Month: June 2017

Moments ago the BEA released its third estimate of GDP, according to which Q1 GDP rose by 1.4% in the quarter, above the second estimate of 1.2%, and double the initial estimate of 0.7%. It was also above the consensus estimate of 1.2%, primarily as a result of a jump in personal consumption, which contributed 0.75% to the bottom line, well above the 0.44% estimated last quarter. In annualized terms, personal consumption rose 1.1% in 1Q, beating estimates of 0.6%, and above the 0.6% second estimate however, it was still well below last quarter’s 3.5% increase.

In addition to consumer spending, the upward revision to GDP growth reflected upward revisions to exports, which were partly offset by a downward revision to business investment.

Additionally, denying the poor recent string of CPI prints, inflation continued to run hot, with prices of goods and services purchased by U.S. residents increased 2.5% in the first
quarter after increasing 2.0% in the fourth quarter. Excluding energy and food, prices rose 2.2 percent after increasing 1.6 percent.  

On a Q/Q basis, Core PCE Prices rose 2.0%, missing the expectations of a 2.1% increase, while the final GDP price index rose 1.9%, below the expected 2.2%.

Despite the weaker dollar in Q1, net trade contributed only 0.2% to the bottom line GDP.

And now for the bad news: corporate profits decreased 2.3 percent at a quarterly rate in the first quarter of 2017 after increasing 0.5 percent in the fourth quarter of 2016, a far cry from the non-GAAP numbers posted by S&P companies. 

Profits of domestic nonfinancial corporations decreased 1.0 percent after decreasing 4.9 percent. Profits of domestic financial corporations decreased 5.4 percent after increasing 5.4 percent. Profits from the rest of the world decreased 2.1 percent after increasing 11.0 percent.

Still, as Citi summarizes, “this data argues that even with the list of challenges discussed in the market in Q1, the data suggests the strength of the US economy was underestimated. Will we see more of that in the data (or data revisions) ahead?”

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Via Global Macro Monitor,

This is one of our favorite posts of all-time.

Thought it apropos to re-post given that everyone and their mother is trying to call the top in stocks.  It’s all about yield-seeking capital flows, my friends.   Tell us what interest rate is the tipping point which thwarts that behavior and we will tell you when the stock and credit markets top and flop.

“John Bull can stand many things, but he cannot stand  2 , 0, .5 ,1, 1.5 , 2 percent”  – Bagehot

We are still far from the tipping point interest rate that sends the yield seekers back to their caves, in our opinion.

I just borrowed 5-year money for my daughter’s first car at 2.64 percent.  That is less than 85 basis points over the 5-year note, for a used car!

Expensive Assets

Yes, absolutely, all assets are incredibly expensive.  But pension funds are not going to make their nut sitting in cash waiting for them to get cheaper.   Seniors in Europe can’t eat with their interest earnings from negative rates.

Argentina floating a 100-year bond at 7 percent-ish, even after defaulting several times over the past 30 years, is definitely the warning bell of a credit bubble closer to the top.   And a contrarian call inflation is about to ignite.

The FOMO * yield and return chasing behavior of the markets  reminds us of portfolio managers running to catch the Titanic,  knowing full well the ship is going down.  They just want to enjoy the 3-day party.

How long will the party last?   O Lordy, help us.

* Fear of Missing Out

The Ambiguity of Stock Value

 

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In the aftermath of the recent surprising Saudi succession, overnight the NYT reported that the recently deposed Saudi crown prince, Mohammed bin Nayef, has been barred from leaving the kingdom and confined to his palace in the coastal city of Jidda, citing to four current and former American officials and Saudis close to the royal family.

The paper adds that the new restrictions on the man who until last week was next in line to the throne and ran the kingdom’s powerful internal security services sought to limit any potential opposition for the new crown prince, Mohammed bin Salman, 31, the officials said, speaking on the condition of anonymity so as not to jeopardize relationships with Saudi royals. It was unclear how long the restrictions would remain in place.

However, this morning, a senior Saudi official on Thursday denied as “baseless” the NYT report, and a Saudi official told Reuters that bin Nayef, a veteran interior minister, was continuing to host guests and there were no restrictions at all on his or his family’s movements.

The senior Saudi official expressed shock at the report, which he described as a “fabricated story” and suggested that Mohammed bin Nayef may seek legal action against the newspaper.

“What was published by the New York Times is untrue, completely false, and baseless,” the official told Reuters, responding to a question on the New York Times report.

 

“His Royal Highness Prince Mohammed bin Nayef and his family is moving freely and hosting his guests unrestrictedly. Nothing has changed for Prince Mohammed, except for stepping down from his government positions,” the official said.

The Saudi official said Mohammed bin Nayef was “entitled to bring legal action against the newspaper and anyone who defames his reputation by publishing such false news about him”.

As a reminder, Mohammed bin Nayef, who was admired in Washington for quashing an al Qaeda insurgency in the kingdom between 2003 and 2006, was relieved of all his duties a week ago. In his place as Crown Prince, King Salman appointed his son Mohammed bin Salman who also serves as defense minister and leads an ambitious reform agenda to end Saudi Arabia’s over-reliance on oil.

Mohammed bin Salman’s promotion ended two years of speculation about a behind-the-scenes rivalry near the pinnacle of royal power, but analysts said he still has to win over powerful relatives, clerics and tribesmen.

To be sure, so far the promotion has proceeded unexpectedly smoothly, with royal family members, senior officials and clerics participating in a traditional ceremony held in the Muslim holy city of Mecca in which they pledged allegiance to the new crown prince. Saudi state media, eager to show the change was going smoothly, repeatedly broadcast footage of the young Mohammed bin Salman kissing the hand of Mohammed bin Nayef, as his older cousin offered him congratulations.

