One day after the biggest jump in stocks in two months on what has still been an undetermined catalyst, overnight global equities did a U-turn with European stocks falling toward a one-month low and U.S. stock index futures declining, as crude oil dropped toward $44 a barrel. A driver the move lower was a sharp reversal in the USDJPY which dropped 100 pips from yesterday’s highs which took places just as Goldman predicted the USDJPY has finally bottomed, facilitated by a weaker dollar (also following a Goldman report yesterday forecasting the USD was about to surge).
S&P 500 futures fell 0.2% after Walt Disney Co. tumbled 5.5% in premarket New York trading after posting second-quarter results that missed analysts’ estimates. Macy’s Inc. is among companies releasing earnings Wednesday. In Europe, the Stoxx 600 lost 0.7%. A gauge of lenders fell the most on the index, with Raiffeisen Bank International AG tumbling 8.6 percent after saying it’s considering merging with its parent company to ease the pressure of regulatory requirements. ABN Amro lost 2.4 percent. Total SA and Eni SpA dragged energy producers down as oil prices retreated.
Commodities were once again at the forefront of the action, with industrial metals from aluminum to zinc climbing as Glencore Plc forecast demand to exceed supply. Soybeans, silver and gold also gained, while crude fell before U.S. inventories data. As the chart below shows, however, the main driver of market action remains the dollar, which impacts both commodities, and risk as the two continue to move broadly in line all year.
In an amusing twist, China’s Economic Information Daily publication wrote a front page article saying China should avoid short-term A-Share intervention, adding that state-backed funds such as the China Securities Finance Corp. should be long-term investors in the A-share market and avoid short-term intervention, adding that CSFC traded stocks frequently during 1Q, which artificially distorted the market: report.
Aside from central bank intervention in various markets, skepticism still remained: “earnings so far have been OK but not strong enough to deliver a real upside for stock prices,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “What is still really missing from this environment is a notable rally in the banking stocks, which is an important driver for any stock market rally. With oil moving down, it’s negative for oil producers.”
Elsewhere, the Lyxor ETF Brazil rose 1.3 percent before a Senate vote that would force Rousseff out of office and into an impeachment trial. The Philippine Stock Exchange Index surged 3.1 percent, extending Tuesday’s 2.6 percent rally, as Rodrigo Duterte, a tough-talking mayor of Davao city, won Monday’s presidential vote. The peso gained 0.4 percent on Wednesday.
Market Wrap
- S&P 500 futures down 0.2% to 2073
- Stoxx 600 down 0.7% to 333.8
- Eurostoxx 50 -1.1%
- FTSE 100 -0.3%
- CAC 40 -1.1%
- DAX -0.8%
- IBEX -1.2%
- FTSEMIB -2.1%
- SMI -0.4%
- MSCI Asia Pacific up 0% to 127.6
- Nikkei 225 up 0.1%
- Hang Seng down 0.9%
- Kospi down 0.1%
- Shanghai Composite up 0.2%
- ASX up 0.6%
- US 10Yr yield down 2bps to 1.75%
- Italian 10Yr yield down 3bps to 1.48%
- Spanish 10Yr yield down 3bps to 1.61%
- German 10Yr yield down 1bps to 0.11%
- Gold spot up 0.5% to $1272.2/oz
- Brent Futures down 0.6% to $45.3/bbl
Top Global Headlines
- IMF Might Not Join Greek Bailout at Current Review: Kathimerini: newspaper cites three unidentified European officials
- Norway Increases Oil Wealth Spending to Ward Off Recession: fiscal stimulus impulse rises to 1.1ppt From 0.7ppt
- The Fog of Brexit: Investor complacency over Brexit may not last, Macro View column says
- Glencore CEO Lists Mining’s Mistakes After $1 Trillion Spree: Glasenberg outlines a ‘recipe for better returns’ from mining
- Staples-Office Depot Merger Collapses After Block by Judge: shares of both companies plunge in after-market trading
Looking at regional markets, Asia stocks traded mixed with most of the major bourses taking the impetus from a firm Wall St. close. ASX 200 (+0.6%) traded higher after yesterday’s energy advances which saw WTI regain the USD 44/bbl level, while a recovery in basic materials also benefited large cap miners with BHP Billiton surging nearly 4%. Nikkei 225 (+0.1%) was positive, although the index pulled off its best levels as JPY strength pared some exporter gains, while participants also digested a slew of earnings. Chinese markets were mixed with the Shanghai Comp (+0.2%) higher after the PBoC upped its liquidity injection. 10yr JGBs saw subdued trade as a mildly positive risk-tone in Japan dampens demand for government paper, while the BoJ’s presence in the market for JPY 1.24tr1 in JGBs stemmed any significant downside.
