S&P futures are sliding this morning, down 0.4% and tracking the accelerating decline in European and Asian stocks, driven by a move higher in global interest rates, which started with Japanese 10Y yields rising to 0.1% for the first time since February, but mostly Bund yields which spiked after tripping stops, and jumped as high as 0.53% for the first time since early 2016. Oil climbs, dollar and gold slide. Economic data include initial jobless claims, trade balance, Markit PMI readings.
The main story of the otherwise quiet session has been the sharp move higher in bond yields, and particularly German 10y yields, which trended higher ahead of the release of the ECB minutes and large duration supply, extending losses after soft French auction results, and piercing the widely flagged 0.50% support level then rising as high as 0.53%, a 17 month high that saw declines quicken as futures volumes surged. French bonds were squeezed into the auction, before soft demand was seen with 30y bid/cover dropping to 1.53x vs 1.93x prior. Hedging related to the auction appeared to weigh heavily on bunds.
Here is Citi's quick take on the sharp move:
Note a move lower across the whole fixed income space here and one flashing red headline on our Bloomberg screens:
*GERMAN 10Y BOND YIELD TOUCHES 0.50%, FIRST TIME SINCE JAN. 2016
The aggressive move first began at 10:00 BST and seems to have been accelerated by stops through levels we haven't seen in 18 months. Bloomberg suggests that the catalyst was the results of a French debt auction which showed a drop in demand for French 30-year debt. Regardless the reason, German bunds are now leading the moves across the global fixed income space, both in Europe and in US treasuries, with the US 10y yield now at 2.357%. This is spilling over into FX, with EURUSD higher and USDJPY following US yields. However we would highlight the journey into the weekend is a long one.
First up is ECB minutes at 12:30 BST but we are also due to hear from ECB's Praet, Weidmann and Nowtony today. If there are further attempts to counter the markets hawkish interpretation of Draghi's Sintra appearance, then yields are in for a nasty ride.
The Bund yield is up 30bps since June 23 low at 23bps, with the German 2/10 curve bear steepening by 5bps tp 112bps. The driver for the sudden weakness was a poor France 30y auction which was met with weak demand as bid/cover drops to 1.53x, tailing 11c. Bund futures volumes surged as stop barrier resistance was taken out and the the widely highlighted 0.50% level broken, with over 18k futures trading in a 1-minute period, the largest volumes of the session. The move above the YTD high level of 0.50% opens up the 200-week moving average at 69bps, according to Bloomberg technical analyst Sejul Gokal. As German bund yields were blowing out, their French peers rose six basis points and those on gilts added four. The yield on 10-year Treasuries rose 4 bps to 2.37%, after falling three basis points Wednesday.
"We believe a strategic short duration bias to core Europe looks attractive given the continuing improvement in the economic backdrop,” said the London-based Insight Investment. “We also expect the European Central Bank to announce a tapering of its asset purchases in September.”
While Germany bore the brunt of the selloff, the move was widespread and has hit virtually every DM:
Equities had a largely quiet session at least until the recent yield fireworks, with MSCI's index of Asia-Pacific shares ex-Japan closing down 0.1 percent overnight. Japan's Nikkei slipped 0.5 percent as a stronger yen depressed the outlook for export earnings. Japan’s Topix dropped 0.2 percent and the yen weakened by the same amount. The South Korean won slumped 0.6 percent to the lowest level since March. India’s Sensex advanced 0.5 percent, poised for a record close.
Trading in Asia has been buffeted this week by tensions on the Korean peninsula after North Korea fired a missile, which U.S. officials concluded was an intercontinental ballistic missile, into Japanese waters. In Europe, a modest early selloff accelerated as US traders walked to their desks, with the Stoxx 600 down 0.7% ahead of the ECB's minutes. Euro zone blue chips and Britain's FTSE 100 also hit a day'w los of -0.8%, on track for the biggest drop since May 18.
S&P 500 futures, which were mostly unchanged for much of the session, have dropped 0.4% after closing higher by 0.2% Wednesday on the back of the Nasdaq's 0.9% jump.
The other major mover of the session was oil, which clawed back some of its biggest loss in four weeks after data showed U.S. stockpiles declining. Brent oil was at $48.35 a barrel in early European trading as it recovered 1 percent of the 4 percent lost on Wednesday after rising OPEC exports had raised fresh questions about the group's plans to cut back supply. WTI crude futures rose 1.3 percent to $45.71 a barrel. The contract dropped 4.1 percent Wednesday, the most in four weeks, as Russia was said to oppose any proposal to deepen OPEC-led production cuts.
Gold was off 0.2 percent at $1,224.24 per ounce though it was up from an eight-week low of $1,217.14 it had hit the previous day.
The dollar meanwhile was stalled at 113.32 Japanese yen as it consolidated a near 1 percent gain this week and was also hovering at $1.13495 per euro. The Bloomberg Dollar Spot Index was little changed.
