The euro soared to the highest level in over a year while bond yields and global shares also climbed, as an ongoing barrage of coordinated hawkish comments from central banks signaled the era of easy money might be coming to an end for more than just the United States. S&P futures were fractionally in the green following the best day for US equities in two months, as banks climbed after passing the Fed's stress tests and announcing bigger than expected shareholder payouts. Asian stocks posted broad gains and European shares were little changed while oil climbed for the sixth consecutive day, with WTI trading above $45. The euro rose for a third day against the dollar as hawkish comments from Mario Draghi this week boosted bets the ECB is preparing to unwind stimulus, while the ECB's attempt to walk back Draghi's hawkishness was roundly ignored. EUR/USD rose as much as 0.4% to 1.1425, highest since June 2016...
“It will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar,” says Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “Many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB.” The residual sentiment from Draghi's statement meant yields across developed markets continued their upward move, with Bunds back to 0.40%, nearly doubling in the past three days...
In keeping with the overall hawkish sentiment, BOE's chief economist Andrew Haldane echoed Mark Carney's comments from yesterday, when he said that the BOE should seriously look at rising rates, although he added that he is happy with where rates are now. His comment sent the pound briefly above 1.30, back to levels last seen last September, before paring some gains.
The Bank of Canada went further, with two top policymakers suggesting they might tighten as early as July.
"This is simply the central banks getting together and trying to arrest deflation," said Nomura's head of G10 currency trading Peter Gorra. "They are trying to be as smart as they can and agreeing that they have to act in unison. I don't think this is necessarily a dollar move and I don't think the dollar's rally is over. They are just trying to add some two-way risk to the market."
As the Euro surged, the dollar tumbled, touching its lowest since October, before Trump was elected U.S. president - against its broad index, as investors shifted to the view that the U.S. Federal Reserve might not be the only game in town when it comes to higher interest rates.
# For those who may have missed the fireworks over the past few days, here is a concise and accurate summary from SocGen's Kit Juckes:
Apparently, ECB President Mario Draghi's comments about reflationary forces replacing deflationary ones were mis-interpreted by markets and were intended to be more balanced. A case of ham-fisted communication that argues for less forward guidance by policy-makers? Maybe, though I think the strategy on both sides of the Atlantic, which is to only change policy settings after ensuring markets won't be surprised, has merit. And more importantly, will continue. What I don't think, is that you can 'unsay' things by expressing surprise at the market reactions, any more than the king's soldiers could put Humpty-Dumpty back together again.
The ECB isn't going to hike rates soon. And how fast they move to reduce the pace of bond purchases probably does depend on how much the euro rallies. But the turn in the economy is pretty plain for us all to see.
This week it has been the IFO survey and money supply data that show a continued acceleration in underlying loan growth. So of course the lifespan of extraordinarily easy policy settings (particularly asset purchases) is shortening. The lack of inflation, which is going to be highlighted today by Germany CPI figures that are likely to be as low as the Italian ones yesterday, ought to anchor bond yields and affect expectations about what removing extraordinary accommodation means, but they don't change the fact that policy, like the economy, has reached a turn in the road. And that turn is positive for the euro, if only because it has been kept at a very low valuation by the combination of negative rates and bondbuying, despite a large current account surplus.
The ECB can't normalise monetary policy without sacrificing the extreme cheapness of the currency, but maybe the ECB President thinks he can avoid a disorderly currency correction if he managers to guide market expectations. From here, we still think we're a heading, erratically, towards EUR/USD 1.20 and above EUR/JPY 130...
Helping market sentiment this morning was the result from the latest Stress Test, which saw all banks pass, and which would see banks return the most capital on record. JPMorgan, Citigroup and Bank of America Corp. led U.S. firms in unveiling plans to boost dividends and stock buybacks more than analysts had projected, after every lender passed annual stress tests for the first time since the Fed began the reviews in the wake of the 2008 financial crisis. Bank shares rallied in late trading...
Boosted by the US stress test, banks led gains in Europe and Asia, after the S&P 500 Index rebounded from the biggest selloff in six weeks. European equity markets opened higher with initial strength in the banking sector after U.S. lenders’ share buyback announcement, only to give way to declines led by utilities after UBS cuts the sector.
