S&P futures point to a slightly lower open ahead of today’s US non-mfg ISM and Service PMI data. European shares fall, while Asian shares are little changed. Several European countries, including Germany, are closed for Whit Monday leading to subdued trading. Crude futures have reversed overnight gains following the latest unexpected Gulf Crisis overnight, in which Gulf nations cut all diplomatic relations with Qatar amid striking allegations of funding terrorism, as reported overnight.
Looking at other asset classes, the AUD/USD continues grinding higher after a stronger than expected Chinese services PMI and inventories data reduces chances of negative GDP print, iron ore futures +2.0%; GBP/USD fills gap to Friday close, after opening lower in Asia following Saturday’s attacks Bloomberg observes. European equity markets lower from the open, oil-related stocks underperform given heightened political uncertainty. Banco Popular in Spain trades -11% after reports of liquidity pressure due to deposit withdrawals. Core fixed income markets edge lower, German long-end steepens, some focus on wage pressures within PMI data. MXN leads EMFX higher as ruling party is projected to win state election.
European stocks are down, with the Stoxx Europe 600 lower by 0.2% with miners the biggest losers following a downgrade, while zinc and tin led base metals lower. Europe was dragged lower by the Basic Resources index which drops as much as 1.3% to one-month low, making biggest decline of 19 industry groups, after HSBC cuts valuations for London-traded mining companies, downgrades Antofagasta, Kaz Minerals. Antofagasta is biggest decliner in sector, falls 2.8%, Centamin -2%, ArcelorMittal -1.6%, Anglo American -1%. HSBC cuts LSE equities valuations by 4%-9% on assumption of stronger GBP/USD conversion rate, used to convert USD-denominated cash flows to GBP, bank’s analysts write in note Monday.
The big event of the session was the sharp shift in Gulf balance of power with geopolitics surging to the top of the agenda as investors digest the move by Saudi Arabia, Bahrain, the United Arab Emirates and Egypt to suspended air and sea travel to and from Qatar. Saudi Arabia cited Qatar’s support of “terrorist groups aiming to destabilize the region.” Which is ironic considering that a leaked memo by Hillary Clinton last year exposed both Saudi Arabia and Qatar as the two big state sponsors of regional terrorism.
Following the report, Qatar stocks have plunged over 7%, the biggest one day drop since December 2014 to the lowest since January 2016…
… while Qatar bond yield have surged in the worst day in 7 months…
… and Qatar CDS spiked to 2 month highs.
Terror was also in focus in Europe following an attack at a popular London nightlife spot days before a national election.
Crude initially recovered some of Friday’s slump, although it has since filled the gap, while stocks in Qatar plunged as the market digested the fallout from the unexpected diplomatic twist.
Treasury yields remained near the lowest in seven months after U.S. jobs data missed forecasts last week. The peso rallied on signs the ruling PRI was ahead in the governor’s election for the key state of Mexico.
While the Fed has entered a blackout period ahead of next week’s rate decision, there is plenty of data in the coming days, with the headline being former FBI Director James Comey’s testimony before Congress following his dismissal by Donald Trump. U.K. voters go to the polls Thursday. Surveys of voters over the past few weeks have indicated a tightening race, increasing the chance that Prime Minister Theresa May might not get an increased majority.
Policy decisions from central banks in India and Australia are due during the week, as well as data on Chinese trade and inflation, U.S. factory orders, European industrial output figures and GDP reports for Australia, Japan and the euro area.
In Fx, the Bloomberg Dollar Spot Index dropped 0.2 percent, adding to a 0.4 percent decline on Friday. The yen fell 0.1 percent to 110.53 per dollar. Japan’s currency climbed 0.9 percent Friday after the U.S. data. The Mexican peso soared 1.6 percent, reversing an earlier drop. President Enrique Pena Nieto’s party is narrowly ahead in the election for governor of Mexico’s largest state in an official quick count, throwing it a lifeline ahead of next year’s general vote. Follow more on the vote here. The pound traded 0.1 percent weaker, paring its earlier loss. The euro also fell 0.1 percent to $1.1268.
In commodities, WTI crude was 0.5% lower to $47.46, after dropping 1.5 percent on Friday. Gold rose as much as 0.2 percent to $1,282.1 an ounce, hitting the highest since April. Tin fell 1 percent to $20,090 a ton and zinc traded 1.4 percent lower at $2,494.5 a ton on the London Metal Exchange.
