It is unclear how much of this morning's momentum-busting weakness in futures is the result of China's horrendous Service PMI, which as we reported last night dropped to the lowest print on record at the contraction borderline, but whatever low volume levitation was launched by the market after Europe's close yesterday may have fizzled out if only until Europe close (there is no POMO today). Still, futures may have been helped by yet another batch of worse than expected European data, namely the final Eurozone PMI prints, which in turn sent the EURUSD to day lows and the offsetting carry favorite USDJPY to highs, helping offset futures weakness. Because in the New Normal there is nothing like a little bad macro data to goose the BTFATH algos...
Speaking of the final European July PMI, here is what was reported a few hours ago, via Goldman: July Euro area Final Composite PMI came in at 53.8, 0.2pt weaker than the Flash estimate. Relative to June, the Composite PMI increased by 0.9pt. The country breakdown showed improvements in Germany, France and Spain, but a decline in Italy.
The Final manufacturing PMI (released last Friday) came in 0.1pt lower than the Flash estimate. Today's data showed that the Final Services PMI printed 0.2pt below the Flash. The July data showed that the Manufacturing PMI remained stable at 51.8 for the month. In contrast, the Services PMI rose 1.3pt to 54.2. The Manufacturing PMI rose above the Services PMI in late 2013, but this relative outperformance has reversed of late (Chart 1).
Today's data showed differing developments in Italy and Spain. Following June's robust gain, the Italian Composite PMI fell 1.1pt in July to 53.1, as both the Manufacturing and Services PMI eased around 1pt. The Spanish Composite PMI rose 0.5pt to 55.7 in July: the 0.7pt decline in the Manufacturing subcomponent was more than offset by a robust (1.4pt) increase in the Services PMI. Overall, both Spanish and Italian Composite PMIs remain high relative to historical standards (Chart 2). At 53.8, the Euro area PMI is consistent with growth of around +0.5%/+0.6%qoq in early Q3, broadly similar to the Q2 average. The early reading of our Current Activity Indicator (CAI) for July points to a rate of expansion of around 1.3%, slightly below the Q2 average.
Aside from the PMI data, European equities benefited from strong earnings, with outperformance in the benchmark CAC and DAX indices after Credit Agricole, BMW and Deutsche Post reported better-than-expected metrics. Furthermore, M&A news buoyed Vivendi as Telefonica tabled a bid for the Co.’s Brazilian GVT unit, lessening the likelihood of an offer for Telecom Italia’s TIM Brazil unit. As a result, Telecom Italia shares were halted limit down halfway through the trading day. 17 out of 19 Stoxx Europe 600 sectors rise; chemicals, media outperform, telcos, travel & leisure underperform. 73.2% of Stoxx 600 members gain, 24.5% decline. Eurostoxx 50 +0.5%, FTSE 100 +0.5%, CAC 40 +0.6%, DAX +0.6%, IBEX +0.2%, FTSEMIB -0.4%, SMI +0.9%
Turning to Asia, the Chinese data has sent the AUD (-0.17%) and Copper (-0.2%) a touch lower overnight. In Japan, Reuters is reporting that BOJ officials are concerned about increasing signs of weakness in the Japanese economy following a recent sales tax increase. The article says that the central bank’s Board will discuss at their policy meeting this week whether to downgrade their outlook for exports and industrial production. This comes after a number of Street forecasters have downgraded their Japan Q2 GDP growth estimates. In EM Asia, Indonesia has proposed limiting the amount of government-subsidised fuel to the public, which is expected to benefit the government’s fiscal position. The IDR is 0.3% stronger against the greenback today. The RBA has kept policy unchanged at today’s meeting. Asian stocks fall with the Sensex outperforming and the Nikkei underperforming. MSCI Asia Pacific down 0.6% to 147. Nikkei 225 down 1%, Hang Seng up 0.2%, Kospi down 0.7%, Shanghai Composite down 0.2%, ASX down 0.4%, Sensex up 0.7%
Staying in Asia, Bloomberg is reporting that the HK Monetary Authority has again intervened in the FX market to defend the USDHKD peg after recent local currency strength. The HKMA bought $925m yesterday, adding to the $8.4bn it purchased in July. Bloomberg is saying that some Russian companies are converting cash holdings to HKD in case of a further development of tensions between Russia and the West. Apart from a recent inflow of Russian cash, the article also notes that expectations of an improvement in Chinese growth and local corporate activity have been driving up demand for HKD.