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Following the previously noted ongoing rise in yields around the globe on the back of this week’s unexpected and coordinated central bank hawkish jawboning which sent 10Y Bunds as high as 0.43%, double where they were earlier in the week…

… the fixed income sell-off continued in early NY orders with US yields leading the squeeze higher amid burst in volume which saw some 150k contracts push the 10Y yield higher. According to Citi, “there’s little to stop the move, with nothing overnight discouraging this trend – we haven’t seen any obvious headlines to trigger the latest move.”

As such the whole US treasury curve is higher, with 10y yields testing 2.29% and 5y yields reaching for 1.88%. With US yields showing signs of stabilizing and potentially turning higher from here driven by the belly of the curve, Citi adds that we may see a resumption of the bear steepening move.

Consequently USDJPY continues to squeeze higher amid some modest dollar strength, and we are now trading around 112.70 just ahead of the trend line resistance at 112.75.

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Remember when Warren Buffett anecdotally "took a bath" when he decided to effectively rescue Bank of America with a $5 bilion equity injection in 2011? He may be due for another bath any minute.

Warren Buffett, already the largest shareholder in recently disgraced Wells Fargo, could soon become the largest shareholder in another US megabank after Bank of America said it would raise its dividend by 60%, from 30 cents to 48 cents, moments after the Federal Reserve gave it and 32 other SIFI-designated US lenders the greenlight to pursue plans to return capital to shareholders (though it did ask Capital One to resubmit its plan). BAC also announced a buyback plan worth $12 billion.

Buffett said in February’s letter to shareholders that an increase in BAC’s dividend above 44 cents would likely prompt him to swap Berkshire's preferred shares in the second-largest bank into common shares now worth about $16.7 billion, according to Reuters. Doing so would make Buffett the largest shareholder in the US’s second and third largest banks – and more than triple a $5 billion investment made fewer than six years ago.

It would also signal Buffett's confidence in Brian Moynihan, Bank of America's chief executive, who has worked to restore investors' confidence in his Charlotte, North Carolina-based bank after it spent more than $70 billion since the global financial crisis to resolve legal and regulatory matters, largely from its purchases of Countrywide Financial Corp and Merrill Lynch & Co.

"Buffett has said he is very happy with what Moynihan's doing, and it's easy work for him to get more dividends," said Bill Smead, whose $1.16 billion Smead Value fund includes shares in BAC and Wells. "For Bank of America, it would mean a further endorsement by the most spectacular large-cap stock picker of all time."

Buffett, the world’s fourth-richest man with a net worth of $76.1 billion, according to Forbes, bought $5 billion of Bank of America preferred stock with a 6 percent dividend, or $300 million annually, during a fire sale in August 2011 as the bank worried about its capital needs. The purchase included warrants to acquire 700 million common shares at $7.14 each, less than one-third Wednesday's closing price of $23.88.

As Dow Jones Newswires points out, the preferred shares have little downside, so long as Bank of America stays solvent. But they have no upside either. With a change in Berkshire's shares, Mr. Buffett effectively would be saying that he would like to take part in possible gains on Bank of America's stock as well as enjoy a steady dividend. After the exchange, Buffett's firm, Berkshire Hathaway, would own about 7% of BAC's common shares, giving it a significant role in corporate governance issues from compensation to the election of new directors. Bank of America's largest shareholder is Vanguard Group, whose 652.4 million shares give it a 6.6 percent stake, according to Reuters data.

Buffett – America’s de facto private sector “lender of last resort” during the financial crisis – made more than $25 billion of high-yielding investments between 2008 and 2011, in financially troubled lenders like General Electric Co. and Goldman Sachs Group, none of which would have paid out had the Fed not stepped in with a multi-trillion taxpayer funded rescue of the US financial sector.

Buffett’s hard-fought reputation as a benevolent, homespun billionaire would seem to be at odds with the behavior of some of the banks that he effectively controls. Wells Fargo retail bank opened millions of fraudulent customer accounts to try and meet unrealistic sales goals and during a hard fought proxy battle Buffett remained on the side of existing management to the surprise of many. Bank of America has been repeatedly fined and criticized for its treatment of some borrowers in its loan servicing business – believing it easier to kick them out of their homes than to work with customers and adjust the terms of their mortgages.

Still, Buffett is beloved for his folsky ways and his enlightened, liberal outlook, which allows him a softball interview on PBS or any other American media show any time he wants it. It goes without saying that contrary to some contrived views Buffett is far from a socialist, and remains a ruthless capitalist. Maybe he should not so easily be given a pass.

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Walgreens, Boots Alliance and Rite Aid terminated their $9.4 billion merger agreement, amid heavy anti-trust concerns, and unveiled on Thursday a new deal to buy more than 2,000 of Rite Aids stores for $5.2bn. RAD shares tumbled as much as 20% on the news.

The decision to halt the original deal, which was announced in October 2015, came after “feedback” from the US Federal Trade Commission that “led the company to believe that the parties would not have obtained FTC clearance to consummate the merger”. As the WSJ notes, investors had been awaiting a government decision on whether the delayed tie-up between the drugstore chains would go through and had grown increasingly uneasy that the deal could fall apart.

Instead of pursuing what appeared to be a doomed merger, Walgreens will instead acquire 2,186 stores and related assets for $5.2bn. According to the FT, Rite Aid operates a total of 4,523 stores at the end of the first quarter.

“While we believe that pursuing the merger with [Walgreens] was the right thing to do for our investors and customers, this new agreement provides a clear path forward,” said Rite Aid chief executive John Standley.

