S&P futures were little changed at 2,425, ignoring the N.Korea tensions of the past two days which will likely be a major topic in the upcoming G-20 summit, as European stocks fluctuate and Asian markets advance. Crude oil fell, snapping the longest winning streak this year, as Russia said it opposed any proposal to deepen OPEC-led production cuts. Just like Tuesday, it was a session of two halves, with the Yen initially starting the day stronger as military tensions built up in Korean peninsula, and cash Treasuries breaking with a firmer tone as 10-year yield initially fell. Aussie reversed part of Tuesday’s losses despite a drop in Caixin PMI data, and Dalian iron ore 1.6% higher. "North Korea has rattled markets but central bankers are more important," said Kathleen Brooks, at City Index. "While North Korea’s military ambitions are a background threat for markets, we don’t think that this particular geopolitical event is at the stage yet where it will cause a spike in volatility."
However as the session progressed, gold and the Japanese yen gave up early gains, with both the metal and the currency retreating. At the same time, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, regaining half the losses it saw on Tuesday when North Korea fired a missile into Japanese waters. South Korea's main index rebounded by 0.36 percent and Japan's Nikkei ended up 0.25 percent. Shanghai stocks rose more than 1 percent, despite a drop in the Caixin/Markit services purchasing managers' index (PMI) to 51.6 in June, from 52.8 in May.
Of note in China is the continued aggressive tightening behind the scenes, with the People’s Bank of China refraining from offering funds in open-market operations for a ninth day, effectively draining more cash, in the past two weeks than it had injected from June 1 to June 19 amid quarter-end funding demand. The Chinese central bank has pulled 660b yuan since June 20, more than the 540b yuan it had injected from June 1 to June 19. The PBOC said there’s ample liquidity in the banking system, taking into account lenders’ reserve requirement payments and reverse-repo maturities. Sooner or later this latest tightening episode will hit risk assets and commodities, but not just yet. In fact, China’s 7-day repo rate dropped another 5bps to 2.71%, set for the lowest close since April 14. The overnight repo rate falls 14bps to 2.50%, heading for biggest decline in three monthsm while the cost of one-year interest-rate swaps declines 5bps to 3.42%.
Meanwhile, the dollar rose as U.S. stock futures and Treasuries traded sideways before the FOMC Minutes release today. The euro dropped and European stocks edged higher amid a slew of services data, and as investors await Thursday’s publication of the latest ECB minutes. The return in risk sentiment helped USDJPY push higher through 113.60, the highest since May 16 as EUR/JPY breaks to another YTD high; EUR/USD briefly spiked lower after ECB’s Coeure says the ECB has not been discussing policy changes. Gilts underperform after hawkish commentary from BOE’s Saunders overnight and duration heavy corporate issuance, short-end leads gilt curve steeper. Crude futures sold off on OPEC production concerns and Russian comments (see below) mid-morning amid heavy volume.
European equity markets initially rally from the open, DAX outperforms after Adidas upgrade; gains later fade as oil and gas stocks weigh. The Stoxx Europe 600 Index gained less than 0.1 percent after surging 1.1 percent on Monday. Futures on the S&P 500 Index were little changed. The cash index rose 0.2% Monday in a shortened session before the July 4 holiday.
While aside from FX, there were little notable moves, oil futures dropped 1.7 percent in New York, snapping eight straight sessions of gains. Russia wants to continue with the current deal and any further supply curbs would send the wrong message to the market, according to government officials. The U.S. dollar gained, reducing the appeal of commodities denominated in that currency...
While prices have surged during the past week, oil remains in a bear market after concerns that rising global supply will offset output cuts from OPEC and its partners. Libya and Nigeria, exempt from the OPEC-led curbs, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.
# Focus now shifts to the key event on Wednesday, the latest Fed minutes. “The FOMC minutes will be the major macroeconomic highlight as the U.S. returns from the Independence Day break,” Ipek Ozkardeskaya, a market analyst at London Capital Group, wrote in a note. “Lack of details regarding the Fed’s balance sheet policy could further weigh on U.S. yields and the dollar.”
“The more interesting aspect of the minutes is going to be what they have to say about the balance sheet, and in particular, if they give any hints about the time frame,” said Stephen Stanley, chief economist at Amherst Pierpont Securities in New York.
