Silver as an investment

US Futures Rise To Session Highs, Set For Another Record Open; Global Stocks Jump

After yesterday’s positive close in the Dow Jones, which hasn’t had a losing day since July 7 and which took the series of consecutive green closes to 8 in a row – the longest stretch since 2013 – the index will look to lock in its 9th green day in a row with futures currently trading well in the green. It’s not just the US – equities edged higher in Asia and Europe as positive earnings results from some of the world’s biggest companies countered concern the global economy is losing steam. The dollar strengthened while gold retreated.

The MSCI All Country World Index held near an eight-month high as a gauge of Hong Kong shares was poised to enter a bull market. The yuan had its biggest intra-day jump in a month on speculation the PBOC won’t allow the critical 6.70 barrier to be breached, even as rising odds of a U.S. interest-rate lifted the Bloomberg Dollar Spot Index to its highest since May. Oil extended losses below $45 a barrel as gold dropped to this month’s low. The Turkish lira advanced, after earlier sinking to within 0.5 percent of it weakest level on record, before Turkey’s president makes an announcement in the wake of a failed coup.

A three-week run that’s boosted the combined worth of global shares by more than $4.5 trillion has pushed valuations to the highest level in 11 months. Investors are assessing corporate earnings amid concern sluggish global growth will persist after the International Monetary Fund scrapped its forecast for a pickup in the pace of expansion this year. Goldman Sachs Group Inc. and Microsoft Corp. on Tuesday announced quarterly profits that surpassed analysts’ estimates, something achieved by 77% of the S&P 500 members to have reported so far.

“The rally is losing some momentum as the reporting season heats up,” said Niv Dagan, executive director at Peak Asset Management LLC in Melbourne. “We’re staying cautious and taking a little bit of profit off the table. With the equity rebound stalling, we are really looking for positive momentum from the reporting season” for the next leg up in stocks, he said.

While the reason behind the recent relentless rally remains mostly elusive, with the median stock according to Goldman now trading in its 99% valuation percentile, some have noted familiar catalysts: “expectations for more stimulus has been supportive of equities,” Angus Nicholson of IG Markets told Bloomberg. “Asian markets have been resilient as they’ve been benefiting from capital inflows since the Brexit vote. Hong Kong has been one of the most unloved markets here so it’s catching up. It’s very cheap.”

Following a lackluster Asian session, which saw the MSCI Asia Pacific Index gain 0.1% after earlier falling as much as 0.4%  with the MSCI Hong Kong Index rising 0.8% and has now rebounded more than 20 percent from a three-year low recorded in January, Europe started off on the right foot, with Stoxx Europe 600 up 0.9%, after falling 0.4% in the last session.  BHP Billiton Ltd. dropped 2.9 percent in Sydney after the world’s biggest mining company said iron-ore production fell 7 percent from a year earlier during the last quarter. Futures on the S&P 500 Index were 0.4% higher after the U.S. gauge slipped from an all-time high in the last session. The Dow Jones Industrial Average advanced for an eighth day, its longest rally in three years, and Microsoft rallied in after-hours trading following the release of its results.

In a session with little economic data, all eyes will be on today’s earnings with Morgan Stanley, Intel and American Express among U.S. companies announcing results on Wednesday.

Market Snapshot

  • S&P 500 futures up 0.4% to 2166
  • Stoxx 600 up 0.9% to 340
  • FTSE 100 up 0.4% to 6726
  • DAX up 0.7% to 10049
  • German 10Yr yield down 1bp to -0.04%
  • Italian 10Yr yield up less than 1bp to 1.24%
  • Spanish 10Yr yield down less than 1bp to 1.19%
  • S&P GSCI Index up less than 0.1% to 355.4
  • FTSE 100 up 0.4% to 6726
  • DAX up 0.7% to 10049
  • German 10Yr yield down 1bp to -0.04%
  • Italian 10Yr yield up less than 1bp to 1.24%
  • Spanish 10Yr yield down less than 1bp to 1.19%
  • S&P GSCI Index up less than 0.1% to 355.4
  • MSCI Asia Pacific up less than 0.1% to 134
  • US 10-yr yield up less than 1bp to 1.56%
  • Dollar Index up 0.1% to 97.16
  • WTI Crude futures up less than 0.1% to $44.66
  • Brent Futures up 0.4% to $46.83
  • Gold spot down 0.4% to $1,327
  • Silver spot down 0.7% to $19.77

