There has been little in term of tier 1 data releases to drive the price action so far in the overnight session which means participants focused on the upcoming US related risk events including the Fed, Q2 GDP and July Payrolls. This, combined with WSJ article by Fed’s Fisher who opined that the FOMC should consider tapering the reinvestment of maturing securities and begin shrinking the Fed’s balance sheet (note that Fisher’s opinion piece is written based on a speech he gave on July 16th) meant that USTs came under pressure overnight in Asia and in Europe this morning. There has been little notable equity futures action (for now: the USDJPY algo team gave it a good ramp attempt just before Europe open, and will repeat just around the US open despite Standard Chartered major cut to its USDJPY forecast from 110 to 106 overnight), although we expect that to change since today is the day when Tuesday frontrunning takes place with full force. We expect equities to completely ignore the ongoing deterioration in Ukraine and the imminent release of EU’s own sanctions against Russia, as well as what is now shaping up as an Argentina default on July 30.
The only deal so far on Merger Monday is another Carl Ichan victory, after Dollar Tree agreed to buy Family Dollar for a 20% premium, or about $74.50 in a cash and stock combination. The implied EV is a 11.2x multiple of FDO’s LTM EBITDA. And no, this is not some aggressive growth company: this is a deteriorating retailer with margins lower than Amazon’s. Because there is a reason why we call it an M&A bubble…
European shares remain little changed, though off intraday lows, with the personal & household and travel & leisure sectors outperforming and autos, basic resources underperforming. The French and Italian markets are the best-performing larger bourses, Swiss the worst. Financials led the move lower in Europe this morning, with RBS (-2.20%) paring some of Friday’s gains after the bank reported a surprise rise in profit and Aberdeen Asset Management (-3.07%) shares also lower after reporting a fall in funds under administration. On the other hand, the cautious sentiment supported the more defensive sectors, with Danone (+1.49%) shares also gaining following reports that the company is in talks to sell its medical nutrition arms to US group Hospira in a deal valuing the business at around GBP 2.95bln. 10 out of 19 Stoxx Europe 600 sectors rise; personal & household, travel & leisure outperform, autos, basic resources underperform. 43.8% of Stoxx 600 members gain, 53% decline. Eurostoxx 50 +0.2%, FTSE 100 +0.2%, CAC 40 +0.5%, DAX -0%, IBEX +0.1%, FTSEMIB +0.3%, SMI -0.4%
Chinese shares in Hong Kong enter a bull market, lifted by financials as reports of liquidity and cash support for local banks buoys sentiment for the sector. Meanwhile the rally in long-end treasuries has provided support to Asia Pac bonds this morning. Most 10yr Asian sovereign bonds are about 1-2bp firmer in yield terms. The US dollar index is consolidating its gains from Friday, up marginally today (+0.02%) ahead of the multitude of data and the FOMC this week. Chinese A-shares have had a strong start to the week (up 2.3%) as talk of stimulus continues to benefit China-linked growth assets. The HSCEI is now 21% above its March lows and Shanghai copper futures are not far behind at +15% since March. MSCI Asia Pacific up 0.2% to 149.1. Nikkei 225 up 0.5%, Hang Seng up 0.9%, Kospi up 0.7%, Shanghai Composite up 2.4%, ASX down 0.1%, Sensex down 0.5%
The euro is little changed against the dollar. Portuguese 10yr bond yields fall; Greek yields decline. Commodities decline, with Brent crude, wheat underperforming and soybeans outperforming.
Elsewhere in the week ahead, Argentina has until Wednesday to settle a dispute with holdout creditors to avoid triggering a default on restructured debt. Current reports suggest that negotiations between the Argentine government and bondholders have made little progress. The highlights on the European data calendar include Spanish retail sales tomorrow, Spanish Q2 GDP on Wednesday and Final Euroarea PMIs on Friday. The July CPI reports are also due on Wednesday in Germany and Spain, ahead of the first Euroarea estimate on Thursday. In China the official manufacturing PMI will be released on Friday.
Today the US highlights are the Dallas Fed index, pending home sales, Markit U.S. composite PMI, Markit U.S. services PMI, due later.
Market Wrap
- S&P 500 futures at 1971.6
- Stoxx 600 at 342.1
- US 10Yr yield up 2bps to 2.49%
- German 10Yr yield up 1bps to 1.16%
- MSCI Asia Pacific up 0.2% to 149.1
- Gold spot down 0.3% to $1303.7/oz
Bulletin headline summary from Bloomberg and RanSquawk
- Positive sentiment seen overnight in Asia failed to filter through to Europe (Eurostoxx 50, +0.03%), with stocks mixed as market participants position for various risk events due later, with Bunds and USTs also trading lower.
