As reported earlier, the biggest overnight news took place just around 4am Eastern when futures exploded to new ATH on headlines of a new ceasefire in Ukraine, which was promptly refuted by both Putin and the rebels, but futures don’t care and have continue raging higher, in hopes of sweeping the latest batch of ugly economic news out of Europe, this time in the form of Europe’s non-mfg PMIs, under the rug.
As RanSquawk summarizes, heading into the North American open, the bulk of the morning’s price action has been provided by news that Ukrainian President Poroshenko said that he reached an agreement with Russia’s Putin on a “permanent cease fire” in Eastern Ukraine’s Donbass region. This saw an immediate spike higher in European equities with the DAX future rallying and breaking above its 100DMA seen at 9644.50, thus extending earlier gains that stemmed from the strong performance in Asia-Pacific equities, while the e-mini S&P once again printed a fresh record high. However, these moves staged a partial reversal amid comments from Russia’s Putin that he denied that such an agreement had been reached as Russia is not a party to the Ukraine conflict. In stock specific news, Russian exposed Raiffeisen Bank outperforms Europe (+7%) in reaction to the geopolitical developments, while Hugo Boss have underperformed throughout the session following a share placement which came in at the lower end (-5.3%).
A quick recap of the Euroarea final, and disappointing, composite PMI data from Goldman.
The August Euro area Final Composite PMI came in at 52.5, 0.3pt weaker than the Flash (and Consensus) estimate. Relative to July, the Composite PMI declined by 1.2pt. Today’s data showed a surprised 3pt decline in the Italian services PMI to just below 50, while the Spanish counterpart in contrast gained close to 2pt and now stands at a very robust 58.1.
- The Final manufacturing PMI (released last Monday) came in 0.1pt lower than the Flash estimate. Today’s data showed that the Final Services PMI printed 0.3pt below the Flash. Similar to the manufacturing PMI on Monday, the German services PMI also contained a sizeable (1.2pt) negative Flash/Final revision. France also recorded a downward revision to its services PMI relative to the Flash (0.8pt) (the French manufacturing PMI was revised up 0.4pt on Monday).
- The August data showed that the manufacturing PMI declined 1.1pt to 50.7. Meanwhile, today’s data show a 1.2pt decline in the Services PMI to 53.1. The Manufacturing PMI rose above the Services PMI in late 2013, but this relative outperformance has reversed over the past six months (Chart 1).
- The breakdown of forward-looking components was mixed. New manufacturing orders fell by 1.4pt to 50.7 and stocks remained stable, thus decreasing the orders-to-stocks ratio by 1.3pt. Meanwhile, within the Services PMI (the headline figure is not aggregated up from the subcomponents), ‘Business Expectations’ eased 3.1pt while ‘Incoming New Business’ was unchanged.
- The Final PMI data show a mixed country breakdown. The German manufacturing PMI contacted 1.0pt in August, while the services PMI declined by a sizable 3.0pt, resulting in a 2pt decrease in the German Composite PMI (to 53.7). The French Composite PMI, on the other hand, remained broadly stable on the month (at 49.5). The gap between the German and French Composite PMIs narrowed from 6.3pt to 4.3pt, on the back of weaker German PMIs. This gap is considerably smaller than the 8pt differential seen during late 2013/early 2014.
- Today’s data showed a large divergence in Italy and Spain. The Italian Composite PMI contracted by 3.1pt to 49.9 (Chart 2), reflecting a 2.9pt contraction in today’s services PMI (to 49.8, Cons: 52.0) and Monday’s 2.0pt decline in the manufacturing PMI (to 49.8). In sharp contrast, the Spanish Composite PMI continued to gain momentum, increasing by 1.2pt on the month to a robust 56.9. Today’s Spanish services PMI showed a 1.9pt gain, outweighing the 1pt decline in the manufacturing counterpart. The gap between Italian and Spanish Composite PMIs widened substantially from 2.6pt to 7.0pt in August.
In Asia, The Shanghai Comp (+0.6%) and Hang Seng (+2.3%), the former touching the highest level since June 2013. This follows better than expected Chinese PMIs with the non-manufacturing reading recording its first increase in 3 months and HSBC services PMI printing a 17 month high. The Nikkei 225 (+0.38%) pulled of the session’s best levels after Yasuhisa Shiozaki was appointed as the Japanese Health Minister (the post responsible for GPIF reform), as analysts see Shiozaki taking a cautious and gradual stance on increasing Japanese stock allocation in the pension fund’s portfolio. This also resulted in strength in both the JPY and JGBs, last seen unchanged at 146.16.
Bulletin headline summary from Bloomberg and RanSquawk
- Putin throws cold water over initial reports from Kiev that Russia and Ukraine have reached a permanent ceasefire, thus partially reversing the initial gains in European and US equities.
