Month: June 2017

Relative to the market's complacent nonchalence this year, the last two weeks have seen violent swings across almost every asset class as 'no brainer' stocks tumble, perennially dovish central bankers turn hawkish, and suppressed volatility has a mini-Minsky moment. But for all the hand-wringing over this 'regime shift', former fund manager and FX trader Richard Breslow has a simple message – calm down and be careful what you think happened this week…

Via Bloomberg,

It’s been a week filled with hyperbole. Trial balloons dressed up as pre-commitments. A little volatility described in cataclysmic terms and compared to jarring historical market upsets. Feverish extrapolation masquerading as revised forecasts. Central bankers daring to go where no one has gone before.

It’s been an interesting, and in many ways fun, few days, but based on what we can possibly know at this point, unlikely to be enshrined in trading lore.

I hope I’m wrong, but the moves we’ve seen this week don’t strike me as dispositive of anything. Is the dollar offered? Yes, but that’s been the case all year– the flip side of the euro. But the important test will be how it closes today. More important to me than the range extensions we’ve had the last few days.

 

If this time things are really different it shouldn’t be pausing into quarter, month and week end, giving those who “don’t have it” a chance to get in. It should force me to look into the abyss and have to decide whether I’m prepared to reach for it. That’s how powerful trends behave and they’re not benign: despite what they look like on charts after the fact.

 

Equities, too, have spent the first part of the day looking comfortably benign. If traders thought there was any chance that the “put” had been replaced by a “call”, we wouldn’t be talking about sighs of relief, reassessments and that the S&P 500 future is trading in London only one percent from all-time highs. It’s as true as it’s been all month: until we close below 2400, spare the discussions of how much wealth has been destroyed on every pull-back.

 

There’s even been a lot of talk of taper tantrums in bonds. Really? Ten-year Treasuries have made one tepid attempt at 2.30%. People describe bund yields as having exploded higher. But having managed to rise to 44 basis points, it would be indecent to describe anyone one as bleeding from the face. Yields are indeed higher. They should be. But so far Treasuries are closer to YTD lows than where they were in March.

 

And what’s to be said about commodities? Unless the price action is analyzed and described in financial asset terms rather than contrived fundamentals, they will continue to be misunderstood and poorly traded. And leave off the “entered a bear market” line.

 

Maybe everything will boot off next week, but it’s wishful thinking to claim we’ve seen trading Paree, just because a pigeon flew by this week.

We hope, like Breslow, that this is tempest in a teapot but as John Bollinger warned yesterday, there can't be too many more of these 'events' before they catalyze something bigger…

"Another volatility event in the US stock market… This is going to get out of hand one day."

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Authored by Nick Cunningham via OilPrice.com,

The U.S. Federal Reserve has already increased interest rates several times, most recently in June, with promises to do much more. Rate hikes pose a problem for the oil industry, which has used debt to underpin a drilling boom across the U.S. shale patch. Higher rates could raise the cost of drilling.

But low oil prices, and few prospects for a strong rebound in the near-term – and possibly even the medium- and long-term – undercut the rationale for higher rates. After all, inflation is soft, and low commodity prices have a lot to do with that.

In fact, the decline of oil prices this year has led to even lower inflation than expected, not just in the U.S., but also in Europe. The Fed has insisted that weak inflation is “transitory,” but more people are starting to wonder if that is true. “There is now a much bigger chance that there will be an important disinflationary impact from lower oil prices,” Thierry Wizman, global interest rates and currencies strategist for Macquarie, told MarketWatch. With oil prices and broader inflation low, why raise rates?

Still, the Fed seems intent on moving forward. And the Bank for International Settlements (BIS), a group of central banks from around the world, urged central banks a few days ago to continue the “great unwinding.” That is, the extraordinary monetary stimulus stemming from the 2008-2009 financial crisis needs to be reined in. Fed chair Janet Yellen has warned about overpriced asset classes, a side effect of loose monetary policy. The hawkish Fed thinks that monetary policy needs to tighten in order to prevent overheating.

They aren’t alone. The European Central Bank (EBC) has hinted that it could cut back on its policy of quantitative easing. “The time is approaching when the [Federal Reserve] will no longer be the only major central bank in tightening mode,” BNP Paribas SA wrote in a note to clients. In fact, the prospects of tighter conditions from the EBC led to a sharp selloff in bonds and strengthening of other currencies against the dollar.

What does this have to do with oil? A tightening of interest rates could pose problems for the shale industry. The shale boom was underwritten by cheap debt – low interest-rates allowed anyone and everyone to drill, with companies rolling over debt each year to keep the drilling frenzy going. According to May 2017 report from Columbia University’s Center on Global Energy Policy, the total debt of 63 shale companies in the U.S. rose fourfold between 2005 and 2015.

That wasn’t a problem when oil prices were high. The crash in oil prices pushed more than 100 companies into bankruptcy, mostly small and less efficient ones.

But even if the urge to raise interest rates from the central bank is controversial, it seems to be almost a foregone conclusion. So, the shale industry will face rising interest rates at a time when oil prices might be stuck wallowing below $50 per barrel.

This is a much more serious problem for smaller companies without the best credit ratings. The oil majors will take the rate hikes in stride, but for smaller drillers, the rate hikes could be a looming threat. Columbia University concludes that a 2 percent increase in the London Interbank Offer Rate (LIBOR) would cause interest expenses for companies with credit ratings between B and CCC- to skyrocket by 30 percent. Part of that has to do with the knock-on increase in credit spreads for these companies.