- Chinese equities outperformed (Shanghai Comp +2.4%), lifted by financials as reports of liquidity and cash support for local banks buoys sentiment for the sector.
- Focus going forward will be on PMI and pending home sales data from the US, as well as the 2y note auction by the US Treasury
- Treasuries decline to begin a week that brings three coupon auctions and a Fed meeting at which policy makers are expected to trim QE by another $10b.
- 2Y notes to be sold at today’s $29b auction yield 0.54% inWI trading vs 0.511% in June; stopout yield at that levelwould be highest in more than two years
- As part of its review of 128 lenders, the ECB is studying less-actively traded loans and securitized products that banks value with minimal external data; could require Deutsche Bank, BNP and others to restate value of their assets
- Chinese shares in Hong Kong entered a bull market, leading emerging market stocks higher as commodities advanced for a second day
- When the ECB unleashed a stimulus barrage in June, it cautioned that the economy would take some time to respond. Data due this week may test its patience.
- International pressure mounted on Israel to end its three-week offensive in the Hamas-controlled Gaza Strip, with Obama and the United Nations Security Council demanding an immediate truce
- McDonald’s said it eliminated beef, pork and chicken items from its restaurants in China after supplier OSI Group LLC recalled all products made at its Shanghai unit yesterday
- Two U.S. citizens are being treated for Ebola in Liberia and the country shut some border crossings, as the worst outbreak of the disease on record spread to Nigeria
- Sovereign yields mixed, with Germany, U.S. and U.K. higher, EU peripherals falling. Euro Stoxx Banks -0.2%. Asian stocks mostly higher. European equities mixed, U.S. stock futures fall. WTI crude and gold lower, copper little changed
US Event Calendar
- 9:45am: Markit US Composite PMI, July preliminary (prior 61); Markit US Services PMI, July preliminary (prior 61)
- 10:00am: Pending Home Sales m/m, Jun, est. 0.2% (prior 6.1%); Pending Home Sales y/y, June, est. -5% (prior -6.9%)
- 10:30am: Dallas Fed Manufacturing Activity, July, est. 12 (prior 11.4)
- 11:00am: POMO, Fed purchases $1b-$1.25b notes in 2036-2044 sector
- 1:00pm: U.S. to sell $29b 2Y notes
FIXED INCOME
There was little in term of tier 1 data releases to drive the price action which meant that market participants focused on the upcoming US related risk events which are expected to further reinforce the growing expectation of higher rates. This, combined with WSJ article by Fed’s Fisher who opined that the FOMC should consider tapering the reinvestment of maturing securities and begin shrinking the Fed’s balance sheet (note that Fisher’s opinion piece is written based on a speech he gave on July 16th) meant that USTs came under pressure overnight in Asia and in Europe this morning. Of note, Portuguese bonds outperformed in Europe this morning in reaction to Moody’s upgrading Portuguese sovereign debt rating to Ba1 from Ba2.
Barclays Prelim Pan Euro Agg Month-end Extension +0.11y (Prev. month 0.09y, 12m avg. 0.08y), Prelim Treasury Month-end Extension +0.08y (Prev. month 0.08y, 12m avg. 0.09y)
EQUITIES
Financials led the move lower in Europe this morning, with RBS (-2.20%) paring some of Friday’s gains after the bank reported a surprise rise in profit and Aberdeen Asset Management (-3.07%) shares also lower after reporting a fall in funds under administration. On the other hand, the cautious sentiment supported the more defensive sectors, with Danone (+1.49%) shares also gaining following reports that the company is in talks to sell its medical nutrition arms to US group Hospira in a deal valuing the business at around GBP 2.95bln. Of note, Goldman Sachs has downgraded global equities to neutral over 3 months and corporate credit to underweight over both 3 and 12 months.
FX
Currencies remain very quiet ahead of the key risk events later in the week (Fed rate decision, NFP, US GDP, further US earnings), with the USD-index still residing close to six-week highs. The RUB remains softer against most others, with traders eyeing the threat of further sanctions due tomorrow as well as Russia’s USD 50bln fine to shareholders of the now defunct Yukos Energy. EUR/USD sits close to touted option barriers at 1.3425 and 1.3400. Finally, GBP/USD trades close to 1.6975 option expiries for today’s 10am NY cut, as the pair consolidates last week’s modest losses
COMMODITIES
Brent crude futures continue to pull back from Friday’s high of USD 108.46 with a lack of further catalysts to keep the price escalated after EU’s Van Rompuy warned of further sanctions on Russia last Friday, leading the energy complex into negative territory. Gold trades lower as the USD-index holds close to a 6-month high, yet the yellow metals remains above the USD 1300 level on Russian/Ukraine tensions, with positioning ahead of the FOMC and NPF key risk events firmly in focus. Platinum and palladium are outperforming their peers on the back of aforementioned Russian sanctions, with further details expected to be announced on Tuesday.
