With newsflow out of Iraq having slowed down as has the ISIS offensive, which appears to have been halted north of Baghdad, the market now shifts its attention to the Fed’s two-day meeting which begins today and continues through tomorrow afternoon, when it will be leaked by media outlets to ultra-wealthy speculators and robots, breaching the embargo (in exchange for a hefty payoff) some 10 minutes before 2 pm.
Recently there has been some background speculation the FOMC may surprise an overly complacent (in the Fed’s own words) market by issuing a more hawking than expected statement, with even the possibility of a faster conclusion of the taper on the table. Others, however, like DB’s Chief Economist Peter Hooper thinks it is too soon for the FOMC to give a signal that they are ready to shift from the relatively dovish message that they have been providing. Peter thinks that the signs of froth in financial markets are not yet seen as posing a significant risk. The statement and press conference will acknowledge the improvement in activity since the winter downturn but further progress is needed in terms of unemployment and core PCE inflation while housing signals are mixed at best. In terms of the economic projections, Peter thinks that there could be a slight upward revision to interest rate projections but the downward revision to growth for 2014 and the slack in the labor market mean that the median dots for 2014 and 2015 will not be revised upwards. A third reason why the median dot for 2015 may not be revised up is because three new members of the Committee will be voting at the June meeting, and providing forecasts to the SEP (Brainard, Fischer, and Mester). Peter is inclined to think that all three will be supportive of Yellen’s policies at this juncture.
In Asia, sentiment has been a bit mixed with weakness across China and part of the Asian EM complex while the Nikkei (+0.3%) recovers from its sharpest drop in a month yesterday. The Australian dollar is lower (-0.4% against the greenback) after the release of RBA minutes where the central bank reiterated its accommodative stance and noted the strength of the local currency relative to the recent commodity price falls. In currencies, GBP is a touch weaker despite a comment from BoE’s Miles indicating that there is a strong chance that the Bank of England could hike rates by the spring of 2015 (Times Newspaper). Miles also said that only a one-in-ten chance that rates would increase before Christmas is “an implausibly low probability for something that might happen”.
Despite the release of weaker than expected German ZEW survey, stocks in Europe managed to hold onto gains, with financials among the best performing sectors. At the same time, selling pressure on both WTI and Brent crude futures meant that energy related stocks underperformed on the sector breakdown. Also of note, the FTSE-100 index underperformed its EU peers on the back of lower metal prices, in particular iron ore. The euro is little changed against the dollar. Portuguese 10yr bond yields rise; Greek yields increase. Commodities decline, with WTI crude, Brent crude underperforming and zinc outperforming. U.S. CPI, housing starts, building permits due later.
Today, in the US focus will be on the release of the latest US CPI, Housing Starts and Building Permits reports, as well as API inventories after the closing bell on Wall Street.
Most importantly: it’s Tuesday.
Market Update
- S&P 500 futures up 0.3% to 1934.5
- Stoxx 600 up 0.4% to 346.8
- US 10Yr yield down 0bps to 2.59%
- German 10Yr yield up 1bps to 1.36%
- MSCI Asia Pacific down 0.1% to 143.5
- Gold spot down 0.6% to $1264.7/oz
EUROPE
- 15 out of 19 Stoxx 600 sectors rise
- 73.3% of Stoxx 600 members gain, 24.8% decline
- Eurostoxx 50 +0.6%, FTSE 100 +0.2%, CAC 40 +0.5%, DAX +0.8%, IBEX +0.7%, FTSEMIB +0.6%, SMI +0.2%
ASIA
- Asian stocks fall with the Kospi outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific down 0.1% to 143.5
- Nikkei 225 up 0.3%, Hang Seng down 0.4%, Kospi up 0.4%, Shanghai Composite down 0.9%, ASX down 0.2%, Sensex up 0%
- 5 out of 10 sectors rise with tech, consumer outperforming and telcos, financials underperforming
FIXED INCOME
Reduction in risk-premium related to the recent rise in geopolitical tensions in Iraq and Ukraine buoyed demand for risk today. As a result, in spite of weaker than expected German ZEW survey, Bunds remained under pressure. Following the release of the report, ZEW President said that there are signs Q2 growth will be weaker than in Q1.
