The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos’ complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today’s downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham’s 2,200 bubble peak after which Bernanke’s Frankenstein market will finally, mercifully die.
Looking at overnight markets, 10yr UST yields are down another half a basis point in Japanese trading at around 2.43%. Other government bonds in Asia Pac are trading firmer today led by Australia (-9bp), New Zealand (-5bp) and Indonesia (-3bp). The gap tighter in US yields is creating a strong search for yield in Asian EM especially in credit as evidence by the strong performance of recent new deals and the strong demand in secondary. This is a continuation of the price action that we saw in LATAM late yesterday. EMFX bellwethers including the INR (+0.1%) and KRW (+0.05%) are trading firmer today, adding on to the solid gains posted yesterday. In Japan, the drop in retail sales in April was worse than expected (-4.4% vs -3.3% expected) following the sales hike of that month, but this is partly offset by the anecdotal evidence from retailers that suggest that sales have recovered well in May. The Nikkei is down slightly overnight (-0.05%) while the Hang Seng (+0.1%) and HSCEI (+0.6%) are on firmer footing.
Outside of rates, another focus in Asia is on the renminbi with USDCNH breaking out of its recent trading range, The CNH has managed to firm a little overnight but the start of this week has seen the currency depreciate about 0.5% against the USD, large in historical context and pushing it to its weakest level since Q3 2012. There have been a lot of reports in recent weeks that the PBoC is in the midst of tweaking reserve ratios and other targeted monetary levers to ease funding pressure on banks. And if we look at onshore money market rates, short term funding costs appear to be stable so far this month, although we enter into the traditionally volatile June period when short term rates have typically fluctuated. DB’s Chinese bank analysts also highlight in a report that China’s financial sector is coping well with the repayment peaks of trust products and higher risk corporate bonds expected in May and June, as most of them have repaid or rolled over, with the unresolved risks concentrated in the coal and mining sectors.
European shares remain mixed with the banks and utilities sectors underperforming and personal & household, oil & gas outperforming. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Portuguese yields increase. Commodities gain, with nickel, zinc underperforming and soybeans outperforming. European newsflow remains light with parts of Europe on Ascension holiday and no tier 1 data to guide fixed income or equities markets. BoE’s Weale (neutral) said the BoE needs to start raising interest rates sooner rather than later if it wants to avoid sharp and painful increases in the future, and the BoE can wait a bit longer before first rate hike, but he is not sure how much longer.
Looking at the day ahead, it looks like the main focus will be on the 2nd estimate of US Q1 GDP. Other data today are US jobless claims and pending home sales.
Market Wrap
- S&P 500 futures up 0.1% to 1910.3
- Stoxx 600 down 0% to 344.3
- US 10Yr yield down 2bps to 2.42%
- German 10Yr yield up 0bps to 1.34%
- MSCI Asia Pacific up 0.2% to 142.2
- Gold spot down 0.3% to $1254/oz
