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Dollar, Bond "Carnage" Pauses; Global Stocks Rebound Led By Tech Shares

S&P futures rebounded shortly after the stronger than expected European CPI print, rising 0.3% to 2,426, as markets try to forget all about yesterday's brief 50% VIX surge and tech rout, which trimmed the seventh consecutive quarterly gain for the S&P 500 Index to 2.4%. Europe shares rose 0.4%, led by tech stocks, after a drop in Asian markets, as oil and the dollar gained.

The action this week however, yesterday's equity fireworks notwithstanding, has been in dollar and bonds, where as Bloomberg says this morning, the "carnage has paused for a breather" with Treasuries steady after yields across the globe rose this week as central bankers shifted toward a more hawkish tone while the dollar gained against most G10 peers, paring its worst weekly loss in six.

Putting the dollar's quarterly performance in context, it is down -4.8% in Q2, its worst quarterly performance since 2010. Market skepticism remains over the Fed's dots and tightening intentions, the recent 22 bps of curve flattening, and what the ECB may do next. "Obviously there's a shift afoot. It really seems that there's some coordinated effort going on out here among the G10 central banks," said Stephen Innes, head of trading in Asia-Pacific for OANDA in Singapore, referring to the series of hawkish-sounding comments on monetary policy.

The euro came off yearly highs on Friday but was still set for its strongest quarter in six years as investors pile into the currency on a brightening euro zone economy and its implications for monetary policy in the bloc. The single currency dropped 0.2% to trade at $1.1403, but in the April-June quarter the euro has climbed over 7%, putting it on track for its biggest quarterly gain since January-March 2011.  The euro shot to one-year highs after Tuesday's speech by European Central Bank President Mario Draghi bolstered expectations that a reduction in stimulus measures would be signaled as soon as September. Though policymakers looked to play this down in the days that followed, investors appear convinced that economic strength will push them to end stimulus sooner rather than later.

"This is partly a response to Draghi's comments and also on the back of a euro zone economy that is firing on all cylinders and outperforming the rest of the developed economies," said Investec economist Victoria Clarke. "It's at a different stage in the cycle as the U.S. so I do expect some of that to cool in the second half of the year, but the growth momentum doesn't seem to be going anywhere," said Clarke.

Volatility, absent for much of the year, made a brief, violent return as the debate on normalizing central bank policy intensified after nine years of unprecedented stimulus. That suggests some investors are growing concerned about the economy’s ability to withstand a tightening cycle. Technology stocks have been under pressure this week, while banks have been supported on the prospect for higher rates.

Overnight, the MSCI All-Country World Index slipped 0.1 percent. The gauge is up 10 percent for the six months, the best start to a year since 1998. The MSCI Asia Pacific Index has gained 15 percent for the past two quarters. The MSCI Asia-Pacific shares ex-Japan fell 0.7%, after hitting a two-year high on Thursday. It is up 5.3% for the quarter and has risen 18.3% this year.

In Europe, the Stoxx 600 stocks index rebounded, parding its fourth straight weekly loss, and on track to end the quarter little changed as gains in technology and consumer shares offset losses in chemical makers. Bayer AG fell 4.3% as it expects an earnings hit from its Brazilian crop science business.

In Asia, stocks retreated amid Wall Street tech weakness: Nikkei closed 0.9% % lower, and Japan’s Topix dropped 0.8%, bringing its quarterly gain to 6.6 percent. The ASX 200 dropped 1.7%. Meanwhile, the Yuan rose to strongest against dollar since November, although it gave up all gains and traded unchanged by the close of trade. The PBOC skipped liquidity operations for a 6th day, draining net 160 billion yuan, its 8th consecutive liquidity drain, and despite the stronger than expected Chinese PMI prints, analysts are starting to wonder if the PBOC isn't overdoing its latest tightening move.  In Asia, Australian sovereign bonds sharply lower; 10-year yield jumps as much as nine basis points to 2.59% before finding resistance; Aussie breaks above 77 cents following strong Chinese PMI.

Futures on the S&P 500 Index rose 0.3% as US traders walked in, having spoent most of the overnight session unchanged. The cash index fell 0.9% on Thursday, the most since May 17 as the VIX briefly surged more than 50% as a result of what some suggested was a risk parity fund unwind. the S&P remains 2.4% higher this quarter.

