Tag: news

Blain’s Morning Porridge, submitted by Shard Capital’s Bill Blain

An Angel who not so much as Fall, as saunter vaguely downwards…”

This is crazy. Some analysts are predicting 3 Fed eases by year end. Australia and New Zealand have cut rates. German yields are now negative 0.21%. Nothing screams recession more loudly!

The market is discounting US rates 70 bp lower. Everyone is listening for what the Fed says next, and it’s a Fed heavy schedule of speakers this week. Fed Head Jerome Powell could firm the tone when he speaks later today, but we’ve already had a former hawk, Lael Bullard warning “downward policy may be warranted”.

What’s really happening? A pre-emptive Fed getting ready to mitigate the negative effects of Trump’s trade twitter war on the economy? Or does the real data really suggest the last thing the US needs is further monetary distortion from overly low rates, and what’s really happening is the Fed pandering to a wobbly stock market? Massive deflationary risk somewhere down the timeline?

The stock analysts are loving it. They see lower rates driving renewed upside – they don’t care about the long-term distortions! All they want is a schweet short-term hit of rate ease to put stocks back into the stratosphere.

When bonds are yielding very little (I was going to say the square root of nothing, but one investment banking pedant sent me pages of maths y’day explaining why that isn’t a good metaphor), then it stimulates dangerous yield tourism. Low rates encourage bad things – like corporates to overleverage themselves to mount stock buybacks with debt – which increases executive bonuses but doesn’t build new factories or infrastructure. The end-result is a more distorted market reliant on lower for ever rates to stop the bubble bursting.

Short-term, its great. Fill your boots with stocks. Long-term…. Be very aware it is not real.

Perhaps the bubble is fraying in the tech sector. Yesterday’s news about anti-trust investigations into names like Facebook, Alphabet, Amazon and others might have been a light bulb moment – but its been enough to remind investors of regulatory risk as the US agencies divvy up names to attack!

Instead of dwelling on the distortions of the Anglo-Saxon markets, lets take a look at Europe. If you really want a disappointing stock to follow, then try Germany’s “leading” bank. It’s so bad, I thought I’d find Neil Woodford listed among the largest holders of the stock!

As Deutsche Bank tumbles to new lows – dragging other lame European banks in its plummeting wake, you have to wonder where it ends? It’s getting embarrassing – you almost wish they’d do the honourable thing. But no, the CEO, Christian Sewing is coming back with yet another plan to cut headcount in rates and equity trading to restore profitability by the end of July.

The cost of CDS protection has rocketed, but I’m actually surprised the bank’s CoCos aren’t lower given Deutsche’s previous history of pleasing investors when its missed calls! I’m afraid DB looks, smells and feels like a complete FUBAR. I’m awarding Bloomberg a “No-Sh*t Sherlock” for pointing out investors are frustrated at its 90% decline since the Global Financial Crisis. NSS!

But its not just Deutsche. Right across the whole European Banking sector the names honk and are spiralling lower in a sea of red. European banks – you’d have to be daft to buy them… yet more than a few stockpickers say… “they will represent value, soon!” Anything – with the possible exception of DB – has value when it is cheap enough.

When I were young… European banks dominated the league tables for bank lending, IPOs and Eurobonds. Today, they are practically absent. Why have the Americans thrived while Europe has rotted? It’s a question of environment and oversight. The US authorities aggressively dealt with banks during the crisis. Lehman demonstrated they were serious. They forced banks to accept recapitalisations and the banks responded by paying back as quickly as they could. And the banks were encouraged to go out and starting banking again.

In Europe, the banking crisis came later, and the banks never so thoroughly cleansed and reinvented themselves. Their underlying weakness was considered a secondary aspect of the European sovereign debt crisis. Free TLTRO money from the ECB kept them afloat, but primarily allowed them to stabilise spiralling European sovereign debt markets. But… there was no rebuild, and no reinvention of banking. European banks remain essentially national banks, meaning post-crisis austerity kept them from any kind of stable recovery, and unable to really address ongoing bad lending.

We all know the European banks’ obvious problems. They are getting spanked by low interest rates, falling bond yields, and rising trade war threats. But it’s a more complex story; rising regulatory costs and compliance will soon exceed 10% of revenues across Europe dismal banking scene. The fact most European banks trade below asset value hints that we don’t believe where the banks value these assets. No surprise. Banks holding assets in basket case countries – yes, I am thinking of Italy – remain vulnerable. Deutsche is the worst – trading at 18% of book value. Isn’t Germany supposed to be Europe’s economic hot spot?

Years of ultra-low and negative European banks has done nothing to improve credit quality. Instead, its enabled Zombie borrowers to survive for longer, meaning any recovery is likely to trigger a normalisation in default rates. And European banks are still plagued by high NPLs.

It’s not just Deutsche. The WSJ recently pointed out that the eight largest European banks have triple the assets, but are worth less than JP Morgan! Italian banks are massively exposed to Italian debt – and there isn’t any way that’s a positive. Even decent names like BBVA and Santander are getting caned – they had the good sense to seek earnings outside Europe, but this week are pulled down by their Mexican affiliations.