An even grimmer scenario of interest rates rising to 5 percent would ultimately mean that small and medium-sized drillers might only be able to obtain unsecured debt at rates exceeding 10 to 12 percent, Columbia University argues.

The upshot is that higher interest expenses would wipe out much of the gains from cost reductions and efficiencies that these shale drillers achieved over the past three years.

On top of all of this, higher interest rates have a more obvious effect on oil prices. Higher rates will strengthen the dollar, and since oil is priced in dollars, demand will fall as oil becomes costlier. The result will be downward pressure on prices. The flip side of this, of course, is that monetary tightening from other central banks outside of the U.S. tends to have the opposite effect.

In short, the tightening from the Fed poses one more problem for the shale industry at a time when it is fighting hard to stage a rebound.

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Instead of lashing out at various media personalities on Twitter this morning, President Trump has instead pivoted to Healthcare Law, and in an early morning tweet has endorsed a strategy for replacing Obamacare may resonate with conservatives like Kentucky’s Rand Paul: Repeal now, replace later.  Trump tweeted: "If Republican Senators are unable to pass what they are working on now, they should immediately REPEAL, and then REPLACE at a later date!"

If Republican Senators are unable to pass what they are working on now, they should immediately REPEAL, and then REPLACE at a later date!

— Donald J. Trump (@realDonaldTrump) June 30, 2017

The tweet is notable because it is the polar opposite of what Trump told Paul Ryan shortly after he won the election and shortly before Congress went into session, as Axios reminds us. And, more confusing, part of the reason why the House GOP leadership didn't run with a clean repeal vote, as they'd done many times under President Obama, was because Trump had made it clear to Ryan he wouldn't sign the bill.

Furthermore, Axios adds that Trump is "frustrated, like every other Republican involved in the jammed-up health care negotiations. HHS Secretary Tom Price met with senior officials at the White House yesterday, and a source familiar with the meeting said the mood was far more negative than the day before" which means that moderate Republican senators "aren't buying what Mitch McConnell is offering them. At least not yet."

So with a deal seemingly out of the question, Trump is preparing for a Plan B, even if it is with a 6 month delay and 180-degree the opposite of what he pitched at the start of the year.

As for the Senate, after originally planning to go ahead with a planned “do or die” vote, McConnell said Wednesday he would delay the vote until after the July 4 recess, as the GOP still lacks the votes.

The question now is how will moderates like Maine’s Susan Collins and Alaska’s Lisa Murkowski react to Trump’s plan? Both have raised questions about the revised bill’s cuts to medicare spending in their states, something that would negatively impact chronically ill elderly constituents who tend to vote in larger numbers than younger cohorts of the population.
 

 

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• Rhetorical question of the day: Twisted Geniuses or Bumbling Ex-Academics? (WSJ)
• Markets Steady on Quarter’s Last Day (WSJ)
• Their fortunes enmeshed, Trump and Putin to hold first meeting next week (Reuters)
• Oil Is Set for Longest Rally of 2017 (BBG)
• Brightening economy sets euro up for strongest quarter since debt crisis (Reuters)
• Eurozone Inflation Falls Again in Setback for ECB (WSJ)
• Trump’s Travel Ban Takes Effect, Setting Strict Entry Limits (WSJ)
• China says HK joint declaration no longer has meaning (Reuters)
• U.S. likely to bar Japan investigators from interviewing warship crew, official says (Reuters)
• Chinese Regulators Play Whac-A-Mole With Banks (WSJ)
• Trump says he is sending federal help to fight Chicago crime (Reuters)
• Iraq’s Dilemma: Who Will Lead the Next Big Fight Against ISIS? (WSJ)
• Shkreli’s Hedge Fund Went From Success to Bust in 31 Minutes (BBG)
• Ron Dennis to Sell Stakes in McLaren, Step Down as Chairman (BBG)
• Twitter is looking for ways to let users flag fake news, offensive content (WaPo)
• Europe’s Car-Leasing Boom Sets Off Alarm Bells (BBG)
• Google’s Main Strategy Is Under Threat From EU (WSJ)
• German lawmakers approve same-sex marriage in landmark vote (Reuters)
• Electric Cars Are Coming Faster Than You Think  (BBG)
• China ‘outraged’ by $1.42 billion planned U.S. arms sales to Taiwan (Reuters)
• Traders Who Left Banks for Hedge Funds Now Heading Back to Banks (BBG)
• Heathrow Express Braces for Crossrail to End Airport Monopoly (BBG)

 

Overnight Media Digest

WSJ

– Walgreens Boots Alliance Inc and Rite Aid Corp scrapped their $9.4 billion merger agreement, the latest in a series of high-profile deals to be derailed by antitrust enforcers. on.wsj.com/2sXN7wk

– Sycamore Partners intends to split Staples Inc into three to help fund its $6.9 billion purchase of the office-supply seller, in another sign of the challenges facing the retail industry. on.wsj.com/2sXDY6Q

– Swedish fashion retailer H&M reported quarterly operating margin that was higher than a year earlier, despite the continuing decline in same-store sales. on.wsj.com/2sXEemk

– Nike Inc’s chief executive said the company is starting a pilot program to sell sneakers through Amazon.com Inc ending a long stalemate between the sportswear giant and the online retailer. on.wsj.com/2sXQG5t

 

FT

* British Prime Minister Theresa May won backing for her policy programme with a slender parliamentary majority on Thursday in the first test of her authority after an election setback and growing pressure on her Brexit and austerity agenda.

