Equity Algos Await Seasonally Adjusted Data Dump Before Today’s Buying Spree

If yesterday’s non-record, red-tick close can be attributed to algos applying the wrong ISM seasonal factor to the day, believing it was Wednesday instead of the permabullish Tuesday, today there is no such excuse, which is why we fully expect the unallowed redness with which futures are currently trading to promptly morph into a non-red color especially with the USDJPY doing it best to ramp to 103.000 levels overnight, stopping out all shorts, and push spoos to fresh record highs. It is an algo world after all.

It appears that already record low volatility is being pushed even lower in anticipation of numerous imminent data releases, which will naturally “beat” courtesy of seasonal adjustments, including today’s ADP and Services ISM (first, second and final release), tomorrow’s ECB announcement and Friday’s payrolls number. Which while good for low volume levitation means bank trading revenues continue to deteriorate forcing banks to pitch M&A deals to clients, which in turn result in even more synergies and more layoffs: because in order to preserve the bottom line, crushing real employment further is perfectly acceptable collateral damage.

In terms of tomorrow’s ECB meeting, the newswires continued to tick over with reports about what the ECB was discussing and the various policy tools that it was considering. Bloomberg reported that the central bank is currently debating a benchmark and deposit rate cut of 10-15bp, as well as a program modelled after the BoE’s funding for lending scheme to try and improve the policy transmission mechanism for the SME sector. That proposal could see the central bank offering funding equivalent to 5% of their outstanding loan portfolios. The same Bloomberg article reported that Draghi is likely to signal that any rate cut this week won’t necessarily be the final one, and that he will probably reiterate his commitment to keep rates at present or lower levels. The report also said that the ECB will lower their 2014 inflation outlook from 1% forecast in March, but keep later years’ forecasts largely unchanged. The article said that the new forecasts do not take into account the May data.

Turning to Asia, risk is taking a breather following what was a softer session for EM yesterday (CDX EM -0.15pts) amid the continued UST selloff. This has carried through to a number of Asian EMFX bellwethers including IDR (-0.12%), INR (-0.05%) and KRW (-0.3%) overnight. Asian equities are also seeing some profit taking paced by the Hang Seng (-0.5%). DM Asian sovereign bonds are weaker (Australia +6bp) following in the footsteps of the US treasury market. The Aussie dollar is unchanged against the greenback following a small spike post the release of Q1 GDP (1.1% vs 0.9% expected) which was quickly pared.

Bulletin headline summary from Bloomberg and RanSquawk

Treasuries gain for the first time in four days, longer maturities lead; ADP Employment due at 8:15am ET for initial look at May employment in U.S.; ECB tomorrow amid expectations for further accommodation.
Draghi likely to signal that any rate cut this week won’t necessarily be the final one; while final decision won’t be until tomorrow, policy makers are debating 10bps-15bps cut in benchmark and deposit rates, according to two officials
Pioneer Investment Management Ltd. and AllianceBernstein Holding LP are among investors who say traders should be prepared for the ECB falling short of the bond market’s expectations tomorrow
Markit’s euro-area services PMI rose to 53.2 from 53.1 in April; separate data showed consumer spending barely grew in the first quarter and net trade subtracted from growth
Since U.S. Army Sergeant Bowe Bergdahl’s release from Afghanistan on May 31, Republicans and Democrats have raised questions about the Obama administration’s deal that freed five Taliban prisoners; some of Bergdahl’s former fellow soldiers have faulted him for allegedly deserting his unit
Top advisers to Obama are trying to sell wary Democrats in the U.S. Senate on the administration’s plan to cut greenhouse-gas emissions from power plants; a number from energy producing states have expressed concern about the proposed rule
U.K. services grew faster than forecast, according to Markit, which said the economy “continued to boom” last month as PMI came in at 58.6 vs 58.2 median estimate
Chris McDaniel breathed new life into the Tea Party movement, mostly contained this year by a business-aligned faction of the Republican Party, as he appeared to have forced U.S. Senator Thad Cochran into a runoff nomination race in Mississippi.
Sovereign yields higher. Asian and European equity markets lower. U.S. stock futures fall. WTI crude gains, gold little changed, copper slides