US stock futures trade flat as markets await earnings from Walt Disney, CVS Caremark and Emerson Electric.
Looking at the day ahead, the rest of the global service PMIs and ISMs are the main highlights on the data docket. With the service sector’s importance to the overall employment outlook, today’s US non-manufacturing ISM will be closely followed with a Street consensus of 56.5. Euroarea retail sales for June will be released this morning. US factory orders round out the data docket. The European corporate reporting calendar rolls on with updates from BMW and InterContinental followed by UniCredit SpA. About 5% of BMW’s revenues are exposed to Russia according to the WSJ – so will the company join the growing chorus of European corporates warning about the effect of sanctions on revenue?
*Market Wrap*
· S&P 500 futures little changed at 1932.2
· Stoxx 600 up 0.6% to 333.2
· US 10Yr yield little changed at 2.49%
· German 10Yr yield up 1bps to 1.15%
· MSCI Asia Pacific down 0.6% to 147
· Gold spot up 0.3% to $1292.7/oz
*Bulletin Headline Summary from Bloomberg and RanSquawk
*
· Treasuries decline, 2Y-10Y yields rise by 1bp-2.2bps (3Y) amid light volumes; with eco calendar light this week, market’s focus shifting to next week’s quarterly refunding auctions.
· U.K. services rose more than forecast in July, with Markit’s PMI jumping to 59.1 from 57.5 in June, the highest since November; pickup may result in split vote on rates at this week’s BOE meeting, Capital Economics says
· Euro-area services expanded less than initially estimated last month, keeping alive concerns about the outlook for the recovery in the 18-nation region
· China’s service industries stagnated in July as a private index fell to a record low, suggesting the government’s stimulus measures are failing to gain traction outside of manufacturing.
· India’s central bank left interest rates unchanged for a third straight meeting as retail inflation slowed and Prime Minister Narendra Modi released food stocks to offset the risk of higher prices from a weak monsoon; click here for roundup of views
· Japan renewed its criticism of China’s “assertive” maritime activities in a report published days after Prime Minister Shinzo Abe said he wanted a summit meeting with Chinese President Xi Jinping
· Credit Agricole SA jumped the most in three months after the bank wrote down its holding of bailed-out lender Banco Espirito Santo SA to zero while boosting profit excluding the charge
· Ukraine expressed concern about a new buildup of Russian forces on its border as it pursued an offensive against pro- Moscow separatists. Half the residents of the city of Luhansk fled as the fighting got closer
· Israel pulled its remaining troops out of the Gaza Strip after completing a campaign to destroy tunnels used by Hamas to stage attacks, bolstering a 72-hour truce that took effect early today
· A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with Kentucky tobacco plants, appears to be working
· Sovereign yields mostly higher. Euro Stoxx Banks -0.24%. Asian stocks mostly lower,European equities gain, U.S. stock futures decline. WTI crude and gold rise, copper falls
· European equities regain some poise on strong earnings from Credit Agricole, BMW, Deutsche Post and Standard Life
· EUR/USD breaks back below 1.34 as final services PMIs in the Eurozone disappoint, while UK services PMI spikes to 8-month highs, lifting GBP
· Market focus turns to US ISM non-manufacturing composite, factory orders and earnings from Walt Disney, Emerson Electric and CVS Caremark
*US Event Calendar*
· 9:45am: Markit US Services PMI, July final, est. 60.8 (prior 61)
· 9:45am: Markit US Composite PMI, July final (prior 60.9)
· 10:00am: ISM Non-Manufacturing Composite, July, est. 56.5 (prior 56)
· 10:00am: Factory Orders, June, est. 0.6% (prior -0.5%)
· 10:00am: IBD/TIPP Economic Optimism, Aug., est 47.3 (prior 45.6)
*ASIAN HEADLINES*
Asia-Pacific equities closed lower (Nikkei 225 -1.0%, Shanghai Composite -0.15%) as China’s July HSBC Services PMI fell to the lowest rate on record, indicating that the Chinese services sector failed to grow at all for the first time in nine years. Japanese markets were led lower by Fast Retailing (the largest weighted stock in the Nikkei 225) after domestic Uniqlo sales posted their first decline in 9 months.