With the merger halted, a related deal in which Fred’s, a retailer, was to buy 865 stores from Walgreens and Rite Aid was also ended. Fred shares also tumbled

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• Global Bonds Gyrate as Investors Try to Parse Central Banks’ Next Stimulus Moves (WSJ)
• Republicans struggle to salvage healthcare effort (Reuters)
• States’ Medicaid spending to increase (Reuters)
• Apple’s iPhone turns 10, bumpy start forgotten (Reuters)
• Fed’s Stress Tests: All Banks Cleared on Payouts to Shareholders (WSJ)
• Bitcoin’s Become So Volatile That It Looks Like a Steroidal ETF (BBG)
• They Built the First Phone You Loved. Where in the World Is Nokia Now?  (BBG)
• Macron Outlines Plans to Overhaul France’s Labor Laws (WSJ)
• HSBC Surges After US Stress-Test Pass Boosts Payout Prospects (BBG)
• The Pound Is on a Seven-Day Hot Streak (BBG)
• Unease in Brussels over Trump’s Poland visit (Reuters)
• Anxious Investors Try to Hedge Against a Big Selloff, Even as Good Times Roll (WSJ)
• U.K. Inclined to Refer $15 Billion Fox-Sky Deal to Regulator (BBG)
• Merkel Takes a Slap at Trump and Brexit (BBG)
• Pro-Trump groups take no prisoners in rush to help an embattled president (Reuters)
• Chinese paper says Australia spying on embassy, monitoring citizens (Reuters)
• The Hotel With 30 Rolls-Royces and No Guests (BBG)
• Modi Condemns India’s Spate of Cow-Related Vigilante Murders (BBG)

Overnight Media Digest

WSJ

– Private-equity firm Sycamore Partners agreed to buy Staples Inc for about $6.9 billion, as the company’s sales have been shrinking in recent years. on.wsj.com/2soT8yo

– Global firms scrambled to cope with fallout from a cyberattack that disrupted computers across Europe and the U.S. Security experts described the computer disruption as a cyberattack and said the virus – dubbed Petya – appeared to stem in part from an obscure Ukrainian tax software product. on.wsj.com/2soUnNX

– Alibaba Group Holding Ltd said Wednesday it is plowing an additional $1 billion into Southeast Asian e-commerce firm Lazada Group, raising its stake to 83 percent from 51 percent. on.wsj.com/2soOcK5

– The meal-ingredient delivery company Blue Apron Holdings priced its initial public offering at $10 a share Wednesday, at the low end of its already lowered range. The deal values Blue Apron at $1.9 billion – below the $2 billion that it was valued in a 2015 fundraising round. on.wsj.com/2soOv7H

– Japan’s Toshiba Corp sued Western Digital Corp in a bid to keep the sale of its chip unit alive, as the struggling conglomerate is racing to raise about $20 billion from the sale, and close a gaping financial hole. on.wsj.com/2soTm8H

 

FT

* The Federal Reserve has approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks, dividends and other purposes beyond being a cushion against catastrophe.

* U.S. Homeland Security Secretary John Kelly on Wednesday unveiled enhanced security measures for foreign flights arriving in the United States in what officials said was a move that aims to end a limited in-cabin ban on laptops and other large electronic devices and prevent its expansion to additional airports.

* Britain’s Rolls-Royce will announce on Thursday that it will commit at least 150 million pounds ($194.06 million) to a new facility for testing large civil turbines in Derby

 

NYT

– Sycamore Partners, a private equity firm that specializes in retailers and already owns the likes of Talbots, the Limited and Hot Topic, said it would acquire Staples Inc for $6.9 billion, citing its “iconic brand.” nyti.ms/2soW5ip

– Samsung Electronics Co Ltd said it plans to open a factory in South Carolina, as President Trump has tried in recent months to entice manufacturers into creating more industrial jobs in the United States. nyti.ms/2soXsOd

– ABC reached a settlement with a South Dakota meat producer that accused the network of defamation following its news reports about so-called pink slime in 2012. nyti.ms/2soKkbF

– Meal delivery service Blue Apron Holdings Inc reduced the expected price of its initial public offering to about $10 per share on Wednesday afternoon. That was well below a price range of $15 to $17 the company disclosed just last week, a few days after Amazon.com Inc unveiled a deal to buy Whole Foods Market Inc. nyti.ms/2soJrQH

– All of the largest U.S. banks passed the latest stress test on Wednesday, the first time all aced the exam since the Federal Reserve began administering the exercise seven years ago. nyti.ms/2soysGE

 

Canada

THE GLOBE AND MAIL

** The new leader of grocer Sobeys Inc vows not to “miss out” on the emerging e-commerce battle as U.S. powerhouse Amazon.com Inc prepares to shake up the supermarket sector with its upcoming $13.7-billion acquisition of Whole Foods Market Inc. (tgam.ca/2s562Ce)

** Calgary-based Obsidian Energy Ltd and three former employees are facing U.S. Securities and Exchange Commission charges for their roles in an alleged accounting fraud – issues the company says it flagged three years ago and has fixed.

 

Britain

The Times

– Investors in the Co-op Bank’s bonds are facing the second big reduction in the value of their holdings within four years after the struggling lender revealed the terms of a £700 million bailout. bit.ly/2sSFMhd

– Tesco Plc is to slash 1,200 jobs at its head office only days after saying that hundreds of jobs would go at its call centre in Cardiff. bit.ly/2sSvPQU

The Guardian

– BT Group Plc was the most complained-about broadband provider in the first three months of the year as customers took the company to task over faults and service issues, according to Ofcom. bit.ly/2sT5UZt

– The governor of the Bank of England Mark Carney said the continued growth in the UK economy would eventually lead to higher interest rates. bit.ly/2sTb0oF

The Telegraph

– The number of cars rolling off UK production lines in May plunged, as demand among British motorists for new vehicles fell, according to Official data from industry trade body the Society of Motor Manufacturers and Traders. bit.ly/2sSMxzR

– The Investment Association has issued a so-called “amber alert” to its members ahead of Burberry’s shareholder meeting next week while Institutional Shareholder Services (ISS) has also urged investors to vote against Burberry’s remuneration report. bit.ly/2sTe6Jj

Sky News

– Revolut, a payments app which undercuts traditional rivals, is in the final stages of talks about a deal that will see it raising more than 50 million pounds. The round will be led by Index Ventures, the technology company investor which originally acquired an interest in Revolut almost a year ago. bit.ly/2sSDwXA

– House prices bounced back to growth in June after three months of falls despite the “unusually uncertain” economic outlook amid Brexit talks, new figures show. Prices rose by 1.1% month-on-month having fallen by 0.2 percent in May according to the latest Nationwide house price index. bit.ly/2sSTBfA

 

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By Bill Blain of Mint Partners, Blain’s Morning Porridge – June 29th 2017

What a difference a day makes

“And a new day will dawn for those who stand long, and the forests will echo with laughter.”

