*Investors flock to safety stocks:
Some lingering concerns about crowded positioning, overbought conditions and stretched valuations in the more defensive pockets of the market. Theme back in the headlines with bond proxies extending relative outperformance amid latest decline in global rates. Recent strategy note from Credit Suisse pointed out that many defensive groups stand out as among most expensive relative to broader market, including Utilities, large-cap Food, Beverage & Tobacco, large-cap Food & Staples Retail. WSJ also discussed this dynamic. Noted buying bond proxies means accepting “insanely” low global yields are right, the economy is weaker than data so far suggest and things likely to get worse. Argued bond market signals may be too pessimistic and highlighted some recent relative strength in economically-sensitive small-cap and semiconductor stocks.
*Polls and bookmakers show increase in Brexit odds; Sun supports Brexit:
Heightened Brexit fears continue to get blame for global risk-off sentiment. Latest Brexit polls show "Leave" camp widening lead over "Remain." TNS online survey out today showed 47% support for Leave vs 40% who want to stay. Last week's poll gave Brexit a two-point lead. YouGov poll for London Times out yesterday showed Leave holding 46%-39% lead. ICM/Guardian poll also out on Monday showed Leave with 53% support vs 47% for Remain when excluding "don't knows". Bookmakers also showing shift to Leave. Ladbrokes noted Brexit chances have hit an all-time high of 43%. William Hill pointed out Leave will be a Brexit favorite bet by the weekend. Leave camp also received support from Sun newspaper editorial board.
*Financials lag, defensives outperform:
Financials worst performer. Recent bank weakness exacerbated by softer credit guidance out of SYF-US. Credit card names sold off. Industrial and precious metals hit materials. Consumer discretionary a slight laggard, but a number of moving parts. Restaurants better. Homebuilders and autos weaker. Retail largely in line (though dept. stores weak). Energy only slightly weaker despite oil retreat. Industrials firmer despite another selloff in airlines. Several multis fared well, with GE a standout. Tech higher. BABA-US a standout on guidance. SYMC-US extended M&A strength. More help for TWTR-US from recent LNKD-US/MSFT-US deal. Telecom, utilities and consumer staples the best performers despite more concerns about crowded trades/overbought conditions in bond proxies.
*Fed expected to leave policy unchanged tomorrow:
Fed widely expected to leave policy unchanged given disappointing May employment data and Brexit risks. Policy statement likely to be tweaked to reflect slower job growth, though broader labor market assessment expected to remain upbeat. Fed also expected to cushion adjustment with more upbeat view of household spending. Central bank once again expected to punt on balance of risks assessment. No change likely in forward guidance as Fed does not want to undo recent tightening preparations, nor does it want to box itself in to a July move. Yellen expected to offer fairly balanced commentary, in line with last Monday’s speech. Market not expecting any change in median projection for two rate hikes this year, though some economists flagged likelihood of a reduction in longer-run rate to ~3% from 3.3% in March.
*Retail sales surprise to upside:
Headline retail sales rose 0.5% m/m in May following unrevised 1.3% increase in April (which was largest March 2015), ahead of consensus expectations for a 0.3% gain. Auto sales up 0.5% following 3.1% increase in April. Gasoline station sales increased 2.1%. Details also upbeat as key core retail sales measure (excludes autos, gasoline, building materials and food services) increased 0.4%, just ahead of consensus for a 0.3% increase. In addition, April increase revised up to 1.0% from previously reported 0.9% gain. Online remained a bright spot with sales in “other” category up 1.3%. Clothing store sales jumped 0.8%, biggest gain since November, despite continued talk of weather headwinds and shift from apparel. Restaurant and bar sales up 0.8%. Furniture sales slipped 0.1%, while sales at building materials and garden equipment stores fell 1.8% following 2% decline in April.
