The melt up is accelerating and with the momentum tailwind back, newsflow is once again irrelevant: any news that is even remotely good is trumpeted, and any bad news – such as Europe’s right storm rising in the northern states, and left storm surge in the states that demand more handouts from the northern states or China sinking a Vietnamese boat, the most serious bilateral incident since 2007 – are once again (and as usual) nothing more than a catalyst for hope for even more liquidity injections. End result: the S&P futures this morning are 5 points above Goldman’s year end target of 1900 and 45 points away from its June 30, 2015 target. Can this breakneck scramble on zero volume continue until Grantham’s bubble peak level of 2,200 is hit? Well of course: after all anything goes in the centrally-planned new normal.
To be sure, this is an equity only phenomenon: moments ago the Bund future hit its highest level since May 19, while the 10 Year remains unchanged at 2.53% as it continues to price in the new “deflationary” (and Japanese) normal. And as has been the case during all such divergences of late, either bonds or equities are making a horrible mistake: the question remains: who? Since all equities are doing is tracking FX pairs to the pip and have completely forgotten all about fundamentals, we have a pretty good idea what the answer is.
In Asia, Chinese stocks are lagging (SHCOMP -0.3%) following the announcement of an equity offering from a large state-owned construction firm which is adding to concerns that a number of state-owned banks and industrials will soon be selling shares to recapitalise balance sheets. As political risks bubble away in Europe, there is a renewed focus on geopolitical tensions in the South China Sea after Vietnamese authorities reported that a Chinese navy vessel has attacked and sunk a Vietnamese fishing boat. Shortly after the incident was reported, Japan’s Chief Cabinet Secretary Suga announced that Japan would begin cooperating with Vietnam on maritime safety.
The Nikkei closed bearly lower as it is once again tracking the USDJPY tick for tick, and the narrowly-traded pair had a 15 pip “plunge” right around the Japanese close, only to recover its losses in time to push its other favorite correlation pair, Spoos, higher. Not helping Japan was a Reuters article which claims that the BoJ has already begun early planning on how to wind back its extraordinary stimulus policies. Citing central bankers familiar with internal BoJ discussions, the article says that with inflation already past the half way mark to the 2% target and with early evidence suggesting that the economy has weathered last month’s sales tax hike, Governor Kuroda is keen to outline a strategy that avoids the market confusion and volatility that the Fed triggered in May 2013. There are also concerns about what a wind back in stimulus could mean in an economy where the BOJ has been buying about 70% of newly issued government debt, including nearly all new 10-year benchmark bonds sold by the government (Reuters).
Looking ahead, today sees the release of US Durable Goods Orders, Services & Composite PMI, Consumer Confidence Index as well as BoE’s Carney, ECB’s Draghi and Praet on the speaker slate.
Bulletin headline summary from Bloomberg and RanSquawk
- Spot gold is seen sharply lower as participants continue to seek comfort in Poroshenko’s victory in the Ukrainian Presidential elections and consequent de-escalation of tensions in the area.
- Stocks have also continued to benefit with the DAX and E-Mini S&P once again printing fresh record highs after tripping large stops as the UK and US return to market.
- Treasuries decline, 5Y and 7Y notes lead, before week’s $108b note auctions begin with $31b 2Y, which yield 0.385% in WI trading vs 0.447% April award.
- Protest parties racked up gains across the 28-nation European Union in elections to the bloc’s Parliament, turning the assembly designed to unite Europe into a chamber for politicians who want to tear it apart
- The U.K. Independence Party, which wants to pull Britain out of the EU, took first place in elections for the European Parliament, winning a national vote for the first time; Prime Minister Cameron said he will not enter into any pacts with UKIP, saying Nigel Farage’s party is out to “destroy†the Tories
- In France, Marine Le Pen’s National Front parlayed complaints about too many immigrants and a lenient penal system into 26% of the vote, dealing a blow to Socialist President Hollande
- The ECB plans to charge lenders as much as 15 million euros ($20.5 million) a year to recover the costs it incurs from supervising them
- In seeking to revive Europe’s ABS market, Draghi risks an unprecedented reach into the functioning of the financial system that could backfire, according to academics including former Bank of England Deputy Governor Paul Tucker
- Ukraine’s government said it inflicted “significant†losses on pro-Russian rebels and retook a major eastern airport a day after President-elect Petro Poroshenko vowed to wipe out the separatists
- The U.S. Department of Justice should investigate allegations that delays in health care at military veterans’ hospitals were covered up, lawmakers from both political parties said
- The Chinese government is pushing domestic banks to remove high-end servers made by IBM and replace them with a local brand, according to people familiar with the matter, in an escalation of the dispute with the U.S. over spying claims
- Vietnam and China traded barbs over the sinking of a Vietnamese fishing boat, their most serious bilateral standoff since 2007 as China asserts its claims in the disputed South China Sea
- Sovereign yields mostly lower. Nikkei +0.2%, Shanghai -0.3%. European equity markets mixed, U.S. stock futures gain. WTI crude and gold lower; copper slightly higher
