It has been a seesion of violent, volatile gaps, starting with sharp gap up in S&P futures on Wednesday night, just around 10pm, which saw ES spike and rally to new all time highs on no news...
... which in turn helped generate a sea of green in Asian stock markets, with the Kospi rising after the Bank of Korea left rates on hold, while China's H shares surged 1.5% higher and the SHCOMP eventually closing up 1.4%; more interesting is that just an hour after the sudden jerk in S&P futures, there was a similar gap higher in both the on and offshore Chinese Yuan, with the CNY surging 0.25% within a 5-minute span...
... which a few hour hours later was followed by a sharp spike lower in both Brent and WTI after OPEC announced that despite "whispers" of a production cut, it was likely to stick with just the largely "priced in" 9 month extension, which yanked Brent back under $54 and WTI below $51...
... in turn sending the DAX and European stocks sharply lower in what until then had been a quiet morning session.
And all throughout these sharp, sudden gaps and spike, US Treasuries remains well bid, while the VIX was again slammed back under 10 as the momentum chasing and stop hunting algos have fun in an increasingly more illiquid, fragmented and broken "market."
And while traders remain focused on oil as the anticlimatic OPEC Vienna meeting concludes, and which has emerged as a "sell the news" event, we go back to the Chinese currency which surged the most in 2 months after at least two Chinese banks sold dollars in the onshore market, driving the yuan higher, according to three traders quoted by Bloomberg. The suggestion is that Beijing was directly manipulating the currency as the PBOC’s daily fixings had "materially diverged" from the prescribed formula, resulting in a gap between the reference rate and currency’s spot value, Khoon Goh, head of Asia research for Australia & New Zealand Banking Group in Singapore, writes in note Thursday. So, instead of sticking to fixing formula, the central bank opted for active intervention to narrow the difference, considering Thursday’s trading. According to Goh, the main rationale for stronger reference rates could be to prevent CFETS RMB Index from dropping too much as the dollar weaken. Ironically all of this took place just hours after the said that PBOC’s injection of U.S. dollars into the market when necessary isn’t exchange-rate manipulation. It followed this up with some very blatant and direct FX manipulation just to be safe.
Whatever the reason, this was the first session in months in which the Yuan saw an unexpected burst of volatility, which as observed previously may be the catalyst for a return of vol to both China and the EM complex.
And now, we go back to Vienna, where moments ago an OPEC delegate announced that OPEC had agreed to extend the existing oil production cuts for nine months, as expected, without any additional production cuts:
- OPEC AGREES TO EXTEND OIL PRODUCTION CUTS FOR NINE MONTHS - DELEGATE
So after all this, to summarize: European shares opened higher, but quickly dipped into negative territory after an oil selloff led to some profit taking. The STOXX 600 index was unchanged, after opening higher, led lower by resources companies, after another 4 percent drop in iron ore on China's Dalian Commodity Exchange. Earlier, Asian stocks, as measured by MSCI gained almost 1% to a two-year high after U.S. S&P futures surged late on Wednesday night to all time highs. This helped push MSCI's 46-country world stock index to a record high of 464.38 percent, up 0.3 percent on the day. E-mini index futures rose by 0.3% to 2410, trading at the highest in history, while the VIX .VIX "fear gauge" of expected volatility in the S&P 500 opened at 9.82, its lowest since May 10.
Following events in Vienna, c rude was trading 0.3 percent lower at $51.20 a barrel as of 10:23 a.m. in London, after touching the highest level in more than a month. Gold slipped less than 0.1 percent to $1,258.29 an ounce.
In rates, the yield on 10-year Treasury notes fell less than 0.1 percent to 2.25 percent after losing three basis points to 2.25 percent on Wednesday. French 10-year yields fell three basis points while those in Germany dropped four basis points.