Should the minutes refer to financial conditions, reiterating comments from Yellen, Fischer and Williams, the market will have to assume that the Fed may be willing to ignore the current inflation undershoot, leaving markets with very little other option than trading closer to the Fed’s own interest rate projections as expressed by the dots, Morgan Stanley strategists say in a note to clients.
A shift towards more hawkish language by several major central banks has dominated the past week and left markets unsure of how much longer emergency stimulus in Europe will continue to support global asset prices.
For now investors seem to be giving policymakers the benefit of the doubt that the global economy can take any tightening of monetary policy, although the latest data on Wednesday was mixed, strong in Europe and weaker in China.
Currency markets were in limbo, the euro trading just over half a cent below last week's 14-month highs against the dollar. The dollar and yen were the main victims of the shift in language last week, but many analysts wonder whether the European Central Bank will be able to rein in money-printing later this year if the euro keeps gaining.
"I meet a lot of people while I talk to clients who think the ECB simply won't be able to escape its current policy setting because a stronger currency is too damaging," said Societe Generale strategist Kit Juckes. "The thought the ECB will resist pressure, is still leading many, to look for cheaper levels to buy euro."
As a result, the Bloomberg Dollar Spot Index strengthened 0.2 percent. The British pound was 0.2 percent weaker at $1.2898. The euro also slipped 0.2 percent to &1.1326.
In addition to the drop in oil, safe haven gold was also weaker, dropping 0.1% to $1,222.35 an ounce, erasing an earlier gain of 0.5 percent.
In rates, the yield on 10-year Treasuries was little changed at 2.35%. U.K. benchmark yields advanced four basis points to 1.28 percent. French and German yields were little changed.
Factory orders and Federal Reserve minutes expected later.
# Bulletin HeadlineSummary from RanSquawk;
- Geopolitical tensions mount amid further missile testing from North Korea. North Korea aims to create an ICBM capable of hitting the US this year
- EUR sags as ECB's Couere says the ECB has yet to discuss changing policy.
- Looking ahead, highlights include FOMC minutes and API Crude Inventories.
*) Market Snapshot;
- S&P 500 futures little changed at 2,424.25
- STOXX Europe 600 up 0.1% to 382.4
- Nikkei up 0.3% to 20,081.63
- Topix up 0.6% to 1,618.63
- Hang Seng Index up 0.5% to 25,521.97
- Shanghai Composite up 0.8% to 3,207.13
- German 10Y yield rose 0.9 bps to 0.484%
- Euro up 0.04% to 1.1350 per US$
- Brent Futures up 0.08% to $49.65/bbl
- Italian 10Y yield fell 2.2 bps to 1.819%
- Spanish 10Y yield rose 1.3 bps to 1.538%
- Gold spot down 0.1% to $1,222.05
- U.S. Dollar Index up 0.1% to 96.33
*) Top Overnight News;
- Fed Minutes May Give Clues on When Balance-Sheet Runoff to Start
- Kim Jong Un ’firmly determined and committed’ to test ICBM capable of hitting U.S. within this year: KCNA
- UN Set to Meet on North Korea as U.S. Confirms Rocket Was ICBM; U.S. says North Korean ICBM test represents a new escalation of threat
- European Jun. Service PMIs: Spain 58.3 vs 56.5 est; Italy 53.6 vs 54.6 est; France 56.9 vs 55.3 est; Germany 54.0 vs 53.7 est; Markit note a further easing in cost inflationary pressures, as input prices rose at the weakest rate since last November
- ECB’s Coeure: the Governing Council has not been discussing changes in our monetary policy, that may come in the future, but it hasn’t come yet
- BOE’s Saunders says prepare for rate increases ’at some point’: Guardian
- Germany sees Saudi-led alliance rejecting Qatar’s crisis response
- Russia said to oppose any move to deepen OPEC cuts at July talks
- Trump-Putin Talks Raise Anxiety Ex- Spymaster Will Get Upper Hand
- Stada Supervisory Board Said to Discuss Replacing CEO Wiedenfels
- ANZ Said to Narrow Bidders in $3 Billion Sale of Wealth Unit
- AIA, MetLife Said to Ready Binding Bids for ANZ Wealth Unit: AFR
- HSBC Said in Talks With U.S. to End Crisis-Era Mortgage Probe
- Monte Paschi’s Italian Rescue Wins EU Nod After Months of Talks
- Euro Area Faces Capacity Bottlenecks as Recovery Gathers Pace