What a fascinating week this is shaping up to be – on Monday I speculated it was going to be about Central Bankers re-thinking where we are. I guess I guessed right.

One of my colleagues from BGC, Ara Levonian, summed it up nicely in his daily comment this morning:

“What a difference a day makes as the ECB pumped out a story that the whole market misinterpreted Draghi despite him speaking in English and most of us having English as out first language. Carney changed his mind from last week, which has become the norm, and said there could be need to remove some stimulus. [They] have realised the marginal utility of QE is almost non-existent now, if not negative and are SERIOUSLY WORRIED ABOUT ASSET PRICE INFLATION. (My emphasis!) 

Draghi might take a tip from Alan Greenspan, who provides the most famous Central Banking quote: “Since becoming a central banker I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” It’s often shortened to “If I have made myself clear, I’ve misspoken.”

Last night two pieces of banking news caused my spidey senses to tingle. US banks have been given the green light to make major $100bln payouts to investors – confirming they are once again the new stock market gods. Then I noticed HSBC stock hit a new high for the year – it’s my dividend yield PA bank stock pick. Both these new spots convince me we’re approaching Peak Banks! (Could not resist writing that!) Time to sell. 

I’m still wondering wtf Janet Yellen was thinking when she clearly and unequivocally told an audience on Tuesday the: “financial system is not likely to experience another significant financial crisis in our lifetime.” To be fair, she was talking in context of the regulatory successes that saved the global financial system in 2008. Sure, US banks are better capitalised, but stability today is no guarantee of tomorrow. Regulators successfully put in place the tools, safeguards and mechanisms to ensure a similar crisis will not bring down the banking system again.

Which is marvelous. If the same crisis happens again. It won’t.

The next crisis is more likely to stem from the last in terms of unintended consequences. Over inflated financial asset bubbles (caused largely by the actions of central bankers – QE), will be front and centre. Sure, we can point to synchronised growth across the globe, but the real issues of confidence (which underlies every single economic choice) are under stress. (And throw in the political consequences of battered confidence: rising inequality and populist politics, Trump, May, etc..)

QE has created a false impression of financial asset values just as surely as a bank that paid and investor to provide capital created a false impression of its financial viability. (Gosh.. who could I be thinking about…)

Which leads us to the question of how to play these trends in current markets: You can talk about waiting for the tide to go out to see who is swimming naked. Or you can believe my key market mantra about the market only being happy when it’s inflicted the maximum amount of pain on the maximum amount of participants. (My favourite is the simple fable about a foolish emperor who believed the shysters who sold him a weightless, invisible suit and told him only clever people could see it. Everyone wanted everyone else to see how clever they were, so everyone agreed how magnificent the suit was – until the little boy asked his mother why the Emperor was butt naked?)

Or go with King Canute – who caught out his fawning courtiers by demonstrating to them, even he, the greatest king of his day, could not stop the tide coming in.
In short, be pragmatic.

Park investments in safe real assets. Its likely markets will go highly illiquid when the stress hits, so don’t get sucked into the liquidity fallacy: paying today for non-guaranteed “liquid” assets you hope to exit in crisis.

Buy assets with longevity to ride the storm.

Think long while the market panics short.

I’ve got a stack of alternative deals parked up from privately placed sovereign risk, infrastructure, transport (including rather attractive aircraft backed paper) and property. Now is the time to be quietly exiting over inflated financial assets, and getting ready to buy them back when the crisis is past.

Meanwhile, back on the continent of still unfixed banks, an interesting thought was triggered by a note in the FT on European banking. Is the current winnowing of the also-ran pack of broken Euro banks a plus or minus?

I think we all agree the Euro bank sector desperately needs consolidation. The risks aren’t in the 30 big SIFIs. They are in the broken second and third tier caused by unwise lending. It’s not just the public banks, but the private banks, the savings banks, post banks, state banks and the rest. Finally, Popular and the Veneto banks show its beginning to happen.

It sounds doubleplusgood. Creative regulatory destruction is underway. Troubled smaller banks are “resolved” away like snow in June, while the beneficiaries are assumed to be the large national champions like Santander in Spain, and Intesa in Italy. (I’m hearing rumours Unicredito will shortly be added to the mix of national champions – its name is being bandied about as potential acquirer of troubled Italian name Carige.)

However… one of the other indisputable facts is many acquisitions don’t work particularly well – and that as true of shot-gun weddings or drunken couples in Las Vegas as it is for swift bank takeovers. Never worked particularly well for RBOS on ABN, or Lloyds and HBOS! It gets especially messy when banking mergers are followed by banking catastrophe!

And especially if the underlying reasons why lending in Italy produced 30% NPLs or Spanish real estate lending was so bad aren’t addressed.

In sort, banking is the product of the society it exists in. Where banking is successful, there is a strong moral propensity for borrowers repaying their debts. In other countries, there tends to be a higher propensity to find reasons not to pay.

Go figure what that means for European banking union and mutualising bank deposit funds… 

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The euro soared to the highest level in over a year while bond yields and global shares also climbed, as an ongoing barrage of coordinated hawkish comments from central banks signaled the era of easy money might be coming to an end for more than just the United States. S&P futures were fractionally in the green following the best day for US equities in two months, as banks climbed after passing the Fed’s stress tests and announcing bigger than expected shareholder payouts.

