Futures Jerk Around Inexplicably In “Abysmally” Illiquid Markets

US index futures swung in an illiquid overnight session in which Bloomberg’s Richard Breslow said “volumes have been utterly abysmal”, concluding a volatile week for stocks, this time ignoring the resurgence in new virus infections across the country that sent them lower earlier in the week. European shares gained on low volumes, 10Y yields dropped by 1.5bps, while the dollar was unchanged.

And speaking of Breslow, he summarizes the overnight moves perfectly:

You know it’s going to be a tough day when the answer to the question of “why thus-and-so has done what it has, such as it has,” is simply, “because.” Ask for more color than that and you get a blank stare. Or, that the S&P 500 was up yesterday, so it’s sagging this morning.

So without trying to piece together a narrative, spoos are shrugging off concerns that a second wave of the pandemic could force policymakers to reverse plans to re-open. On Thursday, virus cases rose across the US by at least 39,818 the largest one-day increase of the pandemic. The governor of Texas temporarily stopped the state’s reopening on Thursday as infections and hospitalizations surged.

“Even though we continue to see some pretty scary virus numbers coming out of the U.S., it’s not really dented sentiment – not to any sustained degree at least,” said Timothy Graf, head of EMEA macro strategy at State Street.

Graf added that recent temporary downward corrections of market optimism have had very little follow-through. And at least on Friday, he was spot on: the MSCI world equity index was up 0.3%, extending gains from late on Thursday.

“There is a disconnect between what you feel should be the case looking at virus numbers and equities and riskier currencies holding up relatively well and volatility receding, but at the same time we’ve never seen a policy response like this, not in the last 80 years at least,” Graf explained. One wonders if that’s how residents of the USSR felt in the mid/late 1980s?

There was a trace of capitalism left when Nike reported extremely disappointing earnings late on Thursday: the company reported Q4 20 EPS of -0.51, far worse than the exp. 0.07, revenue of 6.3bln also missed exp. 7.32bln, while Gross Margin plunged to 37.3% (exp, 43.5%, prev. Y/Y 45.5%).

In Europe, shares opened higher, with the Stoxx 600 up 0.8% and London’s FTSE 100 up 1% in early trading. Air France-KLM climbed after securing a bailout from the Dutch government.

With China still closed, Asian markets traded mostly higher as the region took impetus from Wall Street after US regulators approved to relax Volcker rules, but with some advances in banking names retraced after-market following the Fed stress tests in which it capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. On Thursday, the Senate passed legislation that would impose mandatory sanctions on people or companies that back efforts by China to restrict Hong Kong’s autonomy, in another potential Sino-U.S. flashpoint. However, with China on holiday the news barely registered with either the Yuan or Chinese stocks.

The Bloomberg Dollar Spot Index held its ground and Treasuries were little changed amid quarter-end flows. The Treasury curve bull-flattened modestly with 10Y yield dropping, while the dollar traded mixed against G10 peers, with moves confined within narrow ranges; the yen led gains, supported by haven demand amid concerns over a second wave of coronavirus infections. The New Zealand dollar rose versus the greenback after the New Zealand Treasury Department documents showed RBNZ has limited scope to increase the size of its quantitative easing program under the existing indemnity with the government. The pound was steady and headed for its first weekly gain since early June following a week of choppy trading on variable risk sentiment. Demand for safe euro zone government debt was little changed, with Germany’s 10-year Bund yield close to monthly lows, at -0.479%.

Oil traded near $39 a barrel in New York as Russia slashed exports of its flagship crude Urals to the lowest in at least 10 years. Gold was near $1,765 an ounce, heading for a third weekly advance, the longest winning run since January. Copper was on track for a sixth weekly advance, with prices edging toward $6,000 a ton.