* Britain intends to subject Rupert Murdoch’s takeover of European pay-TV group Sky to a lengthy in-depth investigation after finding the $15 billion deal risks giving the media mogul too much power over the news agenda.

* President Donald Trump on Thursday promoted a “golden era” of the U.S. energy business by seeking to assert power abroad through a boost in natural gas, coal and petroleum exports.

 

NYT

– The British authorities asked regulators to further examine 21st Century Fox’s $15 billion deal for the European satellite giant Sky Plc. nyti.ms/2sssyog

– U.S. President Donald Trump lashed out Thursday at the appearance and intellect of Mika Brzezinski, a co-host of MSNBC’s “Morning Joe,” drawing condemnation from his fellow Republicans and reigniting the controversy over his attitudes toward women that nearly derailed his candidacy last year. nyti.ms/2ssYf0y

– The Trump administration has imposed sanctions on a Chinese bank, a Chinese company and two Chinese citizens in an effort to crack down on North Korea’s financing and development of weapons of mass destruction. nyti.ms/2ssOOOJ

– Walgreens Boots Alliance Inc and Rite Aid Corp said they had called off their long-planned merger after antitrust authorities indicated they were not likely to approve the combination of two of the nation’s biggest drugstore chains. nyti.ms/2ssPweB

– Greta Van Susteren confirmed her departure from MSNBC, five and a half months into the job, with a post on Twitter that read “I am out at MSNBC.” nyti.ms/2ssHhzm

– Shares of Blue Apron Holdings Corp had a bland market debut on Thursday, as investors proved wary of the meal-kit provider and its initial public offering. nyti.ms/2ssBWIx

 

Britain

The Times

– Twenty-First Century Fox Inc’s 11.7 billion pounds ($15.22 billion) bid to take control of Sky Plc faces more regulatory hurdles after the UK government said it was minded to ask Britain’s competition watchdog to examine the deal. bit.ly/2sWM9Ah

– Gatwick will make a fresh pitch for a second runway as the airport says that for the first time it had carried more than 44 million passengers in a year. bit.ly/2sWWe0d

The Guardian

– UK’s Financial Conduct Authority is scrutinising the fast-growing car finance sector and has held discussions with U.S. authorities about the market. bit.ly/2sXczSx

– Banks should disclose lending to companies with carbon-related risks, according to recommendations in a new report by the Task Force on Climate-related Financial Disclosures. bit.ly/2sWMnHz

The Telegraph

– Virgin Media plans to make about 200 redundancies following a management shake-up at the cable operator. The planned cuts follow the operator’s failure earlier this year to hit network expansion targets. bit.ly/2sX7SZ2

– The Turkish exile owner of the British luxury smartphone brand Vertu Corp Ltd plans to put its manufacturing arm into administration to wipe out heavy debts. bit.ly/2sX6KV4

Sky News

– Ron Dennis, the former boss of the McLaren automotive group, is to sever his decades-long ties with the company with the sale of his shareholding in a 275 million pounds deal. bit.ly/2sWSFXR

– Australian DIY chain Bunnings says it will create over 1,000 new jobs in UK after its parent firm bought the Homebase brand last year. bit.ly/2sWGytU

The Independent

– The widows of four men executed by Nigeria’s military regime in 1995 are suing oil giant Royal Dutch Shell Plc for allegedly aiding the army crackdown which led to their husbands’ deaths. ind.pn/2sWORWA

 

 

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While one of Trump’s recurring campaign promises was that he would “punish” China and other key US trade counterparties if elected, for taking advantage of free-trade by imposing steep tariffs and duties on foreign imports to “level the playing field”, the President’s stance changed drastically after the election, U-turning following his amicable meeting with China’s president Xi Jinping in March, but mostly as a result of pressure by his ex-Goldman advisors to keep existing trade arrangements in place and not “rock the boat.”

Now, all that may be about to fall apart.

According to Axios, behind the constant media scandals, “one of the most consequential and contentious internal debates of his presidency unfolded during a tense meeting Monday in the Roosevelt Room of the White House” where with “more than 20 top officials present, including Trump and Vice President Pence, the president and a small band of America First advisers made it clear they’re hell-bent on imposing tariffs — potentially in the 20% range — on steel, and likely other imports.”

In other words, Trump – true to his campaign promises – is set to launch a global trade wars after all, one where then main country impacted would be China, however the collateral damage would extend to Canada, Mexico, Japan, Germany and the UK.

And what may be even more striking is that Trump overruled his cabinet, as “the sentiment in the room was 22 against and 3 in favor — but since one of the three is named Donald Trump, it was case closed.” Axios adds that while “no decision has been made, the President is leaning towards imposing tariffs, despite opposition from nearly all his Cabinet.”

Needless to say, if Trump follows through, the outcome would have a profound effect on U.S. economic and foreign policy; Trump will formalize his decision in the coming days.

What is also notable, is that this is the first time  – so far off the record – in which Trump has openly defied his Wall Street establishment advisors, while siding with the Bannon “populist” front:

In a plan pushed by Commerce Secretary Wilbur Ross, and backed by chief strategist Steve Bannon (not present at the meeting), trade policy director Peter Navarro and senior policy adviser Stephen Miller, the United States would impose tariffs on China and other big exporters of steel. Neither Mike Pence nor Jared Kushner weighed in either way.

 

Everyone else in the room, more than 75% of those present, were adamantly opposed, arguing it was bad economics and bad global politics. At one point, Trump was told his almost entire cabinet thought this was a bad idea. But everyone left the room believing the country is headed toward a major trade confrontation.

