Silver as an investment

S&P Futures Bounce As VIX Hammered, Europe “Euphoric”

After sliding to 3 month lows on “car cartel” concerns yesterday, European stocks have rebounded after three days of declines, while oil extended gains after Saudi export cuts, with Brent rising above $49 and WTI just shy of $47. Asian stocks fell while S&P futures rose 0.2% to 2,473, putting yesterday’s GOOGL drop on plunging Costs-Per-Click in the rearview mirror.

Helping today’s episode of global, pervasive complacency is the VIX which was hammered early by 3% in early Tuesday trading, down to 9.17. As previewed on Monday, the dollar rebounded after dropping to its lowest since August as investors await Wednesday’s U.S. interest rate decision; the greenback strength sent Gold lower for the first time in four days.

US TSYs sell-off in relatively heavy volume after a large futures block trade in London hours and Bunds decline as strong German IFO data weighs. The dollar rallied from overnight low against G-10 and UST move helps USD/JPY trade through yesterday’s high.

Most European industry sectors rose as the Stoxx Europe 600 Index rose 0.5%, with banks leading the way as German 2s10s curve steepens and ahead of bank earnings later this week, helping the DAX regain some of the recently lost ground, although as the chart below shows it has a way to go before catching up with the MSCI World Stocks index which remains just shy of all time highs.

Emerging-market equities fell after gaining in 10 of the past 11 days, on the back The greenback strengthened with the euro, which flirted once again with its highest level in two years after German business confidence data beat expectations. Saudi Arabia’s promise to further cut crude exports pushed Brent to under $1 of $50. Overnight, the Euro got a boost after ECB’s Mersch stated monetary accommodation is still needed and ongoing expansion in the euro area offers confidence but stated that “risks to the euro area growth may be to the upside” and that headline inflation is dampened by weak energy prices, but added that underlying inflation is to rise gradually.

The Euro got a boost as German business morale hit new high, with firms “euphoric” according to the Munich based Ifo economic institute that compiles the data from 7,000 of them in Europe’s largest economy. “Hardly anything seems to be able to hit the German economy,” Ifo economist Klaus Wohlrabe added, saying German business was experienced in managing the impact of exchange rate moves following the euro’s sharp rise.

The Australian dollar rose less than 0.1 percent after erasing an earlier decline. Attention turns to two key events on Wednesday: June quarterly inflation data and a speech on the labor market and monetary policy from Reserve Bank of Australia Governor Philip Lowe. Japan’s Topix index lost 0.3 percent. Australia’s S&P/ASX 200 Index added 0.7 percent. South Korea’s Kospi index retreated 0.5 percent.  The Hang Seng Index was little changed while the Shanghai Composite Index slipped 0.2 percent. Strong rally in base metals, led by copper with most noting potential demand growth from China; U.K. mining stocks supported through the equity open.

The Fed starts a two-day meeting later in the day to discuss its monetary stance and the timing of its long-awaited balance sheet reduction, a plan most likely to be detailed in September. “Any major policy announcement is more likely when Chair Janet Yellen faces the press following the September meeting,” J&E Davy Holdings Ltd. analyst David McNamara wrote in a note. “For now the Fed remain on track for a couple more rate hikes at least this year, with most members believing the recent softness in inflation to be temporary.”

The political troubles of President Donald Trump’s White House continue to mount, with investigations into his pre-election links to Russia deepening. There is also growing anxiety about the United States hitting another debt ceiling in October with few moves to potentially offset that.

“We may seem some consolidation here from the dollar but fundamentally our bearish view on it remains,” UniCredit Global Head of FX Strategy Vasileios Gkionakis told Reuters. “What the Fed says tomorrow is the million dollar question… but the risk is that they sound a bit more cautious after the fourth consecutive downside surprise in inflation.”

Greek government borrowing costs meanwhile hovered near their lowest level since 2010, as the country sought to sell its first longer-dated bond in three years. Some five years since European Central Bank Mario Draghi pledged to do “whatever it takes” to preserve the euro, the debt sale by the euro zone’s weakest economy is the clearest sign yet of the bloc’s recovery from a crippling debt crisis.