Where do we think European banks are going? They are burdened with an overbanked market, aging systems, a lack of resources to digitise and re-invent their services, and there are still no signs of any European banks emerging as cross border champions. European banking union is another EU initiative that seems to have drowned in the sea of bureaucracy that sinks everything. Governments still see their duty as protecting national banking champions. There is repeated regulatory failure; Danske Bank in terms of money laundering and the collapse of Spanish and Italian banks doesn’t help. No European banks are expanding, building market share. Instead they are all and have been retrenching.

If I could think of something positive to say about Europe, But I really can’t…. 

via ZeroHedge News http://bit.ly/2Ii5P8h Tyler Durden

US equity futures and Treasury yields are trading higher this morning following yesterday’s tech wreck and bond buyathon but relative strength signals are flashing warning signs that the risk of reversion looms large…

Treasury yields are ‘most oversold’ (bonds most overbought) in 21 years…

And stocks are most oversold since the December lows…

We suspect the real canary in the coalmine for a bounce will be HY credit which has been the high-beta horror of this latest collapse…

And has the ‘correction’ run its course as liquidity is re-injected to save the world?

So which is it? Beware the bounce or buy the dip?

via ZeroHedge News http://bit.ly/2XpN1tT Tyler Durden

US stocks futures spiked just before 8 am Eastern Time on Tuesday after the Chinese Ministry Commerce struck an unexpectedly conciliatory tone, saying it believed trade differences should be “resolved through dialogue.”

• CHINA HOPES U.S. TO STOP WRONG DOINGS,MEET CHINA HALFWAY:MOFCOM
• CHINA COMMERCE MINISTRY SAYS THE DIFFERENCES AND FRICTIONS BETWEEN CHINA AND THE U.S. SHOULD BE RESOLVED THROUGH DIALOGUE AND NEGOTIATIONS

This was a marked departure from rhetoric bashing Secretary of State Mike Pompeo and a travel advisory warning about the risks of traveling in the US.

Nasdaq futures shot higher, setting the stage for an even more robust recovery after the index tumbled into correction territory on Monday.

To be sure, Washington and Beijing have tried this approach before (remember the ‘trade truce’ that now seems like a distant memory?). The approach worked until a deal was reportedly imminent, at which point Beijing reneged on all of its agreements.

via ZeroHedge News http://bit.ly/2Z3hbne Tyler Durden

President Trump and outgoing UK Prime Minister Theresa May are meeting at No. 10 Downing Street as we speak, and in keeping with both the solemn timing of the occasion (Tuesday is the 30th anniversary of the Tiananmen Square Massacre) and the issues of the day (the US-China trade war), Trump is expected to make a last-ditch lobbying effort to try and convince the UK to prohibit Huawei equipment from being incorporated into its 5G network, according to Bloomberg and the AP.

At the urging of the US, the UK has become somewhat more wary of Huawei, though the biggest steps have been taken by the private sector, with the UK’s largest wireless networks dropping Huawei phones from their 5G launch, in part to comply with the US ‘blacklisting’ of the Chinese telecoms giant.

Last month, the Trump administration placed Huawei and dozens of its affiliates on a ‘black list’. The US also issued a separate order banning American telecoms companies from using foreign-made telecoms equipment that could threaten national security (though both orders have been suspended for 90 days).

A few months back, the UK’s cyber-security chiefs had concluded that the risks posed by Huawei could be managed. However, more recently, officials have highlighted serious flaws with Huawei equipment, suggesting that at least some restrictions will be imposed.

Before the meeting, May’s spokeswoman told reporters that the government is still reviewing its policy on Huawei, and will ultimately make a decision based on “hard-headed technical assessments.”

During an interview with the BBC on Monday, Foreign Minister Jeremy Hunt said the UK is “sensitive” to Huawei’s concerns: “We take careful notice of everything the US says on these issues.”

UK Security Minister Ben Wallace said the British government hasn’t made a final decision, though the UK believes in “fair play” and would like to give the company a chance.

Washington launched a lobbying campaign late last year to try and convince its European allies to shut Huawei out of 5G broadband networks, arguing that the company represents a national security threat by creating an opening for the Chinese MSS to spy on citizens and governments. And, as the New York Times pointed out, there’s also concern that Huawei would have leverage to shut down communications networks should there be a conflict with the West.

May’s office also said the two leaders would discuss relations with Iran and the nuclear deal as the administration escalates its military posturing in the Persian Gulf in response to an unspecified Iranian threat. The UK and the other European signatories to the Iran deal have urged the US to reconsider abandoning the deal, and even threatened to find a workaround allowing them to continue trading with Iran in violation of US sanctions. 

Chinese officials were already on tenterhooks on Tuesday, with Global Times editor Hu Xijin, a mouthpiece for the ruling Communist Party, accused Secretary of State Mike Pence of being “keen on destroying China’s development capability” after Pence tweeted that the US would honor the victims of Tiananmen Square.

