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Futures Rebound On Ongoing Dollar Strength; Commodities Rise, China Slides, Greek Banks Continue Plunging

In many ways the overnight session has been a mirror image of yesterday, with the dollar accelerating its Lockhart-commentary driven rise, which curiously has pushed ES higher perhaps as a result of more USDJPY correlation algos being active and various other FX tracking pairs. Indeed, the weak yen is all that mattered in Japan, where the Nikkei 225 (+0.5%) rose amid JPY weakness, despite opening initially lower as index heavyweight Fast Retailing (-4.5%) reported a 2nd consecutive monthly decline in Uniqlo sales. Elsewhere in mirror images, China slid 1.7%, undoing about half of yesterday's 3.7% jump, and is now down for 4 of the past 5 days.

As a reminder, the key event yesterday interview by Fed centrist, Atlanta Fed President Lockhart, who said that the US economy is ready for a rate rise and that it would take a significant deterioration in data to convince him that a move in September would not be warranted: the result was sending the USD and yields surging and stocks sliding.

Speaking to the WSJ, Lockhart said that ‘my priors going into the September meeting as of today are that the economy is ready and it is an appropriate time to make a change’. Lockhart also said that ‘I think there is a high bar right now to not acting’ and that ‘it will take a significant deterioration in the economic picture for me to be disinclined to move ahead’. There was some mention from Lockhart in the article that inflation could come under pressure in the time ahead with the recent decline in the oil market, although Lockhart said that he was ‘reasonably confident’ inflation is on a path towards its goal given the slack in the labour market and broader economy is diminishing.

The comments were interesting given that Lockhart is seen as something of a centrist in the Fed camp who moves with the consensus. Lockhart had also previously said back in May that he is more prepared to take the risks of waiting rather than being too early. In his comments yesterday Lockhart also added that the addition of the word ‘some’ to the FOMC statement in relation to further improvement in the labour market was ‘a qualifier that conveys to the public that we’re getting close’. This of course will be tested somewhat today when we get the July ADP employment print (with market expectations at 215k) which of course comes as an important precursor ahead of payrolls on Friday.

As DB summarizes "one has to hand it to the Fed as they are not seemingly being derailed by the recent commodity rout, the concerns over China (and other EM countries), and the general disappointments over the state of the wider global recovery." That, and of course the reality that a Fed hike in September will unleash the ghost of 1937...

Back to Asian equity markets which traded mixed following the weak close on Wall Street, after Fed's Lockhart stated that a rate lift-off could be seen as appropriate in September. The Shanghai Comp (-1.6%) was the session's laggard as the PBoC reiterated that they will follow a prudent monetary policy, in spite of the latest Services PMI posting its highest reading since Aug'14.  Finally, JGB's fell following spill-over selling in USTs weighed by the aforementioned more hawkish than usual comments from Fed's Lockhart.

Curiously, despite Lockhart's hawkish comment being blamed for the late day failed to weigh on European sentiment (Euro Stoxx: +0.76%) as stellar earnings from SocGen (+8.0%) buoyed demand for stocks. In turn, the upside was led by the financial sector, with materials also posting good gains following a number of positive broker updates by Liberum who upgraded BHP Billiton (+2.5%), Rio Tinto (+2.7%) and Glencore (+2.0%) to hold from sell. In terms of other notable movers, Standard Chartered shares reversed initial weakness following earnings to trade higher by 0.7%, as market participants welcomed the fact that the bank did not announce capital raising plans, that's despite reporting less than impressive financial metrics.

One place where there was no mirror image was Greek banks which as the Bloomberg chart below shows, continued their limit down selloff for the third day in a row.

As reported moments ago by Bloomberg, Greek banks extended a rout that has wiped out more than half their value this week, sending the nation’s stocks lower for a third day. Piraeus Bank and Alpha Bank plunged at least 29 per cent, while Eurobank Ergasias plummeted 15 per cent. National Bank of Greece climbed 2.3 per cent, rebounding after a 50 per cent tumble in two days.

While about half of the 60 stocks listed on the benchmark ASE Index climbed, the lenders’ losses dragged the gauge lower. The ASE fell 1.4 per cent to 651.02 at 10:43 a.m. in Athens, after closing at its lowest level since September 2012 on Tuesday.