Asian stocks posted broad gains and European shares were little changed while oil climbed for the sixth consecutive day, with WTI trading above $45. The euro rose for a third day against the dollar as hawkish comments from Mario Draghi this week boosted bets the ECB is preparing to unwind stimulus, while the ECB’s attempt to walk back Draghi’s hawkishness was roundly ignored. EUR/USD rose as much as 0.4% to 1.1425, highest since June 2016.

“It will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar,” says Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “Many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB.”  The residual sentiment from Draghi’s statement meant yields across developed markets continued their upward move, with Bunds back to 0.40%, nearly doubling in the past three days.

In keeping with the overall hawkish sentiment, BOE’s chief economist Andrew Haldane echoed Mark Carney’s comments from yesterday, when he said that the BOE should seriously look at rising rates, although he added that he is happy with where rates are now. His comment sent the pound briefly above 1.30, back to levels last seen last September, before paring some gains.

The Bank of Canada went further, with two top policymakers suggesting they might tighten as early as July.

“This is simply the central banks getting together and trying to arrest deflation,” said Nomura’s head of G10 currency trading Peter Gorra. “They are trying to be as smart as they can and agreeing that they have to act in unison. I don’t think this is necessarily a dollar move and I don’t think the dollar’s rally is over. They are just trying to add some two-way risk to the market.”

As the Euro surged, the dollar tumbled, touching its lowest since October – before Trump was elected U.S. president – against its broad index, as investors shifted to the view that the U.S. Federal Reserve might not be the only game in town when it comes to higher interest rates.

For those who may have missed the fireworks over the past few days, here is a concise and accurate summary from SocGen’s Kit Juckes:

Apparently, ECB President Mario Draghi’s comments about reflationary forces replacing deflationary ones were mis-interpreted by markets and were intended to be more balanced. A case of ham-fisted communication that argues for less forward guidance by policy-makers? Maybe, though I think the strategy on both sides of the Atlantic, which is to only change policy settings after ensuring markets won’t be surprised, has merit. And more importantly, will continue. What I don’t think, is that you can ‘unsay’ things by expressing surprise at the market reactions, any more than the king’s soldiers could put Humpty-Dumpty back together again.

 

The ECB isn’t going to hike rates soon. And how fast they move to reduce the pace of bond purchases probably does depend on how much the euro rallies. But the turn in the economy is pretty plain for us all to see. This week it has been the IFO survey and money supply data that show a continued acceleration in underlying loan growth. So of course the lifespan of extraordinarily easy policy settings (particularly asset purchases) is shortening. The lack of inflation, which is going to be highlighted today by Germany CPI figures that are likely to be as low as the Italian ones yesterday, ought to anchor bond yields and affect expectations about what removing extraordinary accommodation means, but they don’t change the fact that policy, like the economy, has reached a turn in the road. And that turn is positive for the euro, if only because it has been kept at a very low valuation by the combination of negative rates and bondbuying, despite a large current account surplus.

 

The ECB can’t normalise monetary policy without sacrificing the extreme cheapness of the currency, but maybe the ECB President thinks he can avoid a disorderly currency  correction if he managers to guide market expectations. From here, we still think we’re a heading, erratically, towards EUR/USD 1.20 and above EUR/JPY 130.

Helping market sentiment this morning was the result from the latest Stress Test, which saw all banks pass, and which would see banks return the most capital on record. JPMorgan, Citigroup and Bank of America Corp. led U.S. firms in unveiling plans to boost dividends and stock buybacks more than analysts had projected, after every lender passed annual stress tests for the first time since the Fed began the reviews in the wake of the 2008 financial crisis. Bank shares rallied in late trading.

Boosted by the US stress test, banks led gains in Europe and Asia, after the S&P 500 Index rebounded from the biggest selloff in six weeks. European equity markets opened higher with initial strength in the banking sector after U.S. lenders’ share buyback announcement, only to give way to declines led by utilities after UBS cuts the sector.

The S&P rose 0.9 percent on Wednesday, bouncing back from a loss of 0.8 percent. It’s on pace for a seventh straight quarterly advance. The Nasdaq Composite Index jumped 1.4 percent on Wednesday. Technology shares climbed while miners jumped with commodity prices. The biggest banks climbed after clearing stress tests and then announcing shareholder payouts. JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. added 2 percent or more in premarket trading.

In Asia, the Aussie pushed to three-month highs amid rising yields and commodities rebound. Australian 3-year yield rises to highest since early May as red and green bank bills extend sell off. Asian stock indexes closed firmly green with Korea’s Kospi rising to a new record high, Nikkei gains 0.5% while ASX 200 is one percent higher. Yuan rallies to seven-month high against dollar as PBOC strengthens daily fixing to two-week high and official journal flags a stronger bias for rest of the year. The composite was up 0.5%.

As Bloomberg notes, Global stocks are poised for the best first half of a year since 1998, gaining 11% to a record on the back of constant central bank liquidity injections. Investors are putting their faith in the robustness of earnings as the economy continues its recovery, shrugging off a host of worries from oil’s slump into a bear market to political wrangling in Washington. But risks remain: markets swung this week as the debate on normalizing central bank policy intensified after nine years of stimulus.
The euro surged 1.4 percent on Tuesday in the wake of comments from European Central Bank President Mario Draghi that investors took to be hawkish. A tumultuous Wednesday session followed as officials said the market had misjudged his message.

The latest moment of euphoria may not last long, however.

“Central banks will be very cautious in their approach,” said Martin Whetton, a senior rates strategist at ANZ. “But once they start tightening in concert, and their bloated balance sheets start unwinding, it is fair to say that bonds, equities, house prices and other asset markets will face stiffer headwinds than they have for a long time.”