*FIXED INCOME *
After UK PMIs beat expectations (59.1 vs. Exp. 58.0), UK gilts are seen underperforming, dragging German bund futures even lower after European fixed income products had already sustained selling pressure after the open on the back of mixed EU PMIs, stronger equities and ahead of supply from Germany tomorrow.
*EQUITIES *
Equities benefited from strong earnings, with outperformance in the benchmark CAC and DAX indices after Credit Agricole, BMW and Deutsche Post reported better-than-expected metrics. Furthermore, M&A news buoyed Vivendi as Telefonica tabled a bid for the Co.’s Brazilian GVT unit, lessening the likelihood of an offer for Telecom Italia’s TIM Brazil unit. As a result, Telecom Italia shares were halted limit down halfway through the trading day.
US stock futures trade flat as markets await earnings from Walt Disney, CVS Caremark and Emerson Electric.
*FX *
GBP outperformed its peers, following the release of better than expected UK Services PMI which came in at its highest level this year, together with somewhat mixed EU based PMIs, which also sent EUR/USD below 1.3400 level. Elsewhere, AUD/USD recovered off the lowest levels of the session following the release of mixed Australian and weak Chinese macroeconomic data, as the RBA left it benchmark rate unchanged at 2.5% and retained its neutral tone.
*COMMODITIES*
Gold has seen a bid tone in European trade, which originated in Asia, after the metal reached lows yesterday as geo-political concerns regarding Israel abated, increasing physical demand from east Asia.
WTI crude futures trade up USD 0.10 at USD 98.40, after snapping their 5-day decline during yesterday’s session and ahead of today’s API inventory report due at 2135BST/1535CDT
* * *
*DB's Jim Reid concludes the overnight recap*
We wake this morning to a pretty bad HSBC Chinese services PMI which may take the edge off the restored calm. The number printed significantly below last month’s reading (50.0 vs 53.1). Put in context, the print of 50.0 is the lowest since the series began in November 2005 and the talk is that the decline reflects a property slowdown in many cities. So there may be some disappointment this morning in markets but it may be cushioned by the likely further stabilisation of global bond yields.
Back to yesterday, there was no new news on the US economy, improvements in the geopolitical situation and a sigh of relief that the BES situation has come to a head even if sub bondholders and equity holders are losing out. As we discussed yesterday there was clearly going to be relief that senior bondholders escaped somewhat with bonds over 10 points higher yesterday and back above par. This is important for the sector as the overall situation was big enough to potentially cause widespread Euro funding fears if senior bondholders were punished.
The lessening of funding fears underpinned the outperformance of European senior financial credit yesterday. iTraxx Fin Senior rallied more than three basis points to 73bp, which was a decent achievement on a day when the European Main index closed virtually unchanged at around 67bp. The spread between the two has narrowed to just under 6bp - the tightest spread since July 7th which was just two days before Banque Privee Espirito Santo disclosed that ESI had missed repayment dates on some debt sold to its clients.