Economic data include personal income and spending, U. of Michigan sentiment survey

Market Snapshot

• S&P 500 futures down 0.4% to 3,058.00
• STOXX Europe 600 up 0.4% to 361.23
• MXAP up 0.6% to 159.65
• MXAPJ up 0.3% to 516.21
• Nikkei up 1.1% to 22,512.08
• Topix up 1% to 1,577.37
• Hang Seng Index down 0.9% to 24,549.99
• Shanghai Composite up 0.3% to 2,979.55
• Sensex up 0.4% to 34,983.24
• Australia S&P/ASX 200 up 1.5% to 5,904.08
• Kospi up 1.1% to 2,134.65
• German 10Y yield fell 0.5 bps to -0.473%
• Euro up 0.09% to $1.1228
• Brent Futures up 0.9% to $41.43/bbl
• Italian 10Y yield rose 3.7 bps to 1.177%
• Spanish 10Y yield fell 0.7 bps to 0.451%
• Brent Futures up 1.4% to $41.64/bbl
• Gold spot little changed at $1,763.36
• U.S. Dollar Index down 0.1% to 97.33

Top Overnight News

• ECB President Christine Lagarde said the recovery from the coronavirus pandemic will be “restrained” and will change parts of the economy permanently
• The staggering pace of U.K. borrowing runs the risk of uprooting the market calm that has allowed pandemic relief efforts to run smoothly. Britain is likely to issue 410 billion pounds ($508 billion) of bonds for the fiscal year that runs through next March, almost 75% more than the previous record, according to the median estimate of a Bloomberg survey of primary dealers
• Germany’s coronavirus infection rate fell to the lowest in three weeks, while the number of new cases remained well below the level at the height of the outbreak
• Oil headed for just its second weekly decline since late April as a surge in coronavirus cases in the U.S. clouded the demand outlook, but the pessimism was tempered by signs Russia is determined to curb output

Asia-Pac markets traded mostly higher as the region took impetus from Wall St’s financial-led gains after US regulators approved to relax Volcker rules, but with some advances in banking names retraced after-market following the Fed stress tests in which it capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. ASX 200 (+1.5%) was underpinned as the top-weighted financials mirrored the outperformance of the sector stateside and amid positive reports for some of the ‘Big 4’ including Nippon Life considering an additional investment NAB’s wealth management business and Westpac winning a Federal Court decision against ASIC’s appeal regarding the responsible lending suit. Conversely, Qantas was at the other end of the spectrum in which its shares fell on a resumption of trade following its recent announcement for an equity raising, mass job cuts, 100-planes grounding and revoke of its interim dividend. Nikkei 225 (+1.1%) was lifted by the positive momentum and with gains spearheaded by financials which saw the index climb back above the 22500 level, while the Hang Seng (-0.9%) lagged on return from its holiday closure and played catch up to yesterday’s losses. Furthermore, the absence of participants in mainland China and mixed US-China headlines also clouded sentiment after the US Senate passed the bill punishing China for Hong Kong actions, although it was also reported the US was to consider an extension of China goods tariff exclusions. Finally, 10yr JGBs were indecisive as initial pressure from the mostly constructive risk tone, was counterbalanced by this week’s support near the 152.00 level and with the BoJ present in the market for JPY 660bln of JGBs with 1yr-5yr maturities.

Top Asian News

• Alibaba Replaces CEO of Southeast Asian Arm Lazada
• Tokyo Inflation Stays Near Zero Even After Emergency Ends
• China-India Tensions Continue Despite Pledge to Disengage
• Jakarta Subway Operator Mulls Bond Sale to Expand Network