Japan PM Abe adviser Hamada said that Japan retains right for FX intervention and Japan should intervene if JPY strengthens rapidly to 100.00 against USD. However, Hamada also further stated that he does not think JPY will appreciate much from between 105.00-110.00 levels.
Asian Top News
- China’s Africa Push Reaches Currencies in Deal Investors Decry: Naira-yuan swap may delay, not prevent devaluation, Citi says
- A Young Tokyo Stock Picker Rubs His Hands as Japan Gets Old: Kuzuhara’s fund gains as Topix tumbles, winning several awards
- Japan’s Biggest Traders See No Commodities Recovery in Sight:
- India Acts to Stop Investors Using Mauritius as Tax Shelter: Capital gains on investments from April 1, 2017 to be taxed
- Toyota Forecasts 35% Decline in Net Income on Stronger Yen: Plans to buy back up to 3.42% of its shares
- Hong Kong Exchange Net Declines on Lower Trading Volume: 1Q net HK$1.43b vs HK$1.58b y/y
- Takata Forecasts Profit Despite Looming Air-Bag Recall Costs: restructuring panel expected to make proposals by October
European equities have suffered this morning, with Euro Stoxx lower by around 1.0% and DAX slipping back below the psychological 10,000 level. Leading the way lower this morning has been financials, with the FTSE MIB underperforming after a number of Italian banks reported their earnings and with Banco Popolare among the worst performers in Europe. Similarly, high profile Credit Suisse and Deutsche Bank are also softer this morning as the latter retraces much of its post-earnings upside. On the other hand, the FTSE outperforms this morning, granted a reprieve by modest strength in the material sector. Despite the upside in equities, Bunds have traded flat throughout the session ahead of supply today from Germany and Portugal. As has been the case throughout the week, today has seen a large quantity of corporate issuance, including deals from the likes of J&J.
European Top News
- ABN Amro 1Q Profit Falls on Lower Fee Income: regulatory charges jump to EU98m from none in 2015
- EON Profit Beats Estimates With 30% Jump on Gazprom Accord: gas supply accord boosts earnings by about EU400m
- Bilfinger Quarterly Loss Widens as Two Directors Step Down: Thomas Blades named chairman of executive board from 3Q
- Raiffeisen Eyes Merger With Parent to Ease Regulatory Burden: six-month review started, decision for deal due this year
- TUI to Sell Adventure-Holidays Arm to Focus on Mass Tourism: to sell about 50 adventure travel brands
- Carlsberg Sales Rise Slightly as Profit Forecast Maintained: to move 300 back-office jobs to India to shed costs
- Premier Oil Says It Will Meet or Exceed 2016 Production Forecast: co. comments in statement
- Altice First-Quarter Earnings Stall as French Unit Struggles: Numericable-SFR facing stiff competition
- Statoil Could Pump More Oil at Giant Sverdrup Field, Lundin Says: output rate from phase 1 seen almost 27% above earlier target
In FX,the all important yen climbed 0.6 percent to 108.62 per dollar, after sliding more than 2 percent over the last two days. This happens the day after Goldman said that USDJPY has bottomed and the USD is – once again – set to soar. The currency has gained more than 10 percent this year, making it harder for the Bank of Japan to achieve its inflation goal, and Finance Minister Taro Aso reiterated Tuesday that the government can intervene to stabilize the exchange rate if necessary. The pound weakened for the first time in three days versus the euro as a report showed U.K. industrial production grew less in March than analysts forecast, adding to signs that Britain’s economy is suffering as it heads toward a referendum on its membership of the European Union. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell for a second day following on Goldman’s forecast that the USD is set to jump. The gauge had its strongest rally in almost a year in the five days through Monday.
In commodities, all eyes were on WTI crude which fell 0.9% to $44.28 a barrel, after climbing 2.8 percent in the last session. Concern over supply disruptions in Nigeria and Libya, holders of Africa’s largest oil reserves, was countered by speculation that U.S. data on Wednesday will show American stockpiles expanded from the highest level since 1929. Zinc and lead rose by more than 1.7 percent in London, while copper gained 1.2 percent. Commodities are “now close to pre-supercycle levels,” when growth in Asia fueled a surge in prices, Glencore said Tuesday. The London Metal Exchange’s LMEX Index of six industrial metals closed at a one-month low on Tuesday. Gold gained 0.5 percent, buoyed by the dollar’s retreat. Goldman Sachs Group Inc. this week raised its forecasts for bullion prices as it scaled back expectations of U.S. Federal Reserve rate hikes over the next year. Silver climbed as much as 1.3 percent.