Top Global Headlines

  • Pimco Names Man Group’s Chief Emmanuel Roman as Its New CEO: Roman to replace Doug Hodge, Man Group names Luke Ellis as CEO
  • U.S. Seeks to Seize $1 Billion Assets Tied to 1MDB, NYT Says: Asset seizure may be largest confiscation by Justice Dept
  • Unilever to Buy Dollar Shave in Deal Said Valued at $1 Billion: Dollar Shave founder, CEO Dubin to remain at helm of company
  • Fox Said to Be Negotiating Exit Terms With News Chief Ailes: Talks follow filing of sex harassment case against executive
  • PBOC Seen Overriding Yuan Market Moves to Limit Depreciation: Currency rises most in two weeks on bets China defending 6.7
  • KKR’s Kravis Sees Market Volatility Amid Negative Rates, Brexit: Predicts 20% of London’s financial sector to leave city
  • Trump Goes on Offense as Republicans Try to Move Past Missteps
  • Musk Expects Majority of Holders to Support SolarCity Deal: WSJ
  • Investors Said to Pull $600m From Ackman Funds in 1H: Fortune
  • Brazil’s Supreme Court Overturns WhatsApp Ban
  • Amazon June Comp Sales Up 11.6%, Ebay Up 3.8%: ChannelAdvisor

Looking at regional markets, we start in Asia which traded lower for much of the session, amid a lack of tier-1 data and key speakers in the region, following the choppy trade seen across US indices. Nikkei 225 (-0.2%) suffered from a delayed reaction to its Asian counterparts and caught up with losses following the country’s long weekend, however did find some support and is off its worst levels, as a firmer JPY weighed on exporters. Conversely, ASX 200 (+0.7%) took the impetus from a lacklustre open trade in the green, despite gains being capped by the materials sector after BHP missed on iron ore output estimates. Elsewhere, China’s Hang Seng (+1.0%) is underpinned by broad based gains across the index and saw property developers buoyed by measures to boost borrowing, while significant gains continued to be stifled in the Shanghai Comp (-0.3%) following another mild liquidity injection. Finally, 10yr JGBs traded with slightly higher despite the absence of risk-appetite in Japan whilst a JPY 1.1trl JGB auction saw lower than prior laic and a lower average yield.

Asian Top News

  • Singapore Seeks U.S. Chapter 11 Prowess in Bankruptcy Reform: Includes automatic stay, pre-pack and super-priority lien
  • Fastest-Growing India Fund Says RBI Dove Needed to Sustain Rally: Global holdings of rupee-denominated bonds have jumped in July
  • China’s Curious Craze for Stock Dividends Survives Market Slump: >200 Shenzhen firms have announced stock payouts
  • Emerging Currencies Weaken in Asia on Global Growth Concern: Turkish lira approaches record low as post-coup purge expands

European equities trade in the green this morning (Euro stoxx +1.2%) with price action largely initially dictated by the latest spate of earnings, most notably from the likes of SAP (4.5%) which has subsequently helped the DAX rise above the 10,000 level. However, gains across the region were extended after an improvement in sentiment after the upbeat UK jobs report. In fixed income, Bunds kicked off the session higher with notable underperformance in the short-end ahead of the launch of the 5-yr Bobl auction. However the German benchmark failed to hold onto their gains in the wake of the aforementioned auction, with the weak take up weighing on German paper across the board to see Bunds fall back below 166.50 and into negative territory on the day.