Market Snapshot
- S&P 500 futures up 0.3% to 2,407.80
- STOXX Europe 600 down 0.3% to 391.28
- MXAP up 0.8% to 152.84
- MXAPJ up 0.9% to 499.72
- Nikkei up 0.4% to 19,813.13
- Topix up 0.2% to 1,578.42
- Hang Seng Index up 0.8% to 25,630.78
- Shanghai Composite up 1.4% to 3,107.83
- Sensex up 0.8% to 30,548.35
- Australia S&P/ASX 200 up 0.4% to 5,789.63
- Kospi up 1.1% to 2,342.93
- German 10Y yield fell 4.4 bps to 0.359%
- Euro up 0.3% to 1.1250 per US$
- Brent futures fall 0.7% to $53.58/bbl
- Italian 10Y yield rose 1.4 bps to 1.844%
- Spanish 10Y yield fell 2.6 bps to 1.584%
- Gold spot down 0.1% to $1,257.51
- U.S. Dollar Index down 0.2% to 97.05
Top Overnight Headlines via BBG
- The U.K. economy slowed more sharply than initially estimated in the first quarter as shoppers flagged and trade dragged on growth. Gross domestic product rose 0.2 percent, less than the 0.3 percent published late last month and down from 0.7 percent at the end of 2016
- Prime Minister Theresa May will raise British concerns over leaks of intelligence related to the Manchester terror attack with President Donald Trump as the BBC reported that police investigating the bombing have stopped sharing information with the U.S.
- Donald Trump’s demands to step up the fight against terrorism are set to resonate with his NATO partners when he visits the alliance headquarters for the first time on Thursday
- OPEC and its allies were poised to extend their production cuts for an additional nine months after last year’s agreement failed to clear a global supply glut or deliver a sustainable price recovery
- Fed’s Kaplan repeats his baseline outlook is for three rate hikes in 2017; Evans says U.S. has essentially returned to full employment
- Attorney General Jeff Sessions didn’t disclose Russia meetings, DOJ says
- BOJ’s Sakurai says vital to continue monetary easing with quantity, interest rates; Iwata says BOJ to avoid causing sharp yield rise at exit
- Fitch says China’s finances and track record underpin A+ rating
- Bank of Korea keeps interest rate at 1.25% as expected
- New Zealand budget forecasts surpluses rising to NZ$7.2b by 2021
Asia equity markets traded mostly higher following the positive US lead where stocks gained for a 5thconsecutive day and both S&P 500 and Nasdaq 100 posted fresh record highs, after FOMC minutes suggested a prudent and gradual approach on rate hikes. This resulted to gains in ASX 200 (+0.24%) and Nikkei 225 (+0.36%), with the latter also helped by commentary from BoJ board member Sakurai that it is vital to maintain monetary easing due to moderate inflation and uncertainty abroad. Shanghai Comp. (+0.9%) and Hang Seng (+0.6%) have also edged gains after the PBoC continued to inject liquidity into the interbank market and amid reports that China is mulling allowing foreign investors access to the futures markets. Finally, 10yr JGBs were indecisive with demand lacking amid positive risk appetite, while the 40yr auction also failed to spur demand with the b/c slightly lower than prior. Fitch stated that China's finance and track record underpin its A+ rating, but added that the nation's imbalances pose risks to economic stability.
Top Asian News
- Vanguard Starts New China Unit as Fund Management Market Expands
- Iron Ore Sinks to 7-Month Low in China After Moody’s Downgrade
- Japan Stocks to Watch: Toshiba Machine, Fuji Electric, Lawson
- Hong Kong Downgrade Over China Ties Masks Signs of Local Health
- China Says It Tracked U.S. Vessel and Warned It to Leave Waters
European equities kicked the session off broadly higher (Eurostoxx 50 +0.1%) in a continuation of the sentiment seen during US and Asia-Pac trade following last night's FOMC minutes release. However, with volumes light across Europe amid the Ascension Day holiday (not a market holiday for most of Europe), the DAX took a tumble amid no new newsflow. This has largely been attributed to mundane trading conditions with those on the continent in the market today also potentially sitting on the sidelines ahead of OPEC today. From a sector standpoint, energy names lag ahead of the cartel's announcement today with notable downside seen specifically in Petrofac (-14%) after suspending their COO. In fixed income markets, prices were dealt a helping hand by the dip seen in equities with prices also supported initially by the fallout from yesterday's FOMC minutes. More specifically the German 10yr June contract took out yesterday's highs at 161.13 with some also attributing the move to model buying and covering of shorts. In peripheral markets, yields are slightly softer with modest outperformance seen in BTPs with investors seemingly confident heading into today's exchange (announced yesterday).