In rates, the yield on 10-year Treasury notes rose one basis point to 2.17 percent after dropping five basis points on Friday. U.K. benchmark yields climbed two basis points.
Bulletin Headline Summary from RanSquawk
- Middle east tensions see crude prices jump as several nations cut ties with Qatar
- European equities trading in subdued fashion with many participants away for Whit Monday
- Looking ahead, highlights include: US ISM Non-Manufacturing PMI and Factory Orders.
Market Snapshot
- STOXX Europe 600 down 0.2% to 391.75
- STOXX Europe 600 down 0.2% to 391.75
- German 10Y yield rose 1.2 bps to 0.286%
- Euro down 0.1% to 1.1266 per US$
- Brent Futures up 0.8% to $50.33/bbl
- Italian 10Y yield rose 0.4 bps to 1.966%
- Spanish 10Y yield fell 0.5 bps to 1.567%
- MXAP up 0.03% to 155.39
- MXAPJ up 0.2% to 503.72
- Nikkei down 0.03% to 20,170.82
- Topix down 0.1% to 1,609.97
- Hang Seng Index down 0.2% to 25,862.99
- Shanghai Composite down 0.5% to 3,091.66
- Sensex up 0.2% to 31,338.30
- Australia S&P/ASX 200 down 0.6% to 5,754.87
- Kospi down 0.1% to 2,368.62
- German 10Y yield rose 1.2 bps to 0.286%
- Euro down 0.1% to 1.1266 per US$
- Italian 10Y yield rose 0.4 bps to 1.966%
- Spanish 10Y yield fell 0.5 bps to 1.567%
Top Overnight Headlines via BBG
- Saudi Arabia, UAE, Egypt and Bahrain cut diplomatic ties with Qatar; shut down sea, airspace and land crossings to the country
- European May Service PMIs:
- Spain 57.3 vs 57.5 est;
- Italy 55.1 vs 55.3 est;
- France 57.2 vs 58.0 est;
- Germany 55.4 vs 55.2 est;
- Euro zone 56.3 vs 56.2 est;
- Markit note services firms faced another strong rise in costs, linked in many cases to salary pressures
- Italy: President Gentiloni says parliament should decide between general election as early as September, or wait until the beginning of next year to hold fresh elections
- U.K. May Services PMI: 53.8 vs 55.0 est.
- Russia does not see not see any impact on oil output cut deal from Qatar tensions
- China May Caixin services PMI 52.8 vs 51.5 prev; composite PMI 51.5 vs 51.2
Looking at regional markets, we start in Asia which dismissed the positive Wall St. close on Friday, to trade with a cautious tone after Saturday’s terrorist attack in London and as the region reacted to the miss on US NFP data. ASX 200 (-0.7%) underperformed with financials heavily weighing on the index amid weakness across banks, while Nikkei 225 (+0.1%) recovered from opening losses after USD/JPY rebounded from its lows. Elsewhere, Shanghai Comp. (-0.5%) and Hang Seng (-0.3%) failed to benefit from an improvement in Caixin Services and Composite PMI figures, as the PBoC remained steadfast in its prudent and neutral policy stance. Specifically, PBoC Deputy Governor Chen stated the PBoC will neither be tight or loose in terms of monetary policy and will remain neutral and prudent. Also in China, the Caixin Services PMI for May printed at 52.8 (Prey. 51.5); a 4-month high; Chinese Caixin Composite PMI (May) 51.5 (Prey. 51.2) PBoC injected CNY 40bIn in 7-day reverse repos and CNY 30bIn in 28-day reverse repos. PBoC set CNY mid-point at 6.7935 (Prey. 6.8070) Finally, 10yr JGBs were mildly higher alongside the cautious tone in markets, although upside was capped following a lack of Rinban announcement from the BoJ, while the curve slightly flattened amid outperformance in the super long-end.