Elsewhere in rates, the yield on 10-year Treasuries increased two basis points to 2.27 percent, the highest in more than a week. Germany’s 10-year yield rose one basis point to 0.52 percent. Britain’s 10-year yield also added one basis point to 1.194 percent. France’s 10-year yield climbed one basis point to 0.763 percent, the first advance in more than a week. The gap between Italian and German 10-year bond yields narrowed to its smallest since December 2016 at 153 basis points.

Companies scheduled to report earnings include AT&T, Amgen and 3M. Economic data include conference board consumer confidence.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,470.50
  • STOXX Europe 600 up 0.5% to 381.00
  • MSCI Asia Pacific down 0.2% to 159.17
  • MSCI Asia Pacific ex-Japan down 0.09% to 526.11
  • Nikkei down 0.1% to 19,955.20
  • Topix down 0.3% to 1,617.07
  • Hang Seng Index up 0.02% to 26,852.05
  • Shanghai Composite down 0.2% to 3,243.69
  • Sensex up 0.03% to 32,257.09
  • Australia S&P/ASX 200 up 0.7% to 5,726.60
  • Kospi down 0.5% to 2,439.90
  • German 10Y yield rose 0.6 bps to 0.514%
  • Euro up 0.09% to 1.1653 per US$
  • Brent Futures up 1% to $49.06/bbl
  • Italian 10Y yield fell 1.7 bps to 1.763%
  • Spanish 10Y yield fell 0.2 bps to 1.483%
  • Brent futures up 1% to $49.06/bbl
  • Gold spot down 0.2% to $1,252.28
  • U.S. dollar Index unchanged at 93.98

Top Overnight News

  • McCain Returns to D.C. for Health Fight; Alphabet Falls on Rising Traffic Costs; Copper Jumps, Leading Industrial Metals
  • Senate Republican leaders and President Donald Trump appear determined to begin a floor debate Tuesday on repealing Obamacare in a highly unorthodox way — without lawmakers knowing what they’ll be voting on or where it might end up
  • The U.S. House is poised to vote on a bill to strengthen sanctions against Russia and prevent President Donald Trump from unilaterally lifting penalties, after the measure was delayed by procedural concerns and objections from energy companies
  • Michael Kors Holdings Ltd. agreed to buy Jimmy Choo Plc for about 896 million pounds ($1.2 billion), as the maker of handbags popular with the commuter set seeks to restore lost luster by adding “Sex and the City” stilettos
  • Greece has fired the starting gun on its first issue of new bonds since 2014, testing whether investors will back its recovery from a debt crisis that forced it to seek multiple international bailouts
  • Carlyle Group LP is seeking $15 billion for its next U.S. fund for what could be the largest pool ever focused on buyouts in the region
  • Hedge funds are still holding large bearish bets against oil and OPEC, yet out in the real world traders and refiners buying and selling actual barrels say it’s starting to look somewhat more bullish
  • German business climate improved for a sixth month, hitting a record high in July
  • House Poised to Add Russia Sanctions With Curbs on Trump’s Power
  • Alphabet Falls on Concern About Rising Google Traffic Costs
  • Michael Kors to Buy Jimmy Choo for About $1.2 Billion
  • German Business Climate Hits Record as Economy Proves Robust
  • Saudi Alliance Says Qatar’s Action Not Enough to End Crisis
  • Elon Musk Says Zuckerberg’s Understanding of AI Is ‘Limited’
  • EU Asks Google, Facebook, Twitter to Make More Changes to Terms
  • Copper Heads for Highest Close Since ‘15 as Rally Picks Up Steam
  • Nasdaq Agrees to Acquire Sybentix to Beef Up Trade Surveillance
  • Wal-Mart and JD Deepen Chinese Logistics, Customer Integration
  • Beximco Pharma Gets FDA Approval for Methocarbamol
  • Quants Unlock Iron Ore’s Secrets as BNP Says Yuan Is the Key
  • Government Shutdown Odds Grow With GOP Border Wall Funding Bill

