With the US closed for Memorial Day and UK markets offline due to a bank holiday, overnight volumes have been weaker than normal on little newsflow. The main story remains the stronger USD following Yellen's hawkish Friday speech, which not only led to the lowest Yuan fixing since February 2011...
... but pushed the USDJPY almost as high as 111.50 overnight before paring gains, however it was enough to send the Nikkei 1.4% higher.
Elsewhere, Europe’s Stoxx 600 is unchanged on volume that is ~55% of the 30-day average, after earlier rising above the 200 DMA for the first time in 2016, with the autos and media sectors outperforming and the oil & gas and technology sectors underperforming. US equity futures were 0.2%, or 4 points higher, currently resting just above 2,101 with the last trading day of May tomorrow expected to push the cash market over 2,100 as well.
The stronger dollar also pressured oil modestly lower while gold bullion fell for a ninth day in its longest losing streak following Yellen's comment on Friday that an interest-rate increase is likely in coming months. The dollar strengthened against all but four of its 16 major peers. Treasury 10-year futures slid the most in almost two weeks, German bunds declined and emerging-market currencies headed toward the worst month since August. European stocks swung between gains and losses, with trading volumes less than half the daily average amid market closures in the U.S. and U.K.
The BBG Dollar Spot Index was poised for its biggest monthly jump since
September 2014, having surged as Fed Funds futures showed the odds of a
U.S. interest-rate hike by July more than doubled to 54 percent.
"What Yellen said confirmed the Fed is open for a June rate increase, and it’s now data dependent,” said Carl Hammer, chief currency strategist at SEB A/B in Stockholm. “The Fed might be on hold next month due to Britain’s European Union referendum, but then make it explicit there will be an increase in July. Our view is that there’s more room to add to positive dollar bets."
Market Snapshot
- Equities: Nikkei 225 (+1.4%), FTSEMIB (+0.4%), CAC 40 up less than 0.1%, DAX up 0.4%, IBEX 35 up 0.1%, FTSE MIB up 0.4%, Euro Stoxx 50 up 0.1%, Vstoxx Index rises 3.6% to 21.2
- US futures: S&P 500 futures up 0.2%
- Commodities: Silver spot (-1.9%), Gold spot (-0.8%), Brent crude down -0.6% to $49.03/bbl, Gold down -0.8% to $1202.78/oz
- FX: Euro spot up 0.1% to 1.1126, Dollar index up 0.37% to 95.875; Yen spot (-1%), Dollar Index (+0.4%)
- Bonds: German 10yr yield up 2bps to 0.16%, French 10Yr yield up 3bps, Greek 10yr yield up 5bps to 7.31%, Portugal 10yr yield up 3bps to 3.08%, Italian 10yr yield up 1bp to 1.37%
Looking at regional markets, in the otherwise sleepy Asian session stocks fell with the Nikkei 225 outperforming and the Kospi underperforming; The MSCI Emerging Markets Index slipped 0.1 percent, bringing its decline in May to 3.9 percent, the most since January. Japan’s Topix index climbed 1.2 percent to a one-month high, led by exporters as the yen weakened. The Nikkei rose 225 +1.4%, Hang Seng +0.3%, Kospi -0.1%, Shanghai Composite up less than 0.1%, ASX up less than 0.1%, Sensex +0.2%; 8 out of 10 sectors fall with consumer discretionary and staples outperforming and materials and industrials underperforming.
European stocks pared modest early gains, with the Stoxx Europe 600 Index slipping less than 0.1% on worse than normal trading volumes. 10 out of 19 Stoxx 600 sectors fall; industrials is the most active, down 0.1% on 77% 30-day avg. vol., followed by media +0.2% on 75% avg. vol.; basic resources is the least active sector down 0.1% on 38% avg. vol. Top Stoxx 600 outperformers include: PostNL +6.9%, Banca Monte dei Paschi di Siena +2.5%, SES +2.3%, Banco Popolare +2%, Eutelsat +2%, Air France-KLM +1.8%, Georg Fischer +1.7%, Volkswagen +1.7%; Top Stoxx 600 underperformers include: Eurobank Ergasias SA -4.2%, bpost SA -3%, Zodiac Aerospace -2%, ams AG -1.8%, Alpha Bank -1.6%, Fingerprint Cards AB -1.4%, Steinhoff International Holdings -1.1%, ArcelorMittal -1%.