Traders have been wary of making any sudden moves before a flurry of U.S. data later, which includes ADP employment, ISM non-manufacturing PMI and the initial jobless claims report, all of which are appetizers ahead of Friday's Payrolls numbers.
Focus on Thursday will likely be on minutes from the latest European Central Bank meeting, and on private jobs data in the U.S. Minutes from the Fed showed a lack of consensus about when to shrink the central bank’s $4.5 trillion balance sheet, and how to approach policy strategy in a time of low inflation.
Bulletin Headline Summary from RanSquawk
- Asian equities trimmed opening gains in what was a light session overnight with FX markets relatively rangebound
- European trade has been subdued as many await data
- Looking ahead, highlights include ECB minutes, ADP and DoEs
Market Snapshot
- S&P 500 futures down 0.4% to 2,417.25
- STOXX Europe 600 down 0.74% to 380.15
- MXAP down 0.2% to 153.95
- MXAPJ down 0.05% to 503.59
- Nikkei down 0.4% to 19,994.06
- Topix down 0.2% to 1,615.53
- Hang Seng Index down 0.2% to 25,465.22
- Shanghai Composite up 0.2% to 3,212.44
- Sensex up 0.6% to 31,445.23
- Australia S&P/ASX 200 down 0.08% to 5,758.76
- Kospi down 0.02% to 2,387.81
- Brent Futures up 1.5% to $48.50/bbl
- Gold spot down 0.2% to $1,224.17
- U.S. Dollar Index down 0.1% to 96.16
- German 10Y yield rose 2.0 bps to 0.49%
- Euro down 0.05% to 1.1346 per US$
- Italian 10Y yield rose 4.6 bps to 1.865%
- Spanish 10Y yield rose 2.4 bps to 1.595%
Top Overnight News
- Xi May Put Ball in Trump’s Court on Talks With North Korea
- Trump Weighs ’Pretty Severe Things’ for North Korea Over Launch
- Cerberus Is Said to Consider Commerzbank Stake in Bank Push
- Manhattan Home Sales Surge as Cuts Bring Prices to Buyers’ Level
- Global Payments Held M&A Talks With Worldpay, Dealreporter Says
- Facebook, Twitter, Snap Said to Seek World Cup Clips From Fox
- Electric Cars Seen Dominating by 2040 as Battery Prices Plunge
- Ford to Increase Focus Car Output in China for Exports to U.S.
- Toyota, Mercedes, Lincoln Earn Top Safety Pick Eluding Model S
- China Agency Orders VW, GM, Benz to Recall Takata Airbags
- Celgene to Develop, Commercialize BeiGene’s Cancer Drug
- Costco Wholesale June Comp Sales Beat Estimates
- Amex May Lose Fight Over EU Card Fee System: EU Court Aide
- Yuhan Rises After Signing Hepatitis C Drug Deal With Gilead
- SpaceX Successfully Launches 10th Falcon 9 Rocket of 2017
- John McAfee Settles Lawsuit Against Intel Over Use of His Name
- Toshiba Said to Mull Move to Western Digital Bid: Kyodo
Asia equity markets failed to sustain opening gains and traded mostly negative as a lack of drivers and weakness in energy suppressed sentiment in the region. ASX 200 (-0.1%) and Nikkei 225 (-0.5%) were both lower with energy among the underperformers after crude prices fell around 3%, while a firmer JPY kept Japanese exporters in check. Shanghai Comp. (-0.3%) and Hang Seng (-0.3%) were choppy as China's continued efforts to support business conditions was overshadowed after the PBoC refrained from liquidity injections and reiterated a prudent policy stance. 10yr JGBs were marginally lower and failed to benefit from the weak sentiment across the region, while the 30yr JGB auction results also failed to spur demand with the b/c virtually unchanged despite a decline in accepted prices from last month.PBoC refrained from conducting open market operations for the 10th consecutive session. PBoC set CNY mid-point at 6.7953, Prey. 6.7922.
