Overnight Manufacturing PMI Euphoria Boosts Futures To Fresh Record Highs

Ever since going public, it appears that Markit’s giddyness about life has spilled over into its manufacturing surveys: after a surge in recent Markit mfg exuberance in recent months in the US, it was first China’s turn overnight to hit an 18 month high, slamming expectations and fixing the bitter taste in the mouth left by another month of atrocious Japan trade data (where even Goldman has thrown in the towel on Abenomics now) following which the euphoria spilled over to Europe just as the triple-dip recession warnings had started to grow ever louder and most economists have been making a strong case for ECB QE. Instead, German July mfg PMI printed at 52.9, above the 52.0 in June and above the 51.9 expected while the Composite blasted higher to 55.9, from 54.0, and above the 53.8 expected thanks to the strongest Service PMI in 37 months!

In France the mfg print was a modest decline from 48.2 to 47.6, but once again the composite beat expectations rising from 48.1 to 49.4, above the consensus estimate of 48.3. The result: a blended Eurozone manufacturing PMI rising from 51.8 to 51.9, despite expectations of a modest decline while the Composite rose from 52.8 to 54.0, on expectations of an unchanged print. Curiously the soft survey data took place as Retail Sales declined both in Italy (-0.7%, Exp. +0.2%), and the UK (-0.1%, Exp. 0.3%), which incidentally was blamed on “hot weather.” Perhaps Markit, now that it has IPOed successfully, can step off the gas or at least lobby to have surveys become part of GDP.

The PMI breakdown is shown in the Goldman charts below:

Can officially exclude France from the Eurozone core yet?

However, the market didn’t care about any such simple distinction and the release of better than expected German and Eurozone PMIs together with better bid stocks, meant that Bunds failed to benefit from a drop in excess liquidity to EUR 103.517bln (lowest level since June 16th) and traded lower.

Stocks in Europe have gradually reversed initial lower open, supported by better than expected German and Eurozone PMI data, as well as earnings by Nokia (+7.52%) and other information tech companies. Nevertheless, DAX remained the worst performing sector, weighed on by earnings by BASF (-2.36%) pre-market.

Overnight China has kicked things off in a strong fashion with a consensus beating 52.0 on the HSBC Manufacturing PMI. Today’s reading beat the median estimate of 51.0 and beat the highest estimate from 21 economists of 51.5. To put it into context, this is the second highest reading for the survey since 2011 and the highest reading since January 2013. In the details of the survey, the output subindex rose to 52.8 (vs 51.8 in June) and the new orders index rose to its highest level in 18 months. This is providing some hope that the Chinese government’s mini-stimulus efforts to date have helped offset the impact of the property cycle and economic reforms that may be constraining short term growth. In reaction to the data, most major Asian equity indices have registered gains today while the AUD (+0.2%) and Shanghai copper futures (+1.2%) are other beneficiaries of today’s data. The other main piece of data overnight was Japanese trade for June, where the trade balance fell to –JPY822bn (vs –JPY643bn expected) on an unexpected 2% YoY fall in exports. This is dragging on the Nikkei today (+0.1%) which is currently lagging other regional equities. Note that exports have been shrinking on a YoY basis for two straight months now, as Japan starts to cycle through the Abenomics-inspired, double-digit export growth numbers recorded in Q2 and Q3 of 2013.

On the earnings front today everyone will be talking about FaceBook’s great numbers driven by surging advertising revenue. What won’t be discussed are the disappointing earnings from the likes of Simon Property (-0.53%), Boeing (-2.34%) as well as AT&T (down 1% in after hours trading).

In terms of data flow, there are the weekly US jobless claims data, new home sales and the Kansas City Fed manufacturing survey. EU foreign ministers are also due to announce options with respect to potential future sanctions against Russia, following their meeting on Tuesday.

Bulletin Headline Summary from RanSquawk and Bloomberg

Chinese HSBC Manufacturing PMI beats, hitting 18-month high but Nikkei-225 hits 1-week low on disappointing Japan trade data and miss in exports.
Stocks in Europe (Eurostoxx 50, +0.80%) recover and move into positive territory, with e-Mini S&P back to all-time highs, following better than expected German and Eurozone PMIs, with German Services PMI at its highest level in 37-months.
Focus turns to earnings by 3M, Ford, Caterpillar, GM and Visa, as well as the release of the weekly jobs and new home sales reports.
Treasuries decline as global stocks extend gains amid better than forecast China and euro-area PMIs; S&P 500 closed at new record high yday amid strong corporate earnings.
Euro-area manufacturing and services PMI rose to 54 in July from 52.8 in June; HSBC/Markit China manufacturing PMI rose to 52, highest in 18 months and above 51 median estimate in Bloomberg survey
French manufacturing contracted in July at the fastest pace this year in a sign that the euro area’s second-largest economy is struggling to gather pace
Spain’s 2Q unemployment rate was 24.7% vs median estimate 24.9% in Bloomberg survey; Spanish graduates are stuck at home as the legacy of the worst slump in Spain’s democratic history is blighting a generation of jobseekers who either can’t find employment at all or enough of it to live on
Japan’s exports unexpectedly fell in June to swell the trade deficit more than forecast, dragging on an economy squeezed by a sales-tax increase in April
Obama has dispatched a government team to the Texas border with Mexico to assess whether National Guard troops can help deal with an influx of undocumented children from Central America
Hamas vowed to keep fighting until the embargo on Gaza is lifted and Israel also said it has no plans to halt its military campaign, damping expectations that U.S.-brokered talks can bring a rapid cease-fire
Ukraine’s coalition collapsed after two parties quit during a months-long pro-Russian insurgency in the nation’s east that downed a Malaysian Air jet last week
An Air Algeria-operated MD83 carrying 116 passengers and crew disappeared en route from Burkina Faso in Africa to Algiers, the aircraft’s owner said
Sovereign yields mostly higher. Euro Stoxx Banks +2.2%. Asian stocks mostly higher. European equities, U.S. stock futures gain. WTI crude and gold decline, copper gains