Asian markets maintained the mixed tone seen on Wall Street where earnings remained in focus and tech outperformed, which pushed the Nasdaq to fresh record highs before a continued drop in Alphabet’s cost-per¬clicks resulted to an after-market pullback in futures. ASX 200 (+0.9%) outperformed as broad-based gains buoyed the index, while Nikkei 225 (-0.1%) traded indecisive and at the mercy of JPY price action. Shanghai Comp. (-0.1%) and Hang Seng (Unch.) were choppy as concerns of tighter regulatory scrutiny persisted, and although the PBoC reduced its liquidity operation by more than half, this was still a respectable CNY 140bln injection. 10yr JGBs were flat amid an inconclusive risk tone in the region, while today’s 40yr auction also failed to spur demand despite the b/c at its highest since February 2015, as this was also accompanied by a decline in lowest accepted prices. BoJ meeting minutes for June 15th – 16th meeting state that members agreed policy needs to be keep easy as price target is still distant. Highlights:

  • Financial conditions were highly accommodative
  • Inflation expectations remain in a weakening phase
  • Overseas economies continue to grow at a moderate pace overall
  • Japan’s economy has been turning towards a moderate expansion
  • One member said BoJ should set asset purchases as target

ECB’s Mersch stated monetary accommodation is still needed and ongoing expansion in the euro area offers confidence. Mersch also stated that risks to the euro area growth may be to the upside and that headline inflation is dampened by weak energy prices, but added that underlying inflation is to rise gradually.

Top Asia News

  • Ishiba Overtakes Abe as Top Choice for Japan Premier in Poll
  • Indonesia Flags Risk of Forest Fires That Triggered 2015 Haze
  • SoftBank Is Said to Mull Buying Stake in Bharti Airtel: CNBC
  • HNA Is Said to Have Parked Shareholdings With Mystery Investor

European bourses trade green across the board, financials out-perform, likely a carry on to a strong Q2 earnings start for the banking stocks. German Ifo was the key piece of data for the morning, where beats were seen across the report. Despite earnings, stock specific news has largely been dictated by takeover talk, with Jimmy Choo confirming an offer from Michael Kors, being followed by reports that Shell and Softbank are among potential suitors considering bidding for renewable energy firm Equis for potentially USD 5bn. Fixed income markets were led by German paper in early trade, as a large sell order was followed by the aforementioned strong German Ifo data. BTP’s have outperformed, after hitting a new high at 137.17, with the Italian yields still managing to hold above 2.00%.

Top European News

  • Ifo July German Business Confidence Index at 116.0, Est. 114.9
  • UPM Falls, Pulling Down Stora Enso; DNB Sees Softness in Paper
  • Kumba Resumes Dividend as Earnings Jump After Iron Ore Recovery
  • Intertrust Shares Slump as Company Cuts Full-Year Margin Target

In currencies, EUR/USD saw a slight bid following the Ifo beat, marginally so, continuing to trade in the day’s range, with similar price action seen in EUR/GBP, with the pair quickly retracing the move. The Kiwi saw some brief, rare selling pressure, amid news that New Zealand Officials stated that a contagious disease has been found in 14 cattle. With New Zealand being one of the top five largest exporters of beef, this weighed on the Kiwi dollar. The volatility in NZD led into early European trade, and despite NZD/USD bouncing ahead of 0.74, a Kiwi recovery was not seen in AUD/NZD, trading though overnight highs in the European session. A 1.07 test in AUD/NZD is possible, as the week’s high is set to act as intra-day resistance. The Japanese risk event overnight was the BoJ meeting minutes for June 15th — 16th meeting; the highlight stating that members agreed policy needs to be keep easy as price target is still distant. Despite a modest uptick following the release, and some buying following, the 11.30/50 area continues to act as intraday resistance, and following the rejection of this level once again, the market has been pushed to look to test 110.60 lows.

