At precisely 4 am Eastern two opposite things happened: the German IFO Business Climate for July printed at a better than expected 106.2 vs 105.9 in June and higher than the 106.1 consensus: news which would have been EURUSD positive. And yet the EUR tumbled. Why? Because at the same time the ECB provided an update to the chart that "keeps Mario Draghi up at night" as we reminded readers yesterday - the ECB's all important credit creation update in the form of the M3, which not only missed expectations (of +3%) but declined from 2.9% to 2.3%. But more importantly, ECB lending to private sector shrank for the 14th consecutive month in June, and slid to a new record low 1.6% in June, down from a 1.1% in May.
In other words, the European monetary plumbing is broken now more than ever and this puts the onus on the ECB for even more monetary stimulus (even though the data specifically confirms this won't help one bit aside from creating another stock market bubble). The news promptly crushed the fragile European confidence that things are getting better despite better PMIs and assorted Spanish "adjusted" data that will promptly roll over once the ongoing lack of credit creation washes ashore on the Iberian peninsula.
General risk off sentiment has ensured that commodities and the broader energy complex remained under pressure even though the USD is seen little changed amid safe-haven flows which also saw USDJPY trend lower.
Turning to the day ahead, in addition to a bevy of earnings today including AMZN, GM, MMM and others, US macro data will include the monthly durable
goods orders update and the weekly initial jobless claims.
News highlights in bulletin format from Bloomberg:
- Treasuries steady as week’s auctions conclude with $29b 7Y notes; traders looking to next week’s FOMC meeting for clues on potential Fed tapering of asset purchases. BOE, ECB also meet next week, with U.S. payrolls on Friday.
- 7Y notes to be sold today yield 2.02% in WI trading; stopout yield at that level would be highest in two years. Yesterday’s 5Y auction stopped through, produced unremarkable bid-to-cover and participation metrics, similar to results for 2Y auction on Tuesday
- U.K. GDP rose 0.6% in 2Q, in line with estimates, from 0.3% in 1Q; services, production, construction and agriculture all grew, the first time that has happened since the third quarter of 2010
- Germany’s Ifo business climate index rose to 106.2 in July, est. 106.1, from 105.9 in June
- NZD gained against all major competitors after New Zealand’s central bank said the pace of future interest-rate increases will depend on the booming housing market’s impact on prices and reiterated it will keep borrowing costs at a record low this year
- Commerzbank wrote down the value of a portfolio of credit extended to the bankrupt city of Detroit, says Armin Guhl, a spokesman for the Frankfurt-based bank
- Wall Street banks are debating whether to suspend doing business with SAC Capital Advisors LP if the hedge fund is charged by U.S. prosecutors, according to two people briefed on the matter
- Anglo Irish Bank Corp. will have EUR3b less to repay creditors after the government sped up its liquidation, two people with knowledge of the matter said
- Sovereign yields mixed. Asian stocks fall, with Nikkei -1.14%, European indexes also decline. U.S. stock index futures drop. WTI crude, gold, copper fall
The full global news recap from RanSquawk:
SocGen's macro highlight update:
- Stocks fell in Europe after the Eurozone M3 data underpinned the need for further stimulative measures from the ECB, whilst broadly inline German IFO survey and UK Q2 GDP report also failed to inspire confidence.
- It is not yet the time for the PBOC to cut RRR, according to a PBOC source.
- In terms of earnings report releases, attention will be on the likes of 3M, GM, Amazon.com and Starbucks.
Market Re-Cap
Stocks traded lower this morning, after the release of the latest Eurozone M3 data which showed that supply growth slowed in June and loans to the private sector contracted at a faster pace than in May, underpinned the need for further stimulative measures from the ECB and in turn raised questions about Wednesday’s encouraging Eurozone PMI Composite Output Index which rose above 50 for the first time since January 2012. Consequently, in spite of the fact that the widely followed German IFO survey beat street estimates, the 1y/1y EONIA forward rate declined sharply and the Euribor curve flattened. Subsequent release of an in line with estimates UK GDP report, which prompted a bout of profit taking related flows, augmented the move to the downside in stocks, where the defensive names outperformed since the get go.
General risk off sentiment ensured that commodities and the broader energy complex remained under pressure, even though the USD is seen little changed amid safe-haven flows which also saw USD/JPY trend lower. Going forward, market participants will get to digest the release of the latest weekly jobs data, durables report for the month of June and the US Treasury will sell USD 29bln in 7y notes. Also, in terms of earnings report releases, attention will be on the likes of 3M, GM, Amazon.com and Starbucks.
Asian Headlines
It is not yet the time for the PBOC to cut RRR, according to a PBOC source.