US Event Calendar

8:30am: Initial Jobless Claims, July 19, est. 307k (prior 302k); Continuing Claims, July 21, est. 2.510m (prior 2.707m)
9:45am: Bloomberg Consumer Comfort, July 20 (prior 37.5)
9:45am: Markit US Manufacturing PMI, July preliminary, est. 57.5 (prior 57.3)
10:00am: New Home Sales, June, est. 475k (prior 504k); New Home Sales, m/m, June, est. -5.8% (prior 18.6%)
11:00am: Kansas City Fed Manufacturing Activity, July, est. 6 (prior 6)
11:00am: Fed to purchase $2b-$2.5b notes in 2019-2020 sector
1:00pm: U.S. to sell $15b 10Y TIPS

FIXED INCOME

The release of better than expected German and Eurozone PMIs, with German Services PMI at its highest level in 37-months, together with better bid stocks, meant that Bunds failed to benefit from a drop in excess liquidity to EUR 103.517bln (lowest level since June 16th) and traded lower. The drop is excess liquidity means that there is a risk of excess liquidity falling below the key EUR 100bln level once the ECB announces the repayment amount this coming Friday. As a result, EUR short-term rates have crept higher and there is potential for further volatility. There was little in terms of tier 1 releases, with the focus on UK retail sales, which came in below expectations as clothing volumes fell after stores postponed discounting due to hot weather.

According to a proposal seen by the FT, the EU to weigh far-reaching sanctions today including a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks. EU sources this morning indicated that the German government believes the EU could move to sanctions on sectors of Russian economy by end of July. Barclays Prelim Pan Euro Agg Month-end Extension +0.11y (Prev. month 0.09y, 12m avg. 0.08y), Prelim Treasury Month-end Extension +0.08y (Prev. month 0.08y, 12m avg. 0.09y)

EQUITIES

As a reminder, after the closing bell yesterday AT&T reported Q2 Adj. EPS USD 0.62 vs. Exp. USD 0.63 and maintained 2014 guidance, Facebook reported Q2 Non-GAAP EPS USD 0.42 vs. Exp. USD 0.32 and daily active users 829mln vs. Exp. 831mln, while QUALCOMM reported Q3 Non-GAAP EPS USD 1.44 vs. Exp. USD 1.21 and also raised year forecast.

EUR/USD recovered into positive territory, having been under pressure earlier after tripping stops on the break of 1.3450 barrier level. Meanwhile, GBP/USD remains under pressure with GBP looking to fall for the 7th straight day, its longest losing streak since January 2013, with June retail sales also coming in weaker than expected. Elsewhere, NZD fell overnight after dovish RBNZ signalled a pause and said high NZD is unsustainable and could have a big fall.

COMMODITIES

After moving below the key USD 1,300 level overnight following the release of Chinese HSBC Manufacturing PMI, spot gold prices settled into a range-bound pattern. Of note, analysts at Goldman Sachs raised gold long-term forecast by 13% to USD 1200/oz but remain bearish on gold in 2014, while UBS Wealth Management sees gold prices at USD 1200/oz in the medium to long term. Elsewhere, WTI and Brent crude futures traded lower, paring DOE and API inspired gains.

DB’s Jim Reid Concludes The Overnight Recap

Markets are flipping between black and white at the moment. However after 7 days where the S&P 500 alternated between up and down days, yesterday saw a second successive up day (+0.18%) though and a new record close. On a day with relatively little economic data or fresh geopolitical headlines, it was earnings which drove much of the price action. The earnings before the US opening bell from the likes of Simon Property (-0.53%), Boeing (-2.34%) were disappointing, as were the after-market earnings release from AT&T (down 1% in after hours trading). The Boeing disappointment was largely attributed to surprise expenses related to wiring problems on a new tanker which the company is building for the US Air Force, rather than any downturn in orders or its outlook that may worry macro investors. Despite all this, a decent rally in Apple (+2.6%) and a few others boosted US equities during the day and Facebook’s 3% rise in late hours trading has supported S&P500 futures overnight. Indeed, Facebook joined the broader S&P500 in hitting all-time highs, after blowing past consensus EPS and revenue estimates. CEO Mark Zuckerberg compared Facebook’s current growth trajectory as similar to 2006, two years after Facebook was launched. The World Cup Final was the most-talked-about Facebook event in Facebook history.