As Axios adds, the reason why Trump defied the guidance of his Wall Street-derived advisors is Trump’s base “which drives more and more decisions, as his popularity sinks — likes the idea, and will love the fight.“

This, more than anything, should send shivers down Wall Street’s spine, because for all his bluster and outrageous media outbursts, Trump had largely been in Wall Street’s pocket so far.

Not anymore, and with Trump’s base hell bent on punishing the 1% (which includes Wall Street), if Trump indeed launches global trade war, his future decisions will become increasingly market unfriendly.

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As we previewed exactly 24 hours ago, Buffett’s Berkshire Hathaway said it will exercise warrants to swap its preferred Bank of America shares for 700 million shares of BAC common stock, making Buffett the largest shareholder, surpassing BlackRock, Vanguard and State Street . Buffett is also the top shareholder at Wells Fargo.

Buffett exercised his warrants, which were due to expire in 2021, to swap $5 billion in preferred stock worth about 6% of the company for common stock at $7.14 a share, less than a third of yesterday’s closing price of $24.32, effectively translating in a profit of $12 billion for the Omaha octogenarian. The decision was prompted by the latest Fed stress test, which allowed the bank to hike its dividend by 60%, from 30 cents to 48 cents. BofA also announced its plans for a record $12 billion stock buyback, almost immediately after the Federal Reserve gave it the green light on Wednesday, while also approving the capital-return plans of 32 other US banks that received the SIFI designation.

As we noted yesterday, in his February letter, Buffett said 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 – more than tripling a $5 billion investment made fewer than six years ago.

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, a 70% discount to Thursday's closing price.

The preferred shares had little downside, so long as Bank of America stayed solvent. But they had no upside either. With a change in Berkshire's shares, Mr. Buffett is effectively 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. Vanguard Group, whose 652.4 million shares give it a 6.6 percent stake, is now the bank's second-largest shareholder, 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.

The decision raises ethical hackles for America’s favorite homespun billionaire, who loves to play the part of benevolent philanthropist even though he’s effectively cashed in on the financial crisis, and will now profit from a bank that was complicit in kicking thousands of mortgage customers out of their homes, believing it easier to foreclose than work with borrowers to modify the terms of their loans.

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Content originally published at iBankCoin.com

Project Veritas founder James O’Keefe has just capped off a week destroying CNN’s last shred of credibility with a Friday morning release of an undercover encounter with another producer for the network. Jimmy Carr, a hate-filled Associate Producer, said that virtually everyone he knows at the network – surprise – absolutely hates President Trump.

“On the inside, we all recognize he is a clown, that he is hilariously unqualified for this, he’s really bad at this and that he does not have America’s best interests. We recognize he’s just f*cking crazy.”

Here’s the deal, this is a man who’s not actually a Republican… He just adopted that because that was the party he thought he could win in. He doesn’t believe anything that these people believe. –Jimmy Carr

Carr goes on to rattle off a laundry list of grievances against the President, stating that “90% of us are on board with just the fact that he’s crazy.”

Carr didn’t stop at the President. When asked about the election, the Associate Producer said American voters are “Stupid as shit,” before insulting Kellyanne Conway – a top Trump advisor and the first woman to run a successful Presidential campaign.

Voters “Stupid as sh*t” says New Day associate producer #AmericanPravda #CNNhttps://t.co/NViTBRJmp0 http://pic.twitter.com/hJzjtcCSNF

— James O’Keefe (@JamesOKeefeIII) June 30, 2017

Ratings

Carr then echoed what another CNN producer admitted to a Project Veritas operative – it’s all about Ratings.

“It’s decisions made by people higher than me and if they go wow, your ratings are soaring right now, keep up what you’re doing. Well, what we’re doing is Russia, ISIS, London terror, shooting in Chicago, that’s it.

Fake News Bust

O’Keefe also caught CNN selectively editing out a Trump supporter’s answer during an election panel to make him appear stupid when giving an answer to the topic of illegal immigrants voting in the 2016 election.

Entire video:

Week of horror for CNN

While O’Keefe saved the best for last, undercover footage released earlier in the week dealt devastating blows to the beleaguered network whose President, Jeff Zucker, may be on the chopping block if a merger between AT&T and CNN parent company Time Warner is approved.

On Monday, Project Veritas released undercover footage of a candid discussion with CNN producer John Bonifield, in which the “Very Fake News” network employee admitted that the whole Russia story against President Trump is a “Mostly B.S.” ratings grab by CNN’s CEO Jeff Zucker.

Bonifield also admitted that he hasn’t seen any evidence of President Trump committing a crime.

But all the nice cutesy little ethics that used to get talked about in journalism school, you’re just like, that’s adorable. That’s adorable. This is a business. –John Bonifield

Then on Wednesday O’Keefe captured footage of CNN host Van Jones saying that the Russia – Trump story is “a big nothing burger.”

Van Jones responded with a CNN op-ed, calling the video a hoax and “highly edited right wing propaganda” made by a “con man.”

[F]or those of you unfamiliar with James O’Keefe and his misnamed  “Project Veritas,” here’s a helpful recap: James O’Keefe is a notorious con man whose infamy arises from his addiction to pulling the same media stunts, over and over again. –Van Jones

(Perhaps the Project Veritas operative approached Van Jones off camera to role-play as a conservative for fun?)