- A lacklustre slew of Eurozone PMIs provided markets with further concerns over the fragility of the area’s economy, although failed to place substantial weight on EUR/USD as geopolitical events take centre-stage.
- Looking ahead, attention now turns towards the US ISM New York release, factory orders, the Bank of Canada rate decision and any further developments on Russia/Ukraine ceasefire talks.
- Treasuries decline for a third day amid heavy corporate calendar before ECB meeting/Draghi press conference tomorrow, nonfarm payrolls Friday.
- Yesterday’s $21.35b of IG issuance was among heaviest year to date, with 13 issuers including five financials selling 23 tranches
- China’s service industries strengthened in August, contrasting with declining manufacturing gauges and suggesting a transition away from factory-led growth
- Russia’s Putin and his Ukrainian counterpart Petro Poroshenko agreed on steps toward a cease-fire in Ukraine’s easternmost regions, where a bloody conflict has raged for more than five months
- A video showing the beheading of a second American journalist by Islamic State brought fresh calls for an international alliance to combat the extremist group as well as renewed condemnation of its barbarism
- Economist Pippa Malmgren, a former adviser to George W. Bush, is calling attention to “shrinkflation,” where companies charge consumers the same, or more, for less; this may foreshadow an overall jump in prices, an alarm she’s been sounding for a while
- Abe’s new cabinet appointments signal his determination to deliver on pledges to overhaul Japan’s pension system and bring more women into the workforce to revive the economy as the population ages
- Australia’s economic growth slowed last quarter in response to a stronger currency and weaker commodity prices, as RBA Governor Glenn Stevens indicated he wants to avoid cutting interest rates further
- The Labour Party is blitzing Scotland in a bid to stop supporters in its traditional heartland from defying the party line and backing independence, according to two people familiar with the campaign’s tactics
- The White House acknowledged that Obama may miss a self- imposed deadline for taking executive action on immigration as his advisers debate delaying an announcement until after the election
Sovereign yields higher. Asian and European stocks, U.S. stock-index futures gain. WTI crude and gold higher, copper falls
US Event Calendar
- 7:00am: MBA Mortgage Applications, Aug. 29 (prior 2.8%)
- 9:45am: ISM New York, Aug. (prior 68.1)
- 10:00am: Factory Orders, July, est. 11% (prior 1.1%)
- TBA: Domestic Vehicle Sales, Aug., est. 16.6m (prior 16.4m)
- Total Vehicle Sales, Aug., est. 13.2m (prior 12.95m) Supply
- 10:00am: Bank of Canada seen maintaining benchmark interest rates of 1%
- 2:00pm: Federal Reserve Beige Book
- 6:15pm: Money Marketeers of New York University dinner featuring Fed’s Powell as speaker
- 11:00am: Fed to purchase $950m-$1.15b notes in 2036-2044 sector
FIXED INCOME
Following the news from the Ukraine fixed income products saw an immediate move lower with Bunds falling around 35 ticks and the German 10yr yield rising back towards 0.96%, with USTs slipping back below 125.00 before staging a modest recovery following the response from Putin. In terms of this morning’s Bobl auction, the offering was technically uncovered although did little to alter German fixed income prices. Elsewhere, the PO/GE spread is tighter by around 2.8bps with the order book for Portugal’s 15 year bond in excess of EUR 6bln and the spread tightening from 240bps to 235bps.
FX
The session’s main data releases have come in the form of the plethora of Eurozone PMIs which painted a relatively lacklustre picture of the Eurozone services sector, although failed to place too much downward pressure on EUR/USD, with the pair later lifted following the initial Ukraine headline. Furthermore, UK services PMI came in above the top end of expectations at a 10-month high, although failed to provide UK asset classes with much in the way of a reaction as markets continue to place focus on the recent geopolitical developments. In the commodities complex alongside the move lower in palladium, spot gold saw a sharp move lower, with prices touching 2.5 month lows, although both metals saw a substantial paring of these losses in reaction to the comments from Putin. Elsewhere, the RUB is stronger against the USD as participants responded positively to the initial reports of a ceasefire between Ukraine and Russia.
COMMODITIES
Palladium is the underperformer in the precious complex following a fast-money move lower of around USD 12.00 amid the erosion of the war premium that had been providing the precious metal with recent support, with spot gold touching a 2.5 month following the initial Ukraine headline. Elsewhere, in the energy complex both WTI and Brent crude futures are seen higher as Brent crude futures pull off their 16-month low and further support provided by yesterday’s strong US manufacturing data.
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Finally, the balance of the overnight summary comes from DB’s Jim Reid
As we slowly build up to the main events of the week, namely the ECB meeting and payrolls, markets are seemingly returning from holidays wondering whether bonds have extended too low in yields in recent months. US 10 year treasuries rose 8bp yesterday, the worst performance in just over a month. The sell off had already started before the stronger than expected ISM manufacturing (59.0 vs 57.0 expected) but the beat provided extra momentum. Away from the US, yesterday was also a fairly poor day for the European government bond market. Ten year yields in Germany, France, UK, Italy and Spain rose 5bp, 6bp, 6bp, 4bp and 2bp to close at 0.93%, 1.31%, 2.44%, 2.45%, and 2.27%, respectively.