This government of you has ruined positive image of the US. The Chinese now deeply believe key US officials are keen on destroying China’s development capability. When you preach Tiananmen incident and human rights, the purpose is the same as you talk about tariffs and Huawei. https://t.co/yUu0mvP9ug

— Hu Xijin 胡锡进 (@HuXijin_GT) June 4, 2019

That tweet was likely only a taste of what’s to come. Later, Vice President Mike Pence is expected to give what has been described as a “hawkish” policy speech on China, which will focus on the country’s human rights record – something that is guaranteed to incense the Chinese leadership at a time when the prospects for a trade deal are dwindling.

via ZeroHedge News http://bit.ly/2wCpAly Tyler Durden

Global stocks rebounded from Monday’s hammering even as worries about a regulatory crackdown on the world’s internet and social media giants compounded mounting global trade and recession jitters, while interest rates remained just shy of multi-year lows as Treasuries dipped for the first time in a week while the dollar was unchanaged.

Europe’s STOXX 600 index recovered from a weak start, reversing earlier losses of as much as 0.7% led by gains in autos and chemicals shares, but tech stocks remained more than 1% lower after reports the US government was gearing up to investigate whether Amazon, Apple, Facebook and Google misused their market power. The Stoxx 600 Automobiles & Parts Index is best-performing as RBC says that it has a more positive bias on the region’s carmakers. BASF (+3%) and Linde (+1.3%) lead gains in chemical stocks.

Earlier, Asian shares dropped as the broadest index of Asia-Pacific shares outside Japan had ended down 0.3%, catching down to the US tech rout, as communications stocks fell while materials shares gained. Most markets in the region were down. The Shanghai Composite Index fell 1%, while Hong Kong’s Hang Seng Index declined for a fifth day in its longest losing streak since April. India’s S&P BSE Sensex Index retreated after reaching a fresh record ahead of the central bank’s rate decision later this week. Emerging-market stocks fell for the first time in three days .

On Monday a combined $85 billion was wiped off Facebook and Google parent Alphabet’s market caps, in the worst rout for the FANG sector in two years…

…which in turn dragged the Nasdaq into correction territory, having lost 10% over the last month.

“That (U.S. investigation) is currently weighing on stocks, but more importantly the market is increasingly pricing in the risk of recession,” said Rabobank senior macro strategist Teeuwe Mevissen. “Sentiment is significantly suppressed.”

Meanwhile, global monetary policy remains in focus this week as the hostile trade rhetoric between the U.S. and China continues. Fed ratesetter James Bullard said on Monday lowering U.S. rates “may be warranted soon”.

Sure enough, after nearly 3 years of resisting any change to its monetary policy, Australia’s central bank cut rates to a record low and on Thursday the European Central Bank is set to detail a fresh dump of cheap money. India is expected to lower its rates too.

After a furious plunge on Monday in a move that left many rates traders shocked, US Treasury yields also rose but remained near recent lows. U.S. 10-year notes yielded 2.0968% after touching 2.06, the lowest since September 2017. All this underlined the scramble to re-price Fed policy and the biggest two-day drop in U.S. two-year Treasury yields since the 2008 crash. The yield curve between three-month and 10-year debt has inverted by as much as 27 basis points, historically a recession signal. More shockingly, the curve between the 3 month and 2 year was the most inverted since the financial crisis.

In FX, the dollar halted a three-day decline and Treasury yields rose as traders awaited clues on monetary policy when Federal Reserve Chairman Jerome Powell speaks later Tuesday. The euro touched its highest level in seven weeks against the dollar before erasing gains after regional inflation data fell slightly short of expectations even as unemployment dropped more than expected. The pound fluctuated after data showed U.K. retail sales in May declined by the most on record.

The AUD/USD advanced briefly after the RBA lowered the cash rate by a quarter-point to 1.25%, citing a need to boost employment and spur inflation. It however surrendered the gain as traders interpreted a move by the Australia & New Zealand Banking Group Ltd. to reduce its mortgage rate as a signal that the central bank may need to cut rates further to achieve its desired impact on the economy. Additionally, Australia’s central bank chief strongly suggested he could follow up Tuesday’s interest- rate cut with another reduction as he seeks to drive down unemployment and revive inflation.

EM currencies, however, extended gains to a fourth day, the longest rally since March, as the dollar remained subdued while traders await further developments on the trade front. South Africa’s rand fell by more than 1% after reporting the biggest first-quarter GDP contraction since 2009. The Thai baht, Hungarian forint and Mexico’s peso led the charge higher as MSCI’s Emerging Markets Currency Index climbed to a three-week high. The yuan and India’s rupee were outliers on the day. “Markets continued to digest the implications of a potential tariff on Mexican exports to the U.S.,” Guillaume Tresca, a Montrouge, France-based strategist at Credit Agricole SA, said in a note to clients. “The timeline for dialogue and resolution is pretty tight. Depending on the outcome, FX and rates markets could go through another round of correction.”

Finally, the Turkish lira initially dropped, then rebounded even after Turkish President Erdogan repeated that Turkey will not take a step back from the Russian S-400 missile deal.

