In a day in which there was and will be virtually no A-list macro data (later we get the FHFA and Richmond Fed B-listers), the inevitable low volume centrally-planned levitation was attributed to news out of China, namely that Likonomics has set a hard (landing) floor of 7% for the GDP, and that just like other flourishing economies (Spain, Italy, California) China would invest in "monorails"to get rid of excess capacity, as well as a smattering of European M&A activity involving Telefonica Deutscheland and KPN. In Japan, the government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months: who says the (negative Sharpe ratio) PenNikkeistock market is not the economy? All this led to a 2% rise in the Shanghai Composite - the most in 2 weeks - and the risk on sentiment also resulted into tighter credit spreads in Europe, with the iTraxx Crossover index falling 4bps and sr. financial also declining by around 4bps, with 5y CDS rates on Spanish lenders down by over 10bps. Naturally, US futures wouldn't be left far behind and took today's first major revenue miss of the day, that of DuPont, which beat EPS and naturally missed revenue estimates, as bullish and a signal to BTFATH (all time high). On the earnings side, in addition to Apple, other notable companies reporting include Lockheed Martin, Altria, AT&T and UPS.
Overnight bulletin highlights from Bloomberg:
- Treasury yields rise overnight, U.S. stock futures higher before today’s FHFA Home Price Index, Richmond Fed index.
- U.S. Treasury will auction $35b 2Y at 1pm ET; last auction on June 25 saw stopout yield at 0.43%, the highest since May 2011
- Chairman Bernanke will trim the Fed’s monthly bond buying to $65b from the current pace of $85b in September, according to a growing number of economists surveyed by Bloomberg News
- Volatility in the foreign-exchange, bond and equity markets dropped to the lowest levels in about two months as policy makers from China to the U.S. pledged to support global growth
- A Muslim Brotherhood leader has called on Egyptians to lay siege to the U.S Embassy in Cairo to protest what he said was American support for the ouster of Islamist President Mohamed Mursi
- Goldman Sachs pared its 12-month commodity return forecast to almost flat after oil rallied, keeping a neutral recommendation on raw materials while predicting losses for gold and gains for base metals
- Sovereign yields little changed. Nikkei +0.82%, Shanghai +1.95%. European stocks up, U.S. index futures rise. WTI crude, gold rise; copper all drop
WHAT TO WATCH:
- 9:00am: FHFA House Price Index, May, est. 0.8% (prior 0.7%)
- 10:00am: Richmond Fed Manufacturing Index, July, est. 9 (prior 8)
- POMO - 11:00am: Fed to purchase $3b-$3.75b notes in 2019-2020 sector
- 1:00pm: U.S. to sell $35b 2Y notes
Market Re-Cap
In terms of notable stock movers, KPN shares rose 5% after agreeing to sell E-Plus unit to Telefonica Deutschland for EUR 5bln in cash and a 17.6% stake in Telefonica Deutschland post-transaction. Swiss watch maker Swatch also saw its shares rise by over 2% after reporting better than expected H1 net sales and also forecast a strong end to the year.
Going forward, market participants will await earnings report releases from Apple, UPS, Lockheed Martin, as well as digest the first of this week’s scheduled auctions by the US Treasury who is due to sell USD 35bln in 2y notes.
Asian Headlines
China Premier Li Keqiang said China's GDP growth bottom line is 7% and that China's economy is at a reasonable level.
The Chinese government is relying on railways investment as a method to boost economic growth and solve overcapacity problems in steel and cement production, according to sources close to the government. The report said the state council is expected to review plans to build the world's longest undersea tunnel across Bohai Strait with a total investment of CNY 260bln and also plans for an industry fund for the railway industry as early as September. Japan's government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months.
EU & UK Headlines
IWH Halle institute expects the German economy to grow 0.7% this year. The institute adds that Germany may need a separate fund to assist economically weaker regions nationwide after the aid programme for Eastern states ends in 2019.