In commodities, energy traders will await the API report following the wall street closing bell this evening, with Oil markets trading subdued following the OPEC led volatility yesterday. The precious metals trade marginally lower, as mild money flow into equities has been clear, further weighed upon by strong numbers out of Germany. Gold does trade at the top of a July uptrend however, slowing down around the 1257.50 area (23 June High).

Taking a look now at the day ahead, we will see house price data for May in the form of the FHFA House Price Index (+0.5% mom expected) and the S&P House Price indices. We will also get the July readings for the conference board consumer confidence indicator (116.5 expected; 118.9 previous) and the Richmond Fed Manufacturing Index (7 expected; 7 previous. Away from the data, the US secretary of Commerce will address the economic club of Washington and BOE Haldane speaks. Notable US companies reporting include: AMD, McDonalds, 3M, Texas instruments, Caterpillar, AT&T and GM.

US Event Calendar

  • 9am: FHFA House Price Index MoM, est. 0.5%, prior 0.7%
  • 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.3%, prior 0.28%; CS 20-City YoY NSA, est. 5.75%, prior 5.67%
  • 10am: Conf. Board Consumer Confidence, est. 116.5, prior 118.9; Present Situation, prior 146.3; Expectations, prior 100.6
  • 10am: Richmond Fed Manufact. Index, est. 7, prior 7

DB’s Jim Reid concludes the overnight wrap

There wasn’t much heat in markets yesterday and we saw a day of mixed sentiment across broader European and US equity markets although the VIX did hit an intra day low of 9.26 (closed at 9.43) in late trading which would have been the all time low. The NASDAQ (+0.4%) hit fresh all time highs. If there was a story to keep on your radar it’s that yesterday saw the US T-bill curve invert after a weak 3m auction. There’s chatter that autumnal debt ceiling fears are creating some worries.

Back to equities, in Europe the STOXX dipped by -0.2% on the day which can be traced to some weaker PMI data out yesterday (discussed further below). However the market dynamics were more uneven across regions: the DAX (-0.3%) and FTSE (-1.0%) both posted losses while the CAC (+0.2%) and FTSE MIB (+0.6%) rose on the day. To be fair the lows of the day were early in the European session and the rest of the day was spent slowly recovering. Most sectors posted a loss though with the Automobile sector as the worst performer at -1.2%, while the STOXX Banks index was the top performer as it gained +0.8% on the day ahead of a number reporting this week. Over in the US the S&P 500 (-0.1%) and Dow (-0.3%) were both down. Nearly all S&P 500 sectors were in the red although financials were the best performer and rose by +0.3% on the day, followed by IT (+0.25%).

This morning in Asia, markets have been quiet and slightly on the softer side with the Nikkei (-0.1%), Kospi (-0.1%), Hang Seng (flat) and the 3 Chinese bourses down around 0.2-0.3%. Alphabet shares fell as much as -3.5% after hours last night after a disappointing earnings report.

On the US political links with Russia, during a 2.5 hours Q&A with Senate investigators, White House advisor Kushner denied he “…colluded with Russia, nor do I know of anyone else in the campaign who did so..”. That said, he also confirmed 4 contacts with Russians during the presidential campaign, but the “encounters were unmemorable”.

The ongoing saga to repeal Obamacare also continues. Trump remains defiant, warning Senate Republicans that anyone who votes not to take up debate of the bill today is saying they are “fine with the Obamacare nightmare.” Realistically, Republicans have been struggling to find a replacement plan that can attract >50 votes in the Senate, even though the party has a 52-48 majority. Nonetheless, Senator Cornyn appears to be fighting to the end, noting yesterday that “if for some reason we aren’t able to muster the votes tomorrow…it’s not the end of it….” For now, we wait and watch.

Back to yesterday and over in government bond markets, we saw the German Bund curve unchanged to slightly lower across all maturity points (2Y: -2bps; 10Y: unch). OATs (2Y: -1bp; 10Y: unch) and BTPs (10Y:  -2bps) also saw yields broadly flat to slightly lower across maturities, while Gilts saw yields rise across all points of the curve (2Y: +1bp; 10Y: +1bp). Over in the US Treasury yields were higher across all maturity points (2Y: +2bps; 10Y: +2bp).

