Somnolent Market Summary Ahead Of Bernanke's Repeat Performance

There was little macro news in the overnight news tape following a heavy earnings day and weak revenues from virtually all reporting companies with IBM, eBay, American Express and Intel all missing revenues. Over in Asia, China flirted briefly with funding disaster after its 1 Month SHIBOR exploded briefly to over 6% following news that the PBOC would not engage in market liquidity operations, only to taper the 299 bps move and close just 4 bps wider. Still, the damage on the Shanghai Composite was palpable with the second consecutive 1% drop in the index pushing it just north of 2000 once more.

In Japan, the president of the GPIF pension fund said he can't ignore Europe as an investment destination, also saying the market has priced in an LDP election win in this weekend's election, that 2% annual inflation will be dfifficult to achieve, that the Japanese gov't is likely to implement stimulus before the 2024 sales tax hike and that China growth falling to 7% is likely not to have a huge global impact.

Over in Europe, the trend of tech company weakness continued after SAP trimmed its outlook for 2013 softward revenue blaming slowing economic growth in China among other factors. Notably, Welt reported that the ECB eased collateral rules and reduced haircuts for ABS pledged as collateral in refi operations - hardly a surprise considering Europe's sad state when it comes to lack of encumbrable assets. Late last night, Greece’s parliament passed a bill which included a package of reforms that could lead to further cuts in public employees. The bill was needed for the troika to sign off on the next disbursement from Greece’s programme and was passed with 153 votes for and 140 against. Of course, since nobody has yet been fired, the situation in a nutshell is that Greece pretends to reform while Europe pretends to give Greece money for anything besides life support and funding coupon and maturity payments to European banks and the ECB.

Looking at today’s calendar, today is the second day of Bernanke's semi-annual testimony this time in the Senate. Yesterday, Fed's Bernanke said Fed could potentially increase purchases on data and if Fed raised rates now, economy would "tank". Said Fed knows how to exit without high inflation and even without QE, interest rates would be low. There is also the G20 finance ministers and central bank deputies meeting in Moscow today. Data-wise, we have initial jobless claims, the Philly Fed, US leading indicators and UK retail sales. Given the persistent noise around the downside risk to Spain's IG rating, its sovereign bond auction (2016, 20118 and 2023 maturities) today will be an interesting event to follow.

The full market recap from RanSquawk:


  • DAX index underperformed its peers, with SAP down 3% after the company failed to meet exp. and noted that it sees a difficult macroeconomic environment.

  • GBP/USD staged an impressive rally, which also saw the pair move back into positive territory following the release of better than expected retail sales report which was boosted by department store summer discounts.

  • Nokia shares fell over 5% after the company reported Q2 loss per share of EUR 0.06 vs. Exp. loss per share of EUR 0.07, Q2 net sales EUR 5.7bln vs. Exp. EUR 6.4bln.

Market Re-Cap

Stocks in Europe recovered from a cautious start to the trading session and gradually edged back into positive territory, though the DAX index in Germany under performed following less than impressive earnings by SAP. Company’s shares fell around 3% after the company trimmed its outlook for 2013 software revenue, blaming slowing economic growth in China. Elsewhere, Akzo Nobel shares fell 5% in early trade after the company said that its Q2 net profit almost doubled from the same period last year thanks to the sale of its North American paints division and a tax gain.

In terms of other asset classes, GBP/USD staged an impressive rally, which also saw the pair move back into positive territory following the release of better than expected retail sales report. The ONS said that sales growth Q/Q was highest since Q4 2011, boosted by department store summer discounts. Technically, resistance levels are seen at the 100DMA line at 1.5265 and then at the 50DMA line at 1.5283.

Going forward, market participants will get to digest the release of the weekly jobs report, Philadelphia Fed survey for the month of July and earnings report releases from Morgan Stanley, Verizon, BlackRock and Google.

Asian Headlines

7.5% growth rate is the lowest China can tolerate right now, according to a PBOC-backed paper. The paper also stated that China may issue measures to boost trade in late July.

Japan will raise its economic assessment for the third month in July and may mention the word "recovery" for the first time in 10 months.

EU & UK Headlines

UK Retail Sales Ex Auto Fuel (Jun) M/M 0.2% vs. Exp. 0.2% (Prev. 2.1%)
UK Retail Sales Ex Auto Fuel (Jun) Y/Y 2.1% vs. Exp. 1.6% (Prev. 2.1%, Rev. 2.3%)
UK Retail Sales w/Auto Fuel (Jun) M/M 0.2% vs. Exp. 0.3% (Prev. 2.1%)
UK Retail Sales w/Auto Fuel (Jun) Y/Y 2.2% vs. Exp. 1.7% (Prev. 1.9%, Rev. 2.1%)

- ONS says UK sales growth Q/Q highest since Q4 2011, boosted by department store summer discounts.

Spanish bond auction results: sells EUR 3.06bln vs. Exp. EUR 2-3bln. Even though yields are lower across the board and b/c are generally higher, it is worth remembering that the Spanish Treasury has only offered EUR 3bln (max), which is lower than regular EUR 4bln.

