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Global Stocks Hit New All Time High As Dollar Rebounds; Europe Volatile On Earnings Deluge

The levitation continues with S&P futures pointing to - what else - another higher open while European stocks swung between gains and losses on the busiest earnings days of the year (85 of the Stoxx 600 report) which has seen European pharma giant AstraZeneca plunge 15%, the most on record, after its flagship lung cancer trial Mystic failed to show benefits, while Deutsche Bank slumped 4% on a 12% plunge in FICC revenue. Asian shares rose spurred by results and alongside a surge in China's small-cap ChiNext index which surged 3.6%, its biggest one day gain since last August, after earnings reports revealed that the Chinese "National Team" aka PPT had bought 2 ChiNext shares.

Europe's Stoxx Europe 600 Index fluctuated before edging lower amid the wave of company reports, with the likes of Nokia and BASF beating estimates but Deutsche Bank and Airbus disappointing. The Stoxx Europe 600 Index declined 0.1 percent. The U.K.’s FTSE 100 Index decreased less than 0.1 percent. Germany’s DAX Index fell 0.5 percent. The MSCI Emerging Market Index rose 0.9 percent to the highest in about three years.

In Asia, solid earnings from giants Samsung and Nintendo helped the MSCI Asia Pacific Index to the highest since December 2007. Japan’s Topix index rose 0.4 percent, while Australia’s S&P/ASX 200 Index added 0.2 percent. South Korea’s Kospi index climbed 0.4 percent. In Hong Kong, the Hang Seng Index added 0.7 percent, while the Shanghai Composite Index added 0.1 percent.

Meanwhile, the MSCI's 47-country All World share index cheered its latest record high.

The big story remains the relentless drop in the greenback which however may have paused for the time being, with the Bloomberg Dollar Spot Index paring an earlier drop, but still trading near the lowest in more than a year after the Fed once again surprised on the dovish side by altering its wording around inflation, suggesting recent inflationary weakness may be more persistent than expected.

"The dollar's biggest problem is it can't expect help from the Fed for a long time," said Alan Ruskin, global head of forex at Deutsche Bank.  "In the short term we are still in a risk-favorable loop, whereby subdued goods and services inflation supports a well-behaved bond market and asset inflation. It's just another day in paradise."

Elsewhere in currencies, the yen traded at 111.35 per dollar, while the Aussie extended gains above 80 US cents, rising 0.4 percent after jumping 0.9 percent Wednesday. The Bloomberg Dollar Spot Index dipped less than 0.05 percent to the lowest in about 15 months as of 9:40 a.m. in London. The euro declined 0.1 percent to $1.1727. The British pound rose 0.1 percent to $1.3138, the strongest in more than 10 months. The Swiss franc decreased 0.3 percent to $0.9542, the weakest in more than a week.

Oil prices paused near eight-week highs after a surprisingly sharp drop in U.S. inventories encouraged speculation a global crude glut would recede. A bout of profit-taking saw Brent crude futures ease 7 cents to $50.90 a barrel, while U.S. crude dipped 5 cents to $48.70.

In rates, Germany’s 10-year yield decreased five basis points to 0.52 percent. France’s 10-year yield fell four basis points to 0.772 percent. Britain’s 10-year yield declined four basis points to 1.191 percent.

Economic data include jobless claims, durable goods orders. Scheduled earnings include Amazon, Procter & Gamble, Comcast, Verizon, Intel. U.S.

Bulletin Headline Summary

  • Swedish PM, Lofven is said to not call a snap election and is to re-arrange cabinet
  • Yields have continued to soften across Europe
  • Looking ahead, highlights include US Durables, Wholesale Inventories and Weekly Jobs

Market Snapshot

  • S&P 500 futures up 0.2% to 2,477.75
  • MXAP up 1% to 160.81
  • MXAPJ up 0.9% to 532.31
  • Nikkei up 0.2% to 20,079.64
  • Topix up 0.4% to 1,626.84
  • Hang Seng Index up 0.7% to 27,131.17
  • Shanghai Composite up 0.06% to 3,249.78
  • Sensex up 0.4% to 32,524.37
  • Australia S&P/ASX 200 up 0.2% to 5,785.01
  • Kospi up 0.4% to 2,443.24
  • STOXX Europe 600 down 0.08% to 382.44
  • German 10Y yield fell 4.7 bps to 0.514%
  • Euro down 0.08% to 1.1725 per US$
  • Italian 10Y yield fell 1.7 bps to 1.836%
  • Spanish 10Y yield fell 3.2 bps to 1.515%
  • Brent Futures down 0.3% to $50.84/bbl
  • Gold spot up 0.1% to $1,261.95
  • U.S. Dollar Index down 0.2% to 93.52

