Second Half Kicks Off With Futures At Record High On Lethargic Yen Carry Levitation

BTFATH! That was the motto overnight, when despite a plethora of mixed final manufacturing data across the globe (weaker Japan, Europe; stronger China, UK) the USDJPY carry-trade has been a one-way street up and to the right, and saw its first overnight buying scramble in weeks (as opposed to the US daytime trading session, when the JPY is sold off to push carry-driven stocks higher). Low volumes have only facilitated the now usual buying at the all time highs: The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing – yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13.

As we start H2, Asian markets are trading with a stronger tone this morning. The official Chinese manufacturing PMI printed at 51.0, in line with consensus and at a six month high. The final HSBC Chinese manufacturing PMI came in at 50.7, slightly below the flash reading of 50.8, but this is also the highest print of the year. The PMIs for other Asian bellwethers including Indonesia and Taiwan were also up on a month-to-month basis. The Nikkei (+1.2%) is the clear outperformer today, on decent volumes and despite a drop in the Japanese Q2 tankan manufacturing index to 12 from 17 previously and 15 expected. This has boosted the USDJPY today. Outside of Japan, activity has been subdued with Hong Kong markets shut for July 1st holidays. The Indonesian rupiah is poised to record its strongest three-day rally in about fourth months – spurred by comments last week from the Bank of Indonesia that the country’s trade balance returned to surplus in May. The AUDUSD is also poised for a solid gain (+0.25%) after the RBA maintained its neutral tone in today’s policy meeting.

Stocks in Europe traded higher this morning, lead higher by basic materials sector after analysts at Bank of America raised Rio Tinto (+2.7%) to buy from neutral. At the same time, financials were supported by BNP Paribas (+4.1%), with FT Lex column noting that the USD 8.9bln settlement may prove a catalyst for recovery. This also saw other French based banks such as SocGen (+3.2%) and Credit Agricole (+1.9%) post decent gains.

In a nutshell: European shares rise, close to intraday highs, with the basic resources and telco sectors outperforming and retail, construction underperforming. Euro- Area manufacturing slowed more than initially estimated in June, China manufacturing expansion quickens to fastest 2014 pace. The Italian and French markets are the best-performing larger bourses, Swedish the worst. The euro is little changed against the dollar. U.K. 10yr bond yields rise; Japanese yields decline.
Commodities little changed, with zinc, soybeans underperforming and silver outperforming.

Turning to the day ahead, the US manufacturing ISM is expected to show a small bump up to 55.9 (vs 55.4 in May) which would mark a six month high. Other highlights on the US data docket are May construction spending, and the IBD/TIPP economic optimism index and vehicle sales due later. Watch for GM to park ever more cars on vacant dealer lots as it hopes end buyers will quickly forget the recall scandal that has made its quality control process into the worst joke in US carmaking history.

Market Wrap

S&P 500 futures up 0.2% to 1957.1
Stoxx 600 up 0.5% to 343.4
US 10Yr yield up 2bps to 2.55%
German 10Yr yield up 2bps to 1.26%
MSCI Asia Pacific up 0.3% to 146.1
Gold spot down 0% to $1326.7/oz

EUROPE

16 out of 19 Stoxx 600 sectors rise; basic resources, bank outperform, retail, personal & household underperform
62.7% of Stoxx 600 members gain, 34.7% decline
Eurostoxx 50 +0.6%, FTSE 100 +0.5%, CAC 40 +0.7%, DAX +0.3%, IBEX +0.4%, FTSEMIB +0.8%, SMI +0.3%

ASIA

Asian stocks rise with the Nikkei outperforming and the ASX underperforming.
MSCI Asia Pacific up 0.3% to 146.1
Nikkei 225 up 1.1%, Kospi down 0.2%, Shanghai Composite up 0.1%, ASX down 0.4%, Sensex up 0.4%
9 out of 10 sectors rise with industrials, materials outperforming and financials, utilities underperforming