- Sells EUR 1.12bln in 3.3% 07/16, b/c 2.6 (Prev. 3.46), avg. yield 2.768% (Prev. 2.875%), yield tail 2.6bps (Prev. 2.2bps)
- Sells EUR 0.926bln in 3.75% 10/18, b/c 2.1 (Prev. 1.71), avg. yield 3.735% (Prev. 3.792%), yield tail 3.3bps (Prev. 6.7bps)
- Sells EUR 1.017bln in 4.4% 10/23, b/c 2.3 (Prev. 1.84), avg. yield 4.723% (Prev. 4.765%), yield tail 3.5bps (Prev. 5.3bps)

French auction results: Sells EUR 8bln vs. Exp. EUR 7-8bln. Even though today's auctions are the first since the downgrade by Fitch which ensured that the country has finally lost its AAA rated status, there was no evidence of weak participation.

- Sells EUR 2.094bln 0.25% 2015, b/c 3.24 (prev. 1.93), avg. yield 0.31% (prev. 0.50%)
- Sells EUR 1.774bln 3.75% 2017, b/c 2.88 (prev. 3.64), avg. yield 0.66% (prev. 0.49%)
- Sells EUR 4.12bln 1.00% 2018, b/c 2.39 (prev. 1.43), avg. yield 1.09% (prev. 1.24%)

Die Welt reported citing sources that the ECB has eased ABS rules and also raised some requirements for covered bonds. Portuguese parties are to resume talks today, according to the Portuguese Social Democratic Party.

US Headlines

Of note, today is the second day of Bernanke's semi-annual testimony. Yesterday, Fed's Bernanke said Fed could potentially increase purchases on data and if Fed raised rates now, economy would "tank". Said Fed knows how to exit without high inflation. and even without QE, interest rates would be low.

Equities

Stocks in Europe recovered from a cautious start to the trading session and gradually edged back into positive territory, though the DAX index in Germany under performed following less than impressive earnings by SAP. Company’s shares fell around 3% after the company trimmed its outlook for 2013 software revenue, blaming slowing economic growth in China.

Nokia shares fell over 5% after the company reported Q2 loss per share of EUR 0.06 vs. Exp. loss per share of EUR 0.07, Q2 net sales EUR 5.7bln vs. Exp. EUR 6.4bln and Q2 net loss EUR 227mln vs. Exp. loss EUR 258.3mln.

Intel shares fell in after market trade yesterday after the company reported Q2 EPS USD 0.39 vs. Exp. USD 0.39 and cut its FY revenue forecast. On the other hand, IBM shares were trading up around 2.8% in after-market hours after the largest member of the Dow Jones Industrial Avg. Index reported Q2 EPS USD 3.91 vs. Exp. USD 3.77 and boosted forecast.

FX

GBP/USD staged an impressive rally, which also saw the pair move back into positive territory following the release of better than expected retail sales report. The ONS said that sales growth Q/Q was highest since Q4 2011, boosted by department store summer discounts.

Broad based JPY weakness was observed overnight in Asia and in Europe this morning as market participants look forward to the July 21st upper house elections where the LDP are widely expected to win, which would consolidate their power over Japanese policy.

Commodities

South Sudan has reduced its oil output and plans to shut it off completely after northern neighbour Sudan insisted production be shut down by Aug. 7, officials said, over allegations of support for rebels that operate across their border.

Anglo American Q2 copper production rose 14% to 182,900 tons, Kumba iron ore production fell marginally by 1% and platinum production up 2% to 594,000.

Tanaka, Japan's biggest gold retailer, said its quarterly gold sales exceeded buying for the first time in year.

* * *

SocGen's FX macro outlook

The USD managed to eke out small gains vs G10 currencies and the UST10y yield touched a 2.45% while equity indices hovered around unchanged levels in the wake of Fed chairman Bernanke's testimony yesterday. By and large there was not much in his prepared remarks or the subsequent Q&A session that proved materially different from recent FOMC communication for markets to get carried away, and so the key takeaway must be that the Fed has succeeded in making itself clear: short term rates will stay low but that will not stop longer-term rates going up if the unemployment situation improves as pencilled in back in June.

We see no reason after yesterday to change our forecast for tapering to start in September and until we are challenged on by an unexpected weakening in incoming employment data (watch initial claims today), we believe the correction in 10y yields and swaps from the June highs may soon have run its course. A break below 2.45% followed in quick succession by a move through the 2.40% area would open the door for a deeper decline to 2.30%, but the market stopped short of 2.45% despite terrible data for housing starts and building permits that saw our economists shave the Q2 annualised GDP forecast to 0.4%. Adding this to 1.8% for Q1 would return an H1 average of 1.1%. Without a pick-up of growth in H2 which we do expect will materialise, the Fed's 2.3% central tendency mid-point 2013 forecast is starting to look optimistic.