Top Overnight News

  • Deutsche Bank’s Trading Outlook Dims; AstraZeneca Plummets After Failed Trial; Big Oil Earnings Beat Across the Board
  • Libor will be phased out by the end of 2021, as U.K. regulators and banks look to replace the scandal- tarred indicator with a more reliable system
  • Senate Republicans who have promised to demolish Obamacare are swerving toward a bare-bones approach that might eliminate just a few pieces of the landmark health-care law
  • Hedge funds which had built up an unprecedented bet against two-year
    U.S. notes in the futures market, left battered by the dovish Fed
  • With House members planning to leave Washington Friday for a five-week recess, the lack of a budget is raising doubts that a tax rewrite -- one of President Donald Trump’s top priorities -- can get done this year, or even before the 2018 elections
  • Schneider Electric SE agreed to buy U.S. power-systems maker ASCO Power Technologies for $1.25 billion as the French company expands in North America and seeks to offset falling sales at its infrastructure division
  • Energy Capital Partners, the private equity firm that owns the largest stake in U.S. power generator Dynegy Inc., is now in advanced talks to buy its rival Calpine Corp.
  • Apollo Global Management LLC amassed $24.6 billion for the largest fund ever raised by a leveraged-buyout firm, crowning a string of record-setting war chests as investors hunt for better returns
  • Just four months into his latest turnaround plan, Deutsche Bank CEO John Cryan is already dialing back ambitions
  • Viacom has dropped out of the bidding to buy Scripps; Discovery remains in talks for deal, WSJ reports
  • Ex-PBOC adviser sees capital outflow as biggest potential threat: Caixin
  • Moody’s changes China banking system outlook to stable from negative
  • Japan doesn’t need fiscal stimulus, economic adviser Takahashi says
  • Brazil cuts benchmark lending rate by 100bps to 9.25%

Asia equity markets were mostly higher following the US gains, where stocks marginally extended on advances amid earnings and following a somewhat dovish-perceived FOMC. As such, mild upside was observed in ASX 200 and Nikkei 225, with the former led by strength across the commodities complex. Elsewhere, Shanghai Comp. and Hang Seng. traded mixed with underperformance in the mainland bourse after the PBoC reduced its liquidity operations, while participants also digested mixed Industrial Profits data. 10yr JGBs were higher despite the mostly positive tone in the region, as yields tracked the declines in their US counterparts following the aforementioned FOMC, while today's 2yr auction results failed to impact prices as the results were mixed. China Industrial Profits in June rose Y/Y 19.1%, above May's 16.7%.  The PBoC injected CNY 60bln 7-day reverse repos, while the PBoC set CNY mid-point at 6.7307 (Prey. 6.7529)

Top Asia News

  • Noble Group Shares Collapse After Warning of $1.8 Billion Loss
  • Glencore Is Said In Talks to Share Assets Yancoal Won From Rio
  • India Said to Mull Allowing Funds to Lend Bonds in Repo Market
  • Queensland Sees Adani Tapping Equipment Firms to Fund Giant Mine
  • Japan’s Main Opposition Leader Resigns Amid Turmoil in Her Party

European equities are pretty choppy this morning with today being without a doubt the busiest session so far in Europe on the earnings front, as the majority of Europe's largest reported before the open. All eyes on AstraZeneca (-15%) as they look set for their worst day on record after initial reports in their lung cancer trial failed to meet primary objectives. Consequently, the healthcare sector underperforms noticeably with the sector slipping 1.5%. On a brighter note, AB InBev and Diageo are enjoying sizeable gains after firm financial results. EGBs higher this morning with the German curve slightly flatter this morning, notable activity has been seen going through in futures with reports of one black trade of 5k at 162.29 with some believing this to be a buyer of Bunds. The EU has warned that the next phase of Brexit negotiations will be delayed for two months because of the UK's refusal to engage with Brussels on the so-called 'Brexit divorce bill', according to the Telegraph. UK Home Secretary Rudd said the government would seek a transitional Brexit arrangement, which would likely to include free movement to avoid a "cliff edge" for employers or EU nationals in the country.