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DB’s Jim Reid as usual concludes the overnight recap
Bond market bears will be hoping that it’s a case of pop goes the Payrolls this week as August starts with a bang on Friday with the monthly employment report. DB expect a +250k gain on both headline and private nonfarm payrolls which should encourage a one-tenth decline in the unemployment rate to 6.0%. The street is expecting +231k, +228k and 6.1% respectively. Our economists highlight the average hourly earnings part of the report as one to watch for clues to when the Fed become more hawkish. Outside of this the other key releases of the week are US Q2 GDP on Wednesday and the conclusion of the FOMC later the same day. The latter should be a formality (another $10bn reduction in asset purchases) with little in the way of surprises especially with no press conference planned. The GDP report will be fascinating given the -2.9% print in Q1 and also due to the annual revisions that will be announced. DB expect +4.2% with the street at +3.0%. Other data in the US include pending home sales tomorrow, consumer confidence and ADP employment on Wednesday, Chicago PMI on Thursday and the ISM manufacturing on Friday. So a very extensive US data docket.
This US data blitz comes after a week where the curve has continued to flatten at the long-end with 30 year USTs hitting 13 month lows. All up, the 2s/30s curve ended the week around 6bp flatter. It seems that the low for longer view camp, which we’re already members, has gained more followers recently. There also seemed to be renewed interest in the theme that the US economy will face a lower terminal cash rate whether it be due to productivity constraints or otherwise. Going forward, our rates strategists also think that foreign official investors still have cash to put to work in Treasuries after a period of underinvestment, and they continue to think that real money investors are short duration in the longer end as a hedge to overweight positions in spread product. So perhaps we could still see more demand at the long end if these underweight positions were to normalise.
The rally in long-end treasuries has provided support to Asia Pac bonds this morning. Most 10yr Asian sovereign bonds are about 1-2bp firmer in yield terms. The US dollar index is consolidating its gains from Friday, up marginally today (+0.02%) ahead of the multitude of data and the FOMC this week. Chinese A-shares have had a strong start to the week (up 2.3%) as talk of stimulus continues to benefit China-linked growth assets. The HSCEI is now 21% above its March lows and Shanghai copper futures are not far behind at +15% since March.
This week is the last major week of the US reporting season with updates from Pfizer (Tue), ConocoPhillips, Exxon Mobil, Time Warner (Wed) and Berkshire Hathway (Fri) scattered throughout the next few days. There are also the earnings from the major European banks due this week including Bankia (today),. UBS (Tue), Barclays (Wed) and BNP (Thur). So far 228 S&P500 constituents have reported their Q2 results, accounting for just shy of 60% of the index market cap. The current tally is that 78% of companies have beat EPS estimates, with 66% exceeding consensus revenue forecasts. In Europe, 127 companies have reported earnings. The earnings performance of European corporates has been noticeably poorer than their US counterparts, with just 55% and 52% beating EPS and revenue estimates respectively. Our usual earnings tracker table is included in the PDF of today’s EMR.
On Friday and over the course of the weekend, more detail on the potential EU sanctions against Russian sectors began to emerge. A 10 page “options” paper was distributed to EU diplomats last week which would ban EU participation in the sales of new stocks and bonds of Russian state owned banks, together with restrictions on exports of technology to the energy sector. Late on Friday, the European Council president Van Rompuy sent a letter to EU prime ministers, which was said to have clarified that energy sanctions are limited to the Russian oil sector, and not the gas industry “in view of the need to preserve EU energy security”. The FT wrote on Sunday that Germany, who have previously been reluctant to take a harder line approach to the Kremlin, is set to back the sanctions on the condition that the burden is spread evenly across the EU. Germany’s foreign minister said in a German radio interview on Sunday that the EU had “created the conditions” to “increase the pressure on Russia” through the sanctions in finance, defence and energy equipment, but “if there are negative consequences, then they must be borne across Europe as a whole”. A meeting of EU ambassadors on Tuesday will debate those sectoral sanctions.
Elsewhere in the week ahead, Argentina has until Wednesday to settle a dispute with holdout creditors to avoid triggering a default on restructured debt. Current reports suggest that negotiations between the Argentine government and bondholders have made little progress. The highlights on the European data calendar include Spanish retail sales tomorrow, Spanish Q2 GDP on Wednesday and Final Euroarea PMIs on Friday. The July CPI reports are also due on Wednesday in Germany and Spain, ahead of the first Euroarea estimate on Thursday. In China the official manufacturing PMI will be released on Friday.
via Zero Hedge http://ift.tt/1th8cfk Tyler Durden