Another place where there has been no mirror image action is AAPL stock which has continued to tumble, catalyzed moments ago by a downgrade to Netural by BofA (more shortly).

FX markets have seen a continuation of yesterday's trend with USD continuing to strengthen on the back of comments from Fed's Lockhart (USD-Index: 0.2%) amid relatively light macro news flow elsewhere. The European morning saw a host of European and UK services and composite PMI with the European numbers generally beating expectation, while UK PMIs came out lower than expected, however these data points failed to have a sustained reaction on FX markets.

Looking elsewhere, Bunds retraced yesterday's flattening bias and traded lower, in tandem with USTs in reaction to hawkish comments by the Fed and also benefited from an encouraging set of EU PMIs . The peripheral bond yield spreads tighter as a result, with the bid tone supported by domestic accounts, whereas BTPs also benefited from a lack of supply in August.

The energy complex heads into the North American crossover flat on the day, with WTI and Brent paring much of their overnight gains on the back of a larger than previous drawdown (-2400k vs. Prey. -1900k), with WTI Sep'15 futures residing just above the USD 50.00/bbl handle ahead of today's DoE crude oil inventories, which are expected to show a drawdown of 1630k.

Elsewhere, gold traded sideways overnight with sentiment dampened as markets price in an increased chances of an earlier than anticipated Fed rate lift-off, while copper prices fell as the USD firmed.

Going forward, today's highlights include the latest US ADP employment change report and ISM non-manufacturing report.a

In summary: European shares rise with the basic resources and autos sectors outperforming and real estate, industrials underperforming. Chinese stocks fall for fourth time in 5 days. European bourses outperforming today include Germany, France, Ireland. Silver, copper fall with cotton as wheat gains. Euro falls to 2-week low vs dollar; yields rise on eurozone 10-yr bonds with gilts, bunds showing largest increases. U.S. ISM non-manufacturing, trade balance, mortgage applications, ADP employment change, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Market Wrap

  • S&P 500 futures up 0.3% to 2088.7
  • Stoxx 600 up 0.8% to 401.9
  • US 10Yr yield up 1bps to 2.23%
  • German 10Yr yield up 3bps to 0.67%
  • MSCI Asia Pacific down 0.1% to 141.5
  • Gold spot down 0.1% to $1086.7/oz
  • Eurostoxx 50 +0.9%, FTSE 100 +0.3%, CAC 40 +1%, DAX +1%, IBEX +0.7%, FTSEMIB +0.8%, SMI +0.1%
  • Asian stocks fall with the Nikkei 400 outperforming and the CSI 300 underperforming; MSCI Asia Pacific down 0.1% to 141.5
  • Nikkei 225 up 0.5%, Hang Seng up 0.4%, Kospi up 0.1%, Shanghai Composite down 1.6%, ASX down 0.4%, Sensex up 0.5%
  • Euro down 0.19% to $1.086
  • Dollar Index up 0.17% to 98.1
  • Italian 10Yr yield up 1bps to 1.78%
  • Spanish 10Yr yield up 1bps to 1.95%
  • French 10Yr yield up 2bps to 0.97%
  • S&P GSCI Index up 0.2% to 372.1
  • Brent Futures up 0.6% to $50.3/bbl, WTI Futures up 0.5% to $46/bbl
  • LME 3m Copper down 0.6% to $5205/MT
  • LME 3m Nickel up 0.2% to $10855/MT
  • Wheat futures up 0.3% to 494.8 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