European equities trade firmer (Eurostoxx 50 +1.4%), after a somewhat choppy start to the day which has seen them trade in negative territory before receiving more of a grinding bid ahead of the US’ entrance; with US futures flat/mixed but moving similarly higher. Stocks have been relatively resilient despite the mounting COVID-19 concerns stateside which has seen Florida and Texas pause their reopening efforts, with ICU’s in the latter state having reached maximum capacity. Furthermore, weakness in the banking sector (US banks were seen lower in after-hours trade) stemming from the latest Fed stress test results has failed to provide any sway on the broader tape thus far with financials in Europe currently the only sector in the red. As a reminder, the Fed capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. From a sectoral standpoint, positivity at the open was largely seen in the travel & leisure sector with Air France (opened higher by around 9.6%) leading the charge after the French and Dutch governments struck a EUR 3.4bln agreement to bail the Co. out. Furthermore, IAG (+2.2%) shares have also seen support after the Co.’s British Airways unit offered pay rises for some cabin crew members. However, as gains in European indices were trimmed, other travel & leisure names succumbed to the pressure and as such, the sector is trading broadly inline with its peers. Elsewhere, sectors are relatively mixed with price action in some areas lead by stock-specific developments. Notably, it has been another session of heavy losses for Wirecard (-48%) amid reports that Visa & Mastercard are considering withdrawing Wirecard’s ability to process payments on their network. Elsewhere to the downside, shares in Intu Properties (-54%) have been crushed this morning after the Co. noted that insufficient alignment has been achieved with creditors, as such and in order to protect stakeholder interests, they are now likely to involve the appointment of administrators. Finally, in the retail space, H&M shares are lower this morning after posting a SEK 6.48bln pretax losses in the three months through May and as such are laying the groundwork to issue fresh debt to help shore the Co.’s finances up.

Top European News

• Lufthansa Faces Arduous Climb Out of Crisis After Bailout Sealed
• Lessons From the Pandemic Add Urgency to ECB’s Focus on Climate
• U.K. Mall Landlord Intu Likely to File For Administration
• ECB’s Lagarde Warns of Complicated, Transformational Recovery

In FX, the broader Dollar and index remain within a tight range early-doors as the latter stays afloat above 97.000, albeit off best levels (97.482), having dipped from yesterday’s high 97.600 high and below the 97.500 mark. Looking ahead, today’s data docket sees US personal income, PCE & core PCE price index, Uni. of Michigan (F).

• EUR – The European outperformer having had kicked off the final trading day of the week with a string of early-morning ECB speakers including Holzmann who downplayed the use of the deposit rate as an instrument, while president Lagarde remarked the economy is possibly past the COVID-19 trough, albeit this was accompanied with a second outbreak caveat. The president, alongside Governing Council member Rehn, also reaffirmed using instruments in a way which provides the most proportional response. However, Lagarde did express caution over a Recovery Fund deal reached at the mid-July summit – sentiment that has been expressed by some members of the Frugal Four. From a technical standpoint, EUR/USD’s 50 DMA has now risen above its 200 DMA, marking a golden cross which is typically perceived as a bullish signal. EUR/USD resides around 1.1225 having recovered from its earlier 1.1203 low, with a sizeable EUR 2.2bln of options expiring at the round figure at the NY cut.
• NZD – Continued consolidation seen in the Kiwi from post-RBNZ lows of ~0.6400, with an added tailwind after the NZ treasury and central bank reached a funding agreement to ensure central bank has adequate resources to meet increasing responsibilities. NZD/USD sees itself just under 0.6450 having found an intraday base at 0.6415, albeit still a way off its 100 WMA and current weekly high at 0.6522 and 0.6532 respectively.
• JPY, CHF – Currently the top gainers among G10s as the risk tone further sours despite an absence of fresh fundamental catalysts thus far heading into the weekend. USD/JPY dipped and remains below the psychological 107.00 (coincides with 10 DMA) and yesterday’s 106.97 low from a high of 107.24. USD/CHF lingers sub-0.9500 with a current base at 0.9471 ahead of yesterday’s 0.9469 low.
• GBP – Sterling remains subdued in early-trade, potentially more-so on the back of the firmer EUR as EUR/GBP hovers around 0.9050 having found support at its 10 DMA at 0.9015. UK specific newsflow has remained light ahead of post-Brexit trade talks next week, with little by way of fireworks expected between the sides. Elsewhere, the UK alongside some European countries offered to limit the scope of proposed digital tax following the US threat which could offer some solace in bilateral post-Brexit relations with Washington. Cable dipped below 1.2400 having had earlier tested the level to the downside.

