Ugly Start As Sentiment Crunched On Cracked Credit Creation In Europe
At precisely 4 am Eastern two opposite things happened: the German IFO Business Climate for July printed at a better than expected 106.2 vs 105.9 in June and higher than the 106.1 consensus: news which would have been EURUSD positive. And yet the EUR tumbled. Why? Because at the same time the ECB provided an update to the chart that "keeps Mario Draghi up at night" as we reminded readers yesterday - the ECB's all important credit creation update in the form of the M3, which not only missed expectations (of +3%) but declined from 2.9% to 2.8%. But more importantly, ECB lending to private sector shrank for the 14th consecutive month in June, and slid to a new record low 1.6% in June, down from a 1.1% in May.
In other words, the European monetary plumbing is broken now more than ever and this puts the onus on the ECB for even more monetary stimulus (even though the data specifically confirms this won't help one bit aside from creating another stock market bubble). The news promptly crushed the fragile European confidence that things are getting better despite better PMIs and assorted Spanish "adjusted" data that will promptly roll over once the ongoing lack of credit creation washes ashore on the Iberian peninsula.
General risk off sentiment has ensured that commodities and the broader energy complex remained under pressure even though the USD is seen little changed amid safe-haven flows which also saw USDJPY trend lower.
Turning to the day ahead, in addition to a bevy of earnings today including AMZN, GM, MMM and others, US macro data will include the monthly durable
goods orders update and the weekly initial jobless claims.
Bulletin news highlights from Bloomberg:
- Treasuries steady as week’s auctions conclude with $29b 7Y notes; traders looking to next week’s FOMC meeting for clues on potential Fed tapering of asset purchases. BOE, ECB also meet next week, with U.S. payrolls on Friday.
- 7Y notes to be sold today yield 2.02% in WI trading; stopout yield at that level would be highest in two years. Yesterday’s 5Y auction stopped through, produced unremarkable bid-to-cover and participation metrics, similar to results for 2Y auction on Tuesday
- U.K. GDP rose 0.6% in 2Q, in line with estimates, from 0.3% in 1Q; services, production, construction and agriculture all grew, the first time that has happened since the third quarter of 2010
- Germany’s Ifo business climate index rose to 106.2 in July, est. 106.1, from 105.9 in June
- NZD gained against all major competitors after New Zealand’s central bank said the pace of future interest-rate increases will depend on the booming housing market’s impact on prices and reiterated it will keep borrowing costs at a record low this year
- Commerzbank wrote down the value of a portfolio of credit extended to the bankrupt city of Detroit, says Armin Guhl, a spokesman for the Frankfurt-based bank
- Wall Street banks are debating whether to suspend doing business with SAC Capital Advisors LP if the hedge fund is charged by U.S. prosecutors, according to two people briefed on the matter
- Anglo Irish Bank Corp. will have EUR3b less to repay creditors after the government sped up its liquidation, two people with knowledge of the matter said
- Sovereign yields mixed. Asian stocks fall, with Nikkei -1.14%, European indexes also decline. U.S. stock index futures drop. WTI crude, gold, copper fall
SocGen's macro highlight update:
A short squeeze lifted EUR/USD to a 1.3255 high yesterday but what stood out from the day really is that the rally was assisted by a 2bp widening in EU/US 10y rate differentials. The US Markit PMI rose to a four-month high in July and new homes sales surged 8.3% in June (note the disparity as Midwest sales incl Detroit plunged 11.8%) but for this data to be trumped by mildly stronger set of eurozone PMIs is quite a feat. Blame market liquidity, US supply set-up or month-end flows, but EUR strength was evident across the board. For EUR/JPY, a test of the 22 May high (133.80) has to be a realistic target now if markets believe that positive economic momentum is carried over from Q2 into the second half of the year. This is also a time to reconsider long-term levels on the charts: 135, 139, 140. Keep an eye on the German Ifo survey this morning. The consensus is for a small up-tick to 106.1 vs 105.9 previously but a positive surprise could create another mini-stampede among EUR shorts. It is not quite time yet to bin the short-term bullish technical picture for EUR/USD as 1.3300/50 stays within reach.
A strong UK GDP number, the first estimate of Q2, will not have a great amount of influence on BoE policy we think. The formal introduction of forward guidance is only weeks away we suspect. Though 2013 GDP estimates may well prove a tad conservative vs May and in need of modest upgrading in the August Inflation Report, the reality is that there is still a long distance to make up for the UK economy (about 3.5%) to return to the starting point of the ‘big recession' in 2008. A steepening of the gilt and swaps curve looks inevitable as the MPC crushes the front end by keeping rates low for longer.
Given the sensitivity of the SEK to higher core yields, GBP/SEK therefore looks a decent bet to capitalise on a strengthening UK recovery. The pair has lost 2.7% this month but the fight back started yesterday. The return of EUR/SEK to over 8.57 follows the pattern of early Q2 and could set the stage for a return towards 8.70, though tactically we prefer long USD/SEK because of our Fed tapering forecast. A stronger Swedish economic tendency and confidence data may initially temper the SEK selling today but we prefer fading gains into next week when Fed FOMC and US payrolls are lined up. US Initial claims and durable goods orders are due this afternoon. Our forecasts are for a rise in claims to 355k vs 340k consensus and a 3.1% rise in durable goods vs 1.4% consensus.