“Risk aversion has also been seen with the yen carry trade unwinding as the markets comprehend that the U.S. technology containment strategy towards China is unlikely to reverse,” analysts at Jefferies said in a note. “In the short term, positioning has become so bearish that ‘a ceasefire’ could spark a risk rally,” they said.

In overnight geopolitical news, China issued a warning against travelling to the US; subsequently, China’s Foreign Ministry says it is clear that every set-back in US trade talks was due to the US breaking consensus, have resolve and ability to defend their interests and rights. Elsewhere, Commerce Secretary Ross reiterated President Trump’s message that Mexico needs to do more on illegal immigration in a meeting with Mexico’s Economic Minister, while Mexico said without its efforts a further 500k migrants would reach US this year and that they could take several paths if the US goes ahead with the tariffs including asking for help from WTO or implementing its own tariffs on US goods. This is as the WaPo reported that US Congressional Republicans are discussing moves to stop Trump’s tariffs on Mexico.

Finally, oil fell and was hovering on the edge of a bear market after the Wall Street banks raised the specter of a recession, while Saudi Arabia tried to assure investors that OPEC will avert a supply glut. Brent crude futures are now testing $60 per barrel for the first time in four months. It was last down 0.6% at $60.92 per barrel and U.S. crude was down 0.4% at $53.02. In contrast, safe-have gold was up 0.1% at $1,326.47 per ounce, near three-month highs.

Expected data include factory orders and durable goods orders. Tiffany and Salesforce are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.5% to 2,763.00
• STOXX Europe 600 down 0.2% to 369.69
• MXAP down 0.1% to 152.41
• MXAPJ down 0.3% to 499.82
• Nikkei down 0.01% to 20,408.54
• Topix up 0.01% to 1,499.09
• Hang Seng Index down 0.5% to 26,761.52
• Shanghai Composite down 1% to 2,862.28
• Sensex down 0.1% to 40,218.55
• Australia S&P/ASX 200 up 0.2% to 6,332.36
• Kospi down 0.04% to 2,066.97
• German 10Y yield fell 0.7 bps to -0.208%
• Euro up 0.2% to $1.1259
• Italian 10Y yield fell 10.8 bps to 2.189%
• Spanish 10Y yield fell 1.5 bps to 0.677%
• Brent futures down 0.3% to $61.10/bbl
• Gold spot down 0.2% to $1,323.23
• U.S. Dollar Index up 0.1% to 97.24

Top Overnight News from Bloomberg

• Investors are plowing into Treasuries, favoring shorter maturities in particular, on growing conviction the Federal Reserve will cut interest rates this year to contain the fallout from trade tensions. Two-year yields sank to their lowest level since December 2017 and have tumbled by more than a quarter- point since the middle of last week
• The Federal Reserve may need to cut interest rates soon to prop up inflation and counter downside economic risks from an escalating trade war, St. Louis Fed President James Bullard said
• Yuan watchers arguing that China shouldn’t be scared of the currency breaking 7 a dollar are being emboldened by a former central bank official’s support for their thesis
• Germany’s Chancellor Angela Merkel won her rattled government some time as her junior coalition partner agreed to remain on board for a while longer despite the turbulent resignation of its chief.
• Italian Prime Minister Giuseppe Conte threatened to resign if the partners in his populist coalition don’t stop posturing, demanding they get to work on new policies to help the country
• Oil edged closer to a bear market collapse as Wall Street banks raised the specter of a recession, while Saudi Arabia tried to assure investors that OPEC will avert a supply glut
• There is no fundamental change in the view that Japan’s economy is gradually recovering, says Taro Aso, assessing the economic outlook in the runup to a planned sales tax hike in October.
• China issued a travel advisory on the U.S. through the end of the year, amid spiraling trade tensions between the two countries
• Donald Trump is expected to wade further into the U.K.’s fraught politics on a visit to London, having already dangled the promise of a trade deal if his hosts push on with Brexit
• Australia’s central bank chief strongly suggested he could follow up Tuesday’s interest- rate cut with another reduction as he seeks to drive down unemployment and revive inflation

Asian equity markets traded subdued after the headwinds from Wall St where tech underperformed and the Nasdaq slipped into a correction as FAANG stocks were hit on reports of the US launching antitrust and business practice probes into the large tech names. ASX 200 (+0.2%) and Nikkei 225 (U/C) were indecisive as strength in mining names and a widely anticipated RBA rate cut helped offset the tech losses in Australia, while trade in Tokyo was relatively uneventful with exporter sentiment dampened by further unfavourable currency flows. Hang Seng (-0.5%) and Shanghai Comp. (-1.0%) weakened as trade tensions persisted as the US accused China of misrepresenting trade talks and placed the blame on Chinese negotiators back-peddling on issues, while the PBoC’s liquidity efforts resulted to a daily net drain of CNY 90bln. Finally, 10yr JGBs were higher and the 10yr yield dropped to the lowest since August 2016 of below -0.10% amid the risk averse tone and as prices tracked the moves in T-notes following the comments from Fed’s Bullard, while 10yr JGB auction results showed higher accepted prices.