Top European News

  • London Walkie Talkie Skyscraper Sells for a Record $1.7 Billion
  • Macron Unleashes a Decade of Italian Anger Since Zidane Headbutt
  • Price Shock Too Big to Ignore Seen Halting Russian Rate Cuts
  • Norway Gas Outage Keeps EU Traders Busy Before Summer Lull
  • U.K. Commissions Study Into Impact of EU Workers on Economy

In currencies, USD selling continued last night post the FOMC meeting in which the central bank was slightly more downbeat on inflation. Subsequently, this prompt the USD sell-off to benefit major FX pairs, with the greenback at 2Y lows against the EUR. Notable size in the options market with 1.3bln worth of vanilla options situated at 1.17. Sweden are currently gripped by a political crisis after opposition parties called for a no confidence vote in PM Lofven's minority government (potentially for August) following handling of an IT out-sourcing deal. With suggestions that the option on the table were possibly for the PM to call a snap election EURSEK broke the early morning range of 9.5680-9.5870 to breach 9.6000. However, the weakness in SEK had been pared after the PM announced that he would reshuffle cabinet.

Looking at the day today, we will see June data on durable (+3.7% mom expected) and capital goods orders (+0.3% mom expected) as well as wholesale inventories (+0.3% mom expected). We will also see jobless claims numbers and the Kansas City Fed’s manufacturing index (11 expected) due. Notable US companies reporting include: Intel, Western Digital, Dow Chemical, Mastercard, Procter & Gamble, Conocophillips and Amazon.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 240,000, prior 233,000; Continuing Claims, est. 1.96m, prior 1.98m
  • 8:30am: Durable Goods Orders, est. 3.7%, prior -0.8%; Durables Ex Transportation, est. 0.4%, prior 0.3%
  • 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.3%, prior 0.2%; Cap Goods Ship Nondef Ex Air, est. 0.25%, prior 0.1%
  • 8:30am: Advance Goods Trade Balance, est. $65.5b deficit, prior $65.9b deficit, revised $66.3b deficit
  • 8:30am: Wholesale Inventories MoM, est. 0.25%, prior 0.4%; Retail Inventories MoM, prior 0.6%
  • 8:30am: Chicago Fed Nat Activity Index, est. 0.4, prior -0.3
  • 9:45am: Bloomberg Consumer Comfort, prior 47.6
  • 11am: Kansas City Fed Manf. Activity, est. 11, prior 11

DB's Jim Reid concludes the overnight wrap

Before we review a broadly in-line FOMC, albeit one that led to a sharpish fall in yields and the dollar its worth reminiscing that it was 5 years ago yesterday that Draghi gave his infamous "Whatever it takes..." speech. So what did it take and what did it achieve? Well the depo rate was cut 4 times to -0.4% and ECB balance sheet has expanded to €4.24tn from just over €3tn 5 years ago. However in September 2014 this had dropped to c.€2tn. So in just under 3 years the ECB has acquired around €2.25tn of securities which interestingly is roughly the size of the entire annual output of France (population 67mn) and only a bit more than that of India (population 1.32bn). Over that 5 year period of 39 major global assets we track on a regular basis the IBEX (+109%), S&P 500 (+106%), FTSE-MIB (+93%) and the DAX (+84%) are the best performers in USD terms.

As one would expect Spanish (+52%) and Italian (+44%) government bonds have dramatically outperformed Bunds (+6%), Treasuries (+5%) and Gilts (+2%). The Euro is actually 'only' -4% lower against the USD over the period. Actually it's interesting that in this world of extreme QE and the perception that bonds are  in a semi-permanent low yield environment with inflation at rock bottom levels, that the core bond market returns above are actually pretty uninspiring and would have given investors a negative real return over 5 years. Probably our strongest held medium-term view continues to be that core bond markets have very  little chance of giving investors a positive real return over any medium-long term horizon. Anyway Draghi clearly did what it took to avert a European financial disaster but only history will tell us whether the huge asset purchases, negative rates and yields were a price worth paying for such a dramatic turnaround in the peripheral asset class complex.

It will also be interesting to see what history makes of the Fed's huge balance sheet expansion in recent years and also their decision to start the reduction process. It will be a journey into the unknown from a historical perspective. On that topic last night's FOMC outcome was broadly inline with expectations but the market must have thought it more dovish than expected as 10 year US yields fell around 4.5bps after the statement and by the same amount on the day. The Dollar index fell by -0.5% immediately after too.

Our US economists saw two minor surprises in the statement. One was the more explicit firming in the Committee’s guidance about the timing to start its balance sheet unwind, which they now expect to begin “relatively soon.” Secondly, it was how the Committee described the inflation outlook. They now acknowledged the further decline in (PCE) inflation since the June meeting, and now view inflation as running “below” rather than “somewhat below” their inflation target (2% in the medium term). Elsewhere, the committee upgraded their view on job gains post solid June employment stats.

On the back of this, DB’s rate expectations remain unchanged, where we expect the Fed to announce it will begin a gradual tapering of its balance sheet reinvestment purchases in October and see the next rate hike coming in December. Looking at market pricing from Bloomberg, traders appear to have taken a very slightly dovish outlook, with the chance of a rate hike in Dec 17 slightly lowered to 43% vs. 45% pre the FOMC.

