In this brave New Normal world, a Chinese contraction is somehow expected to be offset by a rebound in Europe's worst economies, because following China's latest PMI miss, overnight we were told of beats in the Service PMI in Spain (56.5, vs Exp. 54.0, a 7 year high sending the Spanish 10 Year to fresh sub 3% lows), Italy at 51.1, vs Exp. 50.5, also pushing Italian yields to record lows, and France 50.4 (Exp. 50.3). We would speculate that macro events such as these, as fabricated as they may be, are relevant or even market-moving, but they aren't - all that matters is what the JPY and VIX traders at the NY Fed do in a low volume tape, usually in the last 30 minutes of the trading day. And since the trading day today happens to be a Tuesday, and nothing ever goes down on a Tuesday, the outcome is pretty much clear, and not even the absolutely abysmal Barclays earnings report has any chance of denting the latest rigged and manufactured low-volume levitation.
That said, in early trading those all important FX pairs, USDJPY (with AUDJPY) and EURUSD, are seen going in diverging directions, with the USDJPY tumbling...
... while the Euro is soaring to multi-week highs against the dollar on Europe's exportless recovery (but really thanks to Chinese and Japanese buying). For now the slide in the USDJPY has not dragged equity futures far lower because, that's right, algos are starting to remember that it is Tuesday.
Bulletin headline summary from Bloomberg and RanSquawk
- Focus was on Spain, France and Italian Service PMIs beating expectations which pushed Bunds lower
- GBP/USD at multi-year highs helped by Euro-area PMI's and a beat on the UK Services PM, in which employment and new business picked up
- Markets now await the US trade balance, Disney, Emerson and Marathon earnings and a 3y auction
- Treasuries decline before quarterly refunding auctions begin with $29b 3Y notes. 10Y yield remains within 5bps of YTD closing low; 25bp range over past 14 wks is smallest of past two decades.
- 3Y notes to be sold today yield 0.93% in WI trading vs 0.873% at April auction; stopout yield at that level would be highest since May 2011
- Surging casualties are threatening to undermine Ukraine’s campaign to regain ground from pro-Russian militants in its easternmost cities, where insurgents killed four government troops and downed a military helicopter
- The commander of U.S. air forces in the Pacific said Russia has “increased drastically” its long-rangebomber patrols in northeast Asia as ties with America’s allies deteriorate over upheaval in Ukraine
- Service industries in Spain and Ireland showed fastest growth since before the financial crisis; Germany and Italyalso showed growth. Spanish and Italian 10Y yields fell torecord lows
- Draghi may need to take action to stop money-marketinvestors getting ahead of themselves as overnight interbank rates are starting to exceed ECB’s benchmark rate for firsttime since 2008
- European finance ministers are designing a financial- transaction tax on equities and derivatives that could startin 2016 for the 11 nations that have signed up toparticipate
- Premature withdrawals from retirement accounts have become America’s new piggy bank, cracked open in record amounts during lean times; the IRS collected $5.7b in 2011 from penalties, meaning that Americans took out about $57 billionfrom retirement funds before they were supposed to
- Sovereign yields mostly higher. Asian stocks little changed.
- European equity markets, U.S. stock futures gain. WTI crude higher, copper falls, gold little changed
US Event Calendar
- 8:30am: Trade Balance, March, est. -$40.0b (prior -$42.3b)
7:00pm: Fed’s Stein speaks in New York - 7:50pm: Bank of Japan releases April 7-8 meeting minutes
- 11:00am: Fed to purchase $850m-$1.1b notes in 2036-2044 sector
- 1:00pm: U.S. to sell $29b 3Y notes
Asian Headlines
Asian and Australian markets trade mixed amid quiet trade (said to be 30% below the daily average) due to holiday-thinned volumes, with Japanese, South Korean and Hong Kong markets closed for trade in today's session.