Top Asian News
- Konica, INCJ to Buy U.S. Gene Tester Ambry For $800 Million
- Singapore Luxury Home Prices Set to Recover, Guocoland Says
- IDFC, Shriram Group Said to Explore Merger, ET Now Reports
- Xi May Put Ball Back in Trump’s Court on Talks With North Korea
- Japanese Stocks Fall as Yen’s Appreciation Weighs on Exporters
- Short Sellers Burnt Again as Travel Agency’s Shares Take Off
- India States Unlikely to Borrow More in FY18: Official
- Siam Commercial Bank Said to Halt Insurance Unit Sale: Reuters
- Focus on BOJ’s Operation as 5-, 10-Year Yields Rise: Barclays
European bourses see another unexciting start this morning with indices failing to find any firm direction after the Fed minutes appeared to confuse markets over the future path for interest rates in the U.S. Downbeat earnings from Reckitt Benckiser (-2%) who also cut their guidance following the cyber-attack, ABF are among the best performers after they stated that their outlook had marginally improved. In fixed income markets, a slew of supply will hit with Spain, France and the UK. Selling pressure has been evident for Bunds consequently dragging T-notes lower as the German 10Y breaks above 0.5% and now trades at the highest level since Jan'16, (0.524%) while 17k sell contracts also adding to the pressure
Top European News
- Trump Gets Missile Deal, Request for Energy and Troops in Warsaw
- European TV Ad Trends Fail to Track Economic Revival: JPMorgan
- Norwegian Air Tumbles After CFO Departure, Traffic Figures
- Kepler Bets on European Small, Mid-Cap Value Stocks in 2H
- U.K. Working to ‘Mitigate’ White House Attitudes, Johnson Says
- Norwegian Air Says CFO Frode Foss Quits After 15 Years
In currencies, overnight was a relatively muted affair in major FX pairs, EUR hovering within around 113.50 with yields keeping the currency afloat as the German 10Y approach 50bps, price action likely to be tame until ADP Employment Change (Exp. 185k). ECB minutes also scheduled, although this may provide little to no new information given recent comments from ECB's Coeure that the ECB have yet to discuss changing policy. Additionally, today there are around 3yards worth of expiries from 1.1290-1.1330. The FOMC minutes release last night delivered no meaningful surprises, which had been reflected in the price action where the USD edged a fraction higher, however the move was relatively muted, and eventually unwound. This saw USD/JPY make another push towards 113.50, however notable selling interest at these levels saw the pair back down to the low 113s. Yesterday's APIs provided a slight lift to commodity currencies with AUD back above 0.76 and CAD dipping past 1.2950. FX price action tame thus far as participants await the ADP data, with major pairs trading sideways this morning.
Commodities have followed other asset classes with subdued trade this European morning. Volatility was seen in oil markets post the US close as the APIs reported a draw of 5.7mln barrels, resulting in slight reprieve to oil markets, which saw the 2% downturn yesterday. Gold continues to consolidate in the 1299.38 — 1218.00 range, as the yellow gold is seemingly resulting the week's risk appetite. Metals have struggled to find any direction through Asian and European trade as all majors have failed to see any movement >1 %.
Looking at the day ahead,this morning in Europe the only data scheduled to be released is May factory orders in Germany. In the early afternoon we’ll then get the ECB minutes which could garner a little more interest than usual given some of the ECB speak of late. In the US we get the ADP employment print for June along with initial jobless claims, the May trade balance, services and composite PMIs and finally the non-manufacturing ISM for June. Away from the data, today we are due to hear from the Fed’s Williams and Powell. The ECB’s Praet is also due to speak this morning in Paris while Weidmann and Nowotny speak this evening on the subject ‘future of the euro’ which could be worth tracking.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -6.2%
- 7:30am: Challenger Job Cuts YoY, prior 9.7%
- 8:15am: ADP Employment Change, est. 185,000, prior 253,000
- 8:30am: Initial Jobless Claims, est. 243,000, prior 244,000; Continuing Claims, est. 1.94m, prior 1.95m
- 8:30am: Trade Balance, est. $46.3b deficit, prior $47.6b deficit
- 9:45am: Markit US Services PMI, est. 53, prior 53;
- 9:45am: Markit US Composite PMI, prior 53
- 9:45am: Bloomberg Consumer Comfort, prior 48.6
- 10am: ISM Non-Manf. Composite, est. 56.5, prior 56.9
DB's Jim Reid concludes the overnight Wrap
The hot weather is back in the UK and as I type we're bracing ourselves for a big storm this morning. Over the last three years I've had 2 tellies, 4 Sky TV boxes, 2 projectors, 1 amplifier, 2 DVD players and 1 Apple TV player blown up after big thunderstorms. They say lightening doesn't strike twice in the same place but that's clearly a falsehood as twice over this period everything connected to the internet in my house has been frazzled. We think we've lightning proofed the house now but with Game of Thrones starting in 10 days one can't be too careful so last night I unplugged the internet and all the TVs just in case. After all "Winter is Coming!!".
It felt like neither rain nor shine in the FOMC minutes last night and instead we saw a relatively well balanced discussion between committee members. The focal point was the chatter around the balance sheet normalization process with the text revealing that “several preferred to announce a start to the process within a couple months” however also “some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation”. So that suggested a bit of a divide amongst committee members. Other interesting aspects of the minutes included some concern about easing financing conditions. Indeed it was highlighted that “some participants suggested that increased risk tolerance among investors might be contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a build-up of risks to financial stability”. On inflation the main takeaway was “Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run”. Our US economists expect the Fed to likely take a pause on its rate hiking cycle in September and begin the process of balance sheet normalization at that meeting.
