While the situation between Israel and Gaza continues to escalate, pulling the markets’ attention away from the recent developments in Iraq (as for the Ukraine civil war, forget it), the big news overnight came out of China which reported another contraction in consumer prices, which both declined to 2.3% and missed expectations of a 2.4% print (down from 2.5%). Producer Prices had another negative print, the 28th in a row, and have remained negative since 2012. This led to the Hang Seng Index falling at the fastest rate since late June to erase all YTD gains. However, as has now become the norm, macro news hardly impacted US equity futures, which are driven exclusively by the Yen carry trade, which unlike yesterday’s pounding, has traded rangebound between 101.6-101.7 keeping US equity futures just barely in the green. We expect the momentum ignition algo to kick in at some point, for absolute no fundamental reason beside the NY Fed trading desk issuing a green light, sending the USDJPY surging, taking the Spoos with them, and helping stocks forget all about the weak Asian session.
The tone from Tuesday has carried through to overnight markets with losses across all the major equity bourses including Japan (Nikkei -0.1%), Hong Kong and Korea. In the Asian EM space, all eyes are on Indonesia’s presidential elections. Voting ends at around the time that we go to print and ‘quick count results’ will begin to emerge during the London morning today. However the official results won’t be announced until around July 21st or 22nd, or possibly late August if there are legal challenges (Bloomberg). Local Indonesian financial markets are shut today for the elections, however offshore USD Indonesian bonds are trading stronger yet again in anticipation of a Jokowi-win.
European market sentiment is negative amid very thin volumes after the poor performance by Asian stocks filtered through to local indices. European shares remain mixed with the financial services and autos sectors underperforming and chemicals, tech outperforming. The U.K. and Swiss markets are the worst-performing larger bourses, the Italian the best. The euro is little changed against the dollar. Portuguese 10yr bond yields rise; Irish yields increase. Commodities decline, with soybeans, corn underperforming and zinc outperforming. U.S. mortgage applications due later.
The main event on today’s US calendar is the release of the Fed minutes. As DB notes, there seems to be a fair amount of anxiousness ahead of the FOMC minutes release. DB expects the minutes to reveal a more hawkish side to the FOMC than has been presented from Yellen’s recent public commentary. Judging by the trading patterns on previous FOMC minutes days, the minutes have been a bridge between the Fed leadership and perhaps a less dovish overall Committee. Indeed FX strategist Alan Ruskin notes that 10y yields have gone up on ten consecutive FOMC minutes release days. The USD Trade-weighted index versus major currencies, has been up on 11 of the last 13 FOMC minutes release days, suggesting the bearish bias in US longer-dated yields has largely translated to a stronger USD. On the day of the last 8 FOMC minutes releases, the EUR has been weaker 6 times. Speaking of Yellen, it was announced that the Fed chair will be taking part in the semi-annual Humphrey Hawkins testimony before the US senate next week (July 15th). Given her recent public comments, it’s difficult to envisage any major departure from her dovish stance.
MARKET WRAP
- S&P 500 futures little changed at 1961.1
- Stoxx 600 down 0.2% to 339.4
- US 10Yr yield up 2bps to 2.57%
- German 10Yr yield little changed at 1.22%
- MSCI Asia Pacific down 0.7% to 146.6
- Gold spot up 0.3% to $1323.8/oz
Bulletin Headlin Summary from Bloomberg and RanSquawk
- The Hang Seng Index fell at the fastest rate since late June to erase all YTD gains after Chinese inflation data slumped below expectations, marking the 28th consecutive negative PPI.
- European markets trade under pressure, with the FTSE 100 underperforming its peers on a BP downgrade at Barclays.
- Markets now look ahead to the FOMC minutes, expected at 1900BST/1300CDT, with ECB president Draghi expected to speak 30 minutes later.
- Treasuries decline before Fed releases minutes of last month’s meeting, U.S. sells $21b 10Y in reopening; yield 2.575% in WI trading vs 2.648% in June.
- 3Y notes sold yesterday awarded at 0.992%, highest since May 2011 and 0.6bp lower than WI yield at 1pm according to Stone & McCarthy
- Citigroup may reach an agreement with federal prosecutors as early as next week to resolve a probe into MBS sales before the 2008 crisis, a person familiar with the negotiations said
- Bonds of Banco Espirito Santo SA plunged to record lows after a parent company delayed payments on some short-term debt; Portugal’s 10Y yield rose the most in a year
- German authorities are investigating a second case involving allegations of espionage for the U.S., Sueddeutsche Zeitung newspaper reports
- French and German companies are leading among countries outside of greater China in the usage of the yuan, according to a report by HSBC
- China’s factory-gate prices fell in June at the slowest pace in more than two years, adding to signs of stabilization in the world’s second-largest economy
- The thousands of children crossing the southern U.S. border are putting immigration back on the political agenda, with Obama facing the prospect of mass deportations at a time when administration was easing away from such actions
- Israeli officials said the aim of their operation in the Gaza Strip is to cripple the military capability of Hamas, as rockets fired by the Islamist movement and other Palestinian militant groups reached the skies over Tel Aviv and Jerusalem
- Sovereign yields mostly higher. Euro Stoxx Banks index little changed, holding near falls lowest since February. Asian stocks decline. European equities, U.S. stock futures mostly lower. WTI crude little changed, gold and copper higher