Top Asian News

• China to Audit Sanofi, Bristol-Myers in Drugmaker Accounts Probe
• Australia Cuts Key Rate to Record Low, Ending Near 3-Year Pause

Major European indices are now firmer [Euro Stoxx 50 +0.6%] and diverting from the negative overnight session as tech suffered with FAANG stocks underperforming on Wall St. due to reports that the US is launching an antitrust and business practice probe into tech names. While tech names still lag, the sectors has come off of lows as equities have been grinding higher this morning with no significant fundamental drivers behind the move. EU sectors are mixed, with the aforementioned tech sector underperforming on the potential probes into tech names; sector heavyweight SAP (-1.5%) is the notable negative tech stock as it comprises a 27.6% sector weighting, and has over a 10% weighting in the DAX (+0.8%). Elsewhere, other notable movers this morning include Hargreaves Lansdown (-4.2%) at the bottom of both the Stoxx 600 and FTSE 100 (+0.2%), following concern over customer backlash as the Co. had promoted the Woodford fund extensively in-spite of its underperformance, the Co. finally removed the fund from their recommendation list on Monday. Towards the top of the Stoxx 600 rests Telecom Italia (+3.3%) after a filing showed the Co’s CFO purchased 150k ordinary shares. Separately, much of the sessions positive stock activity has been driven by broker moves with the likes of Lagadere (+2.2%), Royal Mail (+3.3%), BMW (+1.9%) and Volkswagen (+2.2%) supported by broker moves.

Top European News

• U.K. Construction Declines at Sharpest Pace in More Than a Year
• ECB Pressured as Euro-Area Inflation Slows More Than Forecast
• Billionaire-Backed Coloplast Said to Mull Urology Asset Sale
• European Tech Stocks Plunge as U.S. Antitrust Sell-Off Spreads

In FX, the Dollar is trying to recover after another bout of post-Bullard selling pressure pushed the DXY through 97.000, albeit marginally and briefly, with the index back above the big figure and now probing fresh highs within a 97.265-96.987 range as certain G10 counterparts succumb to independent bearish impulses. However, Buck bulls and bears will now be focusing on a raft of Fed speakers to see if other members turn more dovish, and in particular Chair Powell.

• AUD/EUR – Both holding up relatively well in the face of seemingly negative factors as RBA Governor Lowe flags further policy easing and a potentially lower than previously forecast OCR by the end of 2019 (was 1% vs the current 1.25% after last night’s 25 bp cut), while Eurozone inflation missed already considerably softer consensus forecasts. Aud/Usd remains firmly above 0.6950 around 0.6975 between 0.6955-93 trading parameters, and Eur/Usd is pivoting 1.1250 where the top of a band of option expiries reside (1 bn from 1.1235), but capped at the 100 DMA (1.1278).
• GBP/CAD/JPY – All a fraction firmer against the Greenback, as Cable straddles 1.2650 and shrugs off another poor UK PMI, but the Pound underperforms vs the Euro on political/Brexit grounds (cross hovering just below 0.8900). Meanwhile, the Loonie is also displaying a degree of resilience in the face of weak crude prices and testing offers/resistance ahead of 1.3400 in a 1.3450-20 band and the Yen extended safe-haven gains through 108.00 to 107.85 before losing some momentum.
• CHF/NZD – The major ‘laggards’ with the Franc stalling ahead of 0.9900 and Kiwi also finding it tough to breach a round number at 0.6600 vs its US rival as the Aud/Nzd cross rebounds from pre-RBA levels amidst general Aussie short covering and profit taking.
• EM – Contrasting fortunes for the Lira and Rand, as Usd/Try retreats further from 6.0000 towards 5.8100 in spite of more talk from Turkish President Erdogan about the merits of Russia’s S-400 system over the US F-35 alternative that could trigger sanctions. However, Usd/Zar has rallied over 1% to just shy of 14.6500 in wake of significantly weaker than expected SA GDP data.

In FX, the energy market continues to be pressured as the ongoing trade concerns dampens global demand output, with WTI (-0.6%) and Brent (-0.6%) on the backfoot in early European trade following on from a lacklustre Asia-Pac session. News-flow this morning has largely been from the OPEC front in which a letter showed that Iran opposes delaying the OPEC meeting to July, whilst Algeria and Kazakhstan have also told OPEC that the early July dates are unsuitable. This comes amid split views as to whether the OPEC/OPEC+ meeting should be at the end of June or in early July (touted dates July 3rd/4th), which Russia is in favour for. Furthermore, sources stated that Russian production this month fell to 10.87mln, down from the prior month’s 11.11mln BPD which was reported via the Energy Ministry. Finally, traders will be eyeing tonight’s API data for any signs of a short-term catalyst, with the street looking for headline inventories to draw by around 1.8mln BPD. Elsewhere, gold (Unch) is choppy and largely unchanged intraday as the yellow metal gave up its gains as the Buck recovered. Meanwhile, copper is little changed as the weaker Dollar countered the soured risk sentiment. Finally, Zinc prices dropped to six-month lows overnight amid a deterioration of the global outlook, with the recent China PMIs pointing to growth of just 4.5%-5%, according to CapEco.