Top Asian News
- Korean Air 2Q Traffic Is ‘Higher’ Than Expected, President Says
- Shenhua, China Guodian Said to Mull $267 Billion Power Giant
- Noble Group Said to Ask Lenders to Extend Key Credit Facility
- Thailand Central Bank Eases Some Currency Rules as Baht Climbs
- YLG Bullion Sees Thailand’s Gold Imports Rising 15% This Year
- Baht Rises After Central Bank Relaxes FX Rules: Kasikornbank
- Qatar Bonds Drop as GCC Governments Cut Diplomatic Ties on Iran
- Nomura Adds to India 7.68% 2023 Bond Position Ahead of RBI Meet
- The Hard-to-Believe Steel Shortage That’s Unfolding in China
In Europe it has been a relatively quiet affair amid market closures due to Whit Monday. Additionally, investors are hovering on the sidelines as they await key releases later in the week (UK election and ECB decision). As such, EU bourses have been directionless, with focus on tensions rising in the middle east as several nations including Saudi Arabia cut diplomatic ties with Qatar, after they are alleged to support terrorists. Subsequently, crude prices jumped over 1% in Asian trade with speculation that this might lead to an impact on oil and LNG supplies. Similarly, fixed income markets are also subdued with Bunds off by around 20 ticks, taking the lead from USTs, while the German curve is showing some modest steepening. Levels of support to the downside reside around 162.45 with the former high situated at 162.15
Top European News
- Germany and France Keep Euro-Area Growth Pace at Six-Year High
- The London Attack Didn’t Stop the Social Media Election
- Inflation Squeeze, Election Jitters Take Toll on U.K. Services
- Popular Said to Meet ECB as It Weighs Options for Liquidity
- Putin Says He’s Not Aware of Kushner’s Russia Channel Proposal
- Sasa Reappraises Lands at Higher Values, Shares Advance
- Juventus Slumps After Champions League Final Loss
- London Cops Adjust to New Terror Reality With Guns, Choppers
- EDP Falls as Prosecutor Investigates CMEC Compensation Regime
In currencies, it has been relatively subdued this morning in FX, with some of the expectant market drivers not playing out as one would expect. Given the terror attack in London and some of the latest election polls showing gap narrowing (to a significant degree in some cases), GBP held up well this morning, perhaps in anticipation of a strong UK services PMI number. However, this came in softer than expected, though remains comfortably in the expansionary zone, printing 53.8 vs 55.8 previously. Cable has since pushed above 1.2900 again, tentatively so as yet, but EUR/GBP is also lower to test initial support ahead of 0.8700. The data alone was cause near term GBP weakness, so we can only put these moves down to an expected Tory victory on Thursday. Elsewhere, Oil prices have risen due to the severing of diplomatic ties with Qatar from some of the leading Arab countries. Allegations over links to terrorism have prompted this, and the push up in WTI and Brent have assisted CAD and NOK to a moderate degree. As for the USD majors, near term trade is extremely tight, with EUR/USD refusing to give up ground in the mid 1.1200’s, while USD/JPY continues to find buyers ahead of 110.00. Treasury yields stagnant, albeit at lower levels.
In commodities, the focus is on Oil this morning as the allegations of terrorism links made on Qatar have led to six Arab countries including Saudi and Egypt to sever diplomatic ties. Qatar has denied this, but uncertainty has lifted Oil price levels to a modest degree, with supply side concerns still weighing on WTI to keep trade below the mid USD48.00 mark. Brent is above USD50.00, but is struggling to maintain a foothold, so the inventory data this week could be significant after the notable draw downs reported last week. These latest developments have also put a fresh bid under precious metals, as Gold is now eyeing a move into the upper USD1280’s. Silver has tipped over USD17.50. Base metals remain heavy though, with Zinc the underperformer today. Nickel still pressured since its loss of the 9000 handle, but off the lows. Copper is still hemmed inside USD2.50-2.60, with a test on the lower end of the limits rebuffed for now.
On today’s calendar, we will get the remaining PMIs as well as final revisions to Q1 unit labour costs and nonfarm productivity, ISM non-manufacturing for May, factory orders for April and final durable and capital goods orders revisions for April
US Event Calendar
- 8:30am: Nonfarm Productivity, est. -0.2%, prior -0.6%; Unit Labor Costs, est. 2.4%, prior 3.0%
- 9:45am: Markit US Services PMI, prior 54; US Composite PMI, prior 53.9
- 10am: ISM Non-Manf. Composite, est. 57.1, prior 57.5
- 10am: Labor Market Conditions Index Change, est. 3, prior 3.5
- 10am: Factory Orders, est. -0.2%, prior 0.2%; Factory Orders Ex Trans, prior -0.3%
- 10am: Durable Goods Orders, est. -0.5%, prior -0.7%; Durables Ex Transportation, prior -0.4%
- 10am: Cap Goods Orders Nondef Ex Air, est. 0.1%, prior 0.0%; Cap Goods Ship Nondef Ex Air, prior -0.1%
DB’s Jim Reid concludes the overnight wrap
A sobering weekend for Londoners. Was very shocked at the attack on London Bridge on Saturday especially as I walked across it on Friday. As I was walking I was remembering the shocking Westminster Bridge attack in March and thought that the pedestrian walkway was so wide and so easy to access from the road that this could sadly be an easy target for a copycat attack. I even moved well away from the side of the road and closer to the river to be what I thought at the time was excessively cautious and paranoid. So I was quite shocked that just over 24 hours later the attackers chose that area to terrorise the capital. I heard the news seconds after watching the most heart-warming film I’d seen for a while called Lion. If you need cheering up then watch it and I challenge anyone not to have at least one tear in the eye at some point during the film.