Top European News
- Unemployment So Low It’s Time for Poland to Worry About It
- Cosco’s Serb Deal to Help Push Chinese Belt and Road Into Europe
- Daily Mail Falls Victim to Slumping Real Estate, Oil Markets
- Man United’s Europa Win Sends Ajax Stock Down Most in a Year
- Dialog Declines; Liberum Says Iphone Report ‘Highly Speculative’
- Intermediate Capital Jumps to Nine-Year High as Results Surprise
In currencies, the USD kicked off the session in close-proximity to the levels seen following the fallout of the Fed minutes with not too much else for traders to initially feed off. The main highlight on the data front came in the form of the second readings of UK GDP which printed softer than expected (Q/Q 0.2% vs. Exp. 0.3%), subsequently adding some modest pressure to GBP/USD despite firmer than anticipated business investment. Elsewhere, FX has been particularly rangebound with modest choppy price action seen following the budget release in which surplus forecasts for FY 16/17 were revised higher, although surplus estimates for the approaching years were reduced.
In currencies, WTI and Brent crude futures initially traded in close proximity to yesterday's highs with the base-case set at a 9-month extension to existing cuts. When this was largely confirmed by various oil ministers as they entered the meeting WTI and Brent crude futures faced heavy selling pressure, largely algo driven before retracing the majority of the move. Furthermore, the cartel have refrained from any deeper cuts (outside bet) and Libya and Nigeria are still free to produce without constraints. Additionally, the UAE minister said that the focus will be on output, not exports which is interesting given the cartel have been subject to criticism for doing little to control exports. Elsewhere, gold traded sideways overnight to hold on to the gains seen following the FOMC minutes release, while copper saw muted trade with prices flat for the entire Asia-Pac session.
Looking at the day ahead now, we’ll get the April advance goods trade balance, April wholesale inventories, May Kansas City Fed manufacturing activity index and last week’s initial jobless claims print. Away from the data the Fed’s Brainard is scheduled to speak at 10am. The other big focus for markets is the aforementioned OPEC meeting. It’s worth noting also that President Trump is due to meet with the EU’s Tusk and Juncker today in Brussels while also taking part in the NATO summit. That starts at 3pm BST.
US Event Calendar
- 8:30am: Advance Goods Trade Balance, est. $64.5b deficit, prior $64.8b deficit, revised $64.2b deficit
- 8:30am: Wholesale Inventories MoM, est. 0.2%, prior 0.2%; Retail Inventories MoM, prior 0.4%
- 8:30am: Initial Jobless Claims, est. 238,000, prior 232,000; Continuing Claims, est. 1.93m, prior 1.9m
- 9:45am: Bloomberg Consumer Comfort, prior 50.2
- 11am: Kansas City Fed Manf. Activity, est. 10, prior 7
- 10am: Fed’s Brainard Takes in Panel Discussion on Global Economy
- 10pm: Fed’s Bullard Speaks on U.S. economy in Tokyo
DB's Jim Reid concludes the overnight wrap
One thing that hasn't changed much after last night is the view of the Fed after they released their minutes. The expectations of a June hike were probably reinforced by remarks that it would "soon be appropriate" to raise rates but markets saw the overall release as dovish (10yr yields rallied 3.0bps after the release) as the Fed signalled that balance sheet reduction would involve a process of rolling caps on reinvestment which perhaps means a slower initial early pace. The suggestion is that the limits would initially be set at low levels and then raised every three months, over a set period of time, to their fully phased-in levels. The minutes confirmed that “nearly all policymakers expressed a favourable view of this approach”. The statement also added that “policymakers agreed that the committee’s policy normalization principles and plans should be augmented soon to provide additional details about the operational plan to reduce the Federal Reserve’s securities holdings over time”. It’s worth adding that prior to the minutes the Fed’s Harker also said that the strategy for the balance sheet should be to “keep it simple and let the markets know what we’re doing”.
As well as Treasury yields slipping the US Dollar (-0.12%) was also a touch weaker following the statement, likely for the same reason. While it feels like a rate hike next month is near to a done deal, pricing for next month was actually a little lower too, albeit at still relatively well priced-in levels. Based on pricing of OIS forwards the odds of a June hike finished at 75% versus 77% prior to the minutes. This method uses the effective rate and seems to be a more reliable and realistic pricing method compared to Bloomberg’s calculator which still shows the odds at 100% (and unchanged over the last few days). Meanwhile there appears to be no stopping US equity markets at the moment. The S&P 500 finished +0.25% last night and back above 2,400 to a new record high close. It also came to within a whisker (0.01%) of hitting the all time intraday high seen back on May 16th. The Dow (+0.36%) also had another decent day while the minutes appeared to be another vol-killer with the VIX dropping over 6% to a near two-week low of 10.02. Markets were quiet in Europe prior to all this with the Stoxx 600 (+0.09%) closing a touch higher.