US Economic Calendar

7:00am: MBA Mortgage Applications, May 30 (prior -1.2%)
8:15am: ADP Employment Change, May, est. 210k (prior 220k)
8:30am: Trade Balance, April, est. -$40.8b (prior -$40.4b); Annual benchmark revisions to trade data
8:30am: Nonfarm Productivity, 1Q final, est. -3.0% (prior -1.7%); Unit Labor Costs, 1Q final, est. 5.3% (prior 4.2%)
9:45am: Markit US Services PMI, May final (prior 58.4)
Markit US Composite PMI, May final (prior 58.6)
10:00am: ISM Non-Manufacturing, May, est. 55.5 (prior 55.2) Central Banks
10:00am: Bank of Canada interest rate decision (prior 1%)
2:00pm: Federal Reserve issues Beige Book Supply
11:00am POMO: Fed to buy $850m-$1.10b in 2036-2044 bonds

ASIAN HEADLINES

Shanghai Comp (-0.66%) and Hang Seng (-0.6%) fell after China’s Vice Environment Minister said that pollution control may affect China’s GDP growth. Nikkei 225 (+0.2%) traded mixed although remained above the 15,000 handle.

FIXED INCOME

Bunds opened slightly higher in-line with the small rebound in T-notes overnight, following the largest losing streak for 2 months for US bonds (in recent trade yields have hit their lowest levels since October at 2.4%). Since the open fixed income markets have been relatively subdued, trading sideways, with Bund volume rolling over to Sep. with the June contract expiring on Friday. Markets have paid little attention to the ECB sources comment that this week’s cut will not be the last but it does go to show the divergence in EU and US monetary policy.

Gilts have seen continued underperformance ahead of the Queen’s speech at 1130BST where she is expected to unveil a sweeping set of reforms for the pensions industry which has already weighed on UK pension providers earlier in the week.

Markets were unreactive to European PMIs and Eurozone GDP which was unrevised.

US HEADLINES

Fed’s Fisher (Voter-Hawk) said will vote to end QE with final USD 15bln trim in October and will not focus on rate hikes until after QE3 taper is complete. He added that odds are slim of a rate hike this year. (RTRS)

EQUITIES

Mid-way through the EU session equities moved into negative territory across the board (Eurostoxx -0.6%) on little fundamental news with volumes 16% lower than normal heading into the ECB tomorrow, with oil and gas and utilities the worst performing sectors.

Overnight AUD/USD strengthened as GDP came in better than expected, however gains were pared as seasonal adjustments for mining were said to be inflated. A slightly firmer USD (+0.08%) has weighed on EUR/USD and GBP/USD, however Cable did see a fast money move higher of 30 pips on a stronger than expected Service PMI. FX markets were unreactive to the final reading of the European PMIs.

COMMODITIES

WTI broke the USD 103 handle on further supply disruptions in Libya and is higher by USD 0.75 trading above Monday’s high.

In metals platinum is down 0.47%, reaching its lowest levels since 12th May, on the break of the 200DMA weighed on by a potential resolution in strike talks in South Africa, where AMCU believe there may be a breakthrough by the end of today. July copper futures (-1.6%) under-perform base metals as the downward trend is continued following concerns over Chinese growth and reports of a probe into metals warehousing at the Qingdao port. Gold on the other hand is trading higher by 0.1% but has traded sideways. Worth noting that there was an extremely large outflow yesterday of 111,405.7oz (-1.59%) in ETF Gold securities.

US API Crude Oil Inventories (May 30) W/W -1400k vs. Prev. 3490k (BBG) – Cushing Crude Inventories (May 30) W/W -300k vs. Prev. -1510k – Gasoline Inventories (May 30) W/W 800k vs. Prev. -1440k – Distillate Inventories (May 30) W/W -300k vs. Prev. 821k

The situation in Eastern Ukraine continues with global newswires reporting of further conflicts in Sloviansk, however the market continues to be un-reactive to the development as Ukrainian armed forces continue to battle pro-Russian separatists.

* * *

Deutsche’s Jim Reid summarizes the balance of overnight key developments

We’ve arrived at an important few days for markets starting with the US ADP employment and services ISMs/PMIs data today, the ECB/Draghi tomorrow and US nonfarm payrolls on Friday. Previewing today’s data, consensus is calling for a +210k change in ADP private nonfarm payrolls in May while DB is calling for +200k. This is broadly consistent with the +220k gain in the previous month and the three-month rolling average of 207k. Depending on today’s print, we could see some fine-tuning of Friday’s payrolls forecasts, but we note that last month showed a large divergence between the ADP and official NFP (220k vs 288k). The ISM non-manufacturing (expected 55.5 vs 55.2 previous) also provides a useful preview for Friday’s payrolls via the employment component reading. Also due for release today is the US trade report for April.