Anyway life goes on and although this tragic event will get headlines markets will move on to what is a busy week. As we dubbed it last week we have super Thursday to look forward to with the UK election, the ECB meeting where hints of a policy shift may take place and also the testimony from Comey before the Senate that could be embarrassing as a minimum for Mr Trump. We’ll preview the ECB in more detail on Thursday but in brief our economists have changed their ECB call. They now think the balance of probabilities have shifted away from a change to forward guidance so soon with the soft May flash inflation print last week perhaps helping to offset confidence in the growth outlook. They still expect some soft exit expectations management, for example, talking up economic growth and tasking the internal committees to consider the options for forward guidance, deposit rate and QE.
Before this today we’ll see the final services PMIs from around the globe and the equivalent ISM in the US. This morning we’ve already had the Caixin release out of China where, in contrast to the disappointing manufacturing reading, the services print rose by an impressive 1.3pts to 52.8 in May and the highest since January. That reading has helped support a rise in the composite to 51.5 from 51.2. This, combined with the rest of the data today will be another good real time gauge of activity after a confusing payroll report on Friday which led to a strong end to the week for fixed income.
Before we recap that though, it’s worth noting that the other breaking news to report this morning is that Saudi Arabia, UAE, Bahrain and Egypt have all cut diplomatic ties with Qatarwith air and sea travel to the Gulf state also suspended. According to Bloomberg the move is related to Qatar’s backing of Iranian-backed terrorism activity in the region. It’s a developing story so the details are fairly light as we go to print though. There’s been some reaction in markets. WTI (+1.28%) and Brent Oil (+1.22%) had already moved higher prior to the headlines hitting but are now even firmer while Gold is +0.10%. Equity markets in Asia are however flat to slightly weaker with financials lagging under the pressure of falling bond yields. Middle Eastern bourses are not yet open. In FX Sterling is down -0.20% following the weekend events.
Back to payrolls. The data revealed headline growth of just 138k for May which compared to the consensus estimate of 182k, while there was a further net 66k of downward revisions to the prior two months also made. That means that over the last three months the average increase in nonfarm payrolls is just 121k, down from as high as 201k in February. The current three-month moving average is also at the lowest reading since July 2012. The difference now however is that the unemployment rate is much lower with the rate down to just 4.3% in May (from 4.4% in April) and the lowest since May 2001. The move lower last month was partly helped by a two-tenths decline in the participation rate to 62.7% however it’s worth noting that this rate has largely stayed in a 62.5-63.0% range for 20 months now despite some month to month volatility. So while a disappointing headline payrolls figure, it does possibly reflect the struggle to hire as we get closer to full employment. As our US economists also note, there simply is not enough excess slack left in the labour market to produce the sort of job gains that we have experienced in the past so employment growth is poised to slow further going forward.
To that point, the Dallas Fed’s Kaplan said following the employment report that “there are dramatically more skilled job openings in the US than there are workers” and that “while there is slack, it is dwindling”. It’s worth also noting that the other important element of the employment report – wages growth – was a bit soft in May. While average hourly earnings rose +0.2% mom and matching expectations, April was revised down a tenth and the annual rate held steady at +2.5% yoy versus expectations for a one-tenth rise to +2.6%.
As mentioned earlier fixed income markets seemingly picked up on some of the softer elements of the data with 5y, 10y and 30y Treasury yields falling 4.3bps, 5.2bps and 5.3bps respectively, while the USD index also hit the lowest since October last year. The short end of the Treasury curve did however pare back an initial move lower with 2y yields eventually closing unchanged. With Bloomberg’s calculator also showing that a June rate hike is around 90% priced in this morning, the data hasn’t yet influenced the market’s expectations of next week’s FOMC too much as yet. Meanwhile core yields were also lower in Europe on Friday. Benchmark yields in Germany, France, UK and Netherlands were between 2bps and 4bps lower although the periphery was a little weaker with yields 1bp to 3bps higher.