Interestingly European bank equities (+0.47%) were one of the best performing sectors yesterday in the context of a 0.23% fall in the Stoxx600. The news also helped Portuguese bond yields which rallied 7bp, benefiting other peripherals including Spain (-6bp) and Italy (-6bp). The S&P500 (+0.72%) staged a fairly impressive intraday recovery from the early lows, helped by the strong performance of market-heavyweight Berkshire Hathaway (+2.8%) after its recent earnings announcement and the late day news of a temporary truce in Gaza. An Egyptian plan for a 72 hour truce between Israeli and Hamas forces was agreed late yesterday and came into effect today at 0500 GMT. Israeli and Palestinian authorities have also reportedly agreed to talks in Cairo aimed at securing a longer term ceasefire agreement. Reuters is reporting that Israeli troops have destroyed the last Hamas built tunnel from Gaza into Israeli territory, providing a glimpse of hope that “Operation Protective Edge” may be drawing to a close.
US high yield enjoyed a relief rally on Monday, aided by last Friday’s benign non-farm payrolls and the relative stability of US rates (10yr yield -1bp to 2.48%). Indeed, the CDX High Yield index posted a gain of three-quarters of a point, which was its best performance since May 22nd and the iBoxx USD Liquid High Yield index rallied 8bp in yield terms to 5.90%. Over the past month, the latter has sold off by just under 100bp in yield terms, which leaves the index at pretty much flat on the year. We suspect that this repricing of risk is a welcome development at the Fed who has warned repeatedly about the froth in the lower-rated parts of the credit market in recent months.
With all the recent focus on HY outflows, especially from the ETF sector, markets may take some comfort from the latest daily fund flow data for the iShares iBoxx HY Corporate Bond ETF. On Monday the ETF recorded its first daily inflow in almost four week (July 7th). Though the amount of inflows yesterday was relatively modest at +$129m, it’s the largest since May 30th. It’s still clearly one days worth of data, but perhaps this represents the start of more balanced fund flows following a sustained month of withdrawals, or perhaps valuations are now more balanced with yields higher and positioning lighter relative to four weeks ago. The other large HY ETF, the SPDR Barclays HY Bond ETF, recorded a $81m outflow yesterday though which was its fifth consecutive daily withdrawal.
On a related note, the Fed’s quarterly loan officer survey released yesterday suggested a further easing in lending standards across various types of borrowing. Nearly one in four U.S. banks said they had eased mortgage-lending standards for borrowers with strong credit during the second quarter, the largest such movement by lenders since before the financial crisis. The survey of 75 domestic and 23 foreign banks operating in the U.S. also showed that banks are continuing to ease standards for various commercial and industrial loans.
Turning to Asia, the Chinese data has sent the AUD (-0.17%) and Copper (-0.2%) a touch lower overnight. In Japan, Reuters is reporting that BOJ officials are concerned about increasing signs of weakness in the Japanese economy following a recent sales tax increase. The article says that the central bank’s Board will discuss at their policy meeting this week whether to downgrade their outlook for exports and industrial production. This comes after a number of Street forecasters have downgraded their Japan Q2 GDP growth estimates. In EM Asia, Indonesia has proposed limiting the amount of government-subsidised fuel to the public, which is expected to benefit the government’s fiscal position. The IDR is 0.3% stronger against the greenback today. The RBA has kept policy unchanged at today’s meeting.
Staying in Asia, Bloomberg is reporting that the HK Monetary Authority has again intervened in the FX market to defend the USDHKD peg after recent local currency strength. The HKMA bought $925m yesterday, adding to the $8.4bn it purchased in July. Bloomberg is saying that some Russian companies are converting cash holdings to HKD in case of a further development of tensions between Russia and the West. Apart from a recent inflow of Russian cash, the article also notes that expectations of an improvement in Chinese growth and local corporate activity have been driving up demand for HKD.
Looking at the day ahead, the rest of the global service PMIs and ISMs are the main highlights on the data docket. With the service sector’s importance to the overall employment outlook, today’s US non-manufacturing ISM will be closely followed. DB is calling for a print of 56.0, slightly below the Street consensus of 56.5. Euroarea retail sales for June will be released this morning. US factory orders round out the data docket. The European corporate reporting calendar rolls on with updates from BMW and InterContinental due as we go to print, followed by UniCredit SpA. About 5% of BMW’s revenues are exposed to Russia according to the WSJ – so will the company join the growing chorus of European corporates warning about the effect of sanctions on revenue? Reported by Zero Hedge 3 hours ago.