Bulletin headline summary from Bloomberg and RanSquawk

Stocks traded higher in Europe (Eurostoxx 50, +0.52%), with volumes light given the usual summer trading conditions and basic materials outperforming after Rio Tinto was upgraded at Bank of America.
GBP/USD rose to its highest level since Oct’08, following the release of better than expected UK Manf PMI.
In terms of the upcoming releases, focus will be on the US ISM Manufacturing and API oil inventories data.
Treasuries decline within recent ranges to begin the second half of 2014; trading may be cautious before ECB, June payrolls and early close on Thursday. *10Y yields have fallen ~50bps since the start of the year, 5/30 curve flattening by around the same amount
China’s manufacturing expanded in June at the fastest pace this year, with the official PMI rising to 51 from 50.8 in May
U.K. manufacturing growth accelerated to the fastest pace in seven months as demand surged, adding to signs of a broadening recovery
Manufacturing in the euro area slowed more than initially estimated in June as a deepening of France’s downturn offset a rise in Spanish activity to a seven-year high
Australia’s central bank kept its benchmark rate at a record low as an elevated currency combines with government cutbacks and a slowdown in mining investment to constrain growth
Ukrainian government forces resumed their campaign against pro-Russian rebels in the country’s violence-torn east after President Petro Poroshenko ended a cease-fire and vowed to retake territory from the separatists
Iraqi lawmakers failed to bridge differences on filling key posts, including appointing a prime minister; parliament adjourned until July 8, citing a lack of quorum and disagreements among leading political blocs
As Russia and Iran step in to bolster the government in Baghdad, Obama has no good options to help defeat the al-Qaeda splinter group that’s proclaimed an Islamic caliphate in Iraq and Syria
Obama said he’ll go it alone on changing U.S. immigration rules because House Republicans are “unwilling to stand up to the Tea Party to do what’s best for the country”
Sovereign yields mostly higher. EU peripheral spreads narrow. Asian stocks mostly higher, European stocks, U.S. stock futures rise. WTI crude higher, gold little changed, copper falls

US Event Calendar

9:45am: Markit US Manufacturing PMI, June final, est. 57.5 (prior 57.5)
10:00am: ISM Manufacturing, June., est. 55.9 (prior 55.4)
ISM Prices Paid, June, est. 60 (prior 60)
10:00am: Construction Spending m/m, May, est. 0.5% (prior 0.2%)
10:00am: IBD/TIPP Economic Optimism, July, est. 48.0 (prior 47.7)
Domestic Vehicle Sales, June., est. 13m (prior 13.11m)
Total Vehicle Sales, June., est. 16.38m (prior 16.70m)
11:00am: POMO – Fed buys $2.50 – $3.25 billion in the 04/30/2020 – 06/30/2021
range

ASIA

Asian equity markets traded mixed amid a slew of data releases including the quarterly BoJ Tankan survey which was impacted by tax hike and Chinese PMI releases, with Chinese official PMI at a 6-month high (as exp.) but HSBC PMI release was revised lower.

EUROPE

The release of somewhat mixed EU based final manufacturing PMI readings failed to weigh on sentiment, with Bunds and Gilts trading lower amid better bid stocks, as well as better than expected UK Manufacturing PMI which marked 16th month of expansion and highest reading since Nov 2013. The release resulted in further bear steepening of the Short-Sterling curve, while the Euribor curve was little reactive to an uptick in Euro-area excess liquidity, which rose to EUR 166.85bln vs. EUR 138.67bln.

EQUITIES

GBP outperformed EUR and USD this morning, with GBP/USD rising to its highest level since October 2008, following the release of better than expected UK Manufacturing PMI. Looking elsewhere, AUD/USD rose to its highest level since November, after the RBA signalled no changes to its monetary policy, which analysts note indicates that the RBA has a very high pain threshold.

COMMODITIES

Despite spiking overnight to its highest level since March after a high volume of trades went through as stops were broken above the USD 1330 level, spot gold gradually retraced the move and the price action was range-bound ever since. Also spot copper hit a 4-month high, with zinc hovering within reach of it highest in almost 3-years both supported by tight supply and after the Chinese data. Elsewhere, WTI and Brent Crude futures trade marginally higher, partly supported by the uncertainty surrounding Ukraine, where Ukrainian President Poroshenko said Ukraine is to end cease-fire in eastern regions and pledged to move against rebels.

* * *

DB’s Jim Reid concludes the overnight news recap

The second half has now begun for markets and in our H1/Q2/ June performance review today we show that most assets have had a positive year so far. So much so that if the year eventually goes to penalties it will end up being a very poor second half showing in line with many of England’s in recent years!! We briefly review the numbers at the end but all the data and charts are in the pdf of this document. Its pretty rare to have almost all main global assets in positive territory this far into a year. Central bank liquidity continues to drive markets in our opinion which has helped this synchronised uplift in valuations. However we can’t help sensing that there’s less joy over these returns than might be expected. Investors are worried about valuations in numerous assets and worried that the Fed might become more hawkish soon. There’s little chance of the ECB following suit anytime soon though and European Government bonds have had a very good 2014 so far.

Over the last month we’ve again highlighted how many European Government bond markets have hit multi-century, all time yield lows. Well yesterday it was the turn of the Dutch 10 year yield to go through it’s all time low again. The Dutch series is where we have our longest history of any government bond market with data going back to 1517 spanning almost half a millennia. The graph is in the pdf today and further shows just how unique the current situation is. The level of uncertainty about how this all ends must by definition be very high given this.