As we noted last week most bond markets are either at or very close to the bottom end of the three-month range for yields. In fact despite US equities hitting new highs on Friday (S&P 500 +0.37% and +0.96% for the week, Dow +0.29% and +0.60%) and European markets also enjoying a solid end to the week (Stoxx 600 +0.23% and +0.31%), last week was actually a pretty strong one for most bond markets too which more than likely reflects some of the benign inflation data we got. Benchmark 10y Treasury yields were 8.7bps lower over the week and at the lowest yield this year (2.159%) while 10y Bund yields were down 5.6bps over the week and have now fallen for 4 weeks in a row. At 0.272% they still have a bit of work to do to get down to the 2017 lows of 0.156% but they are down from as high as 0.452% just last month. Last week was a similar story too for the likes of France (-4.7bps), Switzerland (-5.9bps) and the Netherlands (-5.1bps). Two markets which stand out for bucking that trend though are BTPs (+16.4bps) and Gilts (+2.5bps) where domestic political situations continue to dominate those markets.
With regards to the latter, the last couple of opinion polls continue to point towards a tighter race ahead of Thursday. The latest YouGov/Times poll conducted over 1-2 June shows the Tories as holding a 4% lead over Labour at 42-38% which is unchanged from the last poll. Meanwhile the Survation/Mail on Sunday poll (conducted on 3 June) showed a lead of just 1% for the Tories at 40-39%. That is the smallest lead for the Conservatives of any opinion poll we’ve seen so far. Other polls continue to have a bigger lead for the Tories but the gap has seemingly narrowed over the course of the campaign.
The only other news to report from the weekend is the latest World Bank economic forecasts. Released yesterday, the World Bank expects the global economy to grow 2.7% in 2017 driven by a recovery in US, Europe and advanced economies, followed by 2.9% in 2018. Those forecasts are unchanged versus the January estimates.
In terms of the other news from Friday, Philadelphia Fed President Harker (a voter this year) reiterated his call for a further two rate hikes this year. He said that concern about recent lower than expected inflation outcomes was unwarranted and also that payrolls gains in the range of roughly 100k a month is all that is required to achieve full-employment. Meanwhile there was a bit of focus on a NY Times article which suggested that President Trump is likely to nominate monetary economist Marvin Goodfriend and former Treasury Department official Randal Quarles to fill two of the three vacant Governor positions on the Fed’s board. The article suggested that Quarles would likely become a leading figure in the administration’s efforts to roll back financial regulation and also be nominated to serve as the Fed’s vice-chair for supervision. Meanwhile Goodfriend, who is also a former Fed official, is said to support a more rules based policy approach.
To the week ahead now. This morning we’re kicking off in Europe with the remaining services and composite May PMIs which will also include a first look at the data for the UK and periphery. Over in the US this afternoon we also receive the remaining PMIs as well as final revisions to Q1 unit labour costs and nonfarm productivity, ISM non-manufacturing for May, factory orders for April and final durable and capital goods orders revisions for April. With little of significance in Asia on Tuesday we are straight to Europe with the June Sentix investor confidence reading and April retail sales for the Euro area. In the US tomorrow we are due to get JOLTS job openings for April. Wednesday kicks off in Germany with April factory orders, while in the UK we get the May house prices data. The only data due in the US on Wednesday is April consumer credit. China will also release May foreign reserves data at some stage. The early focus in Asia on Thursday is in Japan with the final Q1 GDP revisions, while the latest trade data will also be released. Over in Europe on Thursday we also receive the final Q1 GDP revisions for the Euro area, while industrial production in Germany for April and trade data in France is also due. The big event in Europe on Thursday comes just after midday with the ECB meeting which will be closely followed by Draghi’s press conference. The only release due in the US on Thursday is initial jobless claims. China will also release May trade data at some stage on Thursday.
We end the week in Asia on Friday with the May CPI and PPI prints in China. Over in Europe we’ll get April trade data in Germany, industrial production in France, and industrial production and trade data in the UK. We finish the week in the US with the final April wholesale inventories print.
With the Fed into the blackout period now there’s no Fedspeak this week while over at the ECB, along with Draghi’s press conference we’ll also hear from Nowotny on Friday. The big event this week is likely to be the UK election this Thursday which will include exit polls just after polling stations close at 10pm BST. Results will then be released through the night. Also worth keeping an eye on is former FBI director James Comey’s testimony before the Senate on Thursday. Other things to note are the RBA meeting on Tuesday, RBI meeting on Wednesday and OECD 2017 outlook on Wednesday.
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