*Sentiment, positioning still cautious:
Latest Global Fund Manager Survey from BofA Merrill Lynch highlighted the continued cautious sentiment and positioning in the market. Cash level jumped to 5.7% in June from 5.5% last month, the highest since November 2001 on concerns about a potential “summer of shocks” and “quantitative failure”. In addition, firm’s Risk & Liquidity Index at a four-year low. Global equity allocation vs cash/bonds/commodities the lowest since July 2012. “Long quality” also flagged as the most crowded trade. Report noted that while risk aversion consistent with recession, global growth and profit expectations at a six-month high and global inflation expectations at a one-year high. Brexit still flagged as biggest tail risk, while hopes for meaningful new policy stimulus low.
*German bund yield turns negative for first time:
Big story today has been continued strength in global bonds. 10-year German Bund yield fell into negative territory for first time on record. Japan and Switzerland only other countries with 10-year paper trading with yields in negative territory. More than $2.8T of other Eurozone debt trades with yields below zero. Heightened Brexit risks, global growth concerns, expectations for further policy support, dampened policy confidence and falling inflation expectations among the usual suspects. In terms of latter, FT noted that on Monday, a key measure of average future Eurozone inflation over next five years, starting in five years, matched all-time record low of 135.6 bp. Also some flight to quality within broader bond market rally with German spread over comparable peripheral debt widest since February.
*US stocks seen as somewhat resilient given VIX spike:
Lot of discussion about the recent surge in volatility. CBOE Volatility Index, or VIX, jumped 23% Monday to a four-month high of 20.97. Marked sixth straight increase. VIX has spiked 43% in just the last two sessions, the largest two-day advance since late last August. Move not surprisingly a function of some recent traction behind global risk-off theme amid concerns about potential signals from depressed rate backdrop. Usual suspects in focus, though Brexit fears have moved to forefront. However, also some thoughts that US equities have actually been fairly resilient despite all the concern. Based on some 10-year data out yesterday from Bespoke Investment Group, the 1.7% pullback in S&P 500 last Friday and yesterday was third-smallest for a two-day period when VIX jumped over 30%.
*IEA slashes near-term oversupply estimate; sees balanced market in 2H16:
IEA monthly report said oversupply in first half of 2016 likely to stand around 800K bpd, down from 1.3M bpd estimated in last month’s report. Highlighted a combination of unexpected supply disruptions and significantly better demand. However, also pointed out that rebalancing of market could be delayed if large volumes of shut-in production in Canada, Nigeria and Libya return to the market. Added that the “enormous inventory overhang” that built up during years of oversupply will limit any significant increase in prices. In first look at 2017, said it expects global demand will increase by 1.3M bpd, the same as this year. Expects global stocks to build slightly in first half of 2017, before falling slightly more in second half, Sees small draw of 0.1M bpd for 2017 as a whole.
*Aso warns on yen strength; BoJ expected to leave policy unchanged:
A few headlines surrounding Japan. Japanese Finance Minister Aso out with a fresh warning on yen strength, noting he would “firmly respond” if rapid and speculative moves continued in the foreign exchange market. Added he will be closely watching Brexit vote next week given potential to disrupt global financial markets. No color on specific levels. Reiterated that intervention would be in accordance with G7 and G20 agreement, though US has not backed Japan’s assessment that market has been disorderly. Elsewhere, BoJ expected to leave policy unchanged at its June 14-15 meeting. Bloomberg survey showed only 27.5% of economists expect further easing this month, while 55% anticipate a July move. Also a lot of uncertainty when it comes to BoJ’s preferred tools to increase policy support.
*Positive takeaways from first week of ECB corporate bond purchases:
Monday's publication of the ECB's bond holdings revealed€348M in corporate bond purchases. Most of the analysis extrapolates that if the ECB continues at the same pace over the month then it will result in approximately €7B in monthly purchases. This is due to the fact that yesterday's data only covered purchases for last Wednesday, as settlement requires two days. Several reports have noted ECB demand for investment grade paper has also benefited high-yield debt. However, there are some thoughts that the large volume of supply is beginning to weigh on prices. Heightened concerns over Brexit and political contagion in the EU are also headwinds.