In commodities, the big mover was oil which rose for a sixth session, with Brent near $47.50/bbl, WTI ~$45. Benchmarks both rise for 6th consecutive session, longest run of gains since early April. Continued short-covering and a weaker dollar seen as helping push prices higher. “There’s probably still short-covering going on,” says Giovanni Staunovo, commodity analyst at UBS. “A weaker dollar and risk-on environment is helping too”

Also on the topic of oil, there was a quick statement by the UAE energy minister Suhail Mazrouei, who said that there are no talks about deeper OPEC cuts, and added that “we are not worried about the market recovery” and there is “no plan or talks” for further production cuts, Mazrouei tells reporters in Paris. “Of course, additional production coming from several producers is prolonging the recovery, but I think it’s a rather short term, and we hope to see more recovery in the third and fourth quarter. There is a drawdown from the inventories, there has been a correction. Yes, the correction is a bit slower than expected. The second quarter is always a low demand quarter. Third quarter and fourth quarter, we will have a pickup on the demand, and hopefully we will reach a more balanced market.”

Gold fell 0.3 percent to $1,245.82 an ounce despite the weaker dollar. Copper futures jumped 0.8 percent, advancing for a seventh day.

In currencies, the Bloomberg Dollar Spot Index slipped 0.1 percent as of 9:29 a.m. in London, dropping for a third day to the lowest since October. The euro increased 0.4 percent to $1.1424, the highest level since last year’s Brexit vote. The pound climbed 0.5 percent to $1.2984, heading for a seventh straight day of gains, the longest winning streak since April 2015. The Canadian dollar rose 0.1 percent after jumping 1.2 percent on Wednesday as Bank of Canada Governor Stephen Poloz reiterated he’s considering tighter policy.

In rates, the yield on 10-year Treasuries rose two basis points to 2.25 percent, after gaining two basis points on Wednesday and jumping seven basis points in the previous session. The yield on U.K. gilts advanced four basis points to 1.20 percent. French 10-year yields also added four basis points, as did those on 10-year German bunds.

Economic data includes initial jobless claims and 1Q GDP. Constellation Brands, Walgreens, Micron and Nike are among companies
reporting earnings. Bloomberg Dollar Spot Index -0.1%, industrial metals
rise.

Bulletin Headline Summary From RanSquawk

• GBP/USD extended on gains and EUR/USD rose above 1.1400, as the USD-index languished below 96.00
• Asian equity markets sustained the momentum from US, where the S&P 500 posted its best day in 2 months
• Looking ahead, highlights National German CPI, US GDP, BoE’s Carney and Fed’s Bullard

Market Snapshot

• S&P 500 futures up 0.1% to 2,441.5
• STOXX Europe 600 down 0.05% to 385.62
• MXAP up 0.6% to 155.77
• MXAPJ up 0.9% to 509.52
• Nikkei up 0.5% to 20,220.30
• Topix up 0.6% to 1,624.07
• Hang Seng Index up 1.1% to 25,965.42
• Shanghai Composite up 0.5% to 3,188.06
• Sensex up 0.3% to 30,938.89
• Australia S&P/ASX 200 up 1.1% to 5,818.10
• Kospi up 0.6% to 2,395.66
• Gold spot down 0.3% to $1,245.72
• U.S. Dollar Index down 0.3% to 95.77
• German 10Y yield rose 4.7 bps to 0.415%
• Euro up 0.4% to 1.1425 per US$
• Italian 10Y yield fell 2.8 bps to 1.74%
• Spanish 10Y yield rose 3.2 bps to 1.461%

Top Overnight News

• Banks Unleash Surprisingly Big Payouts After Fed’s Stress Tests
• Merkel Slaps at Trump and Brexit in Combative Speech Before G-20
• Trump Travel Ban Said to Start Thursday Evening U.S. Time
• Staples to Be Acquired by Sycamore Partners for $6.9 Billion
• Siemens, Bombardier Said to Explore Two Rail Joint Ventures
• Pound on Hot Streak as Carney Hints at Higher Interest Rates
• Euro-Area Economic Confidence Hits Decade High as ECB Mulls Exit
• Money Markets Dragged From Slumber as Central Banks Turn Hawkish
• Activist Crystal Amber Pushes Northgate Executives to Sell
• Shenhua Said to Mull GD Power Takeover Amid Guodian Merger
• French Privacy Watchdog Closes Probe Into Microsoft Windows 10
• Morgan Stanley Hires Barclays’s Mak to Head Malaysia Dealmaking
• Santander Hires Morgan Stanley for Popular Asset Plan: Vozpopuli
• Wood Group 1H Weaker Than Anticipated, Cautious on 2017 Outlook
• BHP’s Nasser Says Activism Rising as Counter to Passive Funds

Asian equity markets sustained the momentum from US, where the S&P 500 posted its best day in 2 months as financials rallied ahead of Fed stress tests results and buyback announcements. This also inspired optimism for financials in ASX 200 (+1.1%) and Nikkei 225 (+0.4%), with the former further bolstered by commodity names after advances in crude and with iron ore prices higher by around 10% this week. Shanghai Comp. (+0.3%) and Hang Seng (+0.7%) adhered to the rising tide, although the mainland somewhat lagged after the PBoC refrained from liquidity operations for a 5th consecutive day citing relatively high liquidity amid month-end fiscal spending. Finally, demand for 10yr JGBs was dampened amid the widespread increased risk-appetite and as the BoJ refrained from a Rinban announcement, while the curve slightly flattened on underperformance in the short-end. PBoC refrained from open market operations for a 5th consecutive day, due to high liquidity levels from month-end fiscal spending.