The euro fell 0.3 percent to $1.1407, after increasing 0.6 percent on Thursday to the highest levels since last year’s Brexit vote. It’s gained 7.1 percent this quarter. The pound dropped 0.2 percent to $1.2985, snapping seven days of gains. The currency is up 2.5 percent this quarter. The yen fell 0.2 percent to 112 per dollar. The Bloomberg Dollar Spot Index rose 0.1 percent, heading for a monthly loss of 1.3 percent. It’s poised for a fourth month of losses.

Crude futures rose for a seventh day, up 0.9% to $45.34, and on course for the longest run of gains this year, as signs of slipping U.S. supply eased pressure on OPEC-led curbs. Gold fell 0.1 percent to $1,244.09 an ounce. The precious metal is heading toward its first monthly decline this year.   Dalian iron ore slips 1.7% despite stronger than expected Chinese PMI data.

The yield on 10-year Treasuries added one basis points to 2.28 percent. The rate has climbed 14 basis points this week. Benchmark yields in the U.K. were little changed at 1.24 percent, as were French yields at 0.8 percent. Yields in Germany fell one basis point.

There will be a flurry of data later today including Michigan sentiment, but no major earnings are expected


Bulletin headline Summary from RanSquawk

  • USD weakness modestly tamed with GBP and EUR pulling back from its recent highs
  • Bayer weighs on the Dax despite stella German Retail Sales
  • Looking ahead, highlights include US PCE and Baker Hughes rig count.

Top Overnight Headlines

  • BOE’s Haldane repeats any policy tightening to be limited, gradual: BBC
  • U.K. June GfK consumer confidence -10 vs -7 estimate; Lloyd’s business barometer 30 vs 27 previous
  • China manufacturing PMI 51.7 vs 51.0 est; non-mfg 54.9 vs 54.5 prev
  • Aso doesn’t see any changes to monetary or fiscal policy
  • Japan May core CPI 0.4% vs 0.4% est; jobless rate 3.1% vs 2.8% est
  • Japan May industrial output -3.3% vs -3.0% est; y/y 6.8% vs 6.9% est
  • Obamacare Repeal Risks Worsening America’s Opioid Crisis
  • Harvard Links Billionaire Samwers, Ex-Eton Manager in New Fund
  • Trump’s Taste for Confronting Putin to Be Tested Face-to-Face
  • Deutsche Bank Declines to Provide Dems With Trump, Russia Info
  • Adelson-Backed Lobbying Against Web Gaming Makes Sessions Fold
  • Nord Pool to Expand Trading Into 7 New EU-Countries Next Year
  • Ecopetrol to Prepay $1.93b Syndicated Loan Due 2020 on June 30
  • IFresh Says Two Legal Disputes May Have Material Adverse Impact
  • Moody’s: North America Coal Sector Outlook Remains Stable

Market Snapshot

  • S&P 500 futures up 0.3% to 2,426
  • STOXX Europe 600 up 0.4% to 382.01
  • MXAP down 0.6% to 154.74
  • MXAPJ down 0.8% to 504.70
  • Nikkei down 0.9% to 20,033.43
  • Topix down 0.8% to 1,611.90
  • Hang Seng Index down 0.8% to 25,764.58
  • Shanghai Composite up 0.1% to 3,192.43
  • Sensex down 0.2% to 30,796.71
  • Australia S&P/ASX 200 down 1.7% to 5,721.49
  • Kospi down 0.2% to 2,391.79
  • German 10Y yield fell 1.5 bps to 0.437%
  • Euro down 0.4% to 1.1397 per US$
  • Brent Futures up 0.7% to $47.74/bbl
  • Italian 10Y yield rose 11.9 bps to 1.859%
  • Spanish 10Y yield fell 1.2 bps to 1.521%
  • Brent Futures up 0.7% to $47.74/bbl
  • Gold spot down 0.2% to $1,243.59
  • U.S. Dollar Index up 0.2% to 95.79