Before we look at how markets are doing this morning, it’s noting that today is the Ascension Day Holiday in Europe. While it’s observed in several countries in this continent most major markets will still be open with just Swiss and Nordic markets due to remain closed, although expect volumes to be a bit thinner than usual.
The main event today is the OPEC and non-OPEC producers meeting in Vienna. The tentative schedule suggests a 2pm BST start but as always with these sorts of things it wouldn’t be a great surprise to see leaks and speculation throughout this morning. All the chatter is that we’ll get an extension on the production cut deal, likely for another 9 months based on comments from various energy ministers. Our commodity strategists note that given the profusion of reassuring noises coming from oil ministers, there are apparently few points of potential friction. They highlight that while earlier reports variously indicated that either "all producers are in agreement" (Saudi Arabia) or that "almost all" countries are in agreement (Iraq), Iraq's public acceptance of a nine-month extension establishes this as the most likely outcome. A deepening of cuts, though, has more potential to provide an upside surprise as the idea had been dismissed earlier by oil ministers. The inclusion of smaller producing non-OPEC countries such as Turkmenistan, Egypt and the Ivory Coast in the deal would be a negligible boost, in our team’s view. Oil is going into the meeting on a bit of a tear of late, no doubt fuelled by rising expectations of a positive outcome. WTI is sitting at $51.82/bbl this morning (up +0.90%) which is about +13% from the April lows, although still below the YTD high of $54.45/bbl.
Refreshing our screens, despite a slightly soft start most major bourses are following the lead from Wall Street last night and edging higher. The Nikkei (+0.54%), Hang Seng (+0.42%), Kospi (+0.79%), Shanghai Comp (+0.39%) and ASX (+0.11%) are all up with US equity futures. It’s worth adding that Chinese equities made a decent u-turn yesterday post the sovereign downgrade to finish flat on the day and the move this morning suggests markets have already shrugged it off. It’s also worth noting that Hong Kong has since been downgraded by one notch by Moody’s to Aa1 post that China move. Also worth highlighting, the Congressional Budget Office in the US has found that the Republicans legislation to overhaul the US healthcare system is estimated to result in an increase in the number of uninsured people by 23 million while also reducing the budget deficit by $119bn over 10 years. That is $32bn less than under the previous version of the legislation.
Moving on. As well as hearing from the Fed yesterday there was also some focus on ECB President Draghi’s speech in Madrid, especially following Coeure’s comments on Tuesday. Ultimately the tone from Draghi appeared to confirm that sequencing would not change. The key passage of his speech was his mention that “there is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conferences”. He added that “asset purchases are inevitably more difficult to calibrate, more complex to implement, and more likely to produce side effects that other instruments, including moderately negative rates”. So this suggests a more close alignment between ECB officials that a taper will come first, followed by rate hikes later.
Wrapping up, yesterday’s economic data was largely a sideshow although in fairness it was all fairly second tier in nature. In the US we learned that existing home sales fell slightly more than expected in April (-2.3% mom vs. -1.1% expected) while the FHFA house price index edged up +0.6% mom in March. In Europe the only data released came from Germany where consumer confidence edged up to its highest level since 2001 at 10.4 (from 10.2).
Before we look at the day ahead, there was some noise around Italy yesterday after the Industry Minister Carlo Calenda said that the country still has much work to do before it could hold an election, suggesting he would be opposed to an early vote this year. Calenda said that Italy has to “arrive at elections at the right time....with an electoral law that gives, if not the certainty, as least a reasonable probability that a government can be formed afterwards”. It’s worth reiterating that political risks still very much remain an issue in Italy with opinion polls tightly bunched (and within the margin of error). It’s also worth noting that the banking sector is still far from being fixed and one would imagine that the hope would be for recaps to happen before the election.
Looking at the day ahead now, in terms of data, this morning in Europe the only real release of note is a second estimate of Q1 GDP in the UK where no change from the +0.3% qoq flash reading is expected. We’ll also get the growth component details. In the US this afternoon we’ll get the April advance goods trade balance, April wholesale inventories, May Kansas City Fed manufacturing activity index and last week’s initial jobless claims print. Away from the data the Fed’s Brainard is scheduled to speak at 3pm BST while the ECB’s Constancio is due to speak this evening. The other big focus for markets is the aforementioned OPEC meeting. It’s worth noting also that President Trump is due to meet with the EU’s Tusk and Juncker today in Brussels while also taking part in the NATO summit. That starts at 3pm BST.