woensdag 31 mei 2017

Quiet Month End, Markets Hide "Below The Surface" Fireworks

It has been another quiet session for global equity markets, with S&P futures flat, as are European and Asian stocks, which is perhaps odd, as there was quite a bit of newsflow and, in the case of China, outright fireworks. The main event in DM was the violent move in sterling, which as we first reported on Tuesday afternoon, tumbled for the first time this week after a YouGov poll showed Theresa May’s Conservative Party may fall short of a majority. The currency’s weakness boosted British equities, and the FTSE 100 Index rose even as miners and energy companies weighed on the broader European gauge after another night of sliding commodities in China...

"The return of U.S. and UK markets yesterday (after holidays) saw a little bit of weakness creep in as we head into month end and what has been a positive month for markets, with records broken on an almost daily basis," said Michael Hewson, chief markets analyst at CMC Markets. "This soft tone looks set to be carried over this morning," he said. Uncertainty about the reliability of polling, however, helped contain the pound’s retreat, which has since regained all of its overnight losses, but the moves are a reminder of the potential risks surrounding a series of national elections in Europe this year. Another key overnight event, one which helped the Shanghai Composite close higher, was a stronger than expected Chinese Mfg PMI, as well as a Non-manufacturing PMI which rose in May. Specifically, China’s NBS May manufacturing PMI came in at 51.2, same as the previous reading and slightly above expectations. The official non-manufacturing PMI (comprised of the service and construction sectors at roughly 80%/20% weights, based on our estimates) increased to 54.5 in May from 54.0 in April, on higher services PMI. Services PMI rose to 53.5 from 52.6 in April. On the other hand, construction PMI fell to 60.4 from 61.6 in April...

But China's "goalseeked" indices were far less notable than what happened in China’s currency market, where the offshore yuan jumped the most in four months as funding costs exploded amid speculation policy makers were supporting the currency in the wake of a surprise sovereign rating downgrade. At one point, in its ongoing crusade to crush offshore Yuan shorts, the PBOC sent the overnight interbank rate higher than 21%....

While the CNH overnight deposit rate hit a staggering 65%!

As a result, the CNH premkum to CNY rose as much as 2.3 standard deviations, as Beijing appears set to send the Yuan far higher, perhaps still hurting from the recent Moody's downgrade, and intent on teaching shorts a very memorable lesson. As shown in the chart below, the Yuan hit the strongest level against the dollar, with the offshore Yuan surging the most...

Meanwhile, as the currency surged, China's commodities, perhaps predictably, tumbled, with all mainland commodities tumbling by the close of trading...

# Simon Ting @simonting ALL mainland commodities closed in GREEN (down) today. Coke leads -8.97%, Rubber -7.81%, Coking Coal -7.64% 
Elsewhere in Asia, 10yr JGBs were lower amid a mild improvement of the risk tone in the region, while the curve was slightly flatter on outperformance in the super-long end, even after a Bloomberg report that the BOJ may "taper its taper" and revert to its traditional bond purchase schedule. Away from China, a much anticipated European inflation report showed that Draghi still has room to scapegoat weak eurozone inflation, afterboth headline and core CPI missed expectation, printing at 1.4% Y/Y (exp. 1.5%) and Core 0.9% Y/Y (Exp. 1.0%) respectively...