Top Asian News

• Inside the Red-Hot HSBC Fund That’s Turning Away New Money
• Japan Stocks to Watch: Hitachi, Honda, Kusuri no Aoki, Nikon
• India’s Modi Says Killing in Name of Cow Protection Unacceptable
• Japan Currency Chief Asakawa Is Said to Stay On for a Third Year
• ‘You Wouldn’t Do It’: BHP Chair Regrets $20 Billion Shale Spree
• Macau Hotel With 30 Rolls-Royces And No Guests Seeks Funds
• Activist Murakami Claims Rare Victory in Japan Shareholder Vote
• Japan Shares Rally, Led by Banks on Optimism for Global Growth

In Europe, since the open, the initial gains in stocks have somewhat petered out, with Euro Stoxx 50 -0.07%, with the exception of the FTSE 100 amid a 4% rise in index heavyweight HSBC after MS upgrade. Financials have been outperforming after the Federal Reserve cleared buyback and dividend plans from the United States largest banks, including local units of Germany’s Deutsche Bank and Spain’s Santander. Additionally, support has been provided by hawkish signals from central bankers, most notably Carney and Draghi. Bunds have fallen off some 60+ ticks as yields steepening across the curve, post firmer regional CPI data, with the German 10yr benchmark now at a 5-week high (2Y +2.6bps, 5Y +4.5bps, 10Y 6.1bps, 30Y 6.9bps).

Ahead of today’s German all too important, inflation print German Reginal CPIs for June all came in better than expected, suggesting Draghi amy have been right that the drop in inflation may have been transitoory.

• German Baden Wurttemburg CPI (Jun) M/M 0.10% (Prey. -0.10%)
• German Baden Wurttemburg CPI (Jun) Y/Y 1.60% (Prey. 1.50%)
• German Hesse CPI (Jun) Y/Y 1.90% (Prey. 1.70%)
• German Hesse CPI (Jun) M/M 0.10% (Prey. 0.00%)
• German Bavaria CPI (Jun) M/M 0.10% (Prey. -0.10%)
• German Bavaria CPI (Jun) Y/Y 1.40% (Prey. 1.40%)
• German Brandenburg CPI (Jun) M/M 0.20% (Prey. -0.10%)
• German Brandenburg CPI (Jun) Y/Y 1.50% (Prey. 1.40%)

Top European News

• U.K. May Consumer Credit Surges, Showing Why BOE Took Action
• Raiffeisen Says ‘Unjustified’ Losses Could Halt Polish IPO
• Bond Investors’ Love for Russia Dispels Gloom of Crude Rout
• U.K. Regulator Opens Probe Into PwC Audits of BT’s Books
• Pound on Best Winning Run Since 2015 as Carney Changes Tune
• European Miners Jump as Iron Ore Gains for a Fifth Day
• JD Sports Falls After Bloated Expectations, Margin Pressure Seen

In currencies, the USD index is has more selling pressure through the European morning, but with the caveat that USD/JPY continues higher amid rising US Treasury yields. As such, narrowing differentials with Europe and the UK drive trade at the present time, with the backdrop of this week’s comments from the ECB’s Draghi on reflationary pressures and the BoE Camey’s reported considerations over rate hikes driving trade — a little too aggressively perhaps. A broader continuation of the themes seen over the last few days, as stronger central bank speak from the ECB and BoE continue to push the EUR and GBP higher against the USD, JPY and CHF. Focusing on the spot rates, EUR/USD resistance ahead of 1.1450 has contained the resurgence from midweek, and we should see some consolidation closer to 1.1400 ahead of the US data this afternoon. Core PCE and the last reading of the Q1 GDP stats are due out later today. Cable has continued higher to test the upper level of the 1.2900-1.3000 resistance zone we have been highlighting, pushing just past the figure level by some 6-7 ticks as traders hunt for stops. The highs seen ahead of 1.3050 have been held intact as yet. EUR/GBP is looking resilient to the downside also, and we have some of the familiar month end demand out of Europe filtering through here also.

In commodities, commodity currencies (USDCAD -0.06%, AUDUSD +0.37%, NZDUSD +0.10%) supported by positive crude prices, while a 3% rise in iron ore has also buoyed AUD strength. The fall in the USD index has led to broad based gains seen across the commodity spectrum, but noticeable is the lack of traction in Gold as the risk parameters have counteracted this. The yellow metal is back under USD1250.00, while Silver continues to trade a modest range up and down the USD 16’s, but we have seen a stronger impact on base metals and Oil. Copper is now testing USD 2.70, showing a near 1% gain on the day, only outpaced by Tin which is 1.75% up today. Nickel is also around 1.0% higher today. For WTI, USD 45.00 continues to hinder progress, but with production levels having decreased in the US in the DoE report, upside relief has naturally followed. The spread with Brent has widened out a little, but enough to see USD 48.00 tested here.

Looking at the day ahead, we’ll get the third and final revisions to Q1 GDP (no change from +1.2% qoq expected) and Core PCE. The latest weekly initial jobless claims data rounds out the releases. Away from the data, the BoJ’s Hararda is scheduled to speak shortly after this hits your emails while the Fed’s Bullard is scheduled to speak on monetary policy this evening in London at 6pm BST. The recently elected South Korea President Moon Jae-in is also due to meet with President Trump in Washington today. The other big event for markets today is the House of Commons vote on PM May’s government program. The vote is due this afternoon.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 1.2%, prior 1.2%
  • Personal Consumption, est. 0.6%, prior 0.6%
  • GDP Price Index, est. 2.2%, prior 2.2%
  • Core PCE QoQ, est. 2.1%, prior 2.1%
• 8:30am: Initial Jobless Claims, est. 240,000, prior 241,000; Continuing Claims, est. 1.94m, prior 1.94m
• 9:45am: Bloomberg Consumer Comfort, prior 49.4

DB’s Jim Reid concludes the overnight wrap:

This week has been a busy one for central bank speak too with the steady chorus of voices certainly keeping markets on their toes. After rates had been hit for the biggest sell-off in many months on Tuesday following Draghi’s speech, yesterday appeared to be all about damage control at the ECB. The backtrack started as Europe walked into the office yesterday with ECB Vice-President Constancio telling CNBC that persistence in stimulus is fully justified given the slack that is still in the economy. While markets appeared to largely shrug off the comments it did seem to set the table for headlines to then hit the screens a few hours later. Specifically it was the Bloomberg story saying that the market  had “misjudged” Draghi’s speech and that it was instead intended to strike a more balanced tone that put the wheels in motion. A separate Reuters article also quoted ECB “sources” as saying that Draghi had intended to signal tolerance for a period of soft inflation rather than imminent policy tightening. In fairness Draghi’s tone changes on Tuesday were fairly subtle and didn’t suggest that a rate hike was around the corner anyway, rather a steadily improving economy will see policy normalise.

