*PBoC fixes yuan at weakest since November 2010:
PBoC fixed midpoint of yuan’s trading band against dollar at 6.6857, 0.39% weaker than previous session and weakest since November 2010. Offshore yuan fell to six-month lows overnight. Bloomberg noted Chinese currency suffering its longest losing streak since February. Also pointed out that a number of investment banks have recently cut their yuan forecasts. Some of the usual discussion about how China will focus on exchange range stability vs a basket of currencies, while taking advantage of the recent strength in the dollar. Yuan weakness has largely been a non-factor in the wake of Brexit vote despite worries about renewed pressure on Beijing to engineer a meaningful devaluation. Some credit has gone to improved PBoC communications with market, particularly in terms of emphasis on gradualism.
*No surprises form FOMC minutes:
Nothing surprising in June FOMC minutes, including consensus on maintaining policy flexibility to adjust to incoming information and debate surrounding high-profile topics like employment and inflation (fits with takeaways flagging uncertainty). Noted nearly all participants viewed surprisingly weak May employment report as increasing uncertainty surrounding labor market outlook. However, also highlighted temporary headwinds and strength in other indicators. Some focus on lower-than-expected long-run neutral rate due to headwinds from slow productivity growth and demographics. Several participants expressed concern about risks to financial stability from further delays in normalizing policy, though some other participants uncertain about whether economic conditions would soon warrant a tightening.
*Most sectors higher:
Performance fairly bunched overall. Healthcare best performer today, though no great explanation for strength in specialty pharma (VRX-US up 15.5%+) and biotech. Consumer discretionary another standout. Retail and builders among better performers. Energy helped by big oil rebound. Tech in line with software and HDDs helping on a quiet news day. Semismixed, but CAVM-US up on CLSA note saying company a good M&A target for QCOM-US. NFLX-US came under pressure in Internet space on Jefferies downgrade. Industrials a slight laggard with upside capped by airline weakness ( UAL-US and AAL-UScaught downgrades at Credit Suisse). Materials trailed tape, but precious metals up big additional help from upgrades). CC hit by adverse ruling in cancer liability case. Financials up as banks bounced (though sentiment still depressed). Most defensive plays underperformed.
*ISM services surprises to upside:
ISM non-manufacturing index increased to 56.5 in June from 52.9 in May, which was lowest since February 2014. Biggest sequential increase since 2008 and better than 53.3 consensus. Details also better as business activity jumped to 59.5 from 55.1 and new orders increased to 59.9 from 54.2. In addition employment swung back into expansion, improving to 52.7 from 49.7. May help sentiment into June payrolls on Friday. Report noted 15 industries reported growth in June, while three reported contraction. Also pointed out respondents’ comments mostly positive about business conditions and economy. Separately, Markit said its US services PMI ticked up to 51.4 in June from 51.3 in May. However, added growth momentum remained weak, job growth at 17-month low, and lowest level of optimism since survey began in October 2009.
*Calls for fiscal policy support ramp up:
When it came to last week’s post-Brexit bounce in risk assets, some of the credit went to speculation surrounding a pickup in fiscal policy support. Such speculation has also been underpinned by widespread concerns that leading central banks are running out of ammunition. There have also been worries about the unintended consequences of unconventional monetary policy.Reuters discussed the recent ramp in calls for fiscal policy support. Noted the extent of the worries about global growth, demographics and deflation highlighted by global bond yields. Fiscal stimulus also getting some attention from a US election standpoint. Recent NY Times report said if elected president, one of Hilary Clinton’s two early priorities would revolve around a $275B infrastructure spending package.
*Italian banking sector still in the crosshairs:
Troubled Italian banking sector continues to dominate the headlines. Along with upcoming constitutional referendum, increasingly seen as biggest potential source of contagion for Europe. Italy’s market watchdog banned short selling in shares of Monte dei Paschi (BMPS-IT) today. In addition, La Republicca said Italian government considering a new bank fund to help facilitate a recapitalization. Other reports have noted recapitalization could be orchestrated via a sale of convertible bonds to government. However, Reuters cited comments from a Treasury official who said no immediate plans to support Monte Paschi. Separately, Bloomberg highlighted comments from former ECB official and current SocGen chairman Lorenzo Bin Smaghi, who highlighted the systemic crisis facing the European banking sector and added his voice to calls for a suspension of bank bail-in rules.