European Top News

  • U.K. Unemployment Declines Below 5% for First Time Since 2005: Employment in March-May rose 176,000 to record high level, unemployment rate fell to 4.9%
  • SAP Profit Tops Estimates as Clients Move to New Software: European revenue grew strongly despite Brexit concerns
  • ASML Sales Rise as Orders for New Machines Begin to Materialize: Chip-machine maker trying to get clients to upgrade factories
  • Nordea CEO Says Turning Point Reached as Outlook Improves: CEO says bank will meet higher CET1 requirement due end 2016

In FX, the lira was 0.2 percent stronger at 3.0355 per dollar, after earlier sinking as much as 0.7 percent. The currency has tumbled about 5 percent since a failed coup attempt on Friday as authorities purged state institutions, the central bank lowered interest rates and Moody’s Investors Service said it may lower the country’s credit rating to junk. President Recep Tayyip Erdogan is due to make an announcement on Wednesday that an official said would boost social cohesion and Turkey’s democratic credentials. The Bloomberg Dollar Spot Index added 0.1 percent, after advancing 0.5 percent to a six-week high in the last session as a report showed new-home construction in the U.S. rose more than economists forecast in June. A Citigroup gauge that tracks the degree to which American data are exceeding projections is at an 18-month high and futures put the chance of a Federal Reserve rate increase this year at 43 percent, up from 9 percent at the start of this month. “The market will recalibrate on Fed rate-hike expectations to price in at least one” this year, said Charlie Lay, a foreign-exchange strategist in Singapore at Commerzbank AG. “That should support the dollar.” The yuan jumped as much as 0.28 percent to 6.6780 per dollar amid speculation China’s central bank is trying to prevent the currency from weakening beyond 6.70, a threshold that was breached this week for the first time since 2010. The People’s Bank of China raised its daily reference rate for its currency on Wednesday, even after the greenback strengthened overnight.

In commodities, crude oil fell 0.3 percent to $44.52 a barrel in New York, after sliding 2.8 percent over the last two trading days. While government data Wednesday is forecast to show supplies fell for a ninth week, stockpiles will still be more than 100 million barrels above the five-year seasonal average. Nickel dropped as much as 1.7 percent in London, retreating from its highest close since October. Copper lost 0.7 percent as China released data showing it boosted output by 7.6 percent in the first half and Barclays Plc forecast there will be a worldwide surplus of the metal every year until 2020.

There’s no major data out in the US today although. Earnings will continue to be a big focus with 21 S&P companies due to report. Morgan Stanley (prior to the open), EBay, American Express and Intel (all after the close) are the highlights while over in Europe we’ve got 10 Stoxx 600 companies due to release their latest numbers

Bulletin Headline Summary from RanSquawk and Bloomberg

  • A strong UK jobs report sees GBP/USD move back towards 1.3200 and the USD pare earlier gains
  • Equities trade firmly in the green, with Bunds in negative territory, weighed on further by a soft German 5y auction
  • Highlights today include DoE U.S. Crude Oil Inventories and earnings from Intel, QUALCOMM, Morgan Stanley and eBay

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US Event Calendar

  • 7am: MBA Mortgage Applications, July 15 (prior 7.2%)
  • 10:30am: DOE Energy Inventories

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DB’s Jim Reid concludes the overnight wrap

Earnings and holiday apathy seem to be holding back markets a bit this week ahead of Draghi and the ECB meeting tomorrow. European equities were soft from the off yesterday with the Stoxx 600 and DAX eventually closing -0.41% and -0.81% respectively albeit with summer holiday-esque volumes which were 25% below the usual average. A soft German ZEW survey which included a four-year low for the expectations component didn’t help, while banks were also under pressure after the EU’s highest court backed the EU guidelines preventing taxpayers from bailing out lenders. More on this below.

The afternoon session also saw US equities spend most of it in the red. The S&P 500 eventually closed -0.14% (which believe it or not was the worst performance since July 5th) and had its smallest range for the year in both percentage (0.26%) and points (5.6pts) terms. The Nasdaq (-0.38%) weakened a little bit more with those weak Netflix numbers weighing, although the Dow (+0.14%) did manage to eke out a modest gain into the close after better than expected Johnson & Johnson numbers helped. The other notable earnings report released yesterday came from Goldman Sachs which continued the trend of US Banks exceeding expectations this quarter with the bright spot once again being better than expected performance in fixed income trading. Again though, the beat was amplified by another big cut in analyst expectations leading into the release. While EPS for the quarter came in at $3.72 versus the $3.05 market consensus, this was revised lower from as much as $3.60 in April and $3.80 in March.