Also today, representatives from the ECB, ESM and the Greek Government will be in Frankfurt today to discuss, among other things, the prospect of a return to the financial markets for Greece. ESM and Greek officials recently claimed that Greece should be able to return to the market by summer 2018. But given the current impasse between Greece and her creditors, and the fact that a commitment on debt relief from the EU will probably be pushed back until the end of 2018, that seems optimistic according to Capital Economics. Looking at other asset classes, oil extended losses even as industry data later is expected to show a supply drop in the U.S. even as the American drill count is at the highest since April 2015. What is most notable here is that OPEC jawboning now appears to have lost all potency, as oil tumbled even after the Saudi energy minister vowed to do "whatever it takes" to cut inventories. Oil has since tumbled to fresh session lows.
# Amanda Cooper @a_coops1 Falih has gone for "whatever it takes" "committed to cutting inventories to 5Y ave" and "joint commitment" and #Brent is 10c off session low 
And yet, despite all this, markets barely batted an eyelid, and world stocks are poised to end May up nearly 2 percent, marking the seventh straight monthly increase and the longest monthly winning streak in over a decade. The MSCI's global equity index held steady on Wednesday, while European stocks edged down 0.1% in early trade following Wall Street's dip on Tuesday. The MSCI Asia Pacific Index dropped 0.1 percent, paring its advance for May to 2.6%. Some Asian shares were boosted by the noted strong Chinese PMI surveys, although a sturdy performance from the Japanese yen helped push the Nikkei into the red. European indexes were slightly higher early on Wednesday, with the Stoxx 600 up 0.2% to 381.31 . U.S. futures pointed to a rise of 0.1 percent on Wall Street. In rates, the yield on 10-year Treasuries rose one basis point to 2.22 percent after declining four basis points in the previous session. Benchmark yields in the U.K. were little changed after a drop of two basis points Tuesday. Economic data include MBA mortgage applications, Chicago PMI and pending home sales. Analog Devices and HP are among companies reporting earnings.
*) Global Market Snapshot;
- S&P 500 futures little changed at 2,411.70
- STOXX Europe 600 up 0.2% to 391.31
- Nikkei down 0.1% to 19,650.57
- Topix down 0.3% to 1,568.37
- Hang Seng Index down 0.2% to 25,660.65
- Shanghai Composite up 0.2% to 3,117.18
- German 10Y yield rose 1.2 bps to 0.304%
- Euro down 0.06% to 1.1179 per US$
- Italian 10Y yield rose 10.9 bps to 1.997%
- Spanish 10Y yield fell 0.5 bps to 1.523%
- Brent futures down 1.1% to $51.25/bbl
- Gold spot up 0.1% to $1,264.11
- U.S. Dollar Index up 0.1% to 97.38
*) Top Overnight Stories from Bloomberg;
- Euro-Area Prices Undershoot Estimate; Flynn to Give Documents for Russia Probe; China PMI Steady, Topping Estimates
- BlackRock Inc. expects insurance companies could move more than $300 billion into debt exchange-traded funds over the next five years, thanks to a gate that’s been lifted in U.S. regulations
- Investors including Elliott Management Corp. are seeking to pressure NXP Semiconductors NV to renegotiate with Qualcomm Inc. to persuade the U.S. company to raise its $110-a-share purchase offer, according to people familiar with the process
- American Tower Corp. is exploring a bid for Cellnex Telecom SA to expand in Europe as the Spanish tower operator’s main shareholder considers selling assets as part of a merger, according to people familiar with the matter. Cellnex surged in Madrid trading
- Euro-area inflation slowed more than economists forecast, giving ammunition for European Central Bank policy makers who say it’s too early to commit to an exit from monetary stimulus
- Deutsche Bank AG agreed to pay $41 million to settle Federal Reserve allegations that its U.S. operations failed to maintain adequate protections against money laundering, the latest in a string of fines that have cost the German lender billions of dollars
*) Asian markets shrugged off a negative lead from the US where the S&P 500 snapped a 7-day win streak, with the region mixed as China returned from holiday to be greeted by encouraging PMI data. This aided a recovery in the ASX 200 (+0.1%) which was underpinned by IT and Financial sectors, while Nikkei 225 (-0.1%) lagged after Industrial Production figures missed estimates. Shanghai Comp. (+0.2%) initially outperformed as mainland participants returned to market and digested better than expected Official Chinese Manufacturing PMI as well as an improvement in Non-Manufacturing PMI data, although the support from the data gradually faded throughout the day. 10yr JGBs are lower amid a mild improvement of the risk tone in the region, while the curve was slightly flatter on outperformance in the super-long end. Chinese Official Manufacturing PMI (May) 51.2 vs. Exp. 51.0 (Prey. 51.2). Non-Manufacturing PMI (May) 54.5 (Prey. 54.0)