So as we start H2, Asian markets are trading with a stronger tone this morning helped by a solid start to the global manufacturing PMIs. The official Chinese manufacturing PMI printed at 51.0, in line with consensus and at a six month high. The final HSBC Chinese manufacturing PMI came in at 50.7, slightly below the flash reading of 50.8, but this is also the highest print of the year. The PMIs for other Asian bellwethers including Indonesia and Taiwan were also up on a month-to-month basis. The Nikkei (+1.2%) is the clear outperformer today, on decent volumes and despite a drop in the Japanese Q2 tankan manufacturing index to 12 from 17 previously and 15 expected. The capex component of the Tankan survey was above expectations however (+7.4% vs 6.0%) expected, which is strongest rate of growth since 2007. This has helped USDJPY (+0.1%) today. Outside of Japan, activity has been subdued with Hong Kong markets shut for July 1st holidays. The Indonesian rupiah is poised to record its strongest three-day rally in about fourth months – spurred by comments last week from the Bank of Indonesia that the country’s trade balance returned to surplus in May. The AUDUSD is also poised for a solid gain (+0.25%) after the RBA maintained its neutral tone in today’s policy meeting.

The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing. Indeed, yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13. Adding to that, the S&P 500 closed virtually unchanged at -0.04%, and for the record the last time we saw a gain or loss of more than 1% in the index was April 16th. One theme to note though was the continued underperformance of European banks across the equity and credit spectrum. Yesterday’s underperformance was sparked by a 17% fall in the stock of Banco Espirito Santo which is Portugal’s largest bank. The price action was dictated by reports that regulators were concerned over corporate governance between the bank and other related companies and there were also reports that Luxembourg justice authorities had launched an investigation into one of the bank’s holding companies (Reuters). Portuguese securities regulator banned naked short selling on the bank’s stock for one day. The news weighed on Portuguese bond yields which added 8bp, and also on European banking stocks in general (-0.75% vs Stoxx 600 -0.09%). Peripheral bank credit traded about 3-5bp wider yesterday – and the European senior financials index (+2bp) underperformed Main (+1.375bp). The two credit indices were trading flat to each other in the middle of June but the recent underperformance of banks has pushed the basis back to nearly 6bp. We still think its likely that Fin Senior will trade through Main in H2 though.

Across the Atlantic, there was focus on the Chicago PMI and home sales data, following which treasury yields spiked up briefly before retracing the move to be largely unchanged on the day. The US Chicago PMI was slightly below expectations 62.6 (vs 63.0 expected) and also below last month’s 65.5. Still, our economists note that the PMI was consistent with a large snapback in growth in Q2, and they noted the three-month to June average was 63.7 which is the highest since the three months to April 2011. The other regional activity indicator, the Dallas Fed manufacturing outlook rose to 11.4 (vs 8.5 expected and 8.0 prior). Pending home sales rose 6.1% MoM (1.5% expected) which benefited US homebuilders on the equity side (+1.5% yesterday). In terms of Fed speak, the SF Fed’s Williams commented that a first rate hike in 2H15 will be appropriate, but he also reiterated that it may be optimal for the Fed to let inflation run above target in order to balance the Fed’s dual mandate.

Perhaps one of the key themes of 1H14 was the surging M&A activity globally. With 1H14 books closed, the final M&A tally was $2.2trillion according to Bloomberg which is a YoY increase of 77%. By region, leading the way was the resurgence of corporate activity in Europe (+109% YoY), though this was coming off a low base, followed closely by North America (+79%). In terms of industry the biggest pickup in activity came in pharma (+677%) and healthcare (+140%). One reason for the surge in M&A has been the accommodative capital markets. We saw an example of that yesterday with a jumbo bond deal from Oracle who priced $10bn in bonds (the second largest USD offering in the year-to-date according to Bloomberg) to fund the purchase of Micros Systems. The deal was sufficiently large to drag other TMT bonds several basis points wider on the day.

Looking at some of the geopolitical headlines, Ukrainian President Poroshenko said late on Tuesday that we would end the cease-fire with pro-Russian rebels and vowed to intensify military operations in the country’s east. However the president also made some concessions including guaranteeing Russian-language rights and more regional autonomy. Russia also offered some concessions yesterday including allowing Ukrainian and international observers in its own border posts along the border with Ukraine. In Iraq, semi autonomous Kurds plan a referendum for independence according to a regional government spokeperson (Reuters). The Kurds plan to keep control of the Kirkuk oil fields.

There are some mixed headlines elsewhere in China. Firstly China’s banking regulator announced a small change in the way that Loan-to-deposit ratios are calculated which our banking analysts think will reduce the system regulatory LDR ratio by 410bp based on end 2013 data. Our analysts think that this will pave the way for more relaxation of Chinese bank liquidity requirements. Secondly, the latest Macau gaming numbers were reported which showed June casino revenues fell 3.7% YoY in June. This is the first drop since 2009, but some are attributing this to the effects of the World Cup.

Turning to the day ahead, the rest of the global manufacturing PMIs/ISMs will be released starting with the final PMIs for Europe. The US manufacturing ISM is expected to show a small bump up to 55.9 (vs 55.4 in May) which would mark a six month high. DB is expecting a print of 55.0. Other highlights on the US data docket are May construction spending and the IBD/TIPP economic optimism index.

via Zero Hedge http://ift.tt/1mEsLK6 Tyler Durden

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