The S&P rose 0.9 percent on Wednesday, bouncing back from a loss of 0.8 percent. It’s on pace for a seventh straight quarterly advance. The Nasdaq Composite Index jumped 1.4 percent on Wednesday. Technology shares climbed while miners jumped with commodity prices. The biggest banks climbed after clearing stress tests and then announcing shareholder payouts. JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. added 2 percent or more in premarket trading.
Bund futures dipped after German regional CPI releases, all coming in strong, sliding to session lows. The Saxony CPI, which has a strong correlation to headline German inflation; rose +1.7% y/y compared with prior +1.6%; Bloomberg estimates show the headline German print is forecast to fall from 1.5% to 1.4% y/y, creating some upside risk. German 10y yields rose as much as 5bps at 0.42%, wider by over 3bps vs Treasuries.
# The euro advanced for a third day against the dollar as comments from President Mario Draghi this week bolstered bets the European Central Bank is preparing to unwind stimulus, despite the ECB's failed attempt on the next day to walk back Draghi's hawkishness. EUR/USD rises 0.4% to 1.1425, highest since June 2016. Boosting the Euro was Draghi himself, who when speaking in Portugal on Tuesday, said reflation of the euro-area economy creates room to reduce stimulus; he didn’t retract those comments when he spoke again Wednesday, even as unidentified officials say the market reaction was hypersensitive.
In Asia, the Aussie pushed to three-month highs amid rising yields and commodities rebound. Australian 3-year yield rises to highest since early May as red and green bank bills extend sell off. Asian stock indexes closed firmly green with Korea's Kospi rising to a new record high, Nikkei gains 0.5% while ASX 200 is one percent higher. Yuan rallies to seven-month high against dollar as PBOC strengthens daily fixing to two-week high and official journal flags a stronger bias for rest of the year. The composite was up 0.5%.
As Bloomberg notes, Global stocks are poised for the best first half of a year since 1998, gaining 11% to a record on the back of constant central bank liquidity injections. Investors are putting their faith in the robustness of earnings as the economy continues its recovery, shrugging off a host of worries from oil’s slump into a bear market to political wrangling in Washington. But risks remain: markets swung this week as the debate on normalizing central bank policy intensified after nine years of stimulus.
The euro surged 1.4 percent on Tuesday in the wake of comments from European Central Bank President Mario Draghi that investors took to be hawkish. A tumultuous Wednesday session followed as officials said the market had misjudged his message...
The latest moment of euphoria may not last long, however.
"Central banks will be very cautious in their approach," said Martin Whetton, a senior rates strategist at ANZ. "But once they start tightening in concert, and their bloated balance sheets start unwinding, it is fair to say that bonds, equities, house prices and other asset markets will face stiffer headwinds than they have for a long time."
In commodities, the big mover was oil which rose for a sixth session, with Brent near $47.50/bbl, WTI ~$45. Benchmarks both rise for 6th consecutive session, longest run of gains since early April. Continued short-covering and a weaker dollar seen as helping push prices higher. “There’s probably still short-covering going on,” says Giovanni Staunovo, commodity analyst at UBS. “A weaker dollar and risk-on environment is helping too”
Also on the topic of oil, there was a quick statement by the UAE energy minister Suhail Mazrouei, who said that there are no talks about deeper OPEC cuts, and added that "we are not worried about the market recovery” and there is “no plan or talks” for further production cuts, Mazrouei tells reporters in Paris. “Of course, additional production coming from several producers is prolonging the recovery, but I think it’s a rather short term, and we hope to see more recovery in the third and fourth quarter. There is a drawdown from the inventories, there has been a correction. Yes, the correction is a bit slower than expected. The second quarter is always a low demand quarter. Third quarter and fourth quarter, we will have a pickup on the demand, and hopefully we will reach a more balanced market.”
Gold fell 0.3 percent to $1,245.82 an ounce despite the weaker dollar. Copper futures jumped 0.8 percent, advancing for a seventh day.
In currencies, the Bloomberg Dollar Spot Index slipped 0.1 percent as of 9:29 a.m. in London, dropping for a third day to the lowest since October. The euro increased 0.4 percent to $1.1424, the highest level since last year’s Brexit vote. The pound climbed 0.5 percent to $1.2984, heading for a seventh straight day of gains, the longest winning streak since April 2015. The Canadian dollar rose 0.1 percent after jumping 1.2 percent on Wednesday as Bank of Canada Governor Stephen Poloz reiterated he’s considering tighter policy.
