It has been another quiet session for global equity markets, with S&P futures flat, as are European and Asian stocks, which is perhaps odd, as there was quite a bit of newsflow and, in the case of China, outright fireworks.
The main event in DM was the violent move in sterling, which as we first reported on Tuesday afternoon, tumbled for the first time this week after a YouGov poll showed Theresa May’s Conservative Party may fall short of a majority. The currency’s weakness boosted British equities, and the FTSE 100 Index rose even as miners and energy companies weighed on the broader European gauge after another night of sliding commodities in China.
“The return of U.S. and UK markets yesterday (after holidays) saw a little bit of weakness creep in as we head into month end and what has been a positive month for markets, with records broken on an almost daily basis,” said Michael Hewson, chief markets analyst at CMC Markets. “This soft tone looks set to be carried over this morning,” he said.
Uncertainty about the reliability of polling, however, helped contain the pound’s retreat, which has since regained all of its overnight losses, but the moves are a reminder of the potential risks surrounding a series of national elections in Europe this year.
Another key overnight event, one which helped the Shanghai Composite close higher, was a stronger than expected Chinese Mfg PMI, as well as a Non-manufacturing PMI which rose in May. Specifically, China’s NBS May manufacturing PMI came in at 51.2, same as the previous reading and slightly above expectations. The official non-manufacturing PMI (comprised of the service and construction sectors at roughly 80%/20% weights, based on our estimates) increased to 54.5 in May from 54.0 in April, on higher services PMI. Services PMI rose to 53.5 from 52.6 in April. On the other hand, construction PMI fell to 60.4 from 61.6 in April.
But China’s “goalseeked” indices were far less notable than what happened in China’s currency market, where the offshore yuan jumped the most in four months as funding costs exploded amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade. At one point, in its ongoing crusade to crush offshore Yuan shorts, the PBOC sent the overnight interbank rate higher than 21%….
… while the CNH overnight deposit rate hit a staggering 65%!
As a result, the CNH premkum to CNY rose as much as 2.3 standard deviations, as Beijing appears set to send the Yuan far higher, perhaps still hurting from the recent Moody’s downgrade, and intent on teaching shorts a very memorable lesson. As shown in the chart below, the Yuan hit the strongest level against the dollar, with the offshore Yuan surging the most.
Meanwhile, as the currency surged, China’s commodities – perhaps predictably – tumbled, with all mainland commodities tumbling by the close of trading.
Elsewhere in Asia, 10yr JGBs were lower amid a mild improvement of the risk tone in the region, while the curve was slightly flatter on outperformance in the super-long end, even after a Bloomberg report that the BOJ may “taper its taper” and revert to its traditional bond purchase schedule.
Away from China, a much anticipated European inflation report showed that Draghi still has room to scapegoat weak eurozone inflation, afterboth headline and core CPI missed expectation, printing at 1.4% Y/Y (exp. 1.5%) and Core 0.9% Y/Y (Exp. 1.0%) respectively.
Also today, representatives from the ECB, ESM and the Greek Government will be in Frankfurt today to discuss, among other things, the prospect of a return to the financial markets for Greece. ESM and Greek officials recently claimed that Greece should be able to return to the market by summer 2018. But given the current impasse between Greece and her creditors, and the fact that a commitment on debt relief from the EU will probably be pushed back until the end of 2018, that seems optimistic according to Capital Economics.
Looking at other asset classes, oil extended losses even as industry data later is expected to show a supply drop in the U.S. even as the American drill count is at the highest since April 2015. What is most notable here is that OPEC jawboning now appears to have lost all potency, as oil tumbled even after the Saudi energy minister vowed to do “whatever it takes” to cut inventories. Oil has since tumbled to fresh session lows.
And yet, despite all this, markets barely batted an eyelid, and world stocks are poised to end May up nearly 2 percent, marking the seventh straight monthly increase and the longest monthly winning streak in over a decade. The MSCI’s global equity index held steady on Wednesday, while European stocks edged down 0.1% in early trade following Wall Street’s dip on Tuesday.