Key movers were Belgian postal company Bpost SA which fell 1.4 percent after saying it failed to reach an agreement to buy PostNL NV of the Netherlands in a surprise announcement following speculation of an imminent merger. PostNL NV gained 3.2 percent. Banco Popular Espanol SA added 0.5 percent after Spanish newspaper Expansion reported the lender has orders exceeding 4 billion euros ($4.4 billion) for its 2.5 billion-euro planned capital increase. Bayer AG rose 1 percent after people familiar with the matter said the chemical company is close to choosing banks to arrange funds for its proposed acquisition of Monsanto Co.
In FX, the yen fell as much as 1 percent to 111.45 per dollar after an aide to Prime Minister Shinzo Abe said a sales-tax increase will probably be delayed. Japan released retail sales figures on Monday showing that growth stalled in Asia’s second-biggest economy, bolstering the case for a planned sales-tax increase to be postponed. The MSCI Emerging Markets Currency Index declined 0.4 percent and is down 3 percent in May, snapping a three-month run of gains. South Korea’s won retreated 1 percent on Monday. For the month, South Africa’s rand led losses, sliding 9.9 percent.
The yuan dropped as much as 0.3 percent to a four-month low in Shanghai after the People’s Bank of China weakened its daily fixing by 0.45 percent. With the U.S. poised to raise interest rates and pressure building on China to ease monetary policy, cash outflows will accelerate, said Song Yu, China economist for Goldman Sachs/Gao Hua Securities Co. in Beijing.
In commodities, WTI crude fell 0.3% to $49.17 a barrel as Canadian producers moved to resume output after wildfires and before this week’s meeting of the Organization of Petroleum Exporting Countries. Total volume traded was about 50 percent below the 100-day average. Issues including a production freeze will be discussed at the June 2 talks, said Iraq’s Deputy Oil Minister Fayyad Al-Nima, who will head his ministry’s delegation. Oil was headed for fourth monthly gain, the longest winning streak since April 2011.
Gold for immediate delivery dropped as much as 1 percent to $1,199.80 an ounce, a level last seen in February, and is down 7 percent in May, the biggest monthly decline since June 2013. Money managers’ cut bullish bets on the metal by the most this year during the week ended May 24, according to U.S. Commodity Futures Trading Commission data. Silver slid 1.8 percent as of 10:54 a.m. in London, while platinum retreated 0.8 percent as the prospect of higher U.S. borrowing costs damped the appeal of non-interest-bearing assets. Copper futures slipped 0.9 percent in New York, snapping a four-day advance. The London Metal Exchange was closed on Monday.
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Jim Reid concludes the overnight wrap
So coming off the back of another week which was largely dominated by a chorus of relatively hawkish Fedspeak and which has resulted in tightening expectations for this summer moving to a slightly better than 50% probability, it’s over to the economic data now in what is a fairly packed calendar for the five days ahead. Indeed the big release is reserved for this Friday when we’ll get the May employment report including the all important nonfarm payrolls number. That said expectations are relatively modest (consensus currently 160k) and a large part of that is the impact of the striking Verizon workers during the survey period which looks set to muddy the numbers a little. We’ll have a full preview of that closer to the release. Before that though we’ll also get other important data including the personal income and spending reports tomorrow along with consumer confidence, as well as the ISM manufacturing (Wednesday) and services (Friday) prints.
It’s set to be a busy week in Europe too and datawise we’ve got various GDP reports, European CPI and of course the ECB meeting this Thursday. With June marking the start of the unprecedented CSPP program, we’ll be keeping a close eye on any potential further implementation details around that. With regards to the rest of the meeting, the view of our European economists is that this will be a similar ‘treading water’ meeting to that in April. They expect the tone of the press conference to reveal confidence about both the efficacy of policy and policy options available, as well patience over waiting for new policies to be implemented before considering whether or not to do more. Two themes which we also expect to feature in the press conference are Brexit and Greece (particularly with regards to the possible reinstatement of the collateral waiver). So it’ll be interesting to see what comments we get around those two.Ahead of all that then, most of the headlines from the weekend have been focused on Japan. Indeed much of that is on the news that Prime
Minister Shinzo Abe intends to delay the planned sales tax increase for two and a half years or until October 2019. The Nikkei newspaper is reporting that Abe was said to have conveyed this intention to various officials of the Liberal Democratic Party-led ruling coalition on Saturday night. Much of the chatter is that this will also likely trigger a lower house election, while a separate report is suggesting that Abe is also intending to seek a fiscal stimulus package worth ¥5tn to ¥10tn after the July upper house election.
