U.S. index futures point to a slightly higher open, as markets in both Europe and Asian fall.The EUR surges to one year highs as markets continue to reverberate from Draghi's hawkish comments while yields rose around the globe following similar hawkish comments from Fed speakers on Tuesday. Asian stocks closed softer overall with benchmark yields sharply higher following hawkish comment from Draghi and Yellen. The MSCI Asia Pacific Index fell 0.3 percent as declines in technology shares overshadowed gains in banks and raw-materials companies. Samsung Electronics Co., Taiwan Semiconductor and Tencent led the selloff with losses of at least 1.2 percent. Australian 10-year yield jumps as much as nine basis points, their biggest rise since November; while CAD and AUD lead gains in broad-based dollar pullback.
# PBOC skipped open market operations for fourth day, and drained liquidity fro the market for the 6th day while strengthening the daily CNY fixing by most in almost four weeks; Shanghai Composite closed modestly in the red as Dalian iron ore ended near unchanged after yesterday's torrid gains. Of note were comments by a PBOC adviser, who said he sees no further tightening in 2H monetary policy.
In the start of the overnight session, as usual eyes were on the yuan, which was on deck for its biggest two-day gain since June 1, with China’s central bank strengthening its daily fixing by the most in almost four weeks after an overnight drop in the dollar, and the PBOC strengthened its daily reference rate by 0.35% to 6.8053. The yuan continued to rise on speculation of central bank intervention, with the offshore currency up 0.2 percent after surging 0.6 percent Tuesday. As a reminder, on Tuesday the Yuan surged in afternoon trade amid talk of PBOC intervention. Speaking of the PBOC, the central bank drained a net 50 billion yuan in open-market operations, pulling funds from the financial system for the sixth day in a row.
# The big action however continues to be the follow through from Draghi's comments on Tuesday which unleashed a hawkish avalanche on Tuesday. As a reminder, Draghi said that “as the economy continues to recover, a constant policy stance will become accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments, not in order to tighten the policy stance, but to keep it broadly unchanged”. In other words if prices rise as the ECB expect in 2018 ECB policy will become more accommodative as inflation picks up. Draghi also added that “all the signs now point to a strengthening and broadening recovery in the Euro area” and that “deflationary forces have been replaced by reflationary ones”. The ECB President also cited that risks of “hysteresis effects” had diminished and that “now we can be confident that our policy is working and that those risks have abated”. Draghi also suggested that political winds are now becoming tailwinds. As DB strategists called it, the speech seemed to mark a transition from the “whatever it takes” period to “it will take less” and a potential slow turning point in the direction of travel towards tighter policy.
The final day of the Sintra ECB forum is today and a as reminder a policy panel between Draghi, the BoE’s Carney, BoJ’s Kuroda and BoC’s Poloz is due at 1.30pm BST which will be worth watching.
The market reaction to Draghi's comments was violent with 10y Bund yields surged +12.5bps to close at 0.368% and back to the highest yield since May 24th. That was the weakest day for Bunds since August 25th 2015 or 22 months. Comparable OATs rose 13.7bps to 0.732% which matches the sell-off on November 10th last year when yields surged higher post Trump’s election victory. Prior to that you’d have to also go back to August 2015 to find as big a sell-off. It was a similar story in the periphery too with yields in Italy, Spain and Portugal up +16.7bps, +12.2bps and +13.3bps respectively. 10y Gilts also surged +7.9bps to 1.088% while the moves also weighed on US Treasuries with 10y yields darting up +6.8bps to 2.206%.
Fast forward to Wednesday when the euro touched a one-year high and government bond yields climbed as investors digested a series of hawkish messages from central banks. European stocks sank in early trading as the global selloff in technology companies spread, while German 10Y yields rose as high as 0.40%, nearly doubling in two days, as the curve steepened sharply...
The Euro rose to the highest level since last June's Brexit vote and most bonds extended declines. The currency is now up almost 10% this year. The head of the Federal Reserve, Janet Yellen, and one of her lieutenants, Patrick Harker, said on Tuesday that they expected to continue raising U.S. interest rates, but it couldn't rally the dollar.