*Precious metals extend recent gains:
Precious metals higher again. Gold settled up 0.6%, hitting a new two-year high. Silver gained 1.5%, settling at its highest level since early August 2014. However, ended off best levels from earlier in the session when there seemed to be some continued outsized focus on Brexit fallout and contagion worries surrounding Italy. Other big tailwind as of late has come from expectations for further monetary easing and the increasing amount of government debt trading with negative yields. Lot of focus in press on pickup in investment demand. Open interest on Comex hit highest on Friday since November 2010. Gold holdings at ETFs rose 2% on Tuesday to highest since 2013. CFTC data showed net long positions at highest since data began in 2006.
*UBS believes gold has entered a new bull-run:
Safe-haven plays continued to outperform last week even with the bounce in global risk assets. Gold advanced for a fifth straight week. UBS recently said it believes gold has entered a new bull-run. Highlighted drivers such as low/negative real rates, view dollar has peaked against DM currencies, and lingering macro risks. Added Brexit vote reinforces these themes, pointing to dovish policy shifts, consequently lower yields, and heightened uncertainties. Firm does not believe gold trade overly crowded. Pointed out that despite very strong inflows this year into gold ETFs, global holdings still some ways away from record highs. Also discussed upside risk if policies head towards “helicopter money’ theme or if inflations starts becoming a concern again.
*Policy support expectations explain stock-divergence:
Disconnect between stocks and bonds has been a big post-Brexit theme. Lot of discussion in press highlighting skepticism of recent bounce in stocks given the price action in bonds. Goldman Sachs looked at the divergence using its market factor models. Noted rebound in risky assets likely reflects fact that negative growth implications from Brexit vote were offset by expectations for easier monetary (mostly overseas, but to some extent in US as well). Pointed out market implied probability of a Fed rate hike in 2016 has declined from about 50% on eve of Brexit vote to ~10% today. However, added that it still thinks odds of a Fed tightening this year are substantially higher at 70%. Noted if Fed does continue to normalize, impact of Brexit vote on US financial conditions could be more adverse than muted impact seen thus far.
*Low rates, flat curve exacerbate profit worries for banks; M&A catalyst?:
Banking sector has struggled in the wake of the unexpected Brexit vote. Big concern has revolved around lower-for-longer rate environment and the accompanying headwinds on margins/profits. This has overshadowed some of the latest positive takeaways surrounding balance sheet strength and capital return dynamics out of the recent Fed stress tests. WSJ had latest article on bank profit woes. Did not break any new ground, but along with low rates, also discussed the adverse impact from a flat yield curve. Separate WSJ article noted low rate backdrop putting the kind of pressure on banks that could drive a pickup in M&A activity. Highlighted recent acquisition of rate-sensitive PVTB. Also mentioned CMA under pressure from investors and analysts to consider selling off parts of its business.
*Riksbank shifts repo rate path after leaving policy on hold:
Riksbank revised down its repo rate path and said there will now be a longer delay until the repo rate begins to be raised after it kept it key rate unchanged at (0.5%) and maintained the current pace of QE at SEK45B in H2'16. Front and center in the Riksbank statement was uncertainty over economic developments abroad due to the Brexit vote. It continued to talk up the potential for further easing if needed to safeguard its inflation target. It said it can make policy even more expansionary by cutting rates, increasing asset purchases or carrying out FX intervention. The Riksbank repo rate forecast for Q3 2017 is now at (0.45%) vs prior (0.30%) and Q3 2018 at 0.06% vs prior 0.28%. Recall that Governor Ingves said in May that rates would rise gradually from mid- 2017, but this looks unlikely now.