While we wait and watch for today’s data, the generally better tone to yesterday’s US data docket helped drive treasury yields higher, encouraged by the earlier weakness in bunds and other European bonds, despite the lower than expected Euroarea CPI (0.5% vs 0.6% expected). Indeed with the recent positive US data surprises, the Bloomberg Economic Surprise Index has now reached its highest level since July 2013. US factory orders for April rose 0.7% which beat consensus of 0.5%. Vehicle sales in May were running at a rate of 16.7M, versus 16.1M consensus. According to Redbook, US national chain store sales in May rose 0.7% m/m, and was up 3.8% y/y, marking the fastest pace of growth since November 2013 – which some interpreted as evidence of pent-up demand from the cold winter. Separately, the ICSC chain store index rose 3.1% y/y and 2.9% w/w, the first gain after four declines. The IBD economic optimism index (47.7 vs 47.0 expected) and ISM New York survey (55.3 vs 50.6 expected) were both encouraging as well.

The US 10yr yield finished the session yesterday at the highs of 2.60%, having added 7.2bp on the day, and now having added a total of 20bp since the intraday low of 2.40% recorded on the 29th of May. The front end of the UST curve remained fairly stable however, leaving the UST curve noticeably steeper with the 2s/30s curve adding around 5.5bp. Towards the US close, yields took another leg higher off the back of a WSJ/Hilsenrath article warning that Fed officials were growing wary of market complacency. The article points out that futures markets indicate investors expect a 1.6% fed funds rate in December 2016, below the Fed’s own median projection of 2.25% (Wall Street Journal). The article also highlights Fed concerns that low volatility and rates were causing excessive risk taking – something which the Fed’s Fisher and George (both hawks) reiterated in comments yesterday. In the equities space, the S&P500 (-0.04%) recovered from the early lows, spurred by the generally firm US data flow, but stocks mostly appeared to be in a holding pattern ahead of this week’s main risk events. The likes of Ford (+0.7%) and General Motors (+1.15%) outperformed after beating with their vehicle sales numbers.

There wasn’t a major reaction to the Bloomberg article above, perhaps because we’ve had a number of reports about what the ECB could do since Draghi’s “comfortable with acting next time” comments at his last press conference. Indeed EURUSD finished Tuesday about 0.2% firmer and global stocks dipped shortly after the article was published. There is still plenty of chatter that the ECB could underwhelm at Thursday’s meeting but this didn’t stop the European iTraxx (-0.375bp), Crossover (-0.625bp) and EUR iBoxx (-1bp) credit indices from closing at the cyclical tights.

In terms of other headlines, there was an interesting article describing an official investigation being undertaken at the major Chinese commodity port of Qingdao, in north eastern China, amid concern about the discrepancy of metals which are at the port versus the amount of metal that should be there (Reuters). The article says that the discrepancy is around 80,000 tonnes of aluminium and 20,000 tonnes of copper, with a possibility that the gap is
actually higher. Metal imports have been partly used as a means to raise finance, where traders can pledge metal as collateral to obtain better funding terms. In some cases the same inventory can be pledged to more than one bank, fuelling hot money inflows. The article says that trade finance banks are concerned about their exposure there and whether the collateral pledged against those exposures exist. The article also says that shipments from the port have been temporarily halted, which could explain some of the reason for the recent weakness we’ve seen in commodities such as iron ore and copper.

Turning to the day ahead, there’s a fair amount of data lined up today starting with the Euroarea service PMIs and the second estimate of Euroarea GDP. Across the Atlantic, the data docket features Services ISM, US April trade and ADP employment. The Fed will release its latest Beige Book. The G7 meets in Brussels today to discuss security issues including the Ukraine crisis and Iran. The meeting is a substitute for the cancelled G8 meeting that was meant to take place in Sochi. The Bank of Canada announces its rate decision today.

via Zero Hedge http://ift.tt/TcFBbO Tyler Durden

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