dollar Spot Index declined 0.1 percent, trimming this month’s advance to 3.4 percent. The yen was little changed near 110 versus the greenback after Goldman Sachs Group Inc. predicted the Japanese currency would slide 12 percent by this time next year. The MSCI Emerging Markets Currency Index climbed 0.2 percent. The won rose 0.9 percent, boosted by optimism that strength in the U.S. economy will shore up demand for South Korean exports. Malaysia’s ringgit strengthened 0.6 percent and Russia’s ruble gained for a second day to a one-week high. Forwards on the Nigerian naira soared as traders increased bets on Nigeria’s currency weakening, with rates on three-month contracts jumping 16 percent to 288 per dollar. The central bank voted to allow “greater flexibility” in the foreign-exchange market on Tuesday, signaling policy makers may abandon a currency peg they’ve held for 15 months.
In commodities, oil extended gains in New York from the highest closing price in seven months after U.S. industry data showed crude stockpiles declined, easing a glut. Inventories dropped by 5.14 million barrels last week, the American Petroleum Institute was said to report. Data from the Energy Information Administration Wednesday is forecast to show supplies fell. West Texas Intermediate rose 1.1 percent to $49.15 a barrel and Brent added 1.1 percent to $49.16. WTI closed at a premium to Brent Tuesday for the first time in almost two weeks. Gold dropped to the lowest level in almost seven weeks. Bullion for immediate delivery fell 0.5 percent to $1,220.81 an ounce. Most industrial metals declined, with nickel dropping 0.2 percent and aluminum losing 0.3 percent. Copper rose 0.6 percent to $4,630 a metric ton.
On today's US event calendar the early focus is on the April advance goods trade balance reading where some further widening of the deficit is expected mostly due to an expected recovery in imports. Away from that there will be further housing market data in the form of the FHFA house price index for March, while later this afternoon the flash May services (53.0 expected) and composite PMI’s are due out. Fedspeak wise we’ll hear from Harker again while Kashkari and Kaplan are also scheduled for talks.
Bulletin Headline Summary From RanSquawk and Bloomberg
- European equities followed suit from their US and Asian counterparts to trade higher across the board with news of a Greek deal and energy markets also guiding price action
- GBP has once again been a key source of focus for FX markets with GBP/USD briefly breaking above 1.4650 before paring gains in recent trade
- Looking ahead, highlights include BoC Rate Decision, US Trade Balance, Services PM! and DOE U.S. Inventories, Fed's Harker, Kashkari and Kaplan
- Treasuries little changed in overnight trading as global equities rally along with oil; Treasury auctions continue with sale of $34b 5Y notes, WI 1.41%; last sold at 1.41% in April, first tail by a 5Y auction since January.
- Chinese officials plan to ask their American counterparts in annual talks next month about the chance of a Federal Reserve interest-rate increase in June, according to people familiar with the matter
- The ECB expanded the size of its debt-buying program in April by a third to €80 billion ($89 billion) a month and appears to be running out of securities eligible under its own rules
- ECB will aim to buy €5b-€10b worth of corporate bonds per month after it starts “small” in June, Reuters reports, citing several unidentified central bank people with knowledge of matter
- Brazil bond investors are dialing back their optimism after newly appointed Finance Minister Henrique Meirelles acknowledged that the country’s fiscal problems are much worse than anyone had imagined
- A meeting of euro-area finance ministers in Brussels paved the way for a €10.3 billion ($11.5 billion) aid payout to Greece but left important details to be hammered out after Germany’s federal election next year
- Greece’s bonds advanced, pushing 10-year yield below 7% for the first time since November, was as high as 19% last July
- Sovereign 10Y yields mixed; European, Asian equities higher; U.S. equity-index futures rise; WTI crude oil higher, precious metals mixed
US Event Calendar
- 7:00am: MBA Mortgage Applications, May 20 (prior -1.6%)
- 8:30am: Advance Goods Trade Balance, April, est. -$60b (prior -$56.9b)
- 9:00am: House Price Purchase Index q/q, 1Q (prior 1.4%)
- 9:00am: FHFA House Price Index m/m, March, est. 0.5% (prior 0.4%)
- 9:45am: Markit US Services PMI, May P, est. 53.0 (prior 52.8)
- Markit US Composite PMI, May P (prior 52.4)
Central Banks
- 9:00am: Fed’s Harker speaks in Philadelphia
- 11:40am: Fed’s Kashkari speaks in Bismarck, N.D.
- 1:30pm: Fed’s Kaplan speaks in Houston
DB's Jim Reid concludes the overnight wrap
Although credit spreads are generally wider in May on the back of very strong issuance, a number of major equity bourses returned back to positive territory for the month yesterday. Indeed the S&P 500 (+1.37% yesterday, +0.52% MTD) and DAX (+2.18% yesterday, +0.18% MTD) were last positive for May on the 16th and the 10th respectively. The Stoxx 600 (+2.21%) actually went into positive territory (+0.77%) for first time this month following the biggest one day gain yesterday since April 13th. It was hard to pinpoint one particular trigger for yesterday’s rally but one theme which was constant on both sides of the pond was the strong performance for Banks. Indeed a contributor to this may have been some of the comments coming from ECB Supervisory Chief Daniele Nouy. Speaking at a conference in Madrid, Nouy made mention of the ECB still having a lot of work to do on addressing legacy assets and particularly non-performing loans but that the Bank ‘will fast come with certain proposals’. She also highlighted that she is comfortable with the current minimum capital requirements for banks in Europe. Indeed it was the peripheral bourses that outperformed yesterday with the FTSE MIB in particular rallying to the tune of +3.34% with the likes of Monte de Paschi, Banco Popolare, Intesa Sanpaolo and UBI up between 5% and 10%.