That provoked the banking world's single biggest cheerleader for a stronger dollar, Deutsche Bank, to declare the end of the greenback's bull run which dates back to 2014.
"I do think the euro now has got quite significant momentum behind it and I think that will build towards the confirmation of some tapering announcement this year. So I would be long the euro on a tactical basis for the rest of the year," JPMorgan Asset Management's Global Market Strategist, David Stubb, said.
At the same time core European bonds are the significant area of vulnerability to better euro zone growth and to changes in ECB policy, he told Reuters. "If you are looking at a 10-year maturity and further out, it is a global bond market and the extremely low yields in core Europe stick out alongside Japan and Switzerland as the places that seem stretched in terms of valuation."
Not helping the doves this morning was the latest M3 and loan growth data out of Europe, which rose again, with M3 up 5% Y/Y, while Loan Growth rose by 2.6% Y/Y, up from 2.4% the month before, and once again suggesting that Draghi risks falling behind the curve if he doesnt tighten soon...
Janet Yellen added to the hawkish momentum as she noted asset valuations look rich and signaled the U.S. economy can withstand higher interest rates, and Treasury yields rose again after the biggest increase since January. Speaking in London, Yellen made a reference to asset valuations being “somewhat rich” by some metrics contributing to a late leg lower for risk assets in the US. However, the big negative catalyst had taken place earlier when the news that the healthcare legislation vote was to be pushed back beyond July 4th hit. Senate majority leader McConnell reflecting what is almost certainly still a lack of votes and clear divisions within the party. That was seen as another blow to the Trump fiscal trade while away from that markets were also spooked by the news of a fresh global cyberattack which has spread and hit government and corporate systems alike.
And while Yellen qualified her assessment that asset valuations look high by some measures, the note of caution came just as markets were buffeted by a series of events, including an IMF cut to its U.S. growth forecast, Google suffering the biggest ever EU antitrust fine, a fresh blow to the Republican agenda in Washington and a global cyberattack.
“Central banks taking the punch bowl of liquidity away does not bode well for the outlook for volatility in the short term, leading to position adjustments,” Morgan Stanley strategists including Hans Redeker wrote in a note. “Conditions for the emergence of a proper bear market are not yet in place, even so, yesterday’s high trading volume suggests that corrective activity may stay with us for several days.”
Futures on the Nasdaq 100 Index retreated in a sign that the selloff in technology shares may not be over, while a drop in oil also weighed on equity markets. Nasdaq 100 futures expiring in September fell 0.2 percent at 6:03 a.m. in New York, with shares of chipmakers down in premarket trading.
Overnight, Wall Street's S&P 500 posted its biggest one-day drop in about six weeks and closed at its lowest point since May 31. It was spooked after the U.S. Senate delayed voting on a healthcare reform bill, rekindling worries about the timeline of Donald Trump's business-friendly policies. Futures on the S&P 500 Index were higher by 0.1% as of 6:30am EDT. The index lost 0.8% Tuesday, the most since May 17.
In currencies, the euro rose 0.2 percent to $1.1358 as of 10:02 a.m. in London, after briefly touching $1.1379, the highest level since June 2016. The currency surged 1.4 percent on Tuesday.
The dollar index, which gauges the U.S. currency against a basket of six major counterparts, edged down 0.2 percent to 96.227, well below its previous session high of 97.447.
The Bloomberg Dollar Spot Index fell less than 0.1 percent after declining 0.6 percent in the previous session. The Canadian dollar strengthened 0.4 percent, adding to a 0.4 percent gain on Tuesday. Bank of Canada Governor Stephen Poloz said in a CNBC interview that interest rate cuts “have done their job” and that levels are now “extraordinarily low.”
The weaker dollar helped bolster spot gold, which was up 0.4 percent at 1,251.59 per ounce, and also boosted crude. Oil’s winning streak ended as industry data showed American stockpiles rose: WTI futures fell 0.6 percent to $43.99 after climbing 4 percent in the previous four sessions. Gold rose 0.5 percent to $1,252.84 an ounce, climbing for a second day.
In rates, the yield on 10-year Treasuries added three basis points to 2.23 percent after jumping seven basis points Tuesday. The yield on German bunds climbed one basis points, after rising 13 basis points in the previous session for the biggest surge since December 2015. British yields rose four basis points.