*BoJ sidelined ahead of upper house election:
Upper house election in Japan this weekend. Despite declining approval rating for Prime Minister Abe and the heightened skepticism surrounding Abenomics, ruling LDP could still capture enough seats to secure a stand-alone majority. Nikkei highlighted possibility that Abe may ultimately be able to secure enough support for the two-thirds majority needed to revise the constitution (regarding national defense). Reuters also discussed how with little to show for three years of massive stimulus, BoJ has found itself sidelined ahead of the election. Noted central bank’s negative rate policy has been shunned by the government, which wants to shift focus to fiscal stimulus. Fits with concern BoJ increasingly pushing on a string. Also plays into doubts about effectiveness of both monetary and fiscal policy support in the absence of structural reform.
*Pension funds may further underpin support for Treasuries:
Yield on 10-year Treasury continues to hit new record lows. Touched 1.32% level earlier today. Strength a function of post-Brexit vote uncertainty, and expectations for more foreign central bank easing and a slower Fed policy normalization process. Bloomberg noted that despite depressed yield backdrop, BofA Merrill Lynch believes additional support for Treasuries could come from pension funds. Cited interview with Shyam Rajan, firm’s head of US rates strategy, who said pensions are likely to embrace the lower-for-longer mantra. Noted that pensions only have 6% of assets in Treasuries, half the peak seen in the 1980s. Article also pointed out that bond market not signaling much risk with term premium at an unprecedented -0.61%. Turned negative at start of year after holding in positive territory for nearly all of past 50 years.
*National Australia Bank Ltd (NAB):
National Australia Bank has raised $5.4 billion in the US bond market. Commonwealth Bank is said to be lining up a five-year Australian bond issue. Australia’s big banks have brushed off the threats of global and domestic political uncertainty by braving volatile funding markets to raise billions of dollars of debt. On Tuesday night, National Australia Bank raised $US4 billion ($5.4 billion) in the US bond market, one of the larger offshore debt raisings, which marked the first issuance by a big bank since the Brexit vote roiled global markets. While NAB was said to have paid a ‘‘new issuance premium’’ above the equivalent rate of existing five-year bonds to lure investors and compensate for market uncertainty, the size of the deal showed that funding markets remain open to big lenders.
PBoC fixed midpoint of yuan’s trading band against dollar at 6.6857, 0.39% weaker than previous session and weakest since November 2010. Offshore yuan fell to six-month lows overnight. Bloomberg noted Chinese currency suffering its longest losing streak since February. Also pointed out that a number of investment banks have recently cut their yuan forecasts. Some of the usual discussion about how China will focus on exchange range stability vs a basket of currencies, while taking advantage of the recent strength in the dollar. Yuan weakness has largely been a non-factor in the wake of Brexit vote despite worries about renewed pressure on Beijing to engineer a meaningful devaluation. Some credit has gone to improved PBoC communications with market, particularly in terms of emphasis on gradualism.
*No surprises form FOMC minutes:
Nothing surprising in June FOMC minutes, including consensus on maintaining policy flexibility to adjust to incoming information and debate surrounding high-profile topics like employment and inflation (fits with takeaways flagging uncertainty). Noted nearly all participants viewed surprisingly weak May employment report as increasing uncertainty surrounding labor market outlook. However, also highlighted temporary headwinds and strength in other indicators. Some focus on lower-than-expected long-run neutral rate due to headwinds from slow productivity growth and demographics. Several participants expressed concern about risks to financial stability from further delays in normalizing policy, though some other participants uncertain about whether economic conditions would soon warrant a tightening.
*Most sectors higher:
Performance fairly bunched overall. Healthcare best performer today, though no great explanation for strength in specialty pharma (VRX-US up 15.5%+) and biotech. Consumer discretionary another standout. Retail and builders among better performers. Energy helped by big oil rebound. Tech in line with software and HDDs helping on a quiet news day. Semismixed, but CAVM-US up on CLSA note saying company a good M&A target for QCOM-US. NFLX-US came under pressure in Internet space on Jefferies downgrade. Industrials a slight laggard with upside capped by airline weakness ( UAL-US and AAL-UScaught downgrades at Credit Suisse). Materials trailed tape, but precious metals up big additional help from upgrades). CC hit by adverse ruling in cancer liability case. Financials up as banks bounced (though sentiment still depressed). Most defensive plays underperformed.