The MSCI Asia Pacific Index dropped 0.1 percent, paring its advance for May to 2.6%. Some Asian shares were boosted by the noted strong Chinese PMI surveys, although a sturdy performance from the Japanese yen helped push the Nikkei into the red. European indexes were slightly higher early on Wednesday, with the Stoxx 600 up 0.2% to 381.31 . U.S. futures pointed to a rise of 0.1 percent on Wall Street.
In rates, the yield on 10-year Treasuries rose one basis point to 2.22 percent after declining four basis points in the previous session. Benchmark yields in the U.K. were little changed after a drop of two basis points Tuesday.
Economic data include MBA mortgage applications, Chicago PMI and pending home sales. Analog Devices and HP are among companies reporting earnings.
Global Market Snapshot
- S&P 500 futures little changed at 2,411.70
- STOXX Europe 600 up 0.2% to 391.31
- MXAP down 0.1% to 152.63
- MXAPJ down 0.07% to 498.26
- Nikkei down 0.1% to 19,650.57
- Topix down 0.3% to 1,568.37
- Hang Seng Index down 0.2% to 25,660.65
- Shanghai Composite up 0.2% to 3,117.18
- Sensex up 0.1% to 31,204.54
- Australia S&P/ASX 200 up 0.1% to 5,724.57
- Kospi up 0.2% to 2,347.38
- German 10Y yield rose 1.2 bps to 0.304%
- Euro down 0.06% to 1.1179 per US$
- Brent Futures down 0.8% to $51.41/bbl
- Italian 10Y yield rose 10.9 bps to 1.997%
- Spanish 10Y yield fell 0.5 bps to 1.523%
- Brent futures down 1.1% to $51.25/bbl
- Gold spot up 0.1% to $1,264.11
- U.S. Dollar Index up 0.1% to 97.38
Top Overnight Stories from Bloomberg
- Euro-Area Prices Undershoot Estimate; Flynn to Give Documents for Russia Probe; China PMI Steady, Topping Estimates
- BlackRock Inc. expects insurance companies could move more than $300 billion into debt exchange-traded funds over the next five years, thanks to a gate that’s been lifted in U.S. regulations
- Investors including Elliott Management Corp. are seeking to pressure NXP Semiconductors NV to renegotiate with Qualcomm Inc. to persuade the U.S. company to raise its $110-a-share purchase offer, according to people familiar with the process
- American Tower Corp. is exploring a bid for Cellnex Telecom SA to expand in Europe as the Spanish tower operator’s main shareholder considers selling assets as part of a merger, according to people familiar with the matter. Cellnex surged in Madrid trading
- Euro-area inflation slowed more than economists forecast, giving ammunition for European Central Bank policy makers who say it’s too early to commit to an exit from monetary stimulus
- Deutsche Bank AG agreed to pay $41 million to settle Federal Reserve allegations that its U.S. operations failed to maintain adequate protections against money laundering, the latest in a string of fines that have cost the German lender billions of dollars
Asian markets shrugged off a negative lead from the US where the S&P 500 snapped a 7-day win streak, with the region mixed as China returned from holiday to be greeted by encouraging PMI data. This aided a recovery in the ASX 200 (+0.1%) which was underpinned by IT and Financial sectors, while Nikkei 225 (-0.1%) lagged after Industrial Production figures missed estimates. Shanghai Comp. (+0.2%) initially outperformed as mainland participants returned to market and digested better than expected Official Chinese Manufacturing PMI as well as an improvement in Non-Manufacturing PMI data, although the support from the data gradually faded throughout the day. 10yr JGBs are lower amid a mild improvement of the risk tone in the region, while the curve was slightly flatter on outperformance in the super-long end.
