S&P futures rose alongside European stocks as Asian shares posted modest declines. The euro set a new six-month high and European bourses rose as PMI data from Germany and France signaled that the ECB will have to tighten soon as Europe’s recovery remains on track, with the German Ifo business confidence printing at the highest level on record, and hinting at a GDP print in the 5% range. Oil declined after the Trump budget proposal suggested selling half the crude held in the US strategic petroleum reserve.
Strong economic survey data across the Eurozone supported EU bourses, despite a cautious start to trade after last night’s deadly terror attack in the UK. Alongside strong headline numbers, one of the most eye-catching details in the data was the biggest manufacturing sector job growth reading in the survey’s 20-year-history and overall employment gains were the second best in a decade.
“It’s a very good result and it’s broad based. We’ve got a good pace of growth here. The fact we have maintained this high level in May is great news for second quarter GDP,” said Chris Williamson, chief business economist at IHS Markit.”
Just like in the US, tech companies helped propel the Stoxx Europe 600 Index higher after Nokia Oyj settled a litigation with Apple. The U.K.’s FTSE 100 Index rose a third day, the pound pared declines and gilts were steady after the Manchester bombing. The dollar declined after the Washington Post reported Donald Trump asked intelligence chiefs to publicly deny collusion between his campaign and Russia, a potentially impeachable offense. The U.S. president in March asked Director of National Intelligence Daniel Coats and NSA Director Michael Rogers to publicly deny existence of any collusion between his campaign and the Russian government, the Washington Post reported, citing unidentified current and former officials.
Oil dropped, halting a four-day rising streak that took the price of crude above $51 a barrel.
It wasn’t just the German IFO surge: a euro-area Purchasing Managers’ Index showed manufacturing in the bloc expanded at the fastest pace in more than six years, bolstering the case for an ECB rate hike and further capital flows out of the US and into Europe as political wrangling in Washington rumbles on, diverting attention from President Trump’s spending and tax plans.
“Europe’s growth numbers aren’t knocking the skin off the ball, but they are less volatile and it’s doing relatively well compared to the U.S., U.K. and Japan,†said Bill Blain, head of capital markets at London-based Mint Partners. “More than a few global investors have lost faith in the U.S. recovery and Trump jump.â€
There was some bad news: signs that euro zone authorities and the International Monetary Fund remain some way apart on Greece’s debt problems combined with the strong data to nag at bond markets. Greece’s short-dated government bond yields rose sharply as the IMF’s chief negotiator stuck to its stance that there needs to be more realism on what Athens can deliver. The prospect of the ECB scaling down its multi trillion euro stimulus program meanwhile nudged up yields on German Bunds DE10YT=TWEB and other higher-rated government debt.
“The risk-off environment is already erased and we are back to the levels we saw yesterday on the back of the very bright economic outlook,” said DZ Bank analyst Rene Abrecht.
The Stoxx Europe 600 Index gained 0.2 percent in early trading. The U.K.’s FTSE 100 Index added 0.1 percent. Futures on the S&P 500 climbed 0.1 percent after the underlying gauge rose 0.5 percent on Monday. The selloff in Brazilian assets resumed on Monday. The NEXT Funds Ibovespa Linked Exchange Traded Fund, an equity ETF that tracks Brazil’s benchmark index, slumped 3.9 percent in Tokyo trading Tuesday.
Asian trading had seen a modest pull back in risk appetite with MSCI’s broadest index of Asia-Pacific shares not including Japan dropping back from near two-year highs. Tokyo’s Nikkei closed down 0.3 percent as Japanese manufacturing activity expanded at the slowest pace in six months in May, while trading in China was choppy on concerns over a regulatory crackdown on risky lending practices. Japan’s Topix dropped 0.2 percent after swinging between gains and losses. South Korea’s Kospi rose 0.3 percent. Hong Kong’s Hang Seng fell 0.1 percent. The Shanghai Composite Index lost 0.5 percent.
The dollar remained in the doldrums too. It dipped to a 6-1/2-month low against a basket of other major currencies as low 10-year U.S. Treasury yields continued to underscore fading expectations for fiscal stimulus from the Trump administration.
Of note, today the White House will present Trump’s first full budget plan to lawmakers on Tuesday. Its proposals include a $3.6 trillion cut in government spending over 10 years, balancing the budget by the end of the decade. Congress holds the federal purse strings and often ignores presidential budgets, which are proposals and may not take effect in its current form. But the plan, which advocated selling half of strategic U.S. oil reserves, weighed on crude futures according to Reuters, offsetting optimism over expectations that other major oil producers would agree to extend supply curbs this week.
Brent retreated 0.8 percent to$53.44 a barrel. U.S. crude futures gave up all their earlier gains to edge lower to $50.71, after hitting their highest level in more than a month earlier in the session. The weaker dollar, meanwhile, lifted gold slightly. Spot gold climbed 0.1 percent to $1,261.56 an ounce in its third straight session of gains.
This afternoon sees US new home sales and the much-ignored Markit manufacturing PMI. Neither is expected to be much-changed from last month. The big event for the US market is the FOMC Minutes tomorrow. “The big question for markets is how fast investors get back to the business of hunting carry” according to SocGen’s Kit Juckes. “I am watching USD/BRL which has stabilised after last week’s spike, and if this starts to edge down again while US equities move towards new highs, that would increase the likelihood of a June Fed rate hike rate, while also supporting all the higher-yielding currencies. That does, in G10FX, lead to NZD/JPY.”