While there are no major events or central bank speeches, the Fed is set to announce the results of the second part of its annual bank stress test, which will determine whether lenders can increase dividends and share repurchases.
*) Bulletin Headline Summary From RanSquawk;
- EUR/USD breaches 1yr highs post-Draghi yesterday (due again today at 1430BST)
- EU equities continue to slip with healthcare names seen softer
- Highlights include comments from slew of central bank speakers including Carney and Poloz, DoE Crude inventories
*) Markets Snapshot;
- S&P 500 futures up 0.1% to 2,422
- STOXX Europe 600 down 0.3% to 384.76
- Nikkei down 0.5% to 20,130.41
- Topix down 0.3% to 1,614.37
- Hang Seng Index down 0.6% to 25,683.50
- Shanghai Composite down 0.6% to 3,173.20
- German 10Y yield rose 0.8 bps to 0.378%
- Euro up 0.3% to 1.1376 per US$
- Brent future up less then 0.1% to 46.69
- Italian 10Y yield rose 15.9 bps to 1.768%
- Spanish 10Y yield fell 2.5 bps to 1.47%
- Gold spot up 0.5% to $1,252.94
- U.S. Dollar Index down 0.2% to 96.22
*) Top Overnight News;
- Yellen says asset valuations ’somewhat rich’, rates to rise very gradually; Kashkari says economy not on verge of overheating, inflation low
- BOC’s Poloz expects Canada’s growth to stay above potential; looks as though ’rate cuts have done their job’
- PBOC adviser sees no further tightening in 2H monetary policy
- China 2Q economic growth may be 6.8%, CPI 1.4%: Business Herald
- Japan PM Abe said to ditch balanced budget pledge to delay sales tax hike
- RBA could raise rates 8 times in two years, ex-board member Edwards says
- API inventories according to people familiar w/data: Crude +0.9m; Cushing -0.7m; Gasoline +1.4m; Distillates +0.7m
- Rate-Cutting Race Among BRICS Outliers Pits Russia, Brazil
- McConnell Scrambles to Win GOP Votes for Troubled Health Measure
- Moon Enlists Chaebol Execs to Disarm Trump’s Trade Threat
- Buffett Renews Attack on Health Bill as ‘Relief for Rich Act’
- Toshiba Sues Western Digital for 120 Billion Yen in Damages
- F-35 Unreliability Risks Strain on Pentagon Budget, Tester Says
- Google News Redesigns With a Focus on Facts, More User Control
- Australia Signs A$70m Sustainment Contract for C-17A With Boeing
- Bluebird Bio Prices 3.81m Shares at $105 Apiece
- Mattel Accused of ‘Loading Up’ Stores to Bolster Financials
- Dow, DuPont to Sell Some Assets in Competition Bureau Agreement
- International Paper to Pay $354m in Kleen Products Settlement
- Accenture Plans to Spend $1.8B on Acquisitions in 2017: Mint
- Glenview Said to Call for Changes in Dow-DuPont Deal Plan: WSJ
*) Asian equity markets traded mixed after a slight improvement from the losses on Wall Street where there was a renewed sell-off in tech names and healthcare suffered after the Senate delayed the vote to repeal and replace Obamacare. This weighed on Nikkei 225 (-0.3%) from the open although downside was stemmed by yesterday's JPY weakness, while ASX 200 (+0.6%) was kept afloat by strength in miners and materials stocks. Shanghai Comp. (+0.1%) and Hang Seng (-0.3%) were both initially lower after the PBoC refrained from liquidity operations for the 4th consecutive session, before mainland sentiment gradually recovered amid an optimistic forecast of 6.8% growth for China this year by Bank of China and after reports that a PBoC adviser expects no further tightening of monetary policy during H2. 10yr JGB are marginally lower despite the risk averse tone in Japan and a moderate BoJ Rinban announcement of JPY 880b1n, while a slight underperformance was seen in the long-end resulting to a mildly steeper curve.