US Headlines
OECD cuts 2014 global growth forecast to 3.4% from 3.6%, says ECB should consider more stimulus to tackle low inflation and lowers 2014 US GDP forecast to 2.6% from 2.9% in November.
Equities
European stock futures opened positively, with markets taking their cue from stronger US stock futures overnight and UBS earnings, however failed to hold on to the best levels of the session as Barclays (-4.5%) earnings and Ukraine fears, on vague Twitter reports of Russia moving troops into Eastern Ukraine, weighed on equities, however prices have since retraced (Eurostoxx 50 trades flat on the day) on stronger PMIs and no further news out of Ukraine. AstraZeneca (-2.4%) release details of its drug pipeline in what looks like a bid to defend against the Pfizer bid, Merck have now confirmed the sale of its consumer care unit to Bayer for USD 14.2bln.
FX
GBP/USD trades at August 2009 highs of 1.6946 helped by a 7 year high in Spanish Services PMI, with strong readings from France and Italy and the UK. EUR/USD broke through the 1.3900 handle which in turn pushed the USD index (-0.33%) to its lowest since October 2013. UBS note, in the absence of an ECB refi cut this Thursday EUR/ USD might push beyond 1.4000.
The RBA kept rates unchanged at 2.50%, alongside expectations. However the RBA refrained from talking down the AUD and struck a neutral tone.
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Finally, here is the overnight recap from DB's Jim Reid
Markets are in a bit of a holding pattern following Friday’s US payrolls surprise and with holidays affecting volumes in London, Hong Kong, Tokyo and continental Europe over the last few days. We also get the sense that many are taking a wait-and-see approach to events on the near-term horizon including Yellen’s JEC testimony on Wednesday, the ECB/Draghi on Thursday and the potential for the conflict in Ukraine to intensify from already-heightened levels. Ahead of all that, Wall Street had a decent start to the week, recovering from the early lows yesterday. The S&P500 posted a 0.19% gain helped by a beat in the US non-manufacturing ISM data (55.2 vs 54.0 expected). However, the price action in US stocks had a defensive tone to it with the lower-beta utility (+0.77%) and telco (+0.56%) sectors enjoying the best of gains while financials (-0.33%), autos (-0.52%) and household goods (-0.26%) lagged. Dragging US financials lower was the reaction to JPM’s (-2.45%) warning late on Friday that its Q2 markets revenue is likely to be down 20% yoy, marking the second straight quarter of weak trading revenues not just from JPM but from a number of large global broker-dealers. Meanwhile the auto sector was weighed by news that GM (-0.63%) had issued another product recall that will impact more than 50,000 crossover vehicles. Ford (-1.01%) also announced a product recall though the number of recalled vehicles was much smaller at 4,000. It’s still very early days but so far the “Sell in May” effect hasn’t come into play yet with the S&P500 marginally positive on a month-to-date basis.
The strategy has reaped decent returns in recent years with the S&P500 down an average of 3.4% during the month of May from 2010 to 2013. Low volatility continues to be a theme for many markets though we should point out that today marks the fourth anniversary of the May 6th 2010 “flash crash” which saw the DOW lose 1000 points in a matter of minutes before recovering those losses just as quickly. It’s interesting to see that academics and market participants are still debating the exact cause of those day’s events. Closer to the current day, another debate worth having is the exact cause for the rally in treasury yields following last Friday’s the significantly above- consensus non-farm payrolls report. DB’s Alan Ruskin writes that for well established reasons, a multi-decade Pavlovian response to much stronger than expected US data has been higher Treasury yields. However last Friday, this plainly did not work. Alan notes 11 possible reasons for the UST’s resilience including firstly that the Fed was right about the “stock versus flow” effect - the Fed’s large bond holdings will suppress yields far into the future.
Secondly, the flow is bullish given the scale of QE relative to a shrinking deficit. Thirdly, there are very large net short leveraged positions including record CFT Eurodollar shorts and very large 10yr equivalents.