Speaking of the final European July PMI, here is what was reported a few hours ago, via Goldman: July Euro area Final Composite PMI came in at 53.8, 0.2pt weaker than the Flash estimate. Relative to June, the Composite PMI increased by 0.9pt. The country breakdown showed improvements in Germany, France and Spain, but a decline in Italy.
The Final manufacturing PMI (released last Friday) came in 0.1pt lower than the Flash estimate. Today's data showed that the Final Services PMI printed 0.2pt below the Flash. The July data showed that the Manufacturing PMI remained stable at 51.8 for the month. In contrast, the Services PMI rose 1.3pt to 54.2. The Manufacturing PMI rose above the Services PMI in late 2013, but this relative outperformance has reversed of late (Chart 1).
Today's data showed differing developments in Italy and Spain. Following June's robust gain, the Italian Composite PMI fell 1.1pt in July to 53.1, as both the Manufacturing and Services PMI eased around 1pt. The Spanish Composite PMI rose 0.5pt to 55.7 in July: the 0.7pt decline in the Manufacturing subcomponent was more than offset by a robust (1.4pt) increase in the Services PMI. Overall, both Spanish and Italian Composite PMIs remain high relative to historical standards (Chart 2). At 53.8, the Euro area PMI is consistent with growth of around +0.5%/+0.6%qoq in early Q3, broadly similar to the Q2 average. The early reading of our Current Activity Indicator (CAI) for July points to a rate of expansion of around 1.3%, slightly below the Q2 average.
Aside from the PMI data, European equities benefited from strong earnings, with outperformance in the benchmark CAC and DAX indices after Credit Agricole, BMW and Deutsche Post reported better-than-expected metrics. Furthermore, M&A news buoyed Vivendi as Telefonica tabled a bid for the Co.’s Brazilian GVT unit, lessening the likelihood of an offer for Telecom Italia’s TIM Brazil unit. As a result, Telecom Italia shares were halted limit down halfway through the trading day. 17 out of 19 Stoxx Europe 600 sectors rise; chemicals, media outperform, telcos, travel & leisure underperform. 73.2% of Stoxx 600 members gain, 24.5% decline. Eurostoxx 50 +0.5%, FTSE 100 +0.5%, CAC 40 +0.6%, DAX +0.6%, IBEX +0.2%, FTSEMIB -0.4%, SMI +0.9%
Turning to Asia, the Chinese data has sent the AUD (-0.17%) and Copper (-0.2%) a touch lower overnight. In Japan, Reuters is reporting that BOJ officials are concerned about increasing signs of weakness in the Japanese economy following a recent sales tax increase. The article says that the central bank’s Board will discuss at their policy meeting this week whether to downgrade their outlook for exports and industrial production. This comes after a number of Street forecasters have downgraded their Japan Q2 GDP growth estimates. In EM Asia, Indonesia has proposed limiting the amount of government-subsidised fuel to the public, which is expected to benefit the government’s fiscal position. The IDR is 0.3% stronger against the greenback today. The RBA has kept policy unchanged at today’s meeting. Asian stocks fall with the Sensex outperforming and the Nikkei underperforming. MSCI Asia Pacific down 0.6% to 147. Nikkei 225 down 1%, Hang Seng up 0.2%, Kospi down 0.7%, Shanghai Composite down 0.2%, ASX down 0.4%, Sensex up 0.7%
Staying in Asia, Bloomberg is reporting that the HK Monetary Authority has again intervened in the FX market to defend the USDHKD peg after recent local currency strength. The HKMA bought $925m yesterday, adding to the $8.4bn it purchased in July. Bloomberg is saying that some Russian companies are converting cash holdings to HKD in case of a further development of tensions between Russia and the West. Apart from a recent inflow of Russian cash, the article also notes that expectations of an improvement in Chinese growth and local corporate activity have been driving up demand for HKD.