- U.K. Recommends Alexion’s Strensiq for Rare Bone Disorder
- Elbit Europe Unit Gets $35m Contract for Electro Optic Systems
- Poland May Pick Lockheed to Supply Mobile Rocket Launcher System
- General Motors China June Vehicle Sales Rise 4.3% on Year
- Freeport Indonesia Is Optimistic Will Achieve Win-Win Solution
*) Asia equity markets were mostly higher as the region recovered from the opening losses triggered by heightened tensions in the Korean Peninsula after the recent North Korean missile test. ASX 200 (+0.1 %) and Nikkei 225 (+0.2%) were pressured for the majority of the session amid increased provocation by North Korea, although stocks in Japan returned flat with JPY price action as the main driver. China was initially subdued after Caixin Services PMI printed a 13-month low and as participants in Hong Kong were despondent from yesterday's tech-led selling, in which Tencent dropped over 4% after a state backed paper branded its game as poison and called for tighter regulation. However, stocks in the region were also resilient as the Shanghai Comp. (+0.7%) and Hang Seng (+0.6%) gradually rebounded into positive territory. Finally, 10yr JGBs were subdued as sentiment gradually improved with 10yr JGB futures breaking below last week's lows to test the 150.00 level to the downside. Chinese Caixin Services PMI (Jun) 51.6 vs. Exp. 52.9 (Prey. 52.8); 13-month low. (Newswires) - Caixin Composite PMI (Jun) 51.1 (Prey. 51.5)
# Top Asia News;
- U.S. Confirms North Korea Missile Was ICBM, Warns of UN Action
- Singapore July COE First Open Tender: Summary (Table)
- Alibaba Challenges Google, Amazon With New Echo-Like Device
- Flipkart, Snapdeal Said to Duel Over $100 Million Valuation Gap
- UN Set to Meet on North Korea as U.S. Confirms Rocket Was ICBM
- BHP’s New Chairman to Drive ‘Radical Shift’ at World’s Top Miner
- Essar Steel Launches Challenge to Stop Insolvency Proceedings
- Asia Stocks Rebound While Haven-Asset Demand Fades: Markets Wrap
- Freeport, Indonesia Eye Early Resolution to Grasberg Dispute
*) In European markets, risk appetite has been evident following the European cash equity open, despite Korean Peninsula geopolitical concerns continuing. Materials outperform, as Glencore trades up over 2% in the FTSE. Credit Suisse have noted the recent correlation between the oil names and mining names, as the recent reprieve seen in Oil markets seemingly benefiting the aforementioned mining names.
The risk on sentiment has been led by the treasury market, as yields continue to strengthen across the AAA's. Increasingly hawkish commentary from the BoE, most recently BoE's Saunders, has taken its toll on UK paper, with the weakness in Gilts leading to stops being run across the other majors. The lOy Bund is looking towards the 0.50% yield, with the T-note now trading around the 2.30% level. JPY has also seen continued bearish pressure, the noticeable mover in early FX trade, trading past the week's high, now set to test 114.31 (May's high).
# Top European News;
- Russia Said to Oppose Any Move to Deepen OPEC Cuts at Talks
- North Korea Says Missile It Fired Today Was An ICBM
- Yen Reverses Gain as Risk Sentiment Improves, Treasuries Drop
- Bunds Heavy as Stocks Gain, Bobl Lags; Gilts Hit on Issuance
- Baidu Snags 50-Plus Partners for its Apollo Driverless Car
- Qatar’s Antagonists Huddle on Next Steps as Deadline Expires
# Looking at the day ahead, this morning in Europe the main focus will likely be on the remaining PMIs (services and composite readings). We’ll get final revisions for the Euro area, Germany and France as well as the first look at the data in the periphery and the UK. The other data due to be released this morning is May retail sales figures for the Euro area. Over in the US we’ll get May factory orders data and also final revisions to the May durable and capital goods numbers. This evening we’ll then get the FOMC minutes from the June meeting where it’ll be interesting to see how much of a debate there is around the inflation outlook given some of the Fed speak recently. Along with that, it’ll be interesting to see if there are any further details around balance sheet normalization. Away from the data German Chancellor Merkel is due to meet Chinese President Xi Jinping ahead of the G20 summit later this week....