Chinese Official Manufacturing PMI (May) 51.2 vs. Exp. 51.0 (Prey. 51.2). Non-Manufacturing PMI (May) 54.5 (Prey. 54.0)
Top Asian News
- Yuan Surges in Hong Kong as Traders See PBOC Squeezing Bears
- Iron Ore Rout Drives Price Into $30s for Lower-Grade Miners
- Dana Gas Venture Seeks $26.5 Billion in Damages From Iraqi Kurds
- Hong Kong Stocks Set for Longest Run of Monthly Gains Since 2013
- BOJ to Keep Pace of JGB Buys in June; Tweaks
- VietJet to Buy $3.6 Billion of CFM Engines for Growing Fleet
- Kabul Hit by Worst Attack Since Last July, Scores Dead
In Europe, price action and macro newsflow has been relatively quiet for most part of the European morning, stocks are modestly lower across the board with material and energy names the notable laggards. This comes despite some encouraging data from China, which reported Mfg. PMI was unchanged at 51.2 against expectations of a fall to 51. Notable outperformers this morning is Ericsson after activist investor Cevian Capital bought a stake of over 5% in the Co. Tesco shares slipped in the wake of the latest Kantar World panel data which showed discount retailers sales rising the most since 2015. In credit markets, OATs are benefitting from the large month-end extension with the 10 and 30yr spread vs the bund tighter by 1.5bps. Elsewhere, bund yields have ticked up this morning, slight underperformance led by the long end.
Top European News
- Italy Unemployment Rate Fell to Almost 5-Year Low in April
- Co-Op Bank Said to Head for Debt-for-Equity Swap, Sale Fades
- Vivendi CEO Said Poised to Become Telecom Italia Chairman
- Deutsche Bank Fined $41 Million for Money-Laundering Lapses
- German Unemployment Declines as Economy Poised for More Growth
- Bulgaria Seeks Political Backing to Lock It on Road to Euro
- Visco Says Italy Banks May Lose $11 Billion in Bad-Loan Sales
- Veneto Banks Solution Must Be Found Soon: Pop. Vicenza CEO
- Metro’s Consumer Electronics Loss Dampens Spirits Ahead of Split
- Rocket Internet Boosts Startup Sales, Improves Profitability
In currencies, the pound was the key mover, initially tumbling, then recovering all losses and trading at 1.2850 latest. The euro was little changed, heading for a monthly gain of 2.6 percent, its best performance in more than a year. The yen was up 0.1 percent at 110.76 per dollar after rising 0.4 percent Tuesday. The South African rand strengthened 0.1 percent after tumbling for two days. The Bloomberg Dollar Spot Index was little changed for a third straight day. The gauge is down 1.3 percent for the month. Most of the action — if we can call it that(!) — has been in GBP, where the YouGov forecasts through their latest polls put a median probability that a Tory win will fall short of attaining a majority. When the headlines first hit the wires, Cable was trading in the mid 1.2800’s, but hit down through 1.2800, a series of attempted recoveries continue to run into sellers as election fears dictate. Added pressure seen through the month end demand seen in the EUR/GBP rate, but this pair is struggling around 0.8750, above which lies the strong resistance zone from 0.8800-0.8860. Cable support ahead of 1.2750 looks vulnerable though. Elsewhere, USD/JPY is struggling again, and the repeated moves below 111.00 test the resolve of buyers lining up ahead of 110.00-50. US Treasury yields are struggling, though no major sell off in sight as yet, but we have some key data to look to over Thursday and Friday, so the above support may hold in the interim. EU CPI was 0.1% off expectations at at 1.4%, but widely anticipated after the German release yesterday. The unemployment rate eased off to 9.4%, but the EUR is modestly supported today on cross rate flow.
In commodities, there is not too much activity across the commodity spectrum to look to as the global risk mood is pretty balanced at the present time. Near term USD weakness is also adding little influence also, but after the China PMIs overnight, which were a touch above expectations, we would have expected to see some stabilisation in the metals complex. Copper is back in the middle of the USD2.50-2.60 range, but remains heavy amid losses elsewhere. After outperforming yesterday, Nickel is down over 2.5% today, losing the 9000 level (since June last year (with Zinc not far behind at a little under 2.0% down on the day. Oil prices have been drifting sideways, but with WTI struggling to stay close to USD50.00. This has been exacerbated by a rise in Libyan production levels, which has pulled Light Texas under USD49.00 recently. Brent steady in the mid USD51.00’s, but dragged lower. Nb, APIs are tonight. Silver remains comfortably above the USD17.00 level, while Gold is struggling for upside despite the weakness in the greenback.
Looking at today’s calendar, we’ll get the May Chicago PMI which is expected to nudge down a little to 57.0, and also April pending home sales. The Fed’s Beige Bok is also due to be released today while the Fed’s Kaplan speaks at 8am BST.