  • FX markets have seen a continuation of yesterday's trend with USD continuing to strengthen on the back of comments from Fed's Lockhart
  • The unexpected comments by the centrist Fed's Lockhart failed to weigh on sentiment as stellar earnings from SocGen buoyed demand for stocks
  • Going forward, Today's highlights include the latest US ADP employment change report and ISM non-manufacturing report
  • Treasuries higher in overnight trading on rising expectations of Fed hike next month after Fed’s Lockhart stated yday that Sept. may be appropriate time to begin raising rates.
  • Germany’s government bonds fell, with 10-year yields rising the most in three weeks, after euro-area services growth beat estimates and amid signals the Federal Reserve is ready to raise U.S. interest rates as soon as next month
  • China will probably keep the yuan pegged to the dollar into 2016 after the IMF signaled a delay to giving it reserve status
  • Chinese investors, who rushed for the exits when a debt-fueled stock rally ended, are now ignoring worsening credit profiles to buy corporate bonds with borrowed cash
  • Standard Chartered Plc Chief Executive Officer Bill Winters signaled the bank may not need to raise capital after first- half profit dropped by 44 percent
  • Societe Generale SA gained the most in two years after the bank reported the highest profit since the financial crisis, bolstered by equity trading revenue, and raised its capital targets
  • Even as much of Europe’s bond market slows down for the summer holidays, sales of the riskiest bank debt are surging back to life
  • The latest debt-restructuring offer from Ukraine’s government wouldn’t be acceptable to the nation’s bondholders, according to a person with knowledge of the negotiations
  • Sovereign 10Y bond yields mixed. Asian stocks mixed, European stocks, U.S. equity-index futures rise. Crude oil higher; copper and gold fall

US Event Calendar

  • 7:00am: MBA Mortgage Applications, July 31 (prior 0.8%)
  • 8:15am: ADP Employment Change, July, est. 215k (prior 237k)
  • 8:30am: Trade Balance, June, est. -$43b (prior -$41.87b)
  • 9:45am: Markit US Composite PMI, July final (prior 55.2); Markit US Services PMI, July final, est. 55.2 (prior 55.2)
  • 10:00am: ISM Non-Manf. Composite, July, est. 56.2 (prior 56)

DB's Jim Reid completes the overnight event wrap

One has to hand it to the Fed as they are not seemingly being derailed by the recently commodity rout, the concerns over China (and other EM countries), and the general disappointments over the state of the wider global recovery. We're still not convinced the US and global economy merits a hike in September but the official chatter continues to lean towards it. Last night FOMC voter and Atlanta Fed President Lockhart said that the US economy is ready for a rate rise and that it would take a significant deterioration in data to convince him that a move in September would not be warranted. Speaking to the WSJ, Lockhart said that ‘my priors going into the September meeting as of today are that the economy is ready and it is an appropriate time to make a change’. Lockhart also said that ‘I think there is a high bar right now to not acting’ and that ‘it will take a significant deterioration in the economic picture for me to be disinclined to move ahead’. There was some mention from Lockhart in the article that inflation could come under pressure in the time ahead with the recent decline in the oil market, although Lockhart said that he was ‘reasonably confident’ inflation is on a path towards its goal given the slack in the labour market and broader economy is diminishing.

The comments were interesting given that Lockhart is seen as something of a centrist in the Fed camp who moves with the consensus. Lockhart had also previously said back in May that he is more prepared to take the risks of waiting rather than being too early. In his comments yesterday Lockhart also added that the addition of the word ‘some’ to the FOMC statement in relation to further improvement in the labour market was ‘a qualifier that conveys to the public that we’re getting close’. This of course will be tested somewhat today when we get the July ADP employment print (with market expectations at 215k) which of course comes as an important precursor ahead of payrolls on Friday.

US rates were the significant price mover on the back of Lockhart’s comments. 10y Treasury yields, up a couple of basis points prior to the comments closed 7.3bps higher at the end of play at 2.222% while 2y and 5y yields moved 6.8bps and 8.8bps higher respectively – the former now back at 0.734% and to the highest level this year. The move wider was led by the short to mid part of the curve with 30y yields up just 4.5bps to 2.898%. Looking across the Fed Funds contracts, the comments were enough to add 3bps to the Dec 15 contract (to 0.330%) and 7bps and 8bps to the Dec16 and Dec17 contracts respectively to 1.030% and 1.635%. Based on futures pricing, the implied probability of a September move has now risen to 50% from just 38% the day before. The Dollar caught a bid with the comments with the broader Dollar index eventually closing +0.45%.