There was a bit of focus on the IMF too yesterday after the Fund downgraded its global growth forecast this year and next by one-tenth to 3.1% and 3.4% respectively from the April forecasts. The Fund highlighted that the new forecast assumes that UK and EU officials negotiate a deal that does not lead to a large increase in economic barriers. A severe scenario where talks break down could result in growth slumping to 2.8% in both years. Unsurprisingly then it was the UK which bore the brunt of the downgrade. The Fund has pencilled in growth this year at 1.7% (from 1.9% in the previous forecast) and growth of just 1.3% in 2017, having previously pencilled in 2.2%. This makes for an interesting contrast to something our European equity team highlighted yesterday. They pointed out that UK four-week net earnings revisions (defined as upgrades minus downgrades) have just turned positive for the first time since early 2013 on the back of weaker Sterling. They note that the GBP trade-weighted index is down 9% since the UK referendum and that 65% of UK revenues come from abroad.

Refreshing our screens this morning it’s been a fairly mixed start for bourses in Asia. Losses are being led by markets in Japan with the Nikkei currently -0.72%, while the Shanghai Comp (-0.18%) and Kospi (-0.28%) are also down. On the other hand the Hang Seng (+0.77%) and ASX (+0.55%) are stronger despite the minimal newsflow. Commodity markets are little changed with WTI Oil (-0.02%) in particular holding steady having closed below $45/bbl. Elsewhere there’s big news to come from the US Presidency race where Donald Trump has officially been crowned the Republican presidential candidate at the convention in Cleveland.

Moving on. Yesterday we saw the results of the latest ECB Bank Lending Survey that demonstrated a continued easing of lending conditions in Q2 2016, along with further loosening expected in Q3. In a Credit Bite published just before this email we analysed these results alongside some other important default indicators. We find that while the lending survey does not point towards elevated defaults, there are other lead indicators that are more worrying on this front.

Staying in Europe, as we highlighted earlier yesterday the EU’s highest court ruled that the losses imposed on creditors during Slovenia’s banking rescue in 2013 were legal when the nation imposed ‘burden-sharing’ on private investors. That rescue had resulted in €600m of junior bondholder’s debt being wiped out at the time, although significantly the ruling also stated that burden-sharing wasn’t a pre-requisite for state aid. The court said that ‘burden sharing by shareholders and subordinated creditors as a prerequisite for the authorization, by the commission, of state aid to a bank with a shortfall is not contrary to EU law’. Clearly this ruling comes at an interesting time given the focus on Italian lenders at present, with the nation looking to recap or restructure its banking system. EU competition commissioner Margrethe Vestager said following the ruling that the decision will not change the EU’s talks with Italy’s government and that an agreement may be ‘quite close’. Italian banks were generally down 1-3% yesterday by the close.

In terms of that data yesterday, the standout was the decline in the German ZEW survey this month with the current situation component falling 4.7pts and more than expected to 49.8 (vs. 51.8 expected). That was just the second sub-50 reading (the other coming in April) since February last year. More telling though was the weakness in the expectations component which plummeted 26pts to -6.8 (vs. +9 expected) and to the lowest level since November 2012. It’s worth noting that the survey period was July 4th-18th and so post-Brexit. Meanwhile in the UK the inflation report for June was largely in line to a little bit firmer than expected. CPI printed at +0.2% mom as expected, with the YoY rate creeping up two-tenths to +0.5% as a result. The core also rose two-tenths to +1.4% yoy.

Meanwhile across the pond the latest housing market data showed housing starts as rising more than expected in June (+4.8% mom vs. +0.5% expected). The less volatile permits data rose +1.5% mom and also a little more than expected (+1.2% mom expected). Our US economists noted yesterday that starts and permits remain well below their previous-cycle levels by a wide margin, however the latest data confirms that the ongoing grinding improvement in the sector likely has further room to run.

Looking at the day ahead, it’s fairly quiet data-wise in Europe this morning with German PPI the early release, followed by the latest UK employment report where current expectations is for the ILO unemployment rate to hold steady at 5%. There’s no data out in the US this afternoon, although we will receive the European Commission’s flash consumer confidence reading for July along with China’s Conference Board leading economic index for June. Earnings will continue to be a big focus with 21 S&P companies due to report. Morgan Stanley (prior to the open), EBay, American Express and Intel (all after the close) are the highlights while over in Europe we’ve got 10 Stoxx 600 companies due to release their latest numbers