Global equity markets continued to post small gains yesterday. Over in the US, the FOMC didn't seem to have much impact and generally strong earnings pushed the S&P 500 (+0.03%), Dow (+0.45%) and the NASDAQ (+0.17%) to slightly higher brand new highs. In Europe the STOXX 600 index posted strong gains of +0.5%, with nearly every single sector ending the day in positive territory. Regional markets were also broadly positive, as the DAX (+0.33%), FTSE (+0.24%), CAC (+0.56%) and FTSE MIB (+0.56%) were all up on the day as well. This morning in Asia, markets are broadly up, with the Nikkei (+0.1%), Kospi (+0.2%) and Hang Seng (+0.5%) higher, but two of the three main Chinese bourses have fallen -0.6% with the Shenzhen bucking the trend (+0.6%).

Back to bonds yesterday, in Europe we saw German Bund yields (2Y -1bp; 10Y -1bp) lower. Elsewhere Gilt yields fell across all maturities (2Y -3bps; 10Y -3bps) following a fairly lacklustre (if expected) Q2 GDP growth number of +0.3% (+0.2% last quarter) or +1.7% YoY (+2.0% previous).

In other FX markets the Euro/USD climbed by 0.7% - all after the FOMC - and to a fresh 30-month high. Sterling/USD also climbed a similar amount at the same point (+0.6%) to 10-month highs. Both are also a couple of tenths of a percent higher again in Asian trading. In commodity markets the energy sector saw broad based gains as oil continued to rally (WTI +1.8% - although most of this was holding onto levels from the after hours performance the night before), with gains of +6.2% on the week so far. Precious metals were mostly flat on the day while industrial metals gained (Copper +3.3%; Aluminium +0.9%). Agricultural commodities also posted broad based gains.

Away from markets, the voting drama to repeal Obamacare continues. Overnight, the Senate rejected a simple repeal of the plan on votes of 45-55. Senator Cornyn is now exploring a scaled back repeal plan that may be easier to pass, but the House Freedom Caucus Chairman Meadows said there was “zero” chance the house would go for a skinny repeal of Obamacare even if the Senate pass it first. Forward plans are still unclear and it is possible that this could lead to an all-night voting event at some point soon, featuring dozens of amendment votes.

Elsewhere, Treasury secretary Mnuchin reiterated the government can finance tself through September but warned that there is a cost to delaying an increase to the government debt limit.

Staying with US fiscal policy, the Washington Post ran a story that White House officials may be looking to pass a sharp short-term tax cut if President Trump’s broader tax reform plans falter. These contingency plans could be pursued as soon as September and highlight the challenges faced by a broader tax overhaul. According to the story, the top advocates for the targeted tax cut are Larry Kudlow and Steve Moore, both top economic advisers during Trump’s campaign who remain in contact with White House officials. Their pitch is a plan called “Three Easy Pieces” which would (i) cut the corporate tax rate from 35% to 15% for 10 years, (ii) double the standardized deduction that Americans claim in their taxes and (iii) allow companies to bring money back from overseas without a significant tax penalty. While Moore expects the changes to cost between U$2-3tn over 10 years, they could ramp up economic growth and give Congress more time to plan out a broader overhaul of the tax code. This is however a departure from the tax plan crafted by Mnuchin and Cohn over several months, and neither has reportedly entertained the idea much so far. This should become an important story to follow contingent on how tax reform discussions proceed.

Taking a look now at some of the other data out yesterday. Europe saw the July consumer confidence reading out of France disappoint (104 vs. 108 expected; 108 previous). Over in the US the only data ahead of the FOMC rate decision was new home sales data which held steady at 610k against expectations of an increase (615k expected; 610 previous).

For Thursday, the morning session looks quiet with only the German GfK Consumer Confidence indicator for August (10.6 expected; 10.6 previous) and the Euro area M3 money supply number due. Across the pond it’s a busier day over in the US as we will see June data on durable (+3.7% mom expected) and capital goods orders (+0.3% mom expected) as well as wholesale inventories (+0.3% mom expected). We will also see jobless claims numbers and the Kansas City Fed’s manufacturing index (11 expected) due. Notable US companies reporting include: Intel, Western Digital, Dow Chemical, Mastercard, Procter & Gamble, Conocophillips and Amazon. Notable European companies reporting include: Nestle, Shell, Fiat, Volkswagen and Bayer AG. Indeed this is set to be the busiest day for European earnings with 85 of the Stoxx 600 reporting.