White House Endorses

On Tuesday, White House Deputy Press Secretary Sarah H. Sanders encouraged people to watch the O’Keefe video of CNN Producer John Bonifield admitting the Russia story was “Mostly B.S.” pushed by CEO Jeff Zucker for ratings.

 “whether it’s accurate or not, I don’t know – I think if it is accurate, it is a disgrace to all of media, to all of journalism.” –Sarah H. Sanders

Huckabee’s endorsement drew the ire of the MSM, however instead of discussing the content of O’Keefe’s video – pundits like Chuck Todd did a full Exorcist head swivel over the fact that Huckabee hadn’t personally verified each claim in the undercover sting (which CNN confirmed the authenticity of).

“CNN stands by our medical producer John Bonifield.  Diversity of personal opinion is what makes CNN strong, we welcome it and embrace it,” CNN said in a statement. –USA Today

Death knell?

Will a cleanout of CEO Jeff Zucker and perhaps a few other sacrificial wolves restore credibility to the news network that’s been faking it for years? I wouldn’t hold my breath as long as guys like James O’Keefe are around to expose the shills.

When asked about #Veritas and hidden-cameras, @ChrisCuomo said: “Sometimes that’s when you’re the most honest.”

Get ready. #AmericanPravda http://pic.twitter.com/nSQqZrGTKT

— James O’Keefe (@JamesOKeefeIII) June 30, 2017

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S&P futures rebounded shortly after the stronger than expected European CPI print, rising 0.3% to 2,426, as markets try to forget all about yesterday’s brief 50% VIX surge and tech rout, which trimmed the seventh consecutive quarterly gain for the S&P 500 Index to 2.4%. Europe shares rose 0.4%, led by tech stocks, after a drop in Asian markets, as oil and the dollar gained.

The action this week however, yesterday’s equity fireworks notwithstanding, has been in dollar and bonds, where as Bloomberg says this morning, the “carnage has paused for a breather” with Treasuries steady after yields across the globe rose this week as central bankers shifted toward a more hawkish tone while the dollar gained against most G10 peers, paring its worst weekly loss in six.

Putting the dollar’s quarterly performance in context, it is down -4.8% in Q2, its worst quarterly performance since 2010. Market skepticism remains over the Fed’s dots and tightening intentions, the recent 22 bps of curve flattening, and what the ECB may do next. “Obviously there’s a shift afoot. It really seems that there’s some coordinated effort going on out here among the G10 central banks,” said Stephen Innes, head of trading in Asia-Pacific for OANDA in Singapore, referring to the series of hawkish-sounding comments on monetary policy.

The euro came off yearly highs on Friday but was still set for its strongest quarter in six years as investors pile into the currency on a brightening euro zone economy and its implications for monetary policy in the bloc. The single currency dropped 0.2% to trade at $1.1403, but in the April-June quarter the euro has climbed over 7%, putting it on track for its biggest quarterly gain since January-March 2011.  The euro shot to one-year highs after Tuesday’s speech by European Central Bank President Mario Draghi bolstered expectations that a reduction in stimulus measures would be signaled as soon as September. Though policymakers looked to play this down in the days that followed, investors appear convinced that economic strength will push them to end stimulus sooner rather than later.

“This is partly a response to Draghi’s comments and also on the back of a euro zone economy that is firing on all cylinders and outperforming the rest of the developed economies,” said Investec economist Victoria Clarke. “It’s at a different stage in the cycle as the U.S. so I do expect some of that to cool in the second half of the year, but the growth momentum doesn’t seem to be going anywhere,” said Clarke.

Volatility, absent for much of the year, made a brief, violent return as the debate on normalizing central bank policy intensified after nine years of unprecedented stimulus. That suggests some investors are growing concerned about the economy’s ability to withstand a tightening cycle. Technology stocks have been under pressure this week, while banks have been supported on the prospect for higher rates.

Overnight, the MSCI All-Country World Index slipped 0.1 percent. The gauge is up 10 percent for the six months, the best start to a year since 1998. The MSCI Asia Pacific Index has gained 15 percent for the past two quarters. The MSCI Asia-Pacific shares ex-Japan fell 0.7%, after hitting a two-year high on Thursday. It is up 5.3% for the quarter and has risen 18.3% this year.

In Europe, the Stoxx 600 stocks index rebounded, parding its fourth straight weekly loss, and on track to end the quarter little changed as gains in technology and consumer shares offset losses in chemical makers. Bayer AG fell 4.3% as it expects an earnings hit from its Brazilian crop science business.

In Asia, stocks retreated amid Wall Street tech weakness: Nikkei closed 0.9% % lower, and Japan’s Topix dropped 0.8%, bringing its quarterly gain to 6.6 percent. The ASX 200 dropped 1.7%. Meanwhile, the Yuan rose to strongest against dollar since November, although it gave up all gains and traded unchanged by the close of trade. The PBOC skipped liquidity operations for a 6th day, draining net 160 billion yuan, its 8th consecutive liquidity drain, and despite the stronger than expected Chinese PMI prints, analysts are starting to wonder if the PBOC isn’t overdoing its latest tightening move.  In Asia, Australian sovereign bonds sharply lower; 10-year yield jumps as much as nine basis points to 2.59% before finding resistance; Aussie breaks above 77 cents following strong Chinese PMI.

Futures on the S&P 500 Index rose 0.3% as US traders walked in, having spoent most of the overnight session unchanged. The cash index fell 0.9% on Thursday, the most since May 17 as the VIX briefly surged more than 50% as a result of what some suggested was a risk parity fund unwind. the S&P remains 2.4% higher this quarter.