In Asia, stocks traded in a sea of red amid month-, quarter- and half-year end flows, as well as a negative lead from US where tech underperformed. ASX 200 (-1.4%) and Nikkei 225 (-1.2%) were broadly pressured from the open with the latter suffering from a firmer JPY, while Japanese CPI and Unemployment data also left much to be desired. Elsewhere, Shanghai Comp. (+0.07%) and Hang Seng (-0.7%) brushed aside the better than expected Chinese Official Manufacturing PMI and adhered to the downbeat tone after the PBoC continued to refrain from liquidity operations. Finally, 10yr JGBs traded lower despite the risk averse tone, as Japanese yields tracked their global counterparts higher in the wake of the recent hawkish tone from European central bankers. Furthermore, the BoJ were also in the market today, although its Rinban announcement was for a relatively reserved JPY 475b1n of JGBs.

Top Asian News

  • China Factory Momentum Gains in June on Back of Trade Rebound
  • BOJ Plans to Keep Current Pace of Bond Buying in July
  • Hedge Fund Renaissance Picks Winner as Japan Stock Surges 1,813%
  • Global Demand Eases China Deleveraging Pain With Factory Support
  • China Says Trump’s Taiwan Arms Sale Undercuts Early Goodwill
  • Asahi Sells Chinese Beverage Stake For $625 Million, Nikkei Says
  • Limits of Japan’s Export-Led Recovery Show Through in Poor Data

In Europe, the historic, frantic trade on the last day of the month, quarter and half, has been far from visible today, with local bourses trading subdued. Much of the volatility was seen through the US and Asian sessions, however, a dip was seen in the open; with bank buying not enough to offset falls for commodity and health care related sectors. The healthcare sector has been weighed upon by Bayer having fallen 5%, after reporting that they see a negative earnings impact from its Brazilian crop science business — seeing its FY17 one time effect of EUR 300 — 400mln. Gilts have been the noticeable paper to watch this morning, down to a new low around 125.15, looking towards March's 124.42 low, a key yield is approaching in the cash, with 1.30% the next to lookout for. Bunds also have edged lower, breaking below 162, however, with no real conviction. Psychological cash yield levels seem to be the theme, with 0.50% approaching in the cash.

Top European news

  • Euro-Area Inflation Slows as Draghi Urges Prudence in QE Exit
  • German Labor Market Takes Breather as Unemployment Inches Higher
  • Nestle’s New CEO to Show Off M&A Acumen as Activists Circle
  • Goldman Said to Bid for $1.3 Billion of UniCredit U.K. Mortgages
  • Delivery Hero Gains on First Day of Trading as Tech IPO Succeeds
  • German Parliament Backs Fines for Social Media for Hate Speech
  • Bayer to Cut 2017 Forecasts as Crop Unit Struggles in Brazil
  • U.K. Saving Ratio Falls to Record Low as Squeeze Takes Toll
  • U.K. Confidence Lowest Since Just After Brexit Vote

In currencies, a cautious start to the last day of trading for June, and H1, but extreme USD weakness has been modestly tamed, with EUR/USD backing off the mid 1.1400's, while Cable is back under 1.3000. Both key pairs, which have rallied on hawkish twists to the respective central bank outlooks, and as such, remain well placed to retest the highs later on today if the US data comes out weak again. EUR/GBP usually sees some month end pressure to the upside, but there has been little evidence of this in the last few days, remaining on the heavy side and below the 0.8800 mark also. It could be a busy one for the CAD also, as the April GDP numbers could put some fresh light on the optimism going through at the present time. Against this is the level of appreciation seen in the time frame achieved, and to this end, we continue to eye support levels ahead of 1.2900 as sub 1.3000 levels suggest the market is still ready to probe lower.

In commodities, heading into month end, it could be a busy day for the USD as the day wears on, but a number of factors seen impacting on the leading assets this morning. For metals, the better than expected China PMIs will add to the support which has seen Copper testing USD2.70, but through this level, prices are certainly looking heavy. Iron ore is the lead based on the China story, and as long as this holds up, better levels will be maintained. WTI continues to probe levels through USD45.0, but tech based resistance continues to contain trade, with sellers still looking for better levels to fade strength based on US production levels. Output has decreased according to the report this week from the DoE, so the bid tone looks comfortable for now. Gold and Silver are trading extremely tight ranges, but we see the yellow metal looking vulnerable at present, and if the USD manages to recover a little more ground into the weekend, then we could be set for a retest of the early Monday lows seen in brief, but sharp hit in thin volumes. We hit lows just under USD1237.00 at the time.