In the fixed income space, there are a couple of things worth highlighting. Firstly, in European credit we should highlight the improving sentiment in the financials sector after the news around the Portuguese banking sector in recent weeks. This remains an evolving story but for the moment, the European senior financials index has rallied back to within 5.625bp of the European Main index which is basically where it was before the news around Espirito Santo broke out (it got as wide as 10.5bp last week). On the rates side, the front end of the UST curve continues to be well supported following Tuesday’s lower-than-consensus US CPI. With the 10yr yield adding 0.5bp yesterday, the treasury curve steepened by around 1bp. Secondly, the SEC voted yesterday to gradually implement tighter US money market rules that would require prime funds to float their fund share prices like other mutual funds (i.e. funds may now break the buck), allow for the potential “gating” of redemptions in times of stress and to impose exit fees on funds. The rules will be implemented gradually in stages over several years. The SEC vote probably helped flows into the short end of the UST curve yesterday. According to the WSJ, some institutions will have to stop using money market funds because they’re not permitted in invest in a floating price product due to investment guidelines. Note that many prime money market funds are heavy buyers of shorter-dated USTs – so any net flow effect into USTs will probably be marginal. As we mentioned in Tuesday’s EMR, in a world accustomed to central bank liquidity, it’s difficult to understand how markets will behave if flows go the other way and perhaps the SEC’s proposals to introduce “gates” and exit fees on redemptions is a reflection of that unknown.

Today happens to be monthly global flash PMI day, and overnight China has kicked things off in a strong fashion with a consensus beating 52.0 on the HSBC Manufacturing PMI. Today’s reading beat the median estimate of 51.0 and beat the highest estimate from 21 economists of 51.5. To put it into context, this is the second highest reading for the survey since 2011 and the highest reading since January 2013. In the details of the survey, the output subindex rose to 52.8 (vs 51.8 in June) and the new orders index rose to its highest level in 18 months. This is providing some hope that the Chinese government’s mini-stimulus efforts to date have helped offset the impact of the property cycle and economic reforms that may be constraining short term growth. In reaction to the data, most major Asian equity indices have registered gains today while the AUD (+0.2%) and Shanghai copper futures (+1.2%) are other beneficiaries of today’s data. The other main piece of data overnight was Japanese trade for June, where the trade balance fell to –JPY822bn (vs –JPY643bn expected) on an unexpected 2% YoY fall in exports. This is dragging on the Nikkei today (+0.1%) which is currently lagging other regional equities. Note that exports have been shrinking on a YoY basis for two straight months now, as Japan starts to cycle through the Abenomics-inspired, double-digit export growth numbers recorded in Q2 and Q3 of 2013.

Coming back to China, the country’s domestic bond market avoided its second ever default yesterday when Huatong Road & Bridge repaid in full its bond principal at the eleventh hour. According to the South China Morning Post, the bond payment was facilitated by a brokered bailout arranged by the Shanxi local government who was concerned about the company’s position in a long web of intercompany credit. The action from the local government is somewhat at odds with messages from the central government who have said that they will let defaults occur to restore market discipline.

In terms of the rest of today’s PMIs, it’s fair to say that expectations are fairly mild. Starting with the Eurozone reading, the manufacturing and services PMIs are expected to drop 0.1pts to 51.7 and 52.7 respectively. This seems to be largely driven by Germany where both the manufacturing and services PMIs are tipped to fall 0.1pt apiece to 51.9 and 54.5 – extending their declines after reaching highs in Q1 2014. Bloomberg consensus is expecting the French manufacturing PMI to drop 0.2pt to 48.0 and for the services PMI to remain at 48.2. The US Markit PMI is expected to print at 57.5 (vs 57.3 previous).

Elsewhere in the day ahead, though the US earnings season has grabbed the headlines, the Japanese corporate reporting season starts today with Canon’s 1H14 result shortly after we go to print. NTT Docomo and Nissan Motor follow suit in the coming days. Given the heavy focus on the BoJ’s policy steps, it’s always good to see how Japanese corporates are seeing things, and to hear their outlook for capex and growth. It’s also one of the heaviest days on the European and US corporate reporting calendars today. 36 Stoxx600 companies report including Unilever, LVMH and Repsol. Across the Atlantic, almost 50 S&P500 companies release quarterly results. From a macro perspective the ones to watch are GM, Ford & Caterpillar (before mkt open) and Visa and Amazon (after market).

via Zero Hedge http://ift.tt/1z7HVk5 Tyler Durden

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