US stock futures trade flat as markets await earnings from Walt Disney, CVS Caremark and Emerson Electric.
Looking at the day ahead, the rest of the global service PMIs and ISMs are the main highlights on the data docket. With the service sector’s importance to the overall employment outlook, today’s US non-manufacturing ISM will be closely followed with a Street consensus of 56.5. Euroarea retail sales for June will be released this morning. US factory orders round out the data docket. The European corporate reporting calendar rolls on with updates from BMW and InterContinental followed by UniCredit SpA. About 5% of BMW’s revenues are exposed to Russia according to the WSJ – so will the company join the growing chorus of European corporates warning about the effect of sanctions on revenue?
*Market Wrap*
· S&P 500 futures little changed at 1932.2
· Stoxx 600 up 0.6% to 333.2
· US 10Yr yield little changed at 2.49%
· German 10Yr yield up 1bps to 1.15%
· MSCI Asia Pacific down 0.6% to 147
· Gold spot up 0.3% to $1292.7/oz
*Bulletin Headline Summary from Bloomberg and RanSquawk
*
· Treasuries decline, 2Y-10Y yields rise by 1bp-2.2bps (3Y) amid light volumes; with eco calendar light this week, market’s focus shifting to next week’s quarterly refunding auctions.
· U.K. services rose more than forecast in July, with Markit’s PMI jumping to 59.1 from 57.5 in June, the highest since November; pickup may result in split vote on rates at this week’s BOE meeting, Capital Economics says
· Euro-area services expanded less than initially estimated last month, keeping alive concerns about the outlook for the recovery in the 18-nation region
· China’s service industries stagnated in July as a private index fell to a record low, suggesting the government’s stimulus measures are failing to gain traction outside of manufacturing.
· India’s central bank left interest rates unchanged for a third straight meeting as retail inflation slowed and Prime Minister Narendra Modi released food stocks to offset the risk of higher prices from a weak monsoon; click here for roundup of views
· Japan renewed its criticism of China’s “assertive” maritime activities in a report published days after Prime Minister Shinzo Abe said he wanted a summit meeting with Chinese President Xi Jinping
· Credit Agricole SA jumped the most in three months after the bank wrote down its holding of bailed-out lender Banco Espirito Santo SA to zero while boosting profit excluding the charge
· Ukraine expressed concern about a new buildup of Russian forces on its border as it pursued an offensive against pro- Moscow separatists. Half the residents of the city of Luhansk fled as the fighting got closer
· Israel pulled its remaining troops out of the Gaza Strip after completing a campaign to destroy tunnels used by Hamas to stage attacks, bolstering a 72-hour truce that took effect early today
· A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with Kentucky tobacco plants, appears to be working
· Sovereign yields mostly higher. Euro Stoxx Banks -0.24%. Asian stocks mostly lower,European equities gain, U.S. stock futures decline. WTI crude and gold rise, copper falls
· European equities regain some poise on strong earnings from Credit Agricole, BMW, Deutsche Post and Standard Life
· EUR/USD breaks back below 1.34 as final services PMIs in the Eurozone disappoint, while UK services PMI spikes to 8-month highs, lifting GBP
· Market focus turns to US ISM non-manufacturing composite, factory orders and earnings from Walt Disney, Emerson Electric and CVS Caremark
*US Event Calendar*
· 9:45am: Markit US Services PMI, July final, est. 60.8 (prior 61)
· 9:45am: Markit US Composite PMI, July final (prior 60.9)
· 10:00am: ISM Non-Manufacturing Composite, July, est. 56.5 (prior 56)
· 10:00am: Factory Orders, June, est. 0.6% (prior -0.5%)
· 10:00am: IBD/TIPP Economic Optimism, Aug., est 47.3 (prior 45.6)
*ASIAN HEADLINES*
Asia-Pacific equities closed lower (Nikkei 225 -1.0%, Shanghai Composite -0.15%) as China’s July HSBC Services PMI fell to the lowest rate on record, indicating that the Chinese services sector failed to grow at all for the first time in nine years. Japanese markets were led lower by Fast Retailing (the largest weighted stock in the Nikkei 225) after domestic Uniqlo sales posted their first decline in 9 months.