Looking at the day ahead, we are due to get the May personal spending and income reports, along with the PCE core and deflator readings. The Chicago PMI for June will also be released before we end the day with the final revision to the University of Michigan consumer sentiment reading. Away from the data, given all the focus this week it’s probably worth keeping an eye on scheduled comments due from the ECB’s Lautenschlaeger (at 11.30am BST) and Coeure (at 1.00pm BST).

US Event Calendar

  • 8:30am: Personal Income, est. 0.3%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.4%; Real Personal Spending, est. 0.2%, prior 0.2%
    • PCE Deflator MoM, est. -0.1%, prior 0.2%;  PCE Deflator YoY, est. 1.5%, prior 1.7%
    • PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 1.4%, prior 1.5%
  • 9:45am: Chicago Purchasing Manager, est. 58, prior 59.4; Sentiment, est. 94.5, prior 94.5; Current Conditions, prior 109.6; Expectations, prior 84.7

DB's Jim Reid concludes the overnight wrap

Welcome to the last day of June and with it, the halfway point for the year. For the most part in 2017 we have agonised about the lack of volatility in markets. In fact it was probably one of the dullest starts to a year that we can remember when you consider how low various measures of asset class vol got relative to history. Just as it looked like we may be heading into the dog days of summer in a similar vein, this week the cast of hawks which descended on the village of Sintra have certainly sparked a bit of life back into markets.

Indeed as investors debate the various snippets of forward guidance thrown up the ECB, BoE and BoC in the last few days, in addition to a Fed which is in a gradual tightening phase, bond markets this week having been running to stand still on the path to normalization. In a year of super low vol it could well be that we look back on this week at the end of the year as the one in which the tide finally turned.

In markets the last 24 hours has been all about the continued sell off for European bonds. We thought it would be worth taking stock and we’ve detailed some of the moves here with the first number in brackets being the change in basis points over the last 24 hours and the second number being the change versus last Friday. As you’ll see, the magnitude of the moves has also seen a number of markets hit fresh multi-month highs in yield. In no particular order, these are the moves for 10y maturities; Bunds (+8.3, +19.7) to 0.450% and the highest since March 21st, OATs (+8.9, +19.9) to 0.803% and the highest since May 24th, Gilts (+9.5, +21.9) to 1.250% and the highest since February 16th, BTPs (+12.1, +23.3) to 2.145% and the highest since June 8th. Treasuries have also been swept up by the moves on the continent and are up +12.4bps this week (and +3.9bps yesterday) at 2.267% and the highest since May 23rd. We’ve also seen the 2s10s Treasury spread steepen nearly 10bps this week to 89bps and is currently on course for its first steepening over the course of a week since the five days ending May 5th.

It’s worth noting also that the 10y Treasury-Bund spread is at the tightest (182bps) since Trump was elected. It had gotten as wide as 236bps at one stage (the widest since 1989). That narrowing probably also says something about the disappointment in the lack of progress on Trump’s proposed reforms including the lack of support for the healthcare bill this week. It’s not just been rates which have seen big moves this week though. The Euro rose another +0.55% yesterday and is up +2.21% since Friday and at the highest (1.1441) since April last year.

Meanwhile risk assets have also been hit although that seems to mostly be to do with the continued sell-off across the tech sector. The S&P 500 made another u-turn yesterday by falling -0.86% and is down -0.76% for  the week now. The Nasdaq tumbled -1.44% and is down -1.93% over the week which is the worst weekly performance since December last year. The VIX also briefly surged above 15.00 yesterday which is the highest in over a month while the VXN (Nasdaq Vol) closed at the highest (18.43) since November last year. As you might expect however with a rising rate environment, and also the overall positive read through from the Fed’s stress test this week, US Banks (+1.84% yesterday) have rallied +5.34% this week. Meanwhile in Europe the Stoxx 600 tumbled -1.34% yesterday and is down -1.80% this week.