On today’s US calendar, algos will be focused on the DOE energy inventory report at 10:30am while the only data of note is the April Monthly Budget Statement. There’s a similar lack of Fedspeak although we will hear from the ECB’s Weidmann and Nowotny today. Keep an eye on Brazil however where the Senate is scheduled to vote on the impeachment process: a simple majority of 41 senators would be enough for the Senate to accept the request, which would force President Rousseff to temporarily step down for as long as 180 days, a period in which Vice President Michel Temer would take over and have full autonomy to appoint a new cabinet and run the government. Results may not be out until sometime late tonight or early next morning, but it looks like one to watch.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities trade lower as underperformance in financial names dampens sentiment in the region
- GBP lags FX markets in the wake of further disappointing UK data, this time with industrial and manufacturing production failing to meet expectations
- Looking ahead, highlights Include Industrial Production & Manufacturing Production from the UK, US MBA Mortgage Applications, DOE U.S. Crude Oil Inventories
- Long-end Treasuries higher overnight as European equities drop with crude oil and precious metals rally; auctions continue with $23b 10Y notes, WI 1.735%; last sold at 1.765% in April.
- The most aggressive traders are joining the growing ranks of those betting against the three-month rally in U.S. stocks. Since the end of February, investors have sent $1.3 billion into exchange-traded notes that pay two or three times the inverse of the market’s return
- Today may be the last day in office for President Dilma Rousseff, as Brazil’s Senate gears up for a vote that would force her out and into an impeachment trial she appears unlikely to survive. The Senate debate is scheduled to last 10 hours and end with a vote around 7 p.m. local time
- Norway’s government boosted the amount of oil money it will spend this year to a record, dipping deeper into its sovereign wealth fund to ward off a recession
- Spain is the latest euro-region sovereign to sell 50-year bonds, with an issue via banks that’s likely to price today. It follows half-century deals last month from France and Belgium as countries take advantage of historically low interest rates
- U.K. industrial production grew less than forecast in March as manufacturing barely rose and oil and gas output shrank. Output rose 0.3%, figures from the Office for National Statistics published today show
- Billionaire hedge fund manager Paul Singer said that gold’s best quarter in 30 years is probably just the beginning of a rebound as global investors weigh the ramifications of unprecedented monetary easing on inflation
- Sovereign 10Y yields mostly lower led by Greece (-12bp); European equities lower, Asian markets higher; U.S. equity- index futures drop. WTI crude oil falls, precious metals rally
US Event Calendar
- 7:00am: MBA Mortgage Applications, May 6 (prior -3.4%)
- 10:30am: DOE Energy Inventories
- 1pm: U.S. to sell $23b 10Y notes
- 2pm: Monthly Budget Statement, April, est. $107b
DB’s Jim Reid concludes the overnight wrap
Yesterday broke a recent spell of apathetic to soft risk markets. A big rebound across the commodity complex and in particular for Oil helped to fuel what was a much better day for risk generally. A Q1 loss for Credit Suisse that wasn’t quite as bad as feared also helped financials turn in a decent day and the progress between Greece and its Creditors did little to dampen the tone either. The S&P 500 ended the session with a +1.25% gain which was the biggest single day gain since March 11th. Prior to this we’d seen the Stoxx 600 close +0.91% although it was peripheral bourses which put in the better performance in Europe. Spanish and Italian equities were up +1.32% and +1.41% respectively while Greek equities rallied to the tune of +3.15%. Indeed 10y Greek government bond yields also finished the day nearly 60bps lower.
Across commodities, as highlighted it was energy markets which stood out. WTI wiped out all of the previous day losses by rallying +2.81% (to close at $44.66/bbl) while Brent was up an even more impressive +4.33% to close back above $45/bbl. It’s all about the supply side of the equation for the market at the moment and yesterday’s bounce seemed to be predicated on possible production curtailments in Nigeria. Indeed, concern over increasing rebel violence in the Niger River delta has seen major producers commence evacuation procedures there. Production concerns in Libya were also a factor yesterday as well as the ongoing focus on the wildfires in Canada. Away from energy markets base metals were also generally firmer with the exception of Copper. Iron ore (+0.49%) snapped a two-day 9% loss while Zinc (+0.71%), Nickel (+1.22%) and Lead (+0.95%) also had better days.