In commodities, choppy trade in the crude complex once again amid quietened trade heading into the end of the week, with little by way of fresh fundamental newsflow to influence price action. WTI and Brent Aug futures have regained a firmer footing after the latter briefly dipped into negative terriroty in price action that coincided with that in stocks. WTI meanders around USD 39/bbl, having had found a current base at 38.63/bbl, while its Brent counterpart trades on either side of USD 40.50/bbl having touched a low print of USD 41.05/bbl. Looking ahead, traders will be, as usual, eyeing macro newflow in regard to the COVID-19 case count alongside potential US-China or geopolitical developments, whilst data docket sees the weekly Baker Hughes rig count. Spot gold remains within a contained USD 8/oz range around 1765/oz. Copper mimics price action across the equity-space.

US Event Calendar

• 8:30am: Personal Income, est. -6.0%, prior 10.5%; Personal Spending, est. 9.2%, prior -13.6%
• PCE Deflator MoM, est. 0.0%, prior -0.5%; PCE Core Deflator YoY, est. 0.9%, prior 1.0%
• PCE Deflator YoY, est. 0.5%, prior 0.5%; PCE Core Deflator MoM, est. 0.0%, prior -0.4%
• 10am: U. of Mich. Sentiment, est. 79.2, prior 78.9; Current Conditions, est. 88, prior 87.8; Expectations, est. 74, prior 73.1

DB’s Jim Reid concludes the overnight wrap

Despite the latest virus stats making for more bleak reading, a late bounce into the close on Wall Street saw risk assets stage an impressive turnaround from the lows last night. We’ll get to that shortly but first to quickly recap the main headlines yesterday. In Texas the Governor halted the new phases of reopening the state’s economy as the number of cases rose by over 5000 for the fourth day in a row. It came as they also suspended elective surgery in the state’s biggest cities and headlines hit suggesting that Houston-area ICU wards were full. Meanwhile in Florida, case growth also continued to grow strongly, with a further 4.6% increase yesterday (vs. previous 7-day average of 4%). The recent outbreak in Florida has caused Apple to close an additional 14 stores in the state. This means the company has closed 32 stores in the past two weeks as cases have surged in the southern states. In total, the US added 39,596 new cases yesterday – a new daily high – and in percentage terms new cases grew by 1.7% which is the highest daily increase in 39 days.

That said, the news clearly wasn’t entirely negative, with the original epicentre of New York reporting that the number of virus hospitalisations was now below a thousand for the first time since March 18th. New York City is set to enter “phase 3” of reopening on July 6th, including in-door dining and personal-care services, as well as access to basketball and tennis courts, though capacity will continue to be limited.

However, the real catalyst for the late rally yesterday came in the last hour after the CEOs of Houston area hospitals tried to assure the public that the Texas Medical Centre had the required capacity to deal with the hospitalisations. When it was all said and done, the S&P 500 ended the session up +1.10%, a reversal of 1.97% from the lows. That does mask what was actually a fairly calm session for the most part. In fact after recovering from an early dip about half an hour into trading, the index traded in just a 26pt range for the majority of the session, until the surge at the close. That tight range was less than half the average daily range over the last month (54pts) for the S&P. The index was already recovering slightly before the headline, helped primarily by a strong performance for bank stocks (+3.57%) – the best industry performing industry group in the S&P yesterday.

The move higher in bank stocks came after the Fed, the Office of the Comptroller of the Currency, and the FDIC approved changes to the Volcker Rule. The rule changes will allow lenders to increase their business with certain funds, including venture capital funds. Regulators also amended a requirement that lenders had to hold margin when trading derivatives with their affiliates, and this reversal could free up an estimated $40 billion for US banks. However, regulators have added a new threshold, which limits the scale of margin that could be forgiven. This was followed by the stress test results after the NY close which included the Fed telling the major US banks that dividends would be capped at second quarter levels and buybacks would be not be allowed through at least Q3.