*FIXED INCOME *
After UK PMIs beat expectations (59.1 vs. Exp. 58.0), UK gilts are seen underperforming, dragging German bund futures even lower after European fixed income products had already sustained selling pressure after the open on the back of mixed EU PMIs, stronger equities and ahead of supply from Germany tomorrow.
*EQUITIES *
Equities benefited from strong earnings, with outperformance in the benchmark CAC and DAX indices after Credit Agricole, BMW and Deutsche Post reported better-than-expected metrics. Furthermore, M&A news buoyed Vivendi as Telefonica tabled a bid for the Co.’s Brazilian GVT unit, lessening the likelihood of an offer for Telecom Italia’s TIM Brazil unit. As a result, Telecom Italia shares were halted limit down halfway through the trading day.
US stock futures trade flat as markets await earnings from Walt Disney, CVS Caremark and Emerson Electric.
*FX *
GBP outperformed its peers, following the release of better than expected UK Services PMI which came in at its highest level this year, together with somewhat mixed EU based PMIs, which also sent EUR/USD below 1.3400 level. Elsewhere, AUD/USD recovered off the lowest levels of the session following the release of mixed Australian and weak Chinese macroeconomic data, as the RBA left it benchmark rate unchanged at 2.5% and retained its neutral tone.
*COMMODITIES*
Gold has seen a bid tone in European trade, which originated in Asia, after the metal reached lows yesterday as geo-political concerns regarding Israel abated, increasing physical demand from east Asia.
WTI crude futures trade up USD 0.10 at USD 98.40, after snapping their 5-day decline during yesterday’s session and ahead of today’s API inventory report due at 2135BST/1535CDT
* * *
*DB's Jim Reid concludes the overnight recap*
We wake this morning to a pretty bad HSBC Chinese services PMI which may take the edge off the restored calm. The number printed significantly below last month’s reading (50.0 vs 53.1). Put in context, the print of 50.0 is the lowest since the series began in November 2005 and the talk is that the decline reflects a property slowdown in many cities. So there may be some disappointment this morning in markets but it may be cushioned by the likely further stabilisation of global bond yields.
Back to yesterday, there was no new news on the US economy, improvements in the geopolitical situation and a sigh of relief that the BES situation has come to a head even if sub bondholders and equity holders are losing out. As we discussed yesterday there was clearly going to be relief that senior bondholders escaped somewhat with bonds over 10 points higher yesterday and back above par. This is important for the sector as the overall situation was big enough to potentially cause widespread Euro funding fears if senior bondholders were punished.
The lessening of funding fears underpinned the outperformance of European senior financial credit yesterday. iTraxx Fin Senior rallied more than three basis points to 73bp, which was a decent achievement on a day when the European Main index closed virtually unchanged at around 67bp. The spread between the two has narrowed to just under 6bp - the tightest spread since July 7th which was just two days before Banque Privee Espirito Santo disclosed that ESI had missed repayment dates on some debt sold to its clients.
Interestingly European bank equities (+0.47%) were one of the best performing sectors yesterday in the context of a 0.23% fall in the Stoxx600. The news also helped Portuguese bond yields which rallied 7bp, benefiting other peripherals including Spain (-6bp) and Italy (-6bp). The S&P500 (+0.72%) staged a fairly impressive intraday recovery from the early lows, helped by the strong performance of market-heavyweight Berkshire Hathaway (+2.8%) after its recent earnings announcement and the late day news of a temporary truce in Gaza. An Egyptian plan for a 72 hour truce between Israeli and Hamas forces was agreed late yesterday and came into effect today at 0500 GMT. Israeli and Palestinian authorities have also reportedly agreed to talks in Cairo aimed at securing a longer term ceasefire agreement. Reuters is reporting that Israeli troops have destroyed the last Hamas built tunnel from Gaza into Israeli territory, providing a glimpse of hope that “Operation Protective Edge” may be drawing to a close.