This morning in Asia the big mover is the Yen which is currently -0.73% weaker and testing the ¥111 level again, which also marks a one month low. Japanese equity markets are leading the way as a result with the Nikkei and Topix currently +1.07% and +0.87% respectively. The Hang Seng (+0.70%) is also off to a decent start although elsewhere there’s not much to write home about. The Shanghai Comp (+0.16%), Kospi (-0.12%) and ASX (+0.11%) are all close to unchanged while most Asian currencies are a touch weaker. Meanwhile, Oil markets are also flattish this morning and are seemingly struggling to hold onto any move up through that $50/bbl level. With the OPEC meeting looming on Thursday we may well get a flurry of various production-related headlines in the next few days although that said expectations for any sort of material outcome are fairly low.
Back to Friday, which ahead of the Memorial Day weekend in the US and Bank Holiday weekend in the UK (with markets shut in both today) was a fairly unsurprisingly quiet day all round in markets. Much of the focus however was on the Fed Chair Yellen and her talk at Harvard University. In a nutshell Yellen echoed much of the recent commentary from her colleagues in saying that ‘it’s appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate’. So that sticks to the script in keeping the option of a summer move in play while Yellen also made mention to the fact that ‘growth looks to be picking up from the various data that we monitor’ and that she expects ‘inflation will move back up over the next couple of years to our 2% objective’. A reminder that a week today Yellen is due to speak again, this time in Philadelphia, and that will come with the added benefit of a bumper week of data so it feels like that will likely be the bigger speech for really influencing tightening expectations over the next couple of policy meetings.
With regards to the price action that ensued, the S&P 500 was already up a smidgen going into the comments before eventually finishing with a +0.43% gain by the closing bell, albeit with volumes some 20% or so below the usual average. That capped a decent week for the index too with a five-day return of +2.28% the highest since the first week of March. The gains also came despite a reasonable day for the US Dollar with the Dollar index closing up +0.37% with another similar move higher this morning. The Treasury market closed early although 2y and 10y yields did manage to finish up 4bps and 2bps higher respectively.
Pre-Yellen there was also some important economic data for markets to take note of. The main report was the second reading of Q1 GDP. Growth was revised up by three-tenths to +0.8% qoq although that was one-tenth less than expected. The core PCE was left unchanged at +2.1% qoq as expected. Meanwhile, the final University of Michigan consumer sentiment reading for May was revised down a greater than expected 1.1pts to 94.7 (vs. 95.4 expected). That said the print is still the highest since June last year. The downward revision reflected a notable markdown in the expectations component to 84.9 (from 87.5) which more than offset an upward revision for current conditions to 109.9 (from 108.6). Notably, inflation expectations were marked down by one-tenth at both the 1y (to 2.4%) and 5-10y (to 2.5%) brackets.
Closer to home European equity markets also managed to eke out some unspectacular gains on Friday, ending what was a similarly positive week for risk assets here. The Stoxx 600 finished the session +0.21% meaning it’s been up four days in a row now for only the third time this year. Credit markets were a bit more flat although the focus for the asset class continues to be on the new issue market. Indeed some €17bn of corporate and financials came to market in Euro’s last week ahead of the ECB this week, however more impressive are the numbers across the pond. Last week’s $39bn of issuance in the IG market takes May month-to-date to around $170bn and one of the biggest months by volume for years.
With the public holiday in the US today and bank holiday in the UK it’s an unsurprisingly quiet start to the week although today in Europe we will get the May CPI report for Germany, confidence indicators for the Euro area and also Q1 GDP data out of France.
Along with a busy week of data, we’ll also hear comments from the Fed’s Powell and Kaplan on Thursday, as well as Evans and Brainard on Friday. There’s little in the way of chatter out of the ECB this week aside from Draghi’s press conference post ECB. Before we wrap up, the one last event to keep an eye on is this Thursday’s OPEC in Vienna where - while expectations are relatively low for any sort of production freeze - could still be a market sensitive event depending on how much of an additional insight on global production we get.