The FT writes: The “mini stimulus”, though limited in size, could herald more policy moves to prop up growth. The government will eliminate taxes on small businesses, reduce costs for exporters and line up funds for the construction of railways.
EU & UK Headlines
Eurozone M3 (Jun) Y/Y 2.3% vs. Exp. 3.0% (Prev. 2.9%)
Eurozone M3 3m avg. (Jun) 2.8% vs. Exp. 3.0% (Prev. 2.9%)
Loans to the private sector shrank by 1.6 percent from the same month a year ago.
German IFO Business Climate (Jul) M/M 106.2 vs. Exp. 106.1 (Prev. 105.9)
German IFO Current Assessment (Jul) M/M 110.1 vs. Exp. 109.7 (Prev. 109.4)
German IFO Expectations (Jul) M/M 102.4 vs. Exp. 102.5 (Prev. 102.5)
UK GDP (Q2 A) Q/Q 0.6% vs. Exp. 0.6% (Prev. 0.3%)
UK GDP (Q2 A) Y/Y 1.4% vs. Exp. 1.4% (Prev. 0.3%)
ONS says UK GDP helped by extra working day but the UK GDP remains 3.3% below peak of Q1 2008.
Standard & Poor's have cut the ratings on 18 Italian banks, stating that the banks operate in an environment
with higher economic risks, with high exposure to a longer recession than previously anticipated. While,
Moody's said Spain banks' non-performing loans credit negative. This follows Spanish banks' non-performing loans
reaching a fresh high.
Barclays prelim month-end extensions for Pan Euro agg. at +0.11yrs
Barclays prelim month-end extensions for UK at +0.04yrs
US Headlines
President Obama will push for new infrastructure projects and investments as he hits the road again Thursday, travelling this time to Jacksonville, Fla., for his third consecutive speech on the economy.
Barclays prelim month-end extensions for US Treasuries at +0.06yrs
Equities
Stocks traded lower this morning, after the release of the latest Eurozone M3 data which showed that supply growth slowed in June and loans to the private sector contracted at a faster pace than in May, underpinned the need for further stimulative measures from the ECB and in turn raised questions about Wednesday’s encouraging Eurozone PMI Composite Output Index which rose above 50 for the first time since January 2012.
Facebook shares rose by over 10% in after-market hours yesterday after reporting Q2 Adj. EPS USD 0.19 vs Exp. USD 0.14. and Q2 daily active users up 27% to 699mln, with Q2 monthly active users up 21% to 1.15bln. Separately, QUALCOMM shares rose around 4% after the closing bell after the company reported Q3 Adj. EPS USD 1.03 vs Exp. USD 1.03 and boosted forecast.
FX
The release of another solid German macroeconomic data was overshadowed by the release of soft Eurozone M3 data, which underpinned the need for the ECB to introduce further measures to boost lending to SMEs in the joint currency bloc. As a result, the 1y/1y EONIA forward rate declined sharply and the Euribor curve flattened, which in turn weighed on EUR/USD in early trade. Separately, combination of cautious sentiment in Europe, as well as profit taking related flows pressured GBP/USD following an inline with exp. UK GDP reading.
Commodities
Mexican President Enrique Pena Nieto will present an energy reform to Congress in August that proposes changing the constitution to encourage major new private investment in the oil sector, according to a senior lawmaker.
Analysts at Citi note that in the short-term, Brent-WTI could stay tight or move even tighter until mid-August, when greater syncrude availability and later refinery maintenance should reduce the pull on light sweet crude. The correction could be quite sudden and sharp as positions unwind, and the signals to watch could be syncrude diffs and USGC refinery margins.
Walter Oil and Gas is preparing to drill a relief well in an effort to stop the flow of leaking natural gas gas that caused a fire on its Gulf of Mexico rig that caught fire late on Tuesday.
Analysts at HSBC note that the medium-term demand outlook for platinum, palladium and rhodium is more robust than many investors are willing to consider. This is driven primarily by the evolving end-uses of these precious metals, rising wealth levels in emerging markets and the increasing scope of emission legislation in emerging and developed markets.
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DB's overnight action recap with Jim Reid
We reach the peak day for both the US and European reporting season today which will see 56 S&P500 companies (i.e. 11% of index constituents) and 49 Stoxx600 companies providing earnings updates over the next 24 hours. Combined with the 10% of S&P500 companies that reported yesterday, we will get a more definitive picture of corporate profitability by this time tomorrow. On today’s earnings docket are a number of consumer-facing companies such as Amazon and Starbucks in the US and Unilever in Europe. We also have a number of industrial heavyweights such as General Motors, Dow Chemical, 3M and Roche reporting. Credit Suisse has reported Q2 results as we type - CS is one of the first major European investment banks to report Q2 results (not including UBS’ pre-release on Monday) and will provide an important readthrough for rest of the sector.