Credit markets were not to be left behind with the more energy sensitive US market outperforming. CDX IG ended the session 3.5bps tighter, the second successive daily gain and the best single day move tighter since the end of March. CDX HY rallied 16bps while in Europe we saw Main and Crossover finish 3bps and 8bps tighter respectively. The bigger focus for credit right now though is the huge amounts of primary issuance that we’re seeing this week. €11bn worth of deals priced in the European market yesterday across 13 issuers taking the week to date volume past €17bn. Meanwhile in the US nearly $10bn of deals priced meaning that week to date volumes in the two days so far (currently $36bn) already exceeds the YTD weekly average with expectations still for steady issuance over the remainder of the week. While we’re on the subject of credit, a quick mention that this morning our latest Credit Bites note was released which takes a look at the latest monthly Moody’s default rate release. It should have hit your emails just before this.
Switching our focus now to the latest in markets this morning, bourses in Asia had initially gotten off to a decent start, largely following the US lead from last night, but have since given up the bulk of the gains now with the Yen strengthening and the rally in Oil coming to a halt. Indeed the Nikkei is currently +0.29% but was up as much +1.47% at one stage, with the Yen rallying around half a percent. The Hang Seng (-0.63%) and Kospi (-0.38%) are now in the red after also starting strongly, while the Shanghai Comp (+0.62%) is firmer but has traded in a 1% range. Oil markets are off around half a percent, while credit markets a marginally tighter generally.
Moving on. On Monday we recapped the current state of play with regards to earnings season in the US and today we’re taking a closer look at the same data for European earnings. As it stands we are now 79% of the way through the season and earnings beats are currently standing at 57% based on Bloomberg data. While that is less than what we’ve seen in the US, a similar theme has played out in that earnings are beating on low and downwardly revised guidance. The energy sector is a good example of that with 77% of companies beating earnings guidance despite YoY EPS for the sector being down over 60%. In fact our European equity strategy colleagues highlighted in their report from a couple of days ago that overall EPS for the Stoxx 600 is -21% yoy and excluding the impact of energy and financials is ‘just’ -4% YoY but is still lower nevertheless. Much like the US it’s the downward revision guidance which is helping to somewhat artificially inflate that beat miss ratio. Since the turn of the year our colleagues note that Stoxx 600 consensus EPS growth for 2016 has fallen to 0.3% from around 7% which is a significantly sharper decline than in previous years.
Turning to the macro, there was some contrasting economic data for us to touch on yesterday. Releases out of the US were generally a little better than expected. Wholesale inventories were reported as rising +0.1% mom in March as expected, while trade sales were up a greater than expected +0.7% mom (vs. +0.5% expected). The NFIB small business optimism reading was up 1pt last month relative to April to 93.6 (vs. 93.0 expected) and so rebounding off the recent low. Meanwhile JOLTS job openings printed at 5.76m in March, more than expected (5.45m expected) and up from 5.61m in February. Recent data since May 4th has now seen the Atlanta Fed revise up their Q2 GDP forecast to 2.2% from the prior 1.7% estimate.
In contrast, yesterday’s industrial production reports in Europe were generally disappointing. Indeed reports for Germany (-1.3% mom vs. -0.3% expected), France (-0.3% mom vs. +0.7% expected) and Italy (0.0% mom vs. +0.2% expected) all missed expectations and paint some downside risk to Thursday’s report for the wider Euro area. On the positive side, the March export numbers out of Germany (+1.9% mom vs. 0.0% expected) bettered expectations and helped Germany to further widen its trade surplus. We’ll get the Q1 GDP report for Germany this Friday where currently expectations are running at +0.6%.
Looking at the day ahead, the economic diary is relatively sparse today. This morning in Europe the only release of note comes from the UK where we’ll get the March industrial and manufacturing production reports (industrial production expected to come in at +0.5% mom). Later this evening meanwhile and over in the US the only data of note is the April Monthly Budget Statement. There’s a similar lack of Fedspeak although we will hear from the ECB’s Weidmann and Nowotny this evening. It’s worth keeping an eye on Brazil however where the Senate is scheduled to vote on the impeachment process. Our EM colleagues noted last night that a simple majority of 41 senators would be enough for the Senate to accept the request, which would force President Rousseff to temporarily step down for as long as 180 days, a period in which Vice President Michel Temer would take over and have full autonomy to appoint a new cabinet and run the government. Results may not be out until sometime late tonight or early next morning, but it looks like one to watch.
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