Spain tapped its social security reserve fund for the second time in a month to help with extra summer pension payments as unemployment and retirement costs deplete government funds, according to Labour Ministry.
Spain sells EUR 3.52bln vs. Exp. EUR 2.5-3.5bln in 3- and 9-Month T-Bills.
- Sells EUR 2.6bln in 3-month, b/c 4.03 (prev. 2.94), avg. yield 0.442% (prev. 0.869%)
- Sells EUR 0.92bln in 9-month, b/c 2.27 (prev. 2.42), avg. yield 1.152% (prev. 1.441%)
US Headlines
Senate Republicans, including two members of the leadership, are coalescing around a proposal to block any government funding resolution that includes money for the implementation of the 2010 Affordable Care Act.
But such a move is a nonstarter for President Obama and congressional Democrats. Republicans have tried this maneuver in Obama’s first term, only to back off later to the chagrin of Tea Party leaders.
Equities
Stocks traded higher in Europe, buoyed by the latest M&A activity involving Telefonica Deutschland and KPN, as well as comments by the Chinese Premier Li Keqiang, who said that China's GDP growth bottom line is 7%, which is the clearest indication yet that the nation will act to support expansion if needed.
KPN shares rose 5% after agreeing to sell E-Plus unit to Telefonica Deutschland for EUR 5bln in cash and a 17.6% stake in Telefonica Deutschland post-transaction. Swiss watch maker Swatch also saw its shares rise by over 2% after reporting better than expected H1 net sales and also forecast a strong end to the year.
FX
In spite of trading sideways overnight and failing to benefit from China driven optimism, USD/JPY broke out of its tight range to the upside and edged back above the 50DMA line at 99.41 during early stages of trade in Europe. Consequent USD strength weighed on both EUR/USD and GBP/USD, even though implied vols traded heavy.
Commodities
Goldman Sachs kept its neutral recommendation on commodities on both a near and 12 month horizon.
Goldman Sachs added that the oil market is to be amply supplied in H2 amid weak demand and forecasts WTI to average USD 8-9/BBL below Brent crude in 2014.
The Chinese government is relying on railways investment as a method to boost economic growth and solve overcapacity problems in steel and cement production, according to sources close to the government. The report said the state council is expected to review plans to build the world's longest undersea tunnel across Bohai Strait with a total investment of CNY 260bln and also plans for an industry fund for the railway industry as early as September.
India gold imports are to fall on RBI restrictions according to All India Gems & Jewellery trade confederation's Bamalwa. Bamalwa said gold premiums in India will climb on shortage and that India needs 250-300T of gold in the October - December festival season. He also said that the cost for Indian gold jewellery consumers are to increase and that India's gold imports may drop to 175T in H2. He added that India may have a shortage during festivals.
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DB's Jim Reid recaps the overnight action:
Aside from the arrival of the royal baby, markets had a few other pieces of good news to cheer. The European trading session started on the front foot helped by the weekend news that the Portuguese President had ruled out snap elections in favour of letting the current government see out its term. Portuguese yields finished a 41bp firmer at 6.39% in its best one day performance since October. UBS’s above-consensus earnings pre-release certainly helped sentiment as did data showing that inflows into U.S. funds and ETFs in the month-to-date ($29.6bn) were the seventh-highest on record. Despite all that, equities on both sides of the Atlantic were range bound for much of the session. The release of lower-than-expected US home sales gave risk markets a small boost as tapering probabilities eased slightly. Existing home sales for June fell unexpectedly to 5.08M from last month’s 5.18M and were lower than the 5.26M expected. Reasons for the fall were varied with some attributing it to the recent increase in mortgage rates while others pointed to tightness in supply. Still, DB’s economists point out that existing home sales are up +15.2% compared to the same period last year—the highest growth rate since August 2011 (+19.8%). In addition, the current level of home affordability (172.7) remains well above its long term average (+114) from 1971 to 2000. The other interesting snippet was that distressed housing sales as a percentage of existing home sales fell to 15%, the lowest level since tracking started in October 2008. Shares in US homebuilders finished the day down 1.8%, underperforming the S&P500 which posted a 0.2% gain.