US high yield enjoyed a relief rally on Monday, aided by last Friday’s benign non-farm payrolls and the relative stability of US rates (10yr yield -1bp to 2.48%). Indeed, the CDX High Yield index posted a gain of three-quarters of a point, which was its best performance since May 22nd and the iBoxx USD Liquid High Yield index rallied 8bp in yield terms to 5.90%. Over the past month, the latter has sold off by just under 100bp in yield terms, which leaves the index at pretty much flat on the year. We suspect that this repricing of risk is a welcome development at the Fed who has warned repeatedly about the froth in the lower-rated parts of the credit market in recent months.
With all the recent focus on HY outflows, especially from the ETF sector, markets may take some comfort from the latest daily fund flow data for the iShares iBoxx HY Corporate Bond ETF. On Monday the ETF recorded its first daily inflow in almost four week (July 7th). Though the amount of inflows yesterday was relatively modest at +$129m, it’s the largest since May 30th. It’s still clearly one days worth of data, but perhaps this represents the start of more balanced fund flows following a sustained month of withdrawals, or perhaps valuations are now more balanced with yields higher and positioning lighter relative to four weeks ago. The other large HY ETF, the SPDR Barclays HY Bond ETF, recorded a $81m outflow yesterday though which was its fifth consecutive daily withdrawal.
On a related note, the Fed’s quarterly loan officer survey released yesterday suggested a further easing in lending standards across various types of borrowing. Nearly one in four U.S. banks said they had eased mortgage-lending standards for borrowers with strong credit during the second quarter, the largest such movement by lenders since before the financial crisis. The survey of 75 domestic and 23 foreign banks operating in the U.S. also showed that banks are continuing to ease standards for various commercial and industrial loans.
Turning to Asia, the Chinese data has sent the AUD (-0.17%) and Copper (-0.2%) a touch lower overnight. In Japan, Reuters is reporting that BOJ officials are concerned about increasing signs of weakness in the Japanese economy following a recent sales tax increase. The article says that the central bank’s Board will discuss at their policy meeting this week whether to downgrade their outlook for exports and industrial production. This comes after a number of Street forecasters have downgraded their Japan Q2 GDP growth estimates. In EM Asia, Indonesia has proposed limiting the amount of government-subsidised fuel to the public, which is expected to benefit the government’s fiscal position. The IDR is 0.3% stronger against the greenback today. The RBA has kept policy unchanged at today’s meeting.
Staying in Asia, Bloomberg is reporting that the HK Monetary Authority has again intervened in the FX market to defend the USDHKD peg after recent local currency strength. The HKMA bought $925m yesterday, adding to the $8.4bn it purchased in July. Bloomberg is saying that some Russian companies are converting cash holdings to HKD in case of a further development of tensions between Russia and the West. Apart from a recent inflow of Russian cash, the article also notes that expectations of an improvement in Chinese growth and local corporate activity have been driving up demand for HKD.
Looking at the day ahead, the rest of the global service PMIs and ISMs are the main highlights on the data docket. With the service sector’s importance to the overall employment outlook, today’s US non-manufacturing ISM will be closely followed. DB is calling for a print of 56.0, slightly below the Street consensus of 56.5. Euroarea retail sales for June will be released this morning. US factory orders round out the data docket. The European corporate reporting calendar rolls on with updates from BMW and InterContinental due as we go to print, followed by UniCredit SpA. About 5% of BMW’s revenues are exposed to Russia according to the WSJ – so will the company join the growing chorus of European corporates warning about the effect of sanctions on revenue? Reported by Zero Hedge 3 hours ago.