US event claendar
- 7am: MBA Mortgage Applications, prior 4.4%
- 9:45am: Chicago Purchasing Manager, est. 57, prior 58.3
- 10am: Pending Home Sales MoM, est. 0.5%, prior -0.8%; YoY, prior 0.5%
- 2pm: U.S. Federal Reserve Releases Beige Book
- 8am: Fed’s Kaplan Speaks in New York
- 8:10pm: Fed’s Williams Speaks in Seoul
DB;s Jim Reid concludes the overnight wrap
Welcome to the last day of May, the month not the UK PM ahead of next week’s election. On the subject of UK politics I had the surreal experience of being in a hotel room in Berlin last night wifi-ing into my TV at home and seeing the leader of the opposition Jeremy Corbyn presenting a pot of homemade jam to the interviewer on the show he was on. He also boasted about his love of his allotment. Before I get too critical my recent attempt at making homemade hummus was a disaster and I should add that in a small herb garden we have outside our kitchen, this year’s basil has just died over the weekend in spite of much attempted love and affection. The herb garden cost us a fortune to install and was meant to be a lasting monument to our wedding and one that would provide us with many good harvests over the years ahead and remind us of our happy day. So far we’ve got the equivalent of about 5 pots of herbs out of it in nearly 4 years. They would have cost us about 5 pounds in the supermarket.
Like my basil, markets are wilting slightly at the moment. There’s nothing sinister around but it does feel like there is a slight loss of confidence as data momentum is stalling a touch and politics continues to be unpredictable.
Staying in the UK there’s been a bit of a shock poll overnight from YouGov/ Times that shows that the Conservative Party could lose 20 seats in next week’s election and with it the party’s current slim majority. The poll showed that the Conservative Party is on track to take 310 seats (versus 330 seats currently) with 326 seats needed for a majority while Labour may win 257 seats, up from 229. That central estimate therefore implies a hung parliament. The poll is YouGov’s first constituency-by-constituency estimate however it appears that the model allows for big variations and a large margin of error with it also suggesting that the Conservatives could take home as many as 345 seats and as few as 274. The model supposedly draws upon 50,000 respondents quizzed over the course of a week. Notwithstanding the complexity of the polling methodology and some of the large variations, the headlines saw Sterling immediately tumble around -0.50% and down to as low as $1.279, although it has bounced back a bit since and currently sits at -0.35%.
On this subject yesterday DB’s Mark Wall and Oliver Harvey published a note addressing some of the recent trends in the polls. Their central case is still for a market-friendly 50/60 seat Conservative majority, albeit just. In their note they look at four alternatives in the case of a less-than-50-seat majority outcome, none of which are market friendly. Indeed they go on to say that there is value in owning downside to GBP/USD with risk premia and outright vol way below other UK political event risks such as the May 2015 election, Brexit and Scottish independence referendum.
Staying with politics, with markets coming to terms with a possible Italian election as soon as this Autumn and President Trump taking to twitter yesterday to criticise Germanyfor not spending enough on NATO and the military, markets were on the back foot in Europe from the off with the Stoxx 600 closing -0.19%. The US session was probably best remembered for Amazon’s share price briefly passing $1,000 for the first time ever as the broader market was fairly dull with the S&P 500 (-0.12%) bringing to an end a run of 7 consecutive daily gains. Some mixed macro data and softish inflation reports on both sides of the pond (more on that shortly) didn’t help. On that the US economic surprise index continues to hover near 12-month lows while the global measure is at the lowest in over 6 months now. Adding to the softness was the steady slide for Oil prices which saw WTI touch as low as $49.03/bbl intraday and down nearly a Dollar from Friday.
Meanwhile most DM Bond markets (apart from Germany for good reasons and Italy for less good reasons) are approaching the tight end of their 3 month yield range. The data combined with some cautious words from the Fed’s Brainard yesterday saw 10y Treasury yields fall 3.7bps to 2.211% which compares to the 3 month range of 2.168%-2.626%. Gilts were nearly 2bps lower yesterday at 0.992% which is the low mark of the last 3 months with the high being 1.251%. OAT yields were 0.5bps lower at 0.725% which is also the bottom of the range (the high being 1.114%). It’s a similar story too in Spain, Portugal, Sweden, Switzerland and the Netherlands.
