Slowly but surely, all those cans that many hoped were kicked indefinitely into the future, are coming back home to roost. The biggest impact on global risk overnight have been undoubtedly the expanded Russian sanctions announced by Obama yesterday, which have sent the Russian Micex index reeling to six week lows (as it does initially after every sanction announcement, only for the BTFDers to appear promptly thereafter), with the biggest hits saved for the named companies such as Rosneft -5.6%, Novatek -5.1%, and others Alrosa -5.7%, VTB Bank -4.3%, Sberbank -3.4% and so on. Then promptly risk off mood spilled over into broader Europe and at last check the Stoxx600 was down 0.8%, with Bund futures soaring to record highs especially following news (from the Ukraine side) that a Russian warplane attacked a Ukrainian fighter jet. Not helping matters is the end of the dead cat bounce in Portugal where after soaring by 20% yesterday on hopes of a fresh capital infusion, Espirito Santo has once again crashed, dropping as much as 11%, driven lower following downgrades by both S&P and Moodys, as well as the realization that someone was pulling everyone’s legs with the rumor of an equity stake sale.
Heading into the North American open, stocks in Europe are seen broadly lower, weighed on by concerns surrounding the implications that fresh round of sanctions on Russia will have on banks exposed to Eastern Europe. In terms of stock specific movers, SAP (+4.16%) bucked the trend following earnings pre-market, while Fiat (+3.68%) shares rose following reports in Manager Magazin that VW (-2.09%) and Fiat owners are exploring possible takeover deal. 3 out of 19 Stoxx 600 sectors rise; tech, media outperform, telcos, utilities underperform. 27.3% of Stoxx 600 members gain, 70.5% decline. Eurostoxx 50 -0.7%, FTSE 100 -0.4%, CAC 40 -0.6%, DAX -0.4%, IBEX -0.8%, FTSEMIB -1%, SMI -0.5%. The Italian and Spanish markets are the worst-performing larger bourses, the U.K. the best. The euro is little changed against the dollar.Â
Then there is China where since the government decided to resume injecting debt, it now has to face the consequences of a monster credit bubble. And sure enough, overnight a construction company (Huatong Road & Bridge) warned that it may default on RMB400m (or US$65m) of bonds that mature on July 23rd. This would make it just the second Chinese company to default in the domestic bond market after Shanghai Chaori Solar who defaulted in March, and the first to default on both principal and interest payments (Chaori failed to meet coupon payments). Paradoxically this does show that maybe the government is continuing to impose discipline in the nascent domestic bond market which makes little sense considering latest monetary figures show the government has resumed fanning the credit bubble flames on its own. The news has had little impact on the Chinese USD credit market so far.
Looking at the day ahead, the St Louis Fed’s James Bullard will be speaking on monetary policy today (scheduled for around 6:30pm London). Although Bullard is not an FOMC voter this year, he is usually middle-of-the-road on the hawk/dove scale but his comments have gotten noticeably more hawkish in recent months. In recent months Bullard has warned that inflation may overshoot 2% in 2015 and has played down the importance of Q1’s soft GDP growth numbers. Something to watch for today. On the earnings front, Morgan Stanley reports Q2 results before the NY opening bell and Google reports after-market. The US mega banks and tech companies have set a pretty good start to the Q2 reporting season so far (relative to expectations), so it will be interesting to see if this trend can continue. Highlights on the data docket include Euroarea CPI, US housing starts, jobless claims and the Philly Fed survey.