Markets were little moved post the minutes. Treasuries were already a little firmer heading into the data following a big fall in the price of Oil (more on that shortly) before the 10y closed 2.7bps lower at 2.324% - the first time yields have closed lower since last Monday. The US Dollar index pared an earlier modest gain to finish unchanged although EM currencies had another day to forget (South African Rand -1.39%, Argentine Peso -1.29%, Turkish Lira -1.29% amongst those to tumble). Meanwhile in equity markets the S&P 500 edged to a small +0.15% gain on the back of a decent session for tech names (Nasdaq +0.67%) which helped to offset the biggest decline for the energy sector (-2.01%) since March 8th.
Indeed WTI Oil dropped nearly $2/bbl a yesterday to close at $45.13/bbl and suffered its biggest daily decline in a month. There appeared to be a few justifications going around for move with some pointing towards that Russia news we noted yesterday on pushing back on further production cuts, while profit taking following the recent rally and a Reuters report suggesting the OPEC exports rose in June were also cited as possible explanations. Late last night the latest API data revealed a drop in US crude inventories last week which has helped WTI claw back about +0.60% this morning.
Meanwhile in FX the euro was a bit softer yesterday and traded back down towards 1.1300 yesterday morning following comments from the ECB’s Coeure. The board member said that the ECB Governing Council has not been discussing any changes to monetary policy. However that was somewhat balanced by Coeure’s reference to the reaction in European bond markets and the euro last week as not being particularly significant, which suggests a slightly more comfortable stance.
In Asia this morning it’s been a mostly quiet and directionless session with little in the way of new news. The Nikkei (-0.27%), Hang Seng (-0.07%) and Kospi (-0.14%) are all posting modest losses while the Shanghai Comp is little changed and the ASX (+0.08%) is a shade higher. The Yen is a bit firmer although Gold is down a fraction.
Moving on. This morning we have published our latest HY monthly where we provide a further update to potential relative value between BBs and Bs after a month that provided further performance from EUR HY credit that was somewhat curtailed by the government bond sell off on the back of the more hawkish tone from the ECB's Draghi as well as other central bankers. In addition we also update our analysis assessing relative value across the capital structure.
Back to yesterday, the main interest in the macro data released was the solid set of remaining European PMIs. The final services reading for the Euro area was revised up 0.7pts to 55.4. While that is a little lower relative to the last 3 months it is more or less in line with February and higher than any reading in either 2015 or 2016. The upward revision was primarily driven by France (+1.6pts to 56.9) while Germany was revised up 0.3pts to 54.0. A first look at the data outside the core saw Italy come in at 53.6 which is a reasonable drop from the 55.1 in May while Spain printed at 58.3 and a full point ahead of the month prior. The end result of all these revisions saw the composite Euro area reading come in at 56.3 for June which was 0.5pts lower relative to May but, as our economists noted, still suggestive of +0.8% qoq Q2 GDP growth. It’s worth noting that in the UK the services PMI came in more or less as expected at 53.4 (down from 53.8) which has left the composite at 53.8 and the lowest since February (when it was also 53.8). Across the pond yesterday the data didn’t really do much to move the dial. Factory orders in May were even softer than the market had already pegged (-0.8% mom vs. -0.5% expected) but are still up a fairly solid +4.2% yoy. Core capex orders were revised up four-tenths to +0.2% mom for May while headline durable goods orders were revised up three-tenths to -0.8% mom.
Before we wrap up and move on to today’s calendar it’s worth noting that next week will mark the unofficial commencement of Q2 earnings season in the US with a number of the big banks amongst those to report. Last night DB’s Binky Chadha published a preview note. In it he notes that the bottom up consensus EPS growth for the S&P 500 is 7.1% yoy for Q2. Binky makes the point that over the last 10 years, earnings have always surprised to the upside with a median beat of 3.4pp. Should we see this median beat for Q2 then EPS should end up at 10.6% yoy. If that is the case, it should mark the second consecutive quarter of double digit earnings growth – the first time that has happened since 2011. Sector wise tech and financials are expected to post the strongest median growth while consumer discretionary is expected to see earnings growth slow. For more, click here for Binky’s report.
Looking at the day ahead, this morning in Europe the only data scheduled to be released is May factory orders in Germany. In the early afternoon we’ll then get the ECB minutes which could garner a little more interest than usual given some of the ECB speak of late. Over in the US this afternoon we’ll get the ADP employment print for June along with initial jobless claims, the May trade balance, services and composite PMIs and finally the non-manufacturing ISM for June. Away from the data, today we are due to hear from the Fed’s Williams and Powell. The ECB’s Praet is also due to speak this morning in Paris while Weidmann and Nowotny speak this evening on the subject ‘future of the euro’ which could be worth tracking.