UK rates outperformed EU equivalent following the release of lower than expected inflation data, with the Y/Y reading falling to its lowest level since October 2009, which the ONS said was the biggest annual food price fall since 2004 and may have been due to supermarket price wars.
EQUITIES
Despite the release of weaker than expected German ZEW survey, stocks in Europe managed to hold onto gains, with financials among the best performing sectors. At the same time, selling pressure on both WTI and Brent crude futures meant that energy related stocks underperformed on the sector breakdown. Also of note, the FTSE-100 index underperformed its EU peers on the back of lower metal prices, in particular iron ore.
FX
GBP reversed some of recent strength vs. EUR following the release of lower than expected inflation data, however losses were capped by hawkish comments by BoE’s Miles (Soft Dove), who said that said there is a clear chance rates could rise before spring 2015 and that he may vote for rate rise before his term ends.
Elsewhere, AUD remained under pressure, testing the 50DMA level in the process, following the overnight release of more dovish than expected RBA June minutes, which despite reiterating the banks’ neutral stance, showed it is slightly more uncertain about the outlook. The bank also repeated that AUD remains high by historical standards particularly given falling commodity prices. The pair was also weighed on by lower energy and metal prices.
COMMODITIES
Gold and silver prices failed to sustain the recent upside, falling from 3-week highs, driven by safe-haven related flow stemming from the recent escalation of tensions in Iraq and Ukraine, with prices moving lower overnight on profit taking and as number of high profile analysts downplay the significance of the latest developments. Also of note, there is little evidence of physical demand picking up, while gold holdings by the SPDR Gold Trust fell 0.53% (4.2 tonnes, biggest since mid-April) to 782.88 tonnes.
In terms of energy markets, analysts at Goldman Sachs believe that the risk of an oil price spike in the medium term is low as exports proceeding through Iraq’s southern terminal of Basra remain uninterrupted. (BBG) As a result, both WTI and Brent crude futures traded lower overnight and in Europe this morning.
DB’s Jim Reid concludes the overnight news recap
At the moment markets have taken most of it in their stride judging by the performance of the S&P 500 (+0.08%) and US treasuries (-0.6bp) which were both pretty much unchanged at the US closing bell. These headlines were enough to move individual markets but it’s safe to say that much of this could fade into the background if we end up getting an unexpectedly hawkish FOMC tomorrow. Ahead of the FOMC, today’s US CPI and housing data will be helpful in refining Fed expectations.
In terms of the macro picture, the US data printed on the better side of consensus yesterday but the overhang of geopolitical concerns in a number of emerging and frontier markets prevented any significant weakness in US treasuries. There was a bit of underperformance in the front end with 2year yields up 2bp, but the long end held fairly firm with 30yrs closing 2bp lower in yield. Looking at the data itself, the US Empire state manufacturing rose to 19.3 in June (versus +19.0 prev and 15.0 expected) which our economists note was the highest print since June 2010 (20.7). New orders (+18.4 vs. +10.4 prev) reached a four-year high. US industrial production for May rose 0.6% (vs 0.5% expected) following a 0.3% upward revision in April to -0.3%. This pushed capacity utilization to 79.1% from 78.6% in April and modestly below its post-recession high reached in March (79.3%). On the housing front, the NAHB housing index reached 49, which is a 4pt improvement on last month and a touch above analyst expectations.