The euro fell 0.3 percent to $1.1407, after increasing 0.6 percent on Thursday to the highest levels since last year’s Brexit vote. It’s gained 7.1 percent this quarter. The pound dropped 0.2 percent to $1.2985, snapping seven days of gains. The currency is up 2.5 percent this quarter. The yen fell 0.2 percent to 112 per dollar. The Bloomberg Dollar Spot Index rose 0.1 percent, heading for a monthly loss of 1.3 percent. It’s poised for a fourth month of losses.

Crude futures rose for a seventh day, up 0.9% to $45.34, and on course for the longest run of gains this year, as signs of slipping U.S. supply eased pressure on OPEC-led curbs. Gold fell 0.1 percent to $1,244.09 an ounce. The precious metal is heading toward its first monthly decline this year.   Dalian iron ore slips 1.7% despite stronger than expected Chinese PMI data.

The yield on 10-year Treasuries added one basis points to 2.28 percent. The rate has climbed 14 basis points this week. Benchmark yields in the U.K. were little changed at 1.24 percent, as were French yields at 0.8 percent. Yields in Germany fell one basis point.

There will be a flurry of data later today including Michigan sentiment, but no major earnings are expected

 

Bulletin headline Summary from RanSquawk

• USD weakness modestly tamed with GBP and EUR pulling back from its recent highs
• Bayer weighs on the Dax despite stella German Retail Sales
• Looking ahead, highlights include US PCE and Baker Hughes rig count.

Top Overnight Headlines

• BOE’s Haldane repeats any policy tightening to be limited, gradual: BBC
• U.K. June GfK consumer confidence -10 vs -7 estimate; Lloyd’s business barometer 30 vs 27 previous
• China manufacturing PMI 51.7 vs 51.0 est; non-mfg 54.9 vs 54.5 prev
• Aso doesn’t see any changes to monetary or fiscal policy
• Japan May core CPI 0.4% vs 0.4% est; jobless rate 3.1% vs 2.8% est
• Japan May industrial output -3.3% vs -3.0% est; y/y 6.8% vs 6.9% est
• Obamacare Repeal Risks Worsening America’s Opioid Crisis
• Harvard Links Billionaire Samwers, Ex-Eton Manager in New Fund
• Trump’s Taste for Confronting Putin to Be Tested Face-to-Face
• Deutsche Bank Declines to Provide Dems With Trump, Russia Info
• Adelson-Backed Lobbying Against Web Gaming Makes Sessions Fold
• Nord Pool to Expand Trading Into 7 New EU-Countries Next Year
• Ecopetrol to Prepay $1.93b Syndicated Loan Due 2020 on June 30
• IFresh Says Two Legal Disputes May Have Material Adverse Impact
• Moody’s: North America Coal Sector Outlook Remains Stable

Market Snapshot

• S&P 500 futures up 0.3% to 2,426
• STOXX Europe 600 up 0.4% to 382.01
• MXAP down 0.6% to 154.74
• MXAPJ down 0.8% to 504.70
• Nikkei down 0.9% to 20,033.43
• Topix down 0.8% to 1,611.90
• Hang Seng Index down 0.8% to 25,764.58
• Shanghai Composite up 0.1% to 3,192.43
• Sensex down 0.2% to 30,796.71
• Australia S&P/ASX 200 down 1.7% to 5,721.49
• Kospi down 0.2% to 2,391.79
• German 10Y yield fell 1.5 bps to 0.437%
• Euro down 0.4% to 1.1397 per US$
• Brent Futures up 0.7% to $47.74/bbl
• Italian 10Y yield rose 11.9 bps to 1.859%
• Spanish 10Y yield fell 1.2 bps to 1.521%
• Brent Futures up 0.7% to $47.74/bbl
• Gold spot down 0.2% to $1,243.59
• U.S. Dollar Index up 0.2% to 95.79

In Asia, stocks traded in a sea of red amid month-, quarter- and half-year end flows, as well as a negative lead from US where tech underperformed. ASX 200 (-1.4%) and Nikkei 225 (-1.2%) were broadly pressured from the open with the latter suffering from a firmer JPY, while Japanese CPI and Unemployment data also left much to be desired. Elsewhere, Shanghai Comp. (+0.07%) and Hang Seng (-0.7%) brushed aside the better than expected Chinese Official Manufacturing PMI and adhered to the downbeat tone after the PBoC continued to refrain from liquidity operations. Finally, 10yr JGBs traded lower despite the risk averse tone, as Japanese yields tracked their global counterparts higher in the wake of the recent hawkish tone from European central bankers. Furthermore, the BoJ were also in the market today, although its Rinban announcement was for a relatively reserved JPY 475b1n of JGBs.

Top Asian News

• China Factory Momentum Gains in June on Back of Trade Rebound
• BOJ Plans to Keep Current Pace of Bond Buying in July
• Hedge Fund Renaissance Picks Winner as Japan Stock Surges 1,813%
• Global Demand Eases China Deleveraging Pain With Factory Support
• China Says Trump’s Taiwan Arms Sale Undercuts Early Goodwill
• Asahi Sells Chinese Beverage Stake For $625 Million, Nikkei Says
• Limits of Japan’s Export-Led Recovery Show Through in Poor Data

In Europe, the historic, frantic trade on the last day of the month, quarter and half, has been far from visible today, with local bourses trading subdued. Much of the volatility was seen through the US and Asian sessions, however, a dip was seen in the open; with bank buying not enough to offset falls for commodity and health care related sectors. The healthcare sector has been weighed upon by Bayer having fallen 5%, after reporting that they see a negative earnings impact from its Brazilian crop science business — seeing its FY17 one time effect of EUR 300 — 400mln. Gilts have been the noticeable paper to watch this morning, down to a new low around 125.15, looking towards March’s 124.42 low, a key yield is approaching in the cash, with 1.30% the next to lookout for. Bunds also have edged lower, breaking below 162, however, with no real conviction. Psychological cash yield levels seem to be the theme, with 0.50% approaching in the cash.