US Event Calendar

• 10am: Factory Orders, est. -0.95%, prior 1.9%; Factory Orders Ex Trans, prior 0.8%
• 10am: Durable Goods Orders, prior -2.1%; Durables Ex Transportation, prior 0.0%
• 10am: Cap Goods Orders Nondef Ex Air, prior -0.9%; Cap Goods Ship Nondef Ex Air, prior 0.0%

DB’s Jim Reid concludes the overnight wrap

It looked like we were going to get an up day to start the week yesterday but the rally stalled in the US session as large-cap names dragged down the major indices. The S&P 500 ended -0.29%, despite the fact that 72% of companies in the index advanced on the day, only the eighth day this year where the index ended lower despite the majority of names rallying. The -7.51% and -6.11% moves for Facebook and Alphabet outweighed their smaller peers (a mere $85bn of lost market cap between the two), as the Federal Trade Commission and Justice Department reportedly opened investigations into the two companies respectively. The NASDAQ and NYFANG indexes accordingly fell -1.61% and -3.54% to their lowest levels since February and January, respectively, though the Philly semiconductor index outperformed tech peers by advancing +0.33%.

Meanwhile, in rates, treasuries continued their seemingly relentless rally, boosted by softer data and Fedspeak which raised the expectations for near-term policy easing. Ten-year yields fell another -4.7bps (but up +3.4bps this morning) while 2-year yields dropped -8.0bps (up +5.9bps this morning), taking their two-session move to -22.1bps and their 5-day move to -32.4bps. Both are the sharpest such drops since 2008. Futures markets last night priced a fairly startling 68bps of cuts this year. The front-end rally also continued to support the yield curve, with the 2y10y curve steepening +3.4bps to 23.4bps (+21.3bps this morning) – so that’s one silver lining to this whole episode. In Europe, Bunds did hit an intraday low of -0.221% before ending at 0.201% while the euro was a little bit stronger at $1.1242. Elsewhere HY credit spreads were +12bps wider in the US while oil prices fell -1.21%.

The data was the main talking point yesterday following the final PMI revisions in Europe and then the ISM manufacturing in the US. We’ll touch on the details further down but in short there wasn’t a great deal of change in Europe but in the US we saw a 31-month low for the ISM which was slightly tempered by better under-the-hood component details. That in itself causes some problems for markets though as it creates a bit more of a headache for the Fed as they battle with increasingly aggressive market pricing which has completely shifted towards more than two rate cuts this year and almost four over the next 12 months.

Turning to yesterday’s Fedspeak, the highlight was a series of comments from St. Louis Fed President Bullard, who is a voter this year, who said that “a downward policy adjustment may be warranted soon.” That’s the first time this year that an official has directly called for a rate cut. Bullard noted that “the direct effects of trade restrictions on the US economy are relatively small, but the effects through global financial markets may be larger.” He also conspicuously used the word “now” with regards to policy easing, which raises the odds that he votes for a rate cut as soon as this month’s meeting. Separately, Richmond Fed President Barkin also referenced tariff uncertainty as a potential headwind, though he stopped short of talking about interest rate cuts.

Overnight, the US Secretary of State Mike Pompeo condemned China’s human rights record as we hit the 30th anniversary of the Tiananmen Square incident. He said “We urge the Chinese government to make a full public accounting of those killed or missing to give comfort to the many victims of this dark chapter of history,” in a statement issued at 12.01am Beijing time. Elsewhere, negative rhetoric around the US-China trade war continued with the US Treasury Department and the Trade Representative office saying that its ‘disappointed’ that China is misrepresenting trade talks while saying that the US positions in negotiations have been ‘consistent’ while China ‘back-pedaled’. The joint statement also added that the Chinese have used the ‘White Paper’ and recent public statements to “pursue a blame game misrepresenting the nature and history of trade negotiations between the two countries.” Meanwhile, Bloomberg reported (citing sources) that the Congressional Republicans, worried about the possible economic fallout from President Trump’s plan to impose a tariff on Mexico, are considering whether to revive a resolution of disapproval over the national emergency declaration that underpins Trump’s justification for the tariffs. The action would also stop the president from spending billions on a border wall without congressional approval.

This morning in Asia markets are largely heading lower with the Shanghai Comp (-0.84%) and Hang Seng (-0.33%) trading down while the Nikkei (-0.01%) and Kospi (+0.02%) are trading flattish after erasing earlier losses. Elsewhere, futures on the S&P 500 are up +0.14% though. WTI oil prices are down -0.17% this morning, bringing the four day decline to -10.11%, despite Saudi Energy Minister Khalid Al-Falih saying yesterday that he was committed to doing whatever it takes to stabilize markets.