Otherwise the day was a fairly muted one for DM equities. Key indices on both sides of the Atlantic were little changed on the day. The S&P 500 (-0.05%) was weighed by a weak performance in Energy (-1.25%) likely driven by a sharp drop in oil prices. Brent and WTI prices have come off by about 11-12% from their recent highs in June after having extended their fall further yesterday by around 2-3%. A strong Dollar has been one factor used to explain the recent moves and it might lead to further downward pressure on inflation in the months ahead. On the greenback the Dollar index has risen by over 4% since the end of June.
Bringing the focus back to fixed income, European credit spreads outperformed the softness in equities yesterday with Xover and Main closing 2.5bp and 1bp tighter on the day. Senior financials are now back to being within a bp off Main having traded around 10bp wider through the BES episode. We’ve long felt that the Sen Fin index will trade through Main before year-end and still believe that its just a matter of time before it does. Whilst on credit we have just published our latest HY monthly which reviews the market and our view on it after the summer. Having started to look expensive relative to its own history as well as relative to IG, HY credit looks to be more attractive on both counts as we enter September. The latest downgrade/upgrade ratios are supportive of defaults remaining at their current low levels into year end and beyond and ultimately the spread weakness we saw from late June to early August has left us more comfortable with a constructive view on credit going forward. We accept that the deterioration of the technicals (e.g. lower cash balances, an expected increase in issuance and a less accomodative Fed) probably means that the journey might now be increasingly more bumpy than over the 18-24 months to mid-summer this year. However as well as supportive fundamentals, in the background we do have the potential for further action from the ECB that may add further support to fixed income markets around any future wobbles. Therefore any spread weakness should probably be seen as an opportunity to add risk until fundamentals turn considerably more negative.
On to more present matters, Asian equities have largely ignored US and European weakness overnight. Indeed key bourses across the region are trading higher on the day with the Hang Seng, Nikkei, and Shanghai Composite adding 1.3%, 1.0% and 0.6% respectively. A strong China services PMI print and continued weakness in JPY are helping. On China, the official non-manufacturing PMI rose by 0.2pt to 54.4 in August. The HSBC variant rose by 4.1pt to 54.1, the highest since March 2013. The JPY is over 1% lower this week (now 105.28) against the Dollar with the appointment of Shiozaki (pro market reform and advocate of reducing GPIF’s allocation in bonds) as the Health Minister being cited as a main driver. In fact the appointment has been confirmed by the wires (Bloomberg) as we go to print. Asian credit new issues are also performing as they break firmer in secondary although the new issue pipeline is building up rapidly. Vietnam is already planning for a USD sovereign bond issue (Bloomberg) after Indonesia’s lowest yielding Dollar sukuk deal in two years.
In terms of geopolitics the European Commission is set to decide on new sanctions on Russia today. According to Reuters, the recommendations will basically broaden the measures that were approved in July. Notably it would widen a ban on Russian state banks raising capital in EU markets to cover all Russian state-owned firms. The capital markets borrowing ban would be extended to include syndicated loans from EU banks, and a ban on sales in Europe of Russian debt instruments for periods of less than 90 days would be reduced to 30 days. The WSJ noted that the EU is also likely to widen restrictions on exports of dual-use goods to Russia, which are currently banned for military end-users. Reuters reported that more symbolic actions such as banning the Russian Minister of Defence from travelling to the EU are also being considered. On top of all these, EU diplomats seem to be also actively considering boycotting the next world cup although FIFA President Sepp Blatter also said that Russia’s role as a host is not up for discussion. England effectively boycotted the last world cup so it wouldn’t make much difference here.
Taking a closer look at the ISM report yesterday, the 59.0 print was just shy of its post-recession peak of 59.3 seen in February 2011. Joe LaVorgna noted that the improvement in two of the main underlying components (ie new orders (66.7 v 63.4) and production (64.5 v 61.2) suggests that the headline ISM gain should prove to be somewhat durable. As the ISM is highly correlated to quarterly GDP growth the current level of new orders is more consistent with a GDP growth closer to 4.4% according to Joe (DB now forecasting 3.5% in Q3 GDP). The employment sub-reading was broadly unchanged (58.1 v 58.2) although we note that prices paid has fallen more than expected (58.0 vs 58.5 expected and 59.5 previously). Moving on to today, the Fed’s Beige Book, factory orders, and auto sales are the notable US releases. In Europe, we’ll get a full slate of PMI services data for August which will be a nice lead in to Draghi’s showtime tomorrow.
via Zero Hedge http://ift.tt/1CpyrTZ Tyler Durden