Top European news

• Euro-Area Inflation Slows as Draghi Urges Prudence in QE Exit
• German Labor Market Takes Breather as Unemployment Inches Higher
• Nestle’s New CEO to Show Off M&A Acumen as Activists Circle
• Goldman Said to Bid for $1.3 Billion of UniCredit U.K. Mortgages
• Delivery Hero Gains on First Day of Trading as Tech IPO Succeeds
• German Parliament Backs Fines for Social Media for Hate Speech
• Bayer to Cut 2017 Forecasts as Crop Unit Struggles in Brazil
• U.K. Saving Ratio Falls to Record Low as Squeeze Takes Toll
• U.K. Confidence Lowest Since Just After Brexit Vote

In currencies, a cautious start to the last day of trading for June, and H1, but extreme USD weakness has been modestly tamed, with EUR/USD backing off the mid 1.1400’s, while Cable is back under 1.3000. Both key pairs, which have rallied on hawkish twists to the respective central bank outlooks, and as such, remain well placed to retest the highs later on today if the US data comes out weak again. EUR/GBP usually sees some month end pressure to the upside, but there has been little evidence of this in the last few days, remaining on the heavy side and below the 0.8800 mark also. It could be a busy one for the CAD also, as the April GDP numbers could put some fresh light on the optimism going through at the present time. Against this is the level of appreciation seen in the time frame achieved, and to this end, we continue to eye support levels ahead of 1.2900 as sub 1.3000 levels suggest the market is still ready to probe lower.

In commodities, heading into month end, it could be a busy day for the USD as the day wears on, but a number of factors seen impacting on the leading assets this morning. For metals, the better than expected China PMIs will add to the support which has seen Copper testing USD2.70, but through this level, prices are certainly looking heavy. Iron ore is the lead based on the China story, and as long as this holds up, better levels will be maintained. WTI continues to probe levels through USD45.0, but tech based resistance continues to contain trade, with sellers still looking for better levels to fade strength based on US production levels. Output has decreased according to the report this week from the DoE, so the bid tone looks comfortable for now. Gold and Silver are trading extremely tight ranges, but we see the yellow metal looking vulnerable at present, and if the USD manages to recover a little more ground into the weekend, then we could be set for a retest of the early Monday lows seen in brief, but sharp hit in thin volumes. We hit lows just under USD1237.00 at the time.

Looking at the day ahead, we are due to get the May personal spending and income reports, along with the PCE core and deflator readings. The Chicago PMI for June will also be released before we end the day with the final revision to the University of Michigan consumer sentiment reading. Away from the data, given all the focus this week it’s probably worth keeping an eye on scheduled comments due from the ECB’s Lautenschlaeger (at 11.30am BST) and Coeure (at 1.00pm BST).

US Event Calendar

• 8:30am: Personal Income, est. 0.3%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.4%; Real Personal Spending, est. 0.2%, prior 0.2%
  • PCE Deflator MoM, est. -0.1%, prior 0.2%;  PCE Deflator YoY, est. 1.5%, prior 1.7%
  • PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 1.4%, prior 1.5%
• 9:45am: Chicago Purchasing Manager, est. 58, prior 59.4; Sentiment, est. 94.5, prior 94.5; Current Conditions, prior 109.6; Expectations, prior 84.7

DB’s Jim Reid concludes the overnight wrap

Welcome to the last day of June and with it, the halfway point for the year. For the most part in 2017 we have agonised about the lack of volatility in markets. In fact it was probably one of the dullest starts to a year that we can remember when you consider how low various measures of asset class vol got relative to history. Just as it looked like we may be heading into the dog days of summer in a similar vein, this week the cast of hawks which descended on the village of Sintra have certainly sparked a bit of life back into markets.

Indeed as investors debate the various snippets of forward guidance thrown up the ECB, BoE and BoC in the last few days, in addition to a Fed which is in a gradual tightening phase, bond markets this week having been running to stand still on the path to normalization. In a year of super low vol it could well be that we look back on this week at the end of the year as the one in which the tide finally turned.

In markets the last 24 hours has been all about the continued sell off for European bonds. We thought it would be worth taking stock and we’ve detailed some of the moves here with the first number in brackets being the change in basis points over the last 24 hours and the second number being the change versus last Friday. As you’ll see, the magnitude of the moves has also seen a number of markets hit fresh multi-month highs in yield. In no particular order, these are the moves for 10y maturities; Bunds (+8.3, +19.7) to 0.450% and the highest since March 21st, OATs (+8.9, +19.9) to 0.803% and the highest since May 24th, Gilts (+9.5, +21.9) to 1.250% and the highest since February 16th, BTPs (+12.1, +23.3) to 2.145% and the highest since June 8th. Treasuries have also been swept up by the moves on the continent and are up +12.4bps this week (and +3.9bps yesterday) at 2.267% and the highest since May 23rd. We’ve also seen the 2s10s Treasury spread steepen nearly 10bps this week to 89bps and is currently on course for its first steepening over the course of a week since the five days ending May 5th.