# Top Asian News;
- China Prepares Bigger Opening to Its $9 Trillion Bond Market
- Worst Likely Over For Malaysian FX and Rates Markets, CIMB Says
- H.K. SFC Investigates Short Sellers Who Issue Research Reports
- Small China Banks Rally As Investors Seen Seeking Low Valuations
- Japan’s FTC to Take ‘Strict Action’ on LNG Antitrust Violations
- Cofco, ADM Hit by New Cyberattack That’s Spreading Worldwide
- Japan Tobacco Faces Supply Shortage as Rivals Pile On In Japan
*) In European stocks, there has been a modest extension seen in EUR/USD this morning, stretching the lead gains to a little shy of 1.1390. The hawkish European equities are trading lower across the board (Eurostoxx 50 -0.8%) in a continuation of the some of the price action seen yesterday, most notably on Wall Street. More specifically, healthcare names are seen softer in Europe after yesterday's announcement that the US healthcare bill vote is to be delayed until after Independence Day. Tech names continue to face selling pressure in the wake of the Supreme court ruling earlier in the week regarding the Trump travel ban while energy names are also adding pressure to indices after yesterday's 851 k build in the API's. From a fixed income perspective, prices have continued their descent (GE 10yr yield +2.4bps) seen since yesterday's more hawkish than anticipated leaning from ECB President Draghi. That said, some market participants have raised the question over whether the central bank head will try and redress the market later to at 1430BST given the extent of the moves yesterday. In terms of performance elsewhere, spreads are broadly tighter to the German benchmark with 10yr French paper tighter by 0.7bps with BTPs bucking the trend (1bps wider to GE 10yr) amid impending supply on Friday.
# Top European News;
- JPMorgan Reshuffles European Management as Casanueva Retires
- Asset Management Fee Pressure to Intensify After FCA Report: RBC
- Draghi Gets Backing in Argument Over How to Best Spur Reforms
- May’s New U.K. Government to Face First Test on Austerity
- Deutsche Bank Raises EUR/USD Forecast After Draghi’s Speech
- Philips to Buy Spectranetics, Starts Buyback of Up to EU1.5B
- Maersk Has Shut Down Some Systems to Help Contain Cyber Attack
# In currenices, a modest extension seen in EUR/USD this morning, stretching the lead gains to a little shy of 1.1390. The hawkish takeaways from president's Draghi's speech at the ECB forum continue to ring in the ears, and we continue to wrestle for position for a test on 1.1400, with selling interest aplenty all the way through to 1.1500. EUR gains have been added against the major counterparts across the board, and have been underpinned by the EUR/CHF move above 1.0900 again. EUR/GBP put another dent into the upside ahead of 0.8900, but as we have reported, strong resistance will be reinforced by even stronger levels ahead of 0.9000. This serves to prop up Cable, which tested through 1.2850 in NY yesterday, but with liquidity improved, buyers are having a tough time of it this morning. CAD still probing the downside as we challenge lows ahead of 1.3100. Oil prices, and indeed all commodities have edged higher, partly down to USD weakness, and this 'cycle' has generated the move lower to put the key 1.3000 level on the radar, but it is proving slow going in the meantime.
# In commodities, as a function of the weaker USD, we see another round of gains seen across the commodity spectrum, where we will lead with the metals market as Copper extends above USD2.65. The lack of momentum is a clear sign of caution, and at these levels unsurprisingly so as the ongoing concerns over global demand linger despite a broadly optimistic outlook from central banks globally. On the day, we are seeing prices coming off better levels, Zinc pulling back a little more than the rest after recent bouts of outperformance. WTI is back above USD44.0 this morning, but we sense USD45.0 will be a challenge as there is no change in the fundamental driver that is the growing rate of US shale production. Gold is close to returning back to levels seen Monday morning, just before the sharp USD20.0 hit, with Silver moving decidedly hesitantly inside a USD16-17 range for now.
# Looking at the day ahead, in the US data includes the May advance goods trade balance reading, wholesale inventories for May and pending home sales data for May. Away from the data the main focus for markets today will likely be the aforementioned ECB panel debate between Draghi, Carney and Kuroda. Speaking of the Fed, the results from the second part of the Fed’s stress test (known as the Comprehensive Capital Analysis and Review) will also be out late this afternoon which determines whether banks can increase dividends and conduct share repurchases....