Overall, yesterday’s US earnings reports were some of the strongest that we’ve seen this quarter. Among the 48 companies reporting 83% beat consensus EPS estimates and 71% managed the same on the revenue line. Both percentages are around 10ppt higher than what we’ve seen this reporting season. The better news on the earnings front failed to push the S&P500 past the 1700 mark and we saw weakness in US equities shortly after the opening bell. Of the MD&A yesterday the notable commentary came from Caterpillar Inc (- 2.4%) who had its sharpest fall in three-months after the company downgraded its guidance for 2013 sales by 3%. In keeping with the theme of some of the other earnings reports we’ve seen, Caterpillar’s management said that sales were relatively poor in all regions outside of North America. Currency translation losses and a destocking in dealer inventories also impacted the company’s result. The earnings reports from Ford and Boeing made for better reading though. Ford said that there was “stronger demand for its cars and trucks in China and South America as well as a smaller-than-anticipated loss in Europe”. Meanwhile Boeing signalled that it may increase the production of its best selling jet (the narrow-body 737) in order to “match production with additional demand as our customers require”.
Away from earnings, yesterday’s global PMIs boosted sentiment in the first half of the European session. The euro area flash composite PMI moved back above 50 in July (50.4 vs 49.1 expected) which is the first >50 reading since January last year. The manufacturing and services indices increased by 1.3 points to 50.1 (vs 49.1 expected) and 1.4 points to 49.6 (vs 48.3 expected) respectively. Across the individual countries, Germany and France posted strong monthly improvements with the flash composite PMI rising by 2.4 and 1.5 points to 52.8 and 48.8 respectively. There was more good news across the periphery with DB European economists’ synthetic non-core composite index suggesting that, on average, the composite PMI for Italy, Spain and Ireland improved by about 1 point on the month. Our economists note that with the recent PMI trend including the stronger-than-expected July flash outturn, it seems that that the euro area is on track to post a GDP recovery in the second part of the year.
The strength in European equities was short-lived, and we saw the Stoxx600 (+0.55%) weaken and the S&P500 (-0.38%) quickly trade into negative territory after the US opening bell. The release of better-than-expected US Markit PMI (53.2 vs 52.6) and new home sales (8.3% vs 1.7%) strengthened concerns of a September Fed tapering which saw the USD index add 0.4%. Along the same lines, USTs came back into focus after the 10yr yield added 8bp to close at a two week high of 2.59%. In the EM world, the focus on higher US rates prompted weakness in sovereign credit where Chinese, Mexican and Brazilian 5yr CDS spreads closed around 6-9bp wider on the day. 10yr bunds also had a fairly weak day (+9.5bp to 1.646%) on unconfirmed market chatter of an imminent German sovereign downgrade (Source - The Telegraph). Coming back to the Fed, the WSJ’s Hilsenrath wrote that the race for the next Fed Chairperson has come down to a two-horse race between Obama administration insider Lawrence Summers and Fed vicechair Janet Yellen. We’re likely hear more on this in the next few months leading up to the end of Bernanke’s current tenure.
Across Asia this morning, a weaker tone has prevailed in equities and fixed income following on from the price action in US markets yesterday. All major bourses are trading lower this morning led by the Nikkei (-0.7%), Shanghai Composite (-0.1%) and the Hang Seng (-0.3%). In credit, the pressure on EM continues with the Asian IG index being marked 7.5bp wider led by an 8-15bp widening in sovereign spreads. Japan’s earnings season has gotten off to a mixed start with camera-maker Canon Inc down 5.8% after reporting weaker than expected sales performance yesterday. In China, there are further signs of policy support from the government after the country’s State Council announced three sets of policy measures to stabilize economic growth. The measures were 1) an exemption from VAT and business tax for the smallest firms, 2) the setting up of a Railway Development Fund to speed up railway construction, especially in the central and western parts of China, 3) Steps to support the export sectors including simplifying customs procedures, reducing levies on import and export businesses, and stabilizing the exchange rate. The only major equity index to trade higher is the KOSPI (+0.05%) after Korea reported better than expected Q2 growth of 1.1% (vs 0.8% expected).
Turning to the day ahead, with the focus on US dataflow, today’s durable goods orders and jobless claims will be garner some attention. Euroarea money/credit aggregates, the German IFO survey and the advance UK Q2 GDP are the main data reports out of Europe. The slew of earnings releases on both sides of the Atlantic will ensure that there’s plenty to keep investors busy on the macro and micro front.