Some lingering concerns about crowded positioning, overbought conditions and stretched valuations in the more defensive pockets of the market. Theme back in the headlines with bond proxies extending relative outperformance amid latest decline in global rates. Recent strategy note from Credit Suisse pointed out that many defensive groups stand out as among most expensive relative to broader market, including Utilities, large-cap Food, Beverage & Tobacco, large-cap Food & Staples Retail. WSJ also discussed this dynamic. Noted buying bond proxies means accepting “insanely” low global yields are right, the economy is weaker than data so far suggest and things likely to get worse. Argued bond market signals may be too pessimistic and highlighted some recent relative strength in economically-sensitive small-cap and semiconductor stocks.
*Polls and bookmakers show increase in Brexit odds; Sun supports Brexit:
Heightened Brexit fears continue to get blame for global risk-off sentiment. Latest Brexit polls show "Leave" camp widening lead over "Remain." TNS online survey out today showed 47% support for Leave vs 40% who want to stay. Last week's poll gave Brexit a two-point lead. YouGov poll for London Times out yesterday showed Leave holding 46%-39% lead. ICM/Guardian poll also out on Monday showed Leave with 53% support vs 47% for Remain when excluding "don't knows". Bookmakers also showing shift to Leave. Ladbrokes noted Brexit chances have hit an all-time high of 43%. William Hill pointed out Leave will be a Brexit favorite bet by the weekend. Leave camp also received support from Sun newspaper editorial board.
*Financials lag, defensives outperform:
Financials worst performer. Recent bank weakness exacerbated by softer credit guidance out of SYF-US. Credit card names sold off. Industrial and precious metals hit materials. Consumer discretionary a slight laggard, but a number of moving parts. Restaurants better. Homebuilders and autos weaker. Retail largely in line (though dept. stores weak). Energy only slightly weaker despite oil retreat. Industrials firmer despite another selloff in airlines. Several multis fared well, with GE a standout. Tech higher. BABA-US a standout on guidance. SYMC-US extended M&A strength. More help for TWTR-US from recent LNKD-US/MSFT-US deal. Telecom, utilities and consumer staples the best performers despite more concerns about crowded trades/overbought conditions in bond proxies.
*Fed expected to leave policy unchanged tomorrow:
Fed widely expected to leave policy unchanged given disappointing May employment data and Brexit risks. Policy statement likely to be tweaked to reflect slower job growth, though broader labor market assessment expected to remain upbeat. Fed also expected to cushion adjustment with more upbeat view of household spending. Central bank once again expected to punt on balance of risks assessment. No change likely in forward guidance as Fed does not want to undo recent tightening preparations, nor does it want to box itself in to a July move. Yellen expected to offer fairly balanced commentary, in line with last Monday’s speech. Market not expecting any change in median projection for two rate hikes this year, though some economists flagged likelihood of a reduction in longer-run rate to ~3% from 3.3% in March.
*Retail sales surprise to upside:
Headline retail sales rose 0.5% m/m in May following unrevised 1.3% increase in April (which was largest March 2015), ahead of consensus expectations for a 0.3% gain. Auto sales up 0.5% following 3.1% increase in April. Gasoline station sales increased 2.1%. Details also upbeat as key core retail sales measure (excludes autos, gasoline, building materials and food services) increased 0.4%, just ahead of consensus for a 0.3% increase. In addition, April increase revised up to 1.0% from previously reported 0.9% gain. Online remained a bright spot with sales in “other” category up 1.3%. Clothing store sales jumped 0.8%, biggest gain since November, despite continued talk of weather headwinds and shift from apparel. Restaurant and bar sales up 0.8%. Furniture sales slipped 0.1%, while sales at building materials and garden equipment stores fell 1.8% following 2% decline in April.