# Top Asian News;
- Yuan Surges in Hong Kong as Traders See PBOC Squeezing Bears
- Iron Ore Rout Drives Price Into $30s for Lower-Grade Miners
- Dana Gas Venture Seeks $26.5 Billion in Damages From Iraqi Kurds
- Hong Kong Stocks Set for Longest Run of Monthly Gains Since 2013
- BOJ to Keep Pace of JGB Buys in June; Tweaks
- VietJet to Buy $3.6 Billion of CFM Engines for Growing Fleet
- Kabul Hit by Worst Attack Since Last July, Scores Dead
*) In Europe, price action and macro newsflow has been relatively quiet for most part of the European morning, stocks are modestly lower across the board with material and energy names the notable laggards. This comes despite some encouraging data from China, which reported Mfg. PMI was unchanged at 51.2 against expectations of a fall to 51. Notable outperformers this morning is Ericsson after activist investor Cevian Capital bought a stake of over 5% in the Co. Tesco shares slipped in the wake of the latest Kantar World panel data which showed discount retailers sales rising the most since 2015. In credit markets, OATs are benefitting from the large month-end extension with the 10 and 30yr spread vs the bund tighter by 1.5bps. Elsewhere, bund yields have ticked up this morning, slight underperformance led by the long end.
# Top European News;
- Italy Unemployment Rate Fell to Almost 5-Year Low in April
- Co-Op Bank Said to Head for Debt-for-Equity Swap, Sale Fades
- Vivendi CEO Said Poised to Become Telecom Italia Chairman
- Deutsche Bank Fined $41 Million for Money-Laundering Lapses
- German Unemployment Declines as Economy Poised for More Growth
- Bulgaria Seeks Political Backing to Lock It on Road to Euro
- Visco Says Italy Banks May Lose $11 Billion in Bad-Loan Sales
- Veneto Banks Solution Must Be Found Soon: Pop. Vicenza CEO
- Metro’s Consumer Electronics Loss Dampens Spirits Ahead of Split
- Rocket Internet Boosts Startup Sales, Improves Profitability
# In currencies, the pound was the key mover, initially tumbling, then recovering all losses and trading at 1.2850 latest. The euro was little changed, heading for a monthly gain of 2.6 percent, its best performance in more than a year. The yen was up 0.1 percent at 110.76 per dollar after rising 0.4 percent Tuesday. The South African rand strengthened 0.1 percent after tumbling for two days. The Bloomberg Dollar Spot Index was little changed for a third straight day. The gauge is down 1.3 percent for the month. Most of the action, if we can call it that(!), has been in GBP, where the YouGov forecasts through their latest polls put a median probability that a Tory win will fall short of attaining a majority. When the headlines first hit the wires, Cable was trading in the mid 1.2800's, but hit down through 1.2800, a series of attempted recoveries continue to run into sellers as election fears dictate. Added pressure seen through the month end demand seen in the EUR/GBP rate, but this pair is struggling around 0.8750, above which lies the strong resistance zone from 0.8800-0.8860. Cable support ahead of 1.2750 looks vulnerable though. Elsewhere, USD/JPY is struggling again, and the repeated moves below 111.00 test the resolve of buyers lining up ahead of 110.00-50. US Treasury yields are struggling, though no major sell off in sight as yet, but we have some key data to look to over Thursday and Friday, so the above support may hold in the interim. EU CPI was 0.1% off expectations at at 1.4%, but widely anticipated after the German release yesterday. The unemployment rate eased off to 9.4%, but the EUR is modestly supported today on cross rate flow.
# In commodities, there is not too much activity across the commodity spectrum to look to as the global risk mood is pretty balanced at the present time. Near term USD weakness is also adding little influence also, but after the China PMIs overnight, which were a touch above expectations, we would have expected to see some stabilisation in the metals complex. Copper is back in the middle of the USD2.50-2.60 range, but remains heavy amid losses elsewhere. After outperforming yesterday, Nickel is down over 2.5% today, losing the 9000 level (since June last year (with Zinc not far behind at a little under 2.0% down on the day. Oil prices have been drifting sideways, but with WTI struggling to stay close to USD50.00. This has been exacerbated by a rise in Libyan production levels, which has pulled Light Texas under USD49.00 recently. Brent steady in the mid USD51.00's, but dragged lower. Nb, APIs are tonight. Silver remains comfortably above the USD17.00 level, while Gold is struggling for upside despite the weakness in the greenback.
# Looking at today’s calendar, we’ll get the May Chicago PMI which is expected to nudge down a little to 57.0, and also April pending home sales. The Fed’s Beige Bok is also due to be released today while the Fed’s Kaplan speaks at 8am BST....