It’s worth noting also that the 10y Treasury-Bund spread is at the tightest (182bps) since Trump was elected. It had gotten as wide as 236bps at one stage (the widest since 1989). That narrowing probably also says something about the disappointment in the lack of progress on Trump’s proposed reforms including the lack of support for the healthcare bill this week. It’s not just been rates which have seen big moves this week though. The Euro rose another +0.55% yesterday and is up +2.21% since Friday and at the highest (1.1441) since April last year.

Meanwhile risk assets have also been hit although that seems to mostly be to do with the continued sell-off across the tech sector. The S&P 500 made another u-turn yesterday by falling -0.86% and is down -0.76% for  the week now. The Nasdaq tumbled -1.44% and is down -1.93% over the week which is the worst weekly performance since December last year. The VIX also briefly surged above 15.00 yesterday which is the highest in over a month while the VXN (Nasdaq Vol) closed at the highest (18.43) since November last year. As you might expect however with a rising rate environment, and also the overall positive read through from the Fed’s stress test this week, US Banks (+1.84% yesterday) have rallied +5.34% this week. Meanwhile in Europe the Stoxx 600 tumbled -1.34% yesterday and is down -1.80% this week.

There wasn’t necessarily any new news to trigger yesterday’s big sell off for bonds. A higher than expected CPI print in Germany for June (+0.2% mom vs. 0.0% expected) has raised hopes for a better than expected  Euro area reading today (consensus is for +1.2% yoy headline and +1.0% core). It’s worth noting that we will also receive PCE data in the US while this morning we’ve already had CPI data out of Japan (more on that shortly) – so a good day to test the inflation pulse. It’s worth also noting that Oil (+0.42% yesterday) has quietly gone about rising for the last six sessions while Iron Ore is also now back into a bull market having bounced 20% from the June lows. So the commodity complex is showing signs of rallying off the recent lows. Meanwhile the BoE’s Haldane also continued his hawkish rhetoric by saying that “we need to look seriously at the possibility of raising interest rates” after citing concerns about the rising cost of living in the UK.

Coming back to the ECB, yesterday DB’s Mark Wall published a report in which he reflects on Draghi’s comments. Mark writes that Draghi’s hawkish turn this week came against the run of data and events – weaker PMI,  lower oil prices, higher euro exchange rate, etc. However, the tone was at least more consistent with the decision to ax rates guidance, less risky given the easing in euro area financial conditions since the French election and — over the entirety of the speech — more balanced and conditional than the headlines suggest. The strategy seems to be to talk some confidence into the perception of inflation. The impact has been to tighten financial conditions. Mark goes on to say that after the dovish June Council meeting, we changed our call to a “slow and extend” decision by December. “Slow and extend” still feels appropriate, all the more so with the euro having risen further. But having effectively opened Pandora’s Box with the first formal admission of exit, clarification and transparency is more urgent. Our baseline is now to expect the “slow and extend” QE decision in September. Mark also highlights that the Euro could act as a self-correcting mechanism on exit and in the note attached details some scenarios to help judge the limits of Euro appreciation. You can find more here.

To Asia now where before we look at how markets are finishing the week, there’s been a bit of data to dig through. First up is China where the manufacturing PMI for June came in at a better than expected 51.7 (vs. 51.0 expected), up 0.5pts from May. New orders and output sub-indices were both reported as rising. The non-manufacturing PMI also rose 0.4pts to 54.9. Meanwhile in Japan the latest inflation data for May was a fraction softer than expected. Headline CPI held steady +0.4% yoy (vs. +0.5% expected) while the core-core also held steady at 0.0% yoy (vs. +0.1% expected). The core did however rise one-tenth to +0.4%, as expected.

In terms of markets, equity bourses in Asia have mostly tracked the losses on Wall Street and Europe yesterday. The Nikkei (-1.09%), Hang Seng (-0.91%), ASX (-1.40%), Shanghai Comp (-0.26%) and Kospi (-0.43%) are all weaker to end the week. Sovereign bond markets have also continued to sell with yields across the region between 2bps and 9bps higher. US equity futures are little changed. Moving on. Once again, yesterday’s US economic data was left in the shadows a bit. The third and final Q1 GDP reading was revised up two tenths to +1.4% qoq saar with final sales being revised up four-tenths to +2.6%. A stronger estimate of consumer spending appeared to be the driver of the upward revision. The core PCE was revised down one-tenth to +2.0% qoq saar. The only other data in the US was the latest weekly initial jobless claims reading which came in at 244k and up 2k relative to the prior week. The other data of note in Europe yesterday included the European Commission’s economic sentiment reading for June which rose 1.3pts to 111.1 (vs. 109.5 expected) and a new 10-year high. In the UK mortgage approvals were little changed in May.

Looking at the day ahead, it looks set to be a fairly busy end to the week with a number of important releases due up. First up will be retail sales in Germany, shortly followed by the flash June CPI report in France.  Following that we’ll get the latest unemployment reading in Germany and then the final revisions to Q1 GDP in the UK. After that, all eyes turn to the aforementioned CPI report for the Euro area. This afternoon in the US we are due to get the May personal spending and income reports, along with the PCE core and deflator readings. The Chicago PMI for June will also be released before we end the day with the final revision to the University of Michigan consumer sentiment reading. Away from the data, given all the focus this week it’s probably worth keeping an eye on scheduled comments due from the ECB’s Lautenschlaeger (at 11.30am BST) and Coeure (at 1.00pm BST).

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