In other news, President Trump yesterday called on the UK to throw off the “shackles” of European Union membership and strike a free-trade deal with the US. Trump tweeted, “Big Trade Deal is possible once UK gets rid of the shackles,” and “Already starting to talk!” Elsewhere, French President Emmanuel Macron reinforced his hardline stance on Brexit, saying Brexit must happen at the end of October and there should be no more extensions. Meanwhile, the UK’s former foreign secretary Boris Johnson launched his leadership campaign yesterday, saying the U.K. must leave the bloc in October, with or without a deal.

Back to the details of yesterday’s data, where the May ISM manufacturing in the US hit a new 31-month low of 52.1 (vs. 53.0 expected) – down -0.7pts from April. The good news was that both the new orders (+1.0pt to 52.7) and employment (+1.3pts to 53.7) components improved. Even the prices paid component bounced +3.2pts to 53.2. How much of the latest tariff escalation is in the data however remains to be seen. In the meantime a quick refresh of our equities versus ISM regression shows that the US equities are around 5% ‘cheap’ given that markets have fallen more than the data has. Indeed the equity market-implied ISM is actually now below 50 at 49.8. However for this to be a buying opportunity you have to believe the ISM will settle at these levels over the summer in the face of rising trade tensions. That data followed a small -0.1pt downward revision to the rival Markit PMI release to 50.5 while elsewhere construction spending was flat, versus expectations for a slight rise, though the prior month was revised higher leaving the overall trend roughly neutral.

In Europe, the final manufacturing PMI for the Euro Area was unrevised at 47.7 which means it is -0.2pts down from April and 0.2pts higher than the March lows. Our economists did highlight that there were some green shoots of optimism in the details with the new orders subindex up more than +2pts in the past two months (albeit still at a lowly 46.6) while there were similar moves in both output and the new export order series.They also noted that new orders-to-inventories difference, which tends to lead the headline and output indices, is back to August/September 2018 levels – still negative but signalling that we are perhaps past the trough in the manufacturing PMI. The question though is whether a genuine recovery of the manufacturing sector can be expected especially now the trade war has been reignited. Meanwhile, at a country level Germany and France were unrevised at 44.3 and 50.6 respectively while a big drop for Spain (-1.7pts to 50.1) was partly offset by a +0.6pt advance for Italy to 49.7. Greece (-2.2pts to 54.2) was another country that deteriorated however it is only behind Hungary (57.9) at the top of the EU ranks now. Our regression of European equities versus PMIs now has the STOXX fairly valued but equity markets in France, Italy and Spain all slightly cheap. Only Germany appears expensive on this measure due to how low the German PMI is relative to history. However these are a very broad guide and work best for general market valuations especially when there are big outliers. It’s hard to say there are at the moment. On our measure most global equity markets price in high 40s on the manufacturing PMIs/ISM, and in the US we are still above this and therefore cheap, whilst in Europe we are generally at that level or a bit lower.

Here in the UK, the latest PMI reading of 49.4 was a little worrying, printing -2.6pts lower than expectations and also -3.7pts below the April level. It’s worth flagging that rising stockpiles had been behind some of the recent manufacturing resilience in the UK so it isn’t a huge surprise to now see this filter out and therefore the UK start to catch down to the rest of Europe. It’s worth noting also that the last time the UK PMI went sub-50 was in 2016 and when the BoE last cut rates. One ray of positivity came from Sweden’s manufacturing PMI which came in +2.7pts better than expected at 53.1. Sweden, as a highly cyclical economy, has tended to lead the rest of Europe, so its bounce could be cause for optimism moving forward.

In other news, our economists in Germany published their views on the surprising weekend resignation of SPD party leader and chief whip Andrea Nahles over the weekend. They note that the implications are clearly negative, and go as far as saying that it is hard to see how the Groko might still be in place at the end of the year given the current dynamics in the SPD. They highlight that if the SPD pull out of the coalition, then snap elections are most likely as the Greens rejected joining the government on the basis of the 2017 election results. The Greens currently score around 20% in the polls giving them a much stronger weight in a possible future conservative-green government. See more in our colleagues’ report here .

To the day ahead now, which this morning includes the advanced May CPI report for the Euro Area where the consensus expects a +0.9% yoy core reading compared to +1.3% in April. We’ll also receive the April unemployment rate while data in the US this afternoon includes final durable and capital goods orders revisions for April, as well as April factory orders data. Away from that the Fed’s Williams is due to speak just after lunch before the two-day Fed conference gets underway including opening remarks from Powell at 2.55 pm BST.

via ZeroHedge News http://bit.ly/314CAyp Tyler Durden

Jack Dorsey has got some explaining to do – and for once, it’s not related to Twitter’s crackdown on free speech, shadow-banning, or the social media company’s plans to affix disclaimers to ‘offensive’ tweets from President Trump.

In a shocking report, WSJ exposed a glitch in Square’s payments software whereby the company’s software accidentally forwarded receipts documenting “transactions as mundane as a cup of coffee and as sensitive as an obstetrician’s visit to people who were uninvolved in the purchases.” Some of the receipts were forwarded to seemingly random individuals, with neither the recipient or the person making the purchase able to explain why Square sent the receipts to the people it did.