For the USD, this week's erosion of positive yield differentials has not translated into major selling vs G10. This is in contrast to the beleaguered EM currency world which has been bruised and battered in May and June, and is making the most of the Fed's reassurance that monetary policy will stay accommodative. As Bernanke repeats his testimony to the Senate today and forecasters trim their 2013 forecasts for GDP growth after a brace of weak retail sales and housing construction data, investors must ask whether EM currencies have the legs to complete the recovery to the May highs. The MXN was the best performer yesterday vs the USD and has rallied 6.9% from the June high. USD/MXN now squares up to 12.5191 where a break would open up a return to 12.0. Closer to home, GBP posted solid gains yesterday fuelled by a shock 9-0 vote by the MPC at the July meeting to keep the asset purchase programme unchanged (link to write-up: GBP: doves' hopes turning to ashes?). The formulation of BoE monetary policy next month does nevertheless pose a formidable challenge and GBP bulls should not get carried away even by stronger Q2 GDP data next week.

* * *

Finally, recapping it all including Bernanke's Q&A, as usual, is DB's Jim Reid

Bernanke’s Q&A canvassed a wide range of topics from housing to the debt ceiling to the rise in part time employment and too-big-to-fail. On the recent concerns about rising rates and housing, Bernanke commented that "If we think that mortgage rate increases are threatening (housing market) progress, then we would have to take additional action in the monetary sphere". But he did add that he hadn’t “seen anything that points strongly to any particular problem”. Part two of Bernanke’s two-part Congressional testimony continues today at the Senate Banking Committee. Bernanke’s prepared testimony will be the same, so effectively the only potential for new information will be in the Q&A.

The market reaction to the prepared testimony saw 10yr UST yields rally 10bp to an intra-day low of 2.46%, before yields gradually started to retrace the move to finish at 2.49% (or -4bp on the day). The 5yr UST outperformed, closing 6.5bp lower on the day, leading to a slight steepening of the 5/10s curve. The S&P 500 opened up 0.4% stronger and spent the rest of the day trading sideways before closing at +0.28% with banks (+0.7%) leading the way post the Bank of America earnings beat (more below). The USD index initially weakened as the prepared remarks were released but drifted upwards to close at +0.25%. In Europe, periphery bond yields continued to struggle despite the better risk sentiment as continuing concerns in the political sphere weighed on markets.

Late last night, Greece’s parliament passed a bill which included a package of reforms that could lead to further cuts in public employees. The bill was needed for the troika to sign off on the next disbursement from Greece’s programme and was passed with 153 votes for and 140 against. Elsewhere in the peripheral the pressure continues to mount on the Spanish and Italian governments and is certainly worth keeping an eye on.

On the micro front, one of the more positive earnings reports came from Bank of America who reported EPS of $0.32 (vs $0.26 consensus) and revenues of $22.9bn (just head of the $22.7 expected). Our US bank analyst noted that upside came from higher-than-expected gains on both equity and debt, and we also noted that the bank was able to go against the trend of net interest margin compression by recording a 1bp q/q increase in NIMs to 2.44%. The result seemed to be well-liked by the market as reflected by the +2.8% rally in share price and 5bp compression in its 5yr CDS.

Whilst BofA extended the recent trend of solid US bank results, we are starting to witness some general softness in top-line numbers. Not the first time this has happened in recent quarters. Indeed BofA aside, yesterday’s earnings reports were a bit of a mixed bag overall. Of the twenty S&P500 companies that reported, 65% of those beat EPS estimates but just half of those exceeded revenue consensus. Industrial bell-wether Intel was one of those that missed top line estimates as revenue fell for the fourth consecutive quarter as the switch away from PC to Mobile/tablets continue to weight. The company also downgraded Q3 revenue guidance to below street estimates. Away from Intel, we also saw revenue disappointments from eBay, American Express and IBM. In past reporting seasons we’ve noted how periods of USD strength have had a negative impact on top line performance for companies with global operations so this will be interesting to watch out for this reporting season.

One of the first signs of this came from eBay's commentary yesterday after the company said that the projected weakness in offshore currencies such as Euro and Won against the Dollar have the potential to weigh on earnings in the second half of the year. Intel and eBay shares were down 3.5% and 5.9% in after-hours trading.

Turning to the overnight markets, Asia markets are seeing mixed trading this morning following Chinese government data showing that home prices climbed in 69 out of 70 Chinese cities with the three largest cities in China posting double-digit year-on-year price increases. The data is weighing on property companies listed in HK and China as fears of another round of property curbs weigh on Chinese equities. Indeed, the Hang Seng (unchanged) and Shanghai Composite (-0.5%) are underperforming other Asian bourses this morning. In Japan, the 0.5% weakening in the yen against the USD is helping the Nikkei record gains of +1%. The Asia IG credit index is trading 8bp tighter led by tightening in EM sovereign spreads.

Looking at today’s calendar, Bernanke’s testimony will once again garner most of the attention but it’s also worth noting that there is also the G20 finance ministers and central bank deputies meeting in Moscow today. Data-wise, we have initial jobless claims, the Philly Fed, US leading indicators and UK retail sales. Given the persistent noise around the downside risk to Spain's IG rating, its sovereign bond auction (2016, 20118 and 2023 maturities) today will be an interesting event to follow. We also have French bond auctions scheduled this morning. Corporates reporting include Morgan Stanley, AMD, Google and Microsoft.

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