It was a similar story for the other US indices, with the NASDAQ (+1.09%) and the Dow Jones +1.18%) also seeing late surges. Europe was slightly weaker, with the STOXX 600 up +0.72% as bourses moved higher across the continent. Similar to the US, European Financial Services (+2.24%) and Banks (+1.58%) were among the best performing sectors. Wirecard was once again the worst performer on the STOXX 600, falling by a further -74.90% yesterday after the company filed for insolvency.

The momentum has continued in Asia this morning with the Nikkei (+1.12%), Kospi (+1.06%) and ASX (+0.91%) all up. The Hang Seng is trading down -0.55% having reopened following a holiday while Chinese markets remain closed. Futures on the S&P 500 are flat, as are bond markets. Elsewhere, WTI and Brent oil prices are up around 1% following news that Russia slashed exports of its flagship crude Urals to the lowest in at least 10 years.

In terms of overnight news, the US senate has approved a bipartisan measure that would penalize banks doing business with Chinese officials involved in the national security law that China is seeking to impose on Hong Kong. The bill would require the State Department to report to Congress every year about officials who seek to undermine the “one country, two systems” model that applies to Hong Kong. It gives the President the power to seize the assets of and block entry to the US for those individuals. A companion bill has already been introduced in the House of Representatives for its approval.

Back to yesterday, and markets didn’t appear to be too fussed by the latest weekly initial jobless claims numbers in the US, which for the 2nd week running came in worse than expected. Looking at the detail, there were 1.48m initial claims in the week through June 20th (vs. 1.32m expected), while the previous week’s reading was revised up by +32k. Although that’s now the 12th consecutive week of declining claims from the peak in late March, the last 2 weeks have seen the numbers fall by just -60k this week and -26k the week before, which is a big change from the previous 10 weeks where even the smallest decline was over -200k. The number of continuing claims for the week ending June 13th were somewhat better however, falling to 19.522m (vs. 20m expected), and the insured unemployment rate fell half a point to 13.4%.

Core sovereign bonds were slightly mixed amidst the abrupt turn in sentiment, with yields on 10yr Treasuries (+0.7bps) higher while bunds (-2.8bps) fell. UK gilts outperformed in particular, and yields on the country’s 2yr debt closed at a record low of -0.08%. 10yr gilts similarly closed at a record low of 0.15%, though this was still above their low of 0.075% on an intra-day basis back in March.

In other news, though it was some way down the headlines, the ECB released the minutes from their June meeting yesterday, when they announced an expansion of their Pandemic Emergency Purchase Programme (PEPP) by €600bn. Perhaps the most important aspect was the discussion on the proportionality of the PEPP, as well as the monetary stance more broadly. Bear in mind that one of the German Constitutional Court’s requirements in their ruling was for the ECB to decide on the proportionality of their asset purchase programme. In the minutes, a notable passage was that “there was broad agreement among members that while different weights might be attached to the benefits and side effects of asset purchases, the negative side effects had so far been clearly outweighed by the positive effects of asset purchases on the economy in the pursuit of price stability.”

Elsewhere, ahead of next week’s round of Brexit negotiations in Brussels, we got some interesting comments on Twitter from the UK’s chief negotiator, David Frost. The most notable was that he said “the Government will not agree to ideas like the one currently circulating giving the EU a new right to retaliate with tariffs if we chose to make laws suiting our interests. We could not leave ourselves open to such unforeseeable economic risk.” This is interesting since the possibility of the UK diverging from the level playing field in return for the EU having the right to respond with tariffs had been floated as a possible compromise recently. Following little progress in the negotiations so far, the plan is now for negotiations to take place every week over the next five weeks.

Finally, yesterday’s other data included the preliminary durable goods orders from the US for May. That saw a higher-than-expected increase of +15.8% (vs. +10.5% expected). Meanwhile the Kansas City Fed’s manufacturing index rose to 1 (vs. -1 expected).

To the day ahead now, and the data highlights include French consumer confidence for June, Euro Area M3 money supply for May, and Italian economic sentiment for June. Over in the US, there’ll also be personal income and personal spending for May, along with May’s PCE core deflator and the final University of Michigan sentiment indicator for June.