On the fixed income side, UST 10yr yields spent the 6th consecutive day in the 2.45%-2.55% range (2.48% this morning) which has helped credit markets grind tighter over the same time period. Indeed, the European iTraxx (97bp) cracked the 100bp mark yesterday for the first since May as the European Crossover index tightened further below the 400bp mark closing at 392bp. The CDX IG index was unchanged yesterday at 73bp as it consolidated near YTD tights. The firmer price action in secondary credit trading has buoyed primary markets. New issuance over the last week or so has been led by the US banks which recently exited earnings blackouts. Yesterday saw Wells Fargo and JPMorgan tap the debt markets to raise more than $6bn combined. In commodites, gold (+3.1%) had its best day in a year as it moved back above the $1330/oz mark amid reports of short covering. Silver (+5.3%) finished the session back above the $20/oz mark. A number of gold miners including Barrick Gold (+6.2%) and Newmont (+5.8%) were fairly well bid as a result, albeit rising from a very low base.
We had a relatively quiet start to the week in the world of earnings. Out of 8 companies that reported, 5 of them did come ahead of EPS estimates although 6 of them actually fell short of top line expectations. As we've been flagging for some time now top line disappointments seem to be an increasing theme with more and more non-financial results feeding through. We've been trying to tease out some of the commentaries from corporates that have a global presence to test the pulse of the world economy and the interesting takeaway from yesterday was perhaps McDonald's. The company missed both earnings and revenue estimates in Q2. A stronger USD was a drag to earnings (2cps negative impact) but sales performance was also sluggish in key markets. Breaking same store sales performance down by region, management noted that revenues were +1% in US but down -0.1% in Europe and down -0.3% in Asia/Pac, Middle East and Africa (APMEA). APMEA in particular was primarily affected by negative results in China, Australia and Japan. Management's tone for July sales was also soft with a flat number expected and based on the recent sales trends McD expects the results for the rest of the year to remain challenged. McD's shares fell -2.68% yesterday, its worst daily performance since October 2012.
Today sees Apple Inc report Q3 results after the US market close. Despite its 40% drop in share price since the September peak, the company remains the
second largest company on the S&P500 index with a market cap of $400bn. In terms of what to expect, analysts are estimating zero year-on-year growth in revenues ($35bn) and a -21% year-on-year change in EPS ($7.30). This would be the company’s lowest revenue and EPS result since Q4 2011. Over the past week or so, a consistent theme has been that of softer demand for IT hardware so it will be interesting to see whether this is borne out in today’s Apple result and guidance.
In Asia, markets are trading firmer led by gains on the Hang Seng (+2.1%), Nikkei (+0.7%) and KOSPI (+1.2%). The Shanghai Composite (+2.2%) is headed for its biggest gain in almost two weeks after Beijing News reported that Premier Li Keqiang’s government sees 7% GDP growth as the “bottom line”. The article suggested that Li said that a rate below 7% won’t be tolerated because China needs to achieve a moderately prosperous society by 2020. The comments have boosted a number of Chinese cyclicals in the mining (+3.7%), construction (+3.6%) and financial services (+2.2%). Japanese equities also trading firmer despite a stronger yen (+0.2%), with the main laggard being Tokyo Electric Power (-7.8%) after management said that radioactive water from damaged reactors at the Fukushima nuclear plant has been escaping into the Pacific Ocean. The company doesn’t yet know when the leaks started or how much of the water has escaped into the ocean. Elsewhere Asian credit markets are off to a strong start this morning led by strong demand for cash bonds and the Australian dollar is trading 0.2% firmer against the greenback.
Looking at the day ahead, we have another relatively light day for data ahead of us. Eurozone consumer confidence for July, French business confidence and the US house price index are the main economic reports. In addition to Apple, the other corporate results that may be of interest today include Lockheed Martin, AT&T and UPS.