The chatter proved to be unsupportive for US equity markets however. Having traded relatively flat before hand, the S&P 500 (-0.22%) eventually closed a touch lower with utility names leading the move lower while Apple (-3.21%) continues to be a notable drag, falling for the fifth consecutive day and tenth in the last eleven sessions. The energy component (-0.46%) was also slightly softer yesterday despite a more constructive day in the commodity space. Both WTI (+1.26%) and Brent (+0.95%) rebounded yesterday, with the latter back to $50. Gold ended (+0.08%) modestly higher while there were also modest rebounds for Aluminum (+0.31%) and Copper (+0.29%).

Before we take a look at the rest of markets, it’s a heavy day for PMI data today and we’ve had the day’s first services and composite readings in Asia this morning. In China we’ve seen a decent bounce in the July services reading, increasing 2pts from the previous month to 53.8 - an 11-month high and 12th straight month of expansion. That’s in stark contrast to the manufacturing reading we got earlier in the week which was low enough to keep the composite reading soft, falling 0.4pts to 50.2 and the lowest level since May last year. Staying in China, an IMF report out last night has said that the Fund should hold off any move to add the Yuan to its benchmark currency basket until after September next year after China had made a push to add the Yuan to the IMF’s Special Drawing Rights basket as a way of reducing its dependence on the Dollar.

It’s been another choppy session for Chinese equity markets this morning with the Shanghai Comp (-1.27%) and Shenzhen (-0.91%) both down at the midday break with volumes 30% below the 30-day average. In Japan the Nikkei is +0.53% despite a 0.6pt fall in the services PMI to 51.2, while the composite remained unchanged at 51.5. Elsewhere, the Hang Seng (+0.27%) and Kospi (+0.06%) are both firmer while the ASX (-0.61%) is down. 10y Treasury yields have extended their move higher, up 2bps this morning to 2.241%. Oil markets are a touch firmer with WTI and Brent +0.46% and +0.48% respectively while Gold (-0.16%) is slightly lower. Credit markets are largely unchanged meanwhile.

With Lockhart’s comments coming after the European close there was little to report in terms of price action in European rates with 10y Bunds just 1.1bps higher in yield at 0.637%. Risk assets were a touch softer. Led by declines for tech and financial names, the Stoxx 600 closed -0.17% with peripheral bourses underperforming. In credit Crossover closed 4bps wider in a fairly quiet session while in the FX space the Euro (-0.63%) dropped on the back of Dollar strength. Data wise Euro area PPI was slightly weaker than expected for June (-0.1% mom vs. 0.0% expected) although the annualized rate stayed unchanged at -2.2% yoy. Staying in the region, our colleagues in Europe noted that the latest breakdown of ECB purchases showed that the Central Bank is roughly €7bn ahead of schedule now relative to the monthly target given the frontloading of the last few months. They note now that this gives the ECB room to significantly reduce purchases should they feel that to continue at the current pace would be disruptive in the less liquid conditions, although it’s unlikely that we see a significant drop in purchases in just one month and instead, as mentioned by Coeure and Draghi, there is likely to be a ‘backloading’ of purchases over the space of several months in the remainder of the year to bring the aggregate purchases back in line.

Greece was back in the headlines again yesterday after Greek Finance Minister Tsakalotos said that negotiations with Creditors were going better than expected with the Finance Minister being quoted as saying that ‘everything will be concluded this week’. Greek press Ekathimerini is reporting that there is optimism between the two sides that a third bailout package can be approved by August 20th.
Before we turn over to the day ahead, we again update our earnings beat/miss ratio monitor after accounting for yesterday’s reports. With 402 S&P 500 companies having now reported, earnings beats have remained steady at 74% however sales beats have ticked down once more to 49% now (from 50% yesterday). Over in Europe meanwhile, earnings beats of 64% and sales beats of 66% is up from 63% and 65% this time yesterday.

Turning over to today’s calendar now, as mentioned earlier we’ve got the final July services and composite PMI’s due today and we start this morning with the prints for the Euro area, Germany and France as well as advanced readings for the UK, Italy and Spain. Euro area retail sales for June are also expected this morning. Looking ahead to this afternoon, the services and composite PMI prints for the US will be closely followed as will the July ISM non-manufacturing reading. The aforementioned ADP employment change print will likely be the highlight however while the June trade balance reading is also expected. Earnings wise we’ve got Time Warner due today.