Monday saw UST yields (+2bp) give back some of their outperformance from Friday and the 10yr managed to close just above 2.60% (2.607% at the close) due largely to the above-mentioned ISM non-manufacturing report. Looking deeper into the non-manufacturing ISM, the headline number rose to the highest level since August 2013 and higher than the 54.0 Bloomberg consensus. In the detail of the report, business activity (60.9 vs. 53.4) and new orders (58.2 vs. 53.4) significantly improved as the former reached the highest level since last August. A couple of forecasters upgraded their estimates for Q2 US GDP growth following the data. Outside of the ISM, the Fed released its quarterly Senior Loan Officer Survey which indicated that banks eased their lending policies for commercial and industrial loans and commercial real estate loans and banks saw stronger demand for both types of loans. The hope for the US bulls is that this translates into higher capital expenditure in the near future. The survey indicated more mixed conditions for consumer credit. More broadly, the environment of low volatility and low USD rates remains conducive for credit new issuance. According to Reuters, last month saw $60bn in new issuance from EM which was more than half of the $100bn issued in the first quarter of 2014. In the US high grade market, April saw US$104bn in new deals, which was its biggest April ever excluding the government-guaranteed paper issued during April 2008 according to the IFR.
Yesterday, construction equipment maker Caterpillar Inc became the first US company, excluding financials, to price a 50yr bond in nearly a year. The company priced $500m in “half-century” bonds at a price of treasuries plus 137.5bp which attracted an order book of $8bn. Interestingly this is not the longest dated bond issued by Caterpillar. They have a “century bond” issued in 1997 that matures in 2097 (WSJ).
Across the Atlantic, there was a muted reaction to the weekend’s report in El Pais suggesting that Draghi had formulated a two-stage monetary policy strategy. The report said that the ECB may act in June if inflation does not pick up and the EUR stays strong, by firstly cutting rates. The ECB would then consider asset purchases as second step in autumn according to the report. EURUSD was unchanged yesterday. Moving further east, the situation in Ukraine seemed to deteriorate further with reports of up to 20 casualties in fighting the eastern Ukraine towns and cities. Gold added 0.8% yesterday, adding to a 1.2% gain yesterday, supported by the Ukraine/Russia tension. Much of Asia is closed today (Japan, South Korea, Hong Kong), though the bourses that are open are trading broadly firmer including the Shanghai Comp(+0.2%) and ASX200 (+0.3%). The Reserve Bank of Australia held rates constant at its policy meeting today, as widely expected by the market and DB, and there were very minor changes to the policy statement. The AUD is a little higher (+0.1%) following the RBA statement. S&P500 futures are trading 0.15% higher in the Asian timezone.
In terms of other news flow, the FT’s Robin Harding highlights a recent study by the Fed looking at the effect of short term and long term unemployment on inflation. The Fed study suggests that both short and long term unemployment have a similar downward effect on inflation across US cities - contrary to some market participants’ views that it’s only short-term unemployment that is putting downward pressure on inflation and that the long term unemployed are too disconnected from the labour market to hold down wage inflation. Long term unemployment remains one of the key labour market health indicators for the Fed Chair.
Looking at the day ahead, we have the Euroarea services PMIs and retail sales data followed by US March trade and the IBD/TIPP economic optimism index. A number of European earnings releases are worth watching including UBS, Barclays and Lafarge. A Eurogroup/ECOFIN meeting winds up today. The OECD publishes its spring economic outlook and forecasts for member countries.
Looking at the rest of the week, Wednesday will be largely dictated by Yellen’s congressional testimony. Data flow includes consumer credit, German factory orders and the final China HSBC Services PMI for April. The highlight on Thursday is the ECB. The BoE also meets on Thursday. China will release April trade data – this is a key data release following the disappointing trade reports in the year to date. This takes us to Friday where Chinese CPI, UK industrial production and JOLTs job openings round out the week’s calendar.