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DB's overnight action recap with Jim Reid
We reach the peak day for both the US and European reporting season today which will see 56 S&P500 companies (i.e. 11% of index constituents) and 49 Stoxx600 companies providing earnings updates over the next 24 hours. Combined with the 10% of S&P500 companies that reported yesterday, we will get a more definitive picture of corporate profitability by this time tomorrow. On today’s earnings docket are a number of consumer-facing companies such as Amazon and Starbucks in the US and Unilever in Europe. We also have a number of industrial heavyweights such as General Motors, Dow Chemical, 3M and Roche reporting. Credit Suisse has reported Q2 results as we type - CS is one of the first major European investment banks to report Q2 results (not including UBS’ pre-release on Monday) and will provide an important readthrough for rest of the sector.
Overall, yesterday’s US earnings reports were some of the strongest that we’ve seen this quarter. Among the 48 companies reporting 83% beat consensus EPS estimates and 71% managed the same on the revenue line. Both percentages are around 10ppt higher than what we’ve seen this reporting season. The better news on the earnings front failed to push the S&P500 past the 1700 mark and we saw weakness in US equities shortly after the opening bell. Of the MD&A yesterday the notable commentary came from Caterpillar Inc (- 2.4%) who had its sharpest fall in three-months after the company downgraded its guidance for 2013 sales by 3%. In keeping with the theme of some of the other earnings reports we’ve seen, Caterpillar’s management said that sales were relatively poor in all regions outside of North America. Currency translation losses and a destocking in dealer inventories also impacted the company’s result. The earnings reports from Ford and Boeing made for better reading though. Ford said that there was “stronger demand for its cars and trucks in China and South America as well as a smaller-than-anticipated loss in Europe”. Meanwhile Boeing signalled that it may increase the production of its best selling jet (the narrow-body 737) in order to “match production with additional demand as our customers require”.
Away from earnings, yesterday’s global PMIs boosted sentiment in the first half of the European session. The euro area flash composite PMI moved back above 50 in July (50.4 vs 49.1 expected) which is the first >50 reading since January last year. The manufacturing and services indices increased by 1.3 points to 50.1 (vs 49.1 expected) and 1.4 points to 49.6 (vs 48.3 expected) respectively. Across the individual countries, Germany and France posted strong monthly improvements with the flash composite PMI rising by 2.4 and 1.5 points to 52.8 and 48.8 respectively. There was more good news across the periphery with DB European economists’ synthetic non-core composite index suggesting that, on average, the composite PMI for Italy, Spain and Ireland improved by about 1 point on the month. Our economists note that with the recent PMI trend including the stronger-than-expected July flash outturn, it seems that that the euro area is on track to post a GDP recovery in the second part of the year.
The strength in European equities was short-lived, and we saw the Stoxx600 (+0.55%) weaken and the S&P500 (-0.38%) quickly trade into negative territory after the US opening bell. The release of better-than-expected US Markit PMI (53.2 vs 52.6) and new home sales (8.3% vs 1.7%) strengthened concerns of a September Fed tapering which saw the USD index add 0.4%. Along the same lines, USTs came back into focus after the 10yr yield added 8bp to close at a two week high of 2.59%. In the EM world, the focus on higher US rates prompted weakness in sovereign credit where Chinese, Mexican and Brazilian 5yr CDS spreads closed around 6-9bp wider on the day. 10yr bunds also had a fairly weak day (+9.5bp to 1.646%) on unconfirmed market chatter of an imminent German sovereign downgrade (Source - The Telegraph). Coming back to the Fed, the WSJ’s Hilsenrath wrote that the race for the next Fed Chairperson has come down to a two-horse race between Obama administration insider Lawrence Summers and Fed vicechair Janet Yellen. We’re likely hear more on this in the next few months leading up to the end of Bernanke’s current tenure.
Across Asia this morning, a weaker tone has prevailed in equities and fixed income following on from the price action in US markets yesterday. All major bourses are trading lower this morning led by the Nikkei (-0.7%), Shanghai Composite (-0.1%) and the Hang Seng (-0.3%). In credit, the pressure on EM continues with the Asian IG index being marked 7.5bp wider led by an 8-15bp widening in sovereign spreads. Japan’s earnings season has gotten off to a mixed start with camera-maker Canon Inc down 5.8% after reporting weaker than expected sales performance yesterday. In China, there are further signs of policy support from the government after the country’s State Council announced three sets of policy measures to stabilize economic growth. The measures were 1) an exemption from VAT and business tax for the smallest firms, 2) the setting up of a Railway Development Fund to speed up railway construction, especially in the central and western parts of China, 3) Steps to support the export sectors including simplifying customs procedures, reducing levies on import and export businesses, and stabilizing the exchange rate. The only major equity index to trade higher is the KOSPI (+0.05%) after Korea reported better than expected Q2 growth of 1.1% (vs 0.8% expected).
Turning to the day ahead, with the focus on US dataflow, today’s durable goods orders and jobless claims will be garner some attention. Euroarea money/credit aggregates, the German IFO survey and the advance UK Q2 GDP are the main data reports out of Europe. The slew of earnings releases on both sides of the Atlantic will ensure that there’s plenty to keep investors busy on the macro and micro front.