Over in FX markets, the US dollar index posted a rare recent gain (+0.2%) following two weeks where it has cumulatively dropped by over -2%. Sterling was also up on the day by +0.2%, while the Euro saw its rally pause for breath as it dropped by -0.2% on the day. Over in commodity markets crude oil was up on the day (WTI +1.4%) although other segments of the energy sector posted some losses. Oil was helped by Saudi Arabia pledging big export cuts and also Halliburton suggesting the shale boom was slowing. The metals sector saw precious metals flat to marginally lower (Gold: +0.0%; Silver -0.1%) while industrial metals were a mixed bag with copper gaining (+0.8%) while aluminium was lower (-0.1%).

We also got a look at the latest CSPP numbers out yesterday. Net CSPP purchases averaged €145mn/day last week, well below the €361mn average since the program started. This was a very slow CSPP week, even  by last summer’s standards (only the Christmas break lull is comparable). With PSPP purchases at €12.1bn, the weekly CSPP/PSPP flow ratio dropped to 6% which is less than half of the historical average. However much of this may be noise due to the summer lull and it remains difficult to conclude much from these dynamics. Staying with credit, Michal Jezek on my team published a note yesterday on his views on credit curves in Europe. The piece notes that while credit curves are expectedly steep given the current macro environment and sound corporate fundamentals, future changes will depend on how good a macro outlook is being priced in already and what the contribution of ECB QE technicals has been. Given our views about the likely combination of macro fundamentals and market technicals going forward, we maintain a flattening bias. We also highlight key curve trade strategies around these views.

Taking a look at yesterday’s calendar, the key numbers in Europe were the manufacturing, services and composite PMIs for France, Germany and the Eurozone. The Euro Area composite PMI disappointed as it pulled back more than expected (55.8 vs. 56.2 expected; 56.3 previous). As the services PMI reading was steady on the month as expected (55.4 vs. 55.4 expected; 55.4 previous), the fall in the composite can be largely attributed to the unexpectedly large drop in the manufacturing PMI (56.8 vs. 57.2 expected; 57.4 previous). France and Germany also saw their composite PMIs disappoint after dropping to 55.7 (vs. 56.4 expected; 56.6 previous) and 55.1 (vs. 56.3 expected; 56.4 previous) respectively. However France actually saw its manufacturing PMI unexpectedly rise to 55.4 (vs. 54.6 expected; 54.8 previous) while the drop in the composite was largely due to the fall in the services PMI (55.9 vs. 56.7 expected; 56.9 previous). Germany on the other hand saw both its manufacturing (58.3 vs. 59.2 expected; 59.6 previous) and services (53.5 vs. 54.3 expected; 54.0 previous) disappoint.

Over in the US we also got the Markit PMI numbers, where the composite ticked up to 54.2 (53.0 previous) primarily off an unexpectedly large gain in the manufacturing PMI to 53.2 (vs. 52.3 expected; 52.0 previous) as services remained steady (as expected) on the month at 54.2. Away from PMIs the US also saw existing home sales data for June that came fell more than expected to 5.52m (vs. 5.57m expected; 5.62m previous).

Taking a look now at the day ahead. In Europe we will open with various July confidence indicators out of France, which will be followed by the July IFO business climate (114.9 expected) and expectations (106.5 expected) readings for Germany. Over in the US we will see house price data for May in the form of the FHFA House Price Index (+0.5% mom expected) and the S&P House Price indices. Thereafter we will also get the July readings for the conference board consumer confidence indicator (116.5 expected; 118.9 previous) and the Richmond Fed Manufacturing Index (7 expected; 7 previous).

Away from the data, the US secretary of Commerce will address the economic club of Washington and BOE Haldane speaks. Notable US companies reporting include: AMD, McDonalds, 3M, Texas instruments, Caterpillar, AT&T and GM.