*Sentiment, positioning still cautious:
Latest Global Fund Manager Survey from BofA Merrill Lynch highlighted the continued cautious sentiment and positioning in the market. Cash level jumped to 5.7% in June from 5.5% last month, the highest since November 2001 on concerns about a potential “summer of shocks” and “quantitative failure”. In addition, firm’s Risk & Liquidity Index at a four-year low. Global equity allocation vs cash/bonds/commodities the lowest since July 2012. “Long quality” also flagged as the most crowded trade. Report noted that while risk aversion consistent with recession, global growth and profit expectations at a six-month high and global inflation expectations at a one-year high. Brexit still flagged as biggest tail risk, while hopes for meaningful new policy stimulus low.
*German bund yield turns negative for first time:
Big story today has been continued strength in global bonds. 10-year German Bund yield fell into negative territory for first time on record. Japan and Switzerland only other countries with 10-year paper trading with yields in negative territory. More than $2.8T of other Eurozone debt trades with yields below zero. Heightened Brexit risks, global growth concerns, expectations for further policy support, dampened policy confidence and falling inflation expectations among the usual suspects. In terms of latter, FT noted that on Monday, a key measure of average future Eurozone inflation over next five years, starting in five years, matched all-time record low of 135.6 bp. Also some flight to quality within broader bond market rally with German spread over comparable peripheral debt widest since February.
*US stocks seen as somewhat resilient given VIX spike:
Lot of discussion about the recent surge in volatility. CBOE Volatility Index, or VIX, jumped 23% Monday to a four-month high of 20.97. Marked sixth straight increase. VIX has spiked 43% in just the last two sessions, the largest two-day advance since late last August. Move not surprisingly a function of some recent traction behind global risk-off theme amid concerns about potential signals from depressed rate backdrop. Usual suspects in focus, though Brexit fears have moved to forefront. However, also some thoughts that US equities have actually been fairly resilient despite all the concern. Based on some 10-year data out yesterday from Bespoke Investment Group, the 1.7% pullback in S&P 500 last Friday and yesterday was third-smallest for a two-day period when VIX jumped over 30%.
*IEA slashes near-term oversupply estimate; sees balanced market in 2H16:
IEA monthly report said oversupply in first half of 2016 likely to stand around 800K bpd, down from 1.3M bpd estimated in last month’s report. Highlighted a combination of unexpected supply disruptions and significantly better demand. However, also pointed out that rebalancing of market could be delayed if large volumes of shut-in production in Canada, Nigeria and Libya return to the market. Added that the “enormous inventory overhang” that built up during years of oversupply will limit any significant increase in prices. In first look at 2017, said it expects global demand will increase by 1.3M bpd, the same as this year. Expects global stocks to build slightly in first half of 2017, before falling slightly more in second half, Sees small draw of 0.1M bpd for 2017 as a whole.
*Aso warns on yen strength; BoJ expected to leave policy unchanged:
A few headlines surrounding Japan. Japanese Finance Minister Aso out with a fresh warning on yen strength, noting he would “firmly respond” if rapid and speculative moves continued in the foreign exchange market. Added he will be closely watching Brexit vote next week given potential to disrupt global financial markets. No color on specific levels. Reiterated that intervention would be in accordance with G7 and G20 agreement, though US has not backed Japan’s assessment that market has been disorderly. Elsewhere, BoJ expected to leave policy unchanged at its June 14-15 meeting. Bloomberg survey showed only 27.5% of economists expect further easing this month, while 55% anticipate a July move. Also a lot of uncertainty when it comes to BoJ’s preferred tools to increase policy support.
*Positive takeaways from first week of ECB corporate bond purchases:
Monday's publication of the ECB's bond holdings revealed€348M in corporate bond purchases. Most of the analysis extrapolates that if the ECB continues at the same pace over the month then it will result in approximately €7B in monthly purchases. This is due to the fact that yesterday's data only covered purchases for last Wednesday, as settlement requires two days. Several reports have noted ECB demand for investment grade paper has also benefited high-yield debt. However, there are some thoughts that the large volume of supply is beginning to weigh on prices. Heightened concerns over Brexit and political contagion in the EU are also headwinds.
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