Some of the commentary also pointed towards the latest bumper housing data in the US as helping to nudge rate expectations and yields a little higher and so in turn lending a helping hand in the rally for financials. In fairness much of the rally had already occurred prior to the data but in any case it helped to consolidate gains and was perhaps just evidence that investors are becoming a little more comfortable with the prospect of a possible rate move this summer. New home sales rose an impressive +16.6% mom in April which compared to expectations of just +2.4%. As a result the annualized rate rose to 619k from 531k which is the highest since January 2008 while the monthly surge was actually the biggest since 1992. That helped the US Dollar to strengthen +0.70% relative to the Euro while 10y Treasury yields edged up just shy of 3bps (2y yields were up a less impressive 1bp). By the end of play the odds of a move in June are now 34% (from 32%) with July consolidating around 54%.
Meanwhile rising Oil prices did little to spoil the mood yesterday as WTI (+1.12%) ignored yesterday’s stronger Dollar and has in fact crept back above $49/bbl this morning (and testing the YTD highs) in Asia following a similar magnitude gain ahead of today’s US stockpile data. Elsewhere Gold (-1.75%) tumbled yesterday and is now down over 5% this month.
Before we look at how markets have followed up in Asia, there’s been some positive news to come out of the Eurogroup meeting overnight following 11 hours of talks with the announcement that Greece’s creditors have come to an agreement on allowing for the release of €10.3bn of aid as well as committing to debt relief in later years. It appears that it is the IMF which has backed down somewhat from its previous harder stance with the agreement that the Fund will continue to participate in the nation’s rescue package too. Greek press Ekathimerini is reporting that conditional debt relief is to be granted from 2018 while a statement from the Chair of the meeting, Eurogroup President Dijsselbloem, said that ‘we achieved a major breakthrough on Greece which enables us to enter a new phase in the Greek financial assistance programme’. The finer details should get debated today but so far it looks like there are valid grounds for optimism that this is a big positive step in the right direction.
Refreshing our screens this morning, the positive lead from the US and Europe yesterday has continued this morning in Asia where we’ve seen a decent rebound across the majority of bourses. The Hang Seng (+2.56%) is leading the way, while the Nikkei (+1.80%) is not far behind. In China the Shanghai Comp (+0.41%) and CSI 300 (+0.50%) are both higher while elsewhere the Kospi (+1.15%) and ASX (+1.73%) are also stronger. Credit markets are rallying too with the iTraxx Aus, Asia and Japan indices 3-5bps tighter. There’s also been some activity in FX markets this morning with the main news being that the PBoC has set the CNY fix at its weakest level since March 2011. Indeed the fix was set 0.34% weaker although the current spot rate this morning (around 6.562) is still below the levels reached in the volatile month of January when there was arguably alot more focus on where the PBoC was setting the reference rate for the currency.
Back to yesterday, there was actually a reasonable amount of focus on some of the other chatter coming from the ECB yesterday. Vice-President Constancio said that in his view it is still too early to start discussing further stimulus from the ECB as a response to more challenging financial conditions. Constancio said instead that he prefers to hold tight to wait and see what the effects are of the latest round of measures from the Bank. Meanwhile the ECB’s latest edition of its semi-annual Financial Stability Review showed that a rise in political risk ‘poses a challenge to fiscal and structural reform implementation and, by extension, public debt sustainability’. The review went on to show that this in turn could put renewed pressure on vulnerable sovereigns while potentially contributing to contagion and re-fragmentation in the Euro area.
Meanwhile, over in the UK a fresh EU UK referendum poll released late last night for the Times newspaper and run by YouGov showed an even running between the Remain and Leave camps at 41% each. The Bloomberg headline suggests that the poll covered the May 23rd and 24th period. The last YouGov/Times poll had been split at 44% to 40% in favour of Remain.
Rounding off the other economic data that was released yesterday, in the US the only other release of note was the Richmond Fed manufacturing index for May which provided for further evidence of softness in the sector after dropping 15pts this month to -1 (vs. +8 expected). New orders were also down a significant 18pts. Prior to this in Europe, Germany had reported no change in its final Q1 GDP revision of +0.7% qoq. Meanwhile the May ZEW survey was released which revealed a 5.4pt increase in the current situation component to 53.1 (vs. 49.0 expected). The expectations survey however was down a disappointing 4.8pts to 6.4 (vs. 12.0 expected). It’s worth noting that our German Economists have now revised down their Q2 GDP forecast from 0.3% to 0.1% as they expect material payback for the Q1 strength. While they remain optimistic with regards to the labour market, they think that the impetus from low oil prices to real income is fading. In addition, the mild winter has allowed construction work to be pulled forward, albeit the payback might be limited by the strength of underlying construction demand.
Looking at today’s calendar, this morning we’re kicking things off in Germany where shortly after this hits your emails the latest German consumer confidence data is out. We’re staying in Germany shortly after that when we’ll get the IFO survey for May where a modest increase in the business climate reading is expected. This afternoon in the US the early focus is on the April advance goods trade balance reading where some further widening of the deficit is expected mostly due to an expected recovery in imports. Away from that there will be further housing market data in the form of the FHFA house price index for March, while later this afternoon the flash May services (53.0 expected) and composite PMI’s are due out. Fedspeak wise we’ll hear from Harker again at 2.00pm BST while Kashkari (4.40pm BST) and Kaplan (6.30pm BST) are also scheduled for talks. It’s a busy day for ECB speak meanwhile with Villeroy, Schulz, Knot, Constancio and Praet all due to talk this morning. The EU finance ministers meeting also continues in Brussels today while Central Bank wise the only scheduled monetary policy meeting of note is the Bank of Canada this afternoon (no change expected).