To illustrate the real-world impact of these embarrassing glitches, WSJ shared the stories of several people who were adversely impacted by these unauthorized disclosures of private purchases. One woman had hoped to keep her impending divorce a secret, until Square inadvertently broke the news to her friends.

Teresa Smith hoped she could keep news of her impending divorce a secret, until Square blabbed about it to one of her friends.

The day after Ms. Smith, a horse trainer living outside Washington, paid the retainer for a local divorce attorney in late 2016, an acquaintance forwarded her an email full of details about the transaction. The attorney had swiped Ms. Smith’s credit card through a Square device, and the payments company automatically generated the receipt that wound up her friend’s inbox.

“I might as well have put it out on Facebook or took out a front-page ad in the New York Times,” Ms. Smith said.

When Smith complained to the company, she got the brush off, with Square contending that her friend’s email address was “the one it had on file” for Smith.

Ms. Smith said that when she complained to Square about her experience, she was told that her friend’s email address was previously used to get a copy of a receipt from an earlier purchase made with Ms. Smith’s at a different Square vendor, a chain of events that Square confirmed to the Journal. Square’s policy is to send digital receipts to the phone number or email address on file automatically unless that person opts out.

“Square said, ‘We didn’t do anything wrong'” Ms. Smith said. “The hell you didn’t.”

The owner of a small kitchenware store in Montana said she asked Square to disable the automated digital receipts after the 2017 holiday season, when she heard that customers’ spouses had been inadvertently notified about their Christmas gifts. The store owner said the mishaps soured her relationship with some regular customers.

At Home on the Range, a kitchenware store in Livingston, Mont., asked Square to disable the automated digital receipts following the 2017 holiday season. Owner Jennifer Flight said she heard complaints from a number of customers whose spouses had received itemized receipts for their own Christmas gifts.

Ms. Flight said that the issue of receipts going to someone other than the purchaser generated “the most negative of all of the responses we’ve had from customers.” She said customers didn’t believe her when she explained that the receipts were likely the result of information they provided to another Square business.

“It was clear that in his mind I had dropped from the ranks of friend to salesperson, scheming to get his information to market to him,” Ms. Flight said about one particularly peeved customer.

Oftentimes, complaints about misdirected receipts involve credit cards shared by spouses, but not always. Stories about surprise gifts being spoiled aren’t uncommon.

But the potential for these flaws to have even more embarrassing or disastrous consequences. Square is building ‘customer-engagement and marketing’ services for small businesses to help them leverage the vast drove of purchasing data that the payments company collects – which will create even more potential for these ‘mistakes’ to alienate customers.

via ZeroHedge News http://bit.ly/2XpSfpH Tyler Durden

One day after the Chinese Ministry of Education warned students about the “risks” of studying in the US, and recommended they exercise caution due to ‘visa delays and restrictions’ brought about by the Trump Administration, Beijing has taken its warnings a step further, issuing an official travel advisory highlighting the risks of traveling in the US.

China’s foreign ministry and its embassy cautioned travelers to raise their safety awareness and respond “actively and appropriately” to “harassment” in the form of immigration checks and home interviews, according to the South China Morning Post.

That message was paired with an advisory by the Ministry of Culture and Tourism released on Tuesday afternoon urging Chinese tourists to exercise caution because of the risks of ‘robbery and theft’ (which sounds like China is using President Trump’s own warnings against him).

Foreign Ministry Spokesman Geng Shuang said Tuesday that Chinese nationals were encountering difficulties in the US, and that this is why China announced a travel warning for Chinese going to the US.

“Chinese tourists in the US should fully assess the risks of traveling to the US, keeping up to date with information about public security, laws and regulations, and conscientiously improve awareness to ensure safety,” it said.

Issuing travel advisories is nothing new for Beijing: In response to a travel advisory from Ottawa earlier this year warning Canadian citizens about the risks of ‘arbitrary detention’ in China, the foreign ministry issued a similar warning to Chinese traveling abroad in Canada, just weeks after the arrest of Huawei CFO Meng Wanzhou.

The irony of the travel advisory was apparently lost on Beijing, as the warning coincided with the 30th anniversary of the Tiananmen Square massacre – or the “June 4th incident”, as its known in China.

Vice President Mike Pence is expected to make a speech to commemorate the anniversary on Tuesday, and Secretary of State Mike Pompeo urged Beijing to “make a full public accounting of those killed or missing” after the 1989 massacre. Geng slammed Pompeo and EU Foreign Affairs Representative Federica Mogherini for interfering in China’s international affairs.

Pompeo’s statement “maliciously attacks China’s political freedom and denigrates China’s human rights” and “severely interferes in domestic affairs,” Geng said. It also damaged trust with the US.

American attempts to undermine China’s stability were “doomed to fail” and “the deranged babbling of these people will only end up in the trash can of history.”

Geng concluded by saying that the “tremendous progress” achieved by China in the years since the massacre showed that the “path China has chosen is completely right.”

via ZeroHedge News http://bit.ly/2MskpiS Tyler Durden