Meanwhile China’s official May PMIs were released just a few hours ago and the data is largely positive. The manufacturing reading was unchanged during the month at 51.2 however that did compare to expectations for a small decline to 51.0. The new orders component also held steady at 52.3 while the nonmanufacturing reading rose a solid 0.5pts to 54.5. Following a two-day break, Chinese bourses were initially higher following that data however have pared a good chunk of the move with the Shanghai Comp now just +0.07%. In fact momentum has faded across much of Asia with most bourses now flat to very modestly in the red, following a large positive start this morning.
Back to yesterday. Just on those Brainard comments, while the Fed official highlighted that she still expected a Fed rate hike soon she also noted that “I see some tension between signs that the economy is in the neighbourhood of full employment and indications that the tentative progress we had seen on inflation may be slowing”. She added “if the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy”. It’s worth noting that while Brainard had typically been more upbeat of late, she is also well known for being one of the more dovish members on the FOMC.
Over at the ECB there was a bit of interest in a Reuters report which suggested that ECB officials are ready to drop the reference to downside risks in their statement at the meeting on June 8th and instead replace it with “largely balanced”. The article also suggested that the ECB will debate the removal of its easing bias. None of this appeared to be a great surprise though and the Euro was quick to pare back a small jump. Speaking of FX, yesterday our global FX strategists published their latest FX Blueprint. The most notable takeaway for us is their EUR/USD view which they expect to hold at the top end of the 1.05-1.15 range given European data surprises at positive extremes versus the US, a soft ECB tapering already appearing priced in, European equity valuations shifting to being expensive versus the US and unhedged equity inflows approaching previous peaks. On the US side the path of monetary policy looks mis-priced in their view while the euro has already overshot relative to short-term rate differentials. They expect the Euro to gravitate back to 1.10 over the summer. A link to their report can be found here.
Finally to the economic data now where yesterday the main focus was on the various inflation reports. In Germany headline CPI in May was revealed as falling a little more than expected (-0.2% mom vs. -0.1% expected) with the annual rate dipping six-tenths to +1.4% yoy as a result. In Spain a flat headline CPI reading for May saw the annual rate also fall six-tenths to +2.0% yoy which was a tenth lower than expected. It’s worth noting that these readings come ahead of the Euro area CPI report today. Over in the US we learned that both personal income and spending rose +0.4% mom in April, as expected with the latter seeing the March reading also revised up three-tenths. The headline PCE deflator rose +0.2% mom lowering the annual rate by two tenths to +1.7% yoy. The more important core measure rose +0.2% mom also however base effects saw the annual rate fall one-tenth to +1.5% yoy and the lowest reading since December 2015.
Away from the inflation readings, in France Q1 GDP was revised up one-tenth to 0.4% qoq while the European Commission’s economic indicators for May showed a 0.5pt decline in the economic sentiment index to 109.2 in May, albeit still the second best reading since 2007. In the US the headline consumer confidence reading dipped 1.5pts to 117.9 in May and is now down 7pts from the March high. A decline in the forward-looking expectations index appeared to be the driver, fallings 2.8pts to a four-month low of 102.6. Elsewhere the Dallas Fed’s manufacturing survey for May saw a 0.4pt increase in the headline reading to 17.2, while finally the S&P/Case-Shiller house price index reported that house prices rose +0.9% mom in March.
Looking at today’s calendar, this morning in Europe we start with Germany where April retail sales data is due, before we then get the flash May CPI print in France and then back to Germany with May unemployment data. The UK follows that with April money and credit aggregates data before we then get the flash May CPI print for the Euro area where the market is expecting a decline in the headline to +1.5 yoy (from +1.9%) and core to +1.0% yoy (from +1.2%) as base effects associated with the Easter holiday timing roll out. Across the pond this afternoon we’ll get the May Chicago PMI which is expected to nudge down a little to 57.0, and also April pending home sales. The Fed’s Beige Bok is also due to be released today while the Fed’s Kaplan speaks at 1pm BST. Over at the ECB we are due to hear from Coeure this morning and Lautenschlaeger this afternoon.
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