While not to the same extent as Tuesday, markets were quick to re-price however. After 10y Bund yields had edged up another 4bps early the morning, the direction quickly changed after the headlines hit with Bunds rallying as much as 7bps off the highs. That said they did however still finish the day unchanged  at 0.366% which means that they are still some 12.5bps higher in yield over the past two days. The periphery did a better job of stemming some of the previous day losses however with 10y yields in Italy, Spain and Portugal finishing 3.0bps, 6.9bps and 8.8bps lower respectively yesterday. Across the pond 10y Treasury yields touched a one-month high of 2.256% intraday below settling to close at 2.228%, albeit sill over 2bps higher on the day.

The headlines left its mark on the Euro too. The single currency built on Tuesday’s rally early on, only to then crash -0.77% as the headlines hit. That proved short lived however with the currency swiftly recovering all of that move and more, breaking through $1.140 this morning for a new 1y high. On this subject it’s worth highlighting that yesterday DB’s George Saravelos made a big change to his EUR/USD call for the rest of the year. While Draghi’s speech was not the fundamental driver behind the change of view, in George’s mind it aptly marks the culmination of a number of developments that have caused him to alter his forecasts. He now expects the pair to rise to 1.160 or above by the end of the year (previous year end forecast was 1.030). He also highlights that – unless an existential Eurozone crisis returns – conditions have fallen into place for this year’s 1.030 low to mark the bottom in the medium term EUR/USD bear market.

Staying with central banks, it wasn’t just the ECB which stole the limelight yesterday. In contrast to his cautious Mansion House speech, BoE Governor Mark Carney said yesterday in Sintra that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly become more conventional”. He added that this will be contingent on the extent to which weaker consumption growth is offset by other demand components and also how the UK economy reacts to tighter financial conditions and Brexit negotiations. Those comments sent Sterling surging up +0.87% to $1.2926 and testing the upper bound of the YTD range again. 10y Gilts also finished 6.4bps higher at 1.152% and are now 14.3bps higher in the past two days.

Not to be outdone, the BoC’s Poloz also said that recent rate cuts “have done their job” and that the Bank is considering options “now that the excess capacity is being used up steadily”. The BoJ’s Kuroda was the probably the only central banker not to hint at a more hawkish tone citing caution still about domestic spending and investment. All of those  central bank comments almost overshadowed what was a fairly positive day for risk. While the Stoxx 600 closed a smidgen lower (-0.06%) it had traded as low as -1.04% at one stage prior to all the comments hitting. Boosted by a big rally for Banks (+1.93%) the S&P 500 returned +0.88% and in doing so completely reversed Wednesday’s sell off. The Nasdaq finished up +1.43% while credit indices saw similar strong performance.

Another decent day for the commodity complex – which is flying under the radar a bit – certainly helped too. WTI Oil (+1.13%) has quietly gone about rising for the last four days and is approaching $45/bbl again. Gold (+0.17%) also edged higher for the fifth time in the last six sessions while Iron Ore (+4.41%) is now up nearly +17% from the June lows.

That rally for Banks yesterday also came prior to what was a fairly upbeat result from the second round of the Fed’s stress tests. The Fed gave the green light to approve capital plans for all 34 firms with Capital One Financial the lone institution to be singled out for conditional approval based on “material weakness” in planning. After the close JP Morgan, Bank of America, American Express, Citi and Morgan Stanley were among those to announce either buybacks or dividend boosts which saw shares prices for those names rise between 1% and 2%. Those moves have helped US equity index futures creep up +0.22% in the early going while the rest of Asia is also off to a decent start. The Nikkei (+0.54%), Hang Seng (+0.88%), Shanghai Comp (+0.32%), Kospi (+0.66%) and ASX (+1.11%) are all higher as we go to print led by Banks.

Moving on. With central banks being the obvious focus the macro data that was released yesterday was again largely reserved as an afterthought. In fairness there wasn’t any huge surprises to come out of the US data. The advance goods trade balance for May revealed a deficit of $65.9bn which more or less matched expectations. Wholesale inventories rose +0.3% mom in May which was a tenth more than expected while pending home sales for May declined -0.8% mom which was the third consecutive monthly decline.

Closer to home the ECB’s money and credit aggregates data revealed that M3 growth pushed up one-tenth to +5.0% in May. The data also revealed that loans to households rose one-tenth to +2.7% yoy and a new cyclical high. Growth in credit to non-financial corporates held steady at +2.2% yoy. Perhaps the most standout data however was out of France where consumer confidence rose 5pts to 108 (vs. 103 expected), matching the highest level since 2007 with the surge this month coming in the first month of Macron taking office. The other data out yesterday included a bigger than expected jump in the UK Nationwide house price index for June (+1.1% mom vs +0.1% expected) and a softer than expected CPI print from Italy for this month (-0.1% mom vs. +0.1% expected).

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where we’ll receive the July consumer confidence print before attention turns over to the UK with the May money and credit aggregates data. Shortly after that we’ll receive June confidence indicators for the Euro area before we then get the flash CPI report out of Germany(0.0% mom headline print expected). In the US this afternoon we’ll get the third and final revisions to Q1 GDP (no change from +1.2% qoq expected) and Core PCE. The latest weekly initial jobless claims data rounds out the releases. Away from the data, the BoJ’s Hararda is scheduled to speak shortly after this hits your emails while the Fed’s Bullard is scheduled to speak on monetary policy this evening in London at 6pm BST. The recently elected South Korea President Moon Jae-in is also due to meet with President Trump in Washington today. The other big event for markets today is the House of Commons vote on PM May’s government program. The vote is due this afternoon.

via http://ift.tt/2skpK0W Tyler Durden