In rates, the yield on 10-year Treasuries rose two basis points to 2.25 percent, after gaining two basis points on Wednesday and jumping seven basis points in the previous session. The yield on U.K. gilts advanced four basis points to 1.20 percent. French 10-year yields also added four basis points, as did those on 10-year German bunds.
Economic data includes initial jobless claims and 1Q GDP. Constellation Brands, Walgreens, Micron and Nike are among companies
reporting earnings. Bloomberg Dollar Spot Index -0.1%, industrial metals
*) Bulletin Headline Summary From RanSquawk;
- GBP/USD extended on gains and EUR/USD rose above 1.1400, as the USD-index languished below 96.00
- Asian equity markets sustained the momentum from US, where the S&P 500 posted its best day in 2 months
- Looking ahead, highlights National German CPI, US GDP, BoE's Carney and Fed's Bullard
*) Market Snapshot;
- S&P 500 futures up 0.1% to 2,441.5
- STOXX Europe 600 down 0.05% to 385.62
- Nikkei up 0.5% to 20,220.30
- Topix up 0.6% to 1,624.07
- Hang Seng Index up 1.1% to 25,965.42
- Shanghai Composite up 0.5% to 3,188.06
- Gold spot down 0.3% to $1,245.72
- U.S. Dollar Index down 0.3% to 95.77
- German 10Y yield rose 4.7 bps to 0.415%
- Euro up 0.4% to 1.1425 per US$
- Italian 10Y yield fell 2.8 bps to 1.74%
- Spanish 10Y yield rose 3.2 bps to 1.461%
*) Top Overnight News;
- Banks Unleash Surprisingly Big Payouts After Fed’s Stress Tests
- Merkel Slaps at Trump and Brexit in Combative Speech Before G-20
- Trump Travel Ban Said to Start Thursday Evening U.S. Time
- Staples to Be Acquired by Sycamore Partners for $6.9 Billion
- Siemens, Bombardier Said to Explore Two Rail Joint Ventures
- Pound on Hot Streak as Carney Hints at Higher Interest Rates
- Euro-Area Economic Confidence Hits Decade High as ECB Mulls Exit
- Money Markets Dragged From Slumber as Central Banks Turn Hawkish
- Activist Crystal Amber Pushes Northgate Executives to Sell
- Shenhua Said to Mull GD Power Takeover Amid Guodian Merger
- French Privacy Watchdog Closes Probe Into Microsoft Windows 10
- Morgan Stanley Hires Barclays’s Mak to Head Malaysia Dealmaking
- Santander Hires Morgan Stanley for Popular Asset Plan: Vozpopuli
- Wood Group 1H Weaker Than Anticipated, Cautious on 2017 Outlook
- BHP’s Nasser Says Activism Rising as Counter to Passive Funds
*) Asian equity markets sustained the momentum from US, where the S&P 500 posted its best day in 2 months as financials rallied ahead of Fed stress tests results and buyback announcements. This also inspired optimism for financials in ASX 200 (+1.1%) and Nikkei 225 (+0.4%), with the former further bolstered by commodity names after advances in crude and with iron ore prices higher by around 10% this week. Shanghai Comp. (+0.3%) and Hang Seng (+0.7%) adhered to the rising tide, although the mainland somewhat lagged after the PBoC refrained from liquidity operations for a 5th consecutive day citing relatively high liquidity amid month-end fiscal spending. Finally, demand for 10yr JGBs was dampened amid the widespread increased risk-appetite and as the BoJ refrained from a Rinban announcement, while the curve slightly flattened on underperformance in the short-end. PBoC refrained from open market operations for a 5th consecutive day, due to high liquidity levels from month-end fiscal spending.