Coming back to the FOMC, DB’s Chief Economist Peter Hooper thinks it is too soon for the FOMC to give a signal that they are ready to shift from the relatively dovish message that they have been providing. Peter thinks that the signs of froth in financial markets are not yet seen as posing a significant risk. The statement and press conference will acknowledge the improvement in activity since the winter downturn but further progress is needed in terms of unemployment and core PCE inflation while housing signals are mixed at best. In terms of the economic projections, Peter thinks that there could be a slight upward revision to interest rate projections but the downward revision to growth for 2014 and the slack in the labor market mean that the median dots for 2014 and 2015 will not be revised upwards. A third reason why the median dot for 2015 may not be revised up is because three new members of the Committee will be voting at the June meeting, and providing forecasts to the SEP (Brainard, Fischer, and Mester). Peter is inclined to think that all three will be supportive of Yellen’s policies at this juncture.
The MSCI EM equity index is down 10bp today, and is poised to close weaker for the fifth straight session which would mark the longest losing streak in five months. Much of this is related to geopolitical concerns that have popped up in recent days. There have been plenty of headlines in emerging markets but it was difficult to tie them together to any common theme except for the fact that all had a negative tone. In Latam, there was a sharp drop in Argentinian bonds after the US Supreme Court rejected Argentina’s appeal against the lower-court ruling that it can’t make bond payments until it compensates holdout investors. The Argentinian government said overnight that it will continue to honour payments to exchange bondholders due at the end of June. The government appealed to nationalistic sentiment saying that complying with the ruling would result in payouts of about $15bn, representing more than half of reserves. A growing number of commentators think that Argentina will seek to settle with holdout creditors, rather than incur the unknown costs of potentially going into another default. This sets up an interesting couple of weeks with the June payment deadline for restructured bonds due in a fortnight. EURPLN jumped 0.5% yesterday, the most in three months, as investors reacted to headlines around a recording that called into question the Polish central bank’s independence with respect to the government
(Bloomberg).
In the more frontier market of Iraq, there is a growing sense that we could see a stalemate after the US signalled that it was ready to talk with Iran about how to halt the advance of ISIS. Indeed, US and Iranian officials briefly discussed the matter on the sidelines of the Vienna nuclear talks according to Reuters, and some believe that they share a sufficiently strong common interest in helping the Iraqi government in the conflict. Although the White House indicated yesterday that there would be no US troops on the ground, there are reports in Reuters and Bloomberg that a limited number of special forces could be deployed for training purposes. Brent is down 0.3% overnight, following a 0.5% gain yesterday and spot gold is down 0.2% today (following a 0.4% fall yesterday).
Despite the negative country-specific EM headlines, overall EM appetite remains fairly healthy. An indication of this was Kenya who priced a debut $2bn eurobond yesterday and in the process managed to break the record for the largest debut for an African country in the sovereign bond market. One tranche of the offering was a $1.5bn 10 year note that priced at a yield of 6.875%. Kenya is rated B+ and the deal came several days after a large-scale terrorist attack in Kenya. According to the FT, the orderbook was more than four times oversubscribed which is roughly equivalent to around 20% of the country’s GDP according to Bloomberg data. However, Nairobi is expected to revise its GDP calculation methodology later this year that may result in the size of Kenya’s economy being revised upwards by 20%.
Taking a look at overnight markets, sentiment has been a bit mixed with weakness across China and part of the Asian EM complex while the Nikkei (+0.4%) recovers from its sharpest drop in a month yesterday. The Australian dollar is lower (-0.4% against the greenback) after the release of RBA minutes where the central bank reiterated its accommodative stance and noted the strength of the local currency relative to the recent commodity price falls. In currencies, GBP is a touch weaker despite a comment from BoE’s Miles indicating that there is a strong chance that the Bank of England could hike rates by the spring of 2015 (Times Newspaper). Miles also said that only a one-in-ten chance that rates would increase before Christmas is “an implausibly low probability for something that might happen”.
The highlights on today’s data docket include the German ZEW survey and Italian trade in the European morning. The US CPI will probably be the most important US data point today. Housing starts and building permits data will be released concurrent to the inflation report. Bloomberg consensus is pointing to a continued cooling in the housing data while headline CPI is expected to tick down to 0.2% m/m in May (vs 0.3% the previous month).
via Zero Hedge http://ift.tt/1lwChyx Tyler Durden