There wasn’t necessarily any new news to trigger yesterday’s big sell off for bonds. A higher than expected CPI print in Germany for June (+0.2% mom vs. 0.0% expected) has raised hopes for a better than expected  Euro area reading today (consensus is for +1.2% yoy headline and +1.0% core). It’s worth noting that we will also receive PCE data in the US while this morning we’ve already had CPI data out of Japan (more on that shortly) – so a good day to test the inflation pulse. It’s worth also noting that Oil (+0.42% yesterday) has quietly gone about rising for the last six sessions while Iron Ore is also now back into a bull market having bounced 20% from the June lows. So the commodity complex is showing signs of rallying off the recent lows. Meanwhile the BoE’s Haldane also continued his hawkish rhetoric by saying that “we need to look seriously at the possibility of raising interest rates” after citing concerns about the rising cost of living in the UK.

Coming back to the ECB, yesterday DB’s Mark Wall published a report in which he reflects on Draghi’s comments. Mark writes that Draghi’s hawkish turn this week came against the run of data and events – weaker PMI,  lower oil prices, higher euro exchange rate, etc. However, the tone was at least more consistent with the decision to ax rates guidance, less risky given the easing in euro area financial conditions since the French election and — over the entirety of the speech — more balanced and conditional than the headlines suggest. The strategy seems to be to talk some confidence into the perception of inflation. The impact has been to tighten financial conditions. Mark goes on to say that after the dovish June Council meeting, we changed our call to a “slow and extend” decision by December. “Slow and extend” still feels appropriate, all the more so with the euro having risen further. But having effectively opened Pandora’s Box with the first formal admission of exit, clarification and transparency is more urgent. Our baseline is now to expect the “slow and extend” QE decision in September. Mark also highlights that the Euro could act as a self-correcting mechanism on exit and in the note attached details some scenarios to help judge the limits of Euro appreciation. You can find more here.

To Asia now where before we look at how markets are finishing the week, there’s been a bit of data to dig through. First up is China where the manufacturing PMI for June came in at a better than expected 51.7 (vs. 51.0 expected), up 0.5pts from May. New orders and output sub-indices were both reported as rising. The non-manufacturing PMI also rose 0.4pts to 54.9. Meanwhile in Japan the latest inflation data for May was a fraction softer than expected. Headline CPI held steady +0.4% yoy (vs. +0.5% expected) while the core-core also held steady at 0.0% yoy (vs. +0.1% expected). The core did however rise one-tenth to +0.4%, as expected.

In terms of markets, equity bourses in Asia have mostly tracked the losses on Wall Street and Europe yesterday. The Nikkei (-1.09%), Hang Seng (-0.91%), ASX (-1.40%), Shanghai Comp (-0.26%) and Kospi (-0.43%) are all weaker to end the week. Sovereign bond markets have also continued to sell with yields across the region between 2bps and 9bps higher. US equity futures are little changed. Moving on. Once again, yesterday’s US economic data was left in the shadows a bit. The third and final Q1 GDP reading was revised up two tenths to +1.4% qoq saar with final sales being revised up four-tenths to +2.6%. A stronger estimate of consumer spending appeared to be the driver of the upward revision. The core PCE was revised down one-tenth to +2.0% qoq saar. The only other data in the US was the latest weekly initial jobless claims reading which came in at 244k and up 2k relative to the prior week. The other data of note in Europe yesterday included the European Commission’s economic sentiment reading for June which rose 1.3pts to 111.1 (vs. 109.5 expected) and a new 10-year high. In the UK mortgage approvals were little changed in May.

Looking at the day ahead, it looks set to be a fairly busy end to the week with a number of important releases due up. First up will be retail sales in Germany, shortly followed by the flash June CPI report in France.  Following that we’ll get the latest unemployment reading in Germany and then the final revisions to Q1 GDP in the UK. After that, all eyes turn to the aforementioned CPI report for the Euro area. This afternoon in the US we are due to get the May personal spending and income reports, along with the PCE core and deflator readings. The Chicago PMI for June will also be released before we end the day with the final revision to the University of Michigan consumer sentiment reading. Away from the data, given all the focus this week it’s probably worth keeping an eye on scheduled comments due from the ECB’s Lautenschlaeger (at 11.30am BST) and Coeure (at 1.00pm BST).