# Top Asian News;
- Inside the Red-Hot HSBC Fund That’s Turning Away New Money
- Japan Stocks to Watch: Hitachi, Honda, Kusuri no Aoki, Nikon
- India’s Modi Says Killing in Name of Cow Protection Unacceptable
- Japan Currency Chief Asakawa Is Said to Stay On for a Third Year
- ‘You Wouldn’t Do It’: BHP Chair Regrets $20 Billion Shale Spree
- Macau Hotel With 30 Rolls-Royces And No Guests Seeks Funds
- Activist Murakami Claims Rare Victory in Japan Shareholder Vote
- Japan Shares Rally, Led by Banks on Optimism for Global Growth
*) In Europe, since the open, the initial gains in stocks have somewhat petered out, with Euro Stoxx 50 -0.07%, with the exception of the FTSE 100 amid a 4% rise in index heavyweight HSBC after MS upgrade. Financials have been outperforming after the Federal Reserve cleared buyback and dividend plans from the United States largest banks, including local units of Germany's Deutsche Bank and Spain's Santander. Additionally, support has been provided by hawkish signals from central bankers, most notably Carney and Draghi. Bunds have fallen off some 60+ ticks as yields steepening across the curve, post firmer regional CPI data, with the German 10yr benchmark now at a 5-week high (2Y +2.6bps, 5Y +4.5bps, 10Y 6.1bps, 30Y 6.9bps).
Ahead of today's German all too important, inflation print German Reginal CPIs for June all came in better than expected, suggesting Draghi amy have been right that the drop in inflation may have been transitoory.
# Top European News;
- U.K. May Consumer Credit Surges, Showing Why BOE Took Action
- Raiffeisen Says ‘Unjustified’ Losses Could Halt Polish IPO
- Bond Investors’ Love for Russia Dispels Gloom of Crude Rout
- U.K. Regulator Opens Probe Into PwC Audits of BT’s Books
- Pound on Best Winning Run Since 2015 as Carney Changes Tune
- European Miners Jump as Iron Ore Gains for a Fifth Day
- JD Sports Falls After Bloated Expectations, Margin Pressure Seen
# In currencies, the USD index is has more selling pressure through the European morning, but with the caveat that USD/JPY continues higher amid rising US Treasury yields. As such, narrowing differentials with Europe and the UK drive trade at the present time, with the backdrop of this week's comments from the ECB's Draghi on reflationary pressures and the BoE Camey's reported considerations over rate hikes driving trade, a little too aggressively perhaps. A broader continuation of the themes seen over the last few days, as stronger central bank speak from the ECB and BoE continue to push the EUR and GBP higher against the USD, JPY and CHF. Focusing on the spot rates, EUR/USD resistance ahead of 1.1450 has contained the resurgence from midweek, and we should see some consolidation closer to 1.1400 ahead of the US data this afternoon. Core PCE and the last reading of the Q1 GDP stats are due out later today. Cable has continued higher to test the upper level of the 1.2900-1.3000 resistance zone we have been highlighting, pushing just past the figure level by some 6-7 ticks as traders hunt for stops. The highs seen ahead of 1.3050 have been held intact as yet. EUR/GBP is looking resilient to the downside also, and we have some of the familiar month end demand out of Europe filtering through here also.
# In commodities, commodity currencies (USDCAD -0.06%, AUDUSD +0.37%, NZDUSD +0.10%) supported by positive crude prices, while a 3% rise in iron ore has also buoyed AUD strength. The fall in the USD index has led to broad based gains seen across the commodity spectrum, but noticeable is the lack of traction in Gold as the risk parameters have counteracted this. The yellow metal is back under USD1250.00, while Silver continues to trade a modest range up and down the USD 16's, but we have seen a stronger impact on base metals and Oil. Copper is now testing USD 2.70, showing a near 1% gain on the day, only outpaced by Tin which is 1.75% up today. Nickel is also around 1.0% higher today. For WTI, USD 45.00 continues to hinder progress, but with production levels having decreased in the US in the DoE report, upside relief has naturally followed. The spread with Brent has widened out a little, but enough to see USD 48.00 tested here.
# Looking at the day ahead, we’ll get the third and final revisions to Q1 GDP (no change from +1.2% qoq expected) and Core PCE. The latest weekly initial jobless claims data rounds out the releases. Away from the data, the BoJ’s Hararda is scheduled to speak shortly after this hits your emails while the Fed’s Bullard is scheduled to speak on monetary policy this evening in London at 6pm BST. The recently elected South Korea President Moon Jae-in is also due to meet with President Trump in Washington today. The other big event for markets today is the House of Commons vote on PM May’s government program. The vote is due this afternoon....