*ISM services surprises to upside:
ISM non-manufacturing index increased to 56.5 in June from 52.9 in May, which was lowest since February 2014. Biggest sequential increase since 2008 and better than 53.3 consensus. Details also better as business activity jumped to 59.5 from 55.1 and new orders increased to 59.9 from 54.2. In addition employment swung back into expansion, improving to 52.7 from 49.7. May help sentiment into June payrolls on Friday. Report noted 15 industries reported growth in June, while three reported contraction. Also pointed out respondents’ comments mostly positive about business conditions and economy. Separately, Markit said its US services PMI ticked up to 51.4 in June from 51.3 in May. However, added growth momentum remained weak, job growth at 17-month low, and lowest level of optimism since survey began in October 2009.
*Calls for fiscal policy support ramp up:
When it came to last week’s post-Brexit bounce in risk assets, some of the credit went to speculation surrounding a pickup in fiscal policy support. Such speculation has also been underpinned by widespread concerns that leading central banks are running out of ammunition. There have also been worries about the unintended consequences of unconventional monetary policy.Reuters discussed the recent ramp in calls for fiscal policy support. Noted the extent of the worries about global growth, demographics and deflation highlighted by global bond yields. Fiscal stimulus also getting some attention from a US election standpoint. Recent NY Times report said if elected president, one of Hilary Clinton’s two early priorities would revolve around a $275B infrastructure spending package.
*Italian banking sector still in the crosshairs:
Troubled Italian banking sector continues to dominate the headlines. Along with upcoming constitutional referendum, increasingly seen as biggest potential source of contagion for Europe. Italy’s market watchdog banned short selling in shares of Monte dei Paschi (BMPS-IT) today. In addition, La Republicca said Italian government considering a new bank fund to help facilitate a recapitalization. Other reports have noted recapitalization could be orchestrated via a sale of convertible bonds to government. However, Reuters cited comments from a Treasury official who said no immediate plans to support Monte Paschi. Separately, Bloomberg highlighted comments from former ECB official and current SocGen chairman Lorenzo Bin Smaghi, who highlighted the systemic crisis facing the European banking sector and added his voice to calls for a suspension of bank bail-in rules.
*Precious metals extend recent gains:
Precious metals higher again. Gold settled up 0.6%, hitting a new two-year high. Silver gained 1.5%, settling at its highest level since early August 2014. However, ended off best levels from earlier in the session when there seemed to be some continued outsized focus on Brexit fallout and contagion worries surrounding Italy. Other big tailwind as of late has come from expectations for further monetary easing and the increasing amount of government debt trading with negative yields. Lot of focus in press on pickup in investment demand. Open interest on Comex hit highest on Friday since November 2010. Gold holdings at ETFs rose 2% on Tuesday to highest since 2013. CFTC data showed net long positions at highest since data began in 2006.
*UBS believes gold has entered a new bull-run:
Safe-haven plays continued to outperform last week even with the bounce in global risk assets. Gold advanced for a fifth straight week. UBS recently said it believes gold has entered a new bull-run. Highlighted drivers such as low/negative real rates, view dollar has peaked against DM currencies, and lingering macro risks. Added Brexit vote reinforces these themes, pointing to dovish policy shifts, consequently lower yields, and heightened uncertainties. Firm does not believe gold trade overly crowded. Pointed out that despite very strong inflows this year into gold ETFs, global holdings still some ways away from record highs. Also discussed upside risk if policies head towards “helicopter money’ theme or if inflations starts becoming a concern again.
*Policy support expectations explain stock-divergence:
Disconnect between stocks and bonds has been a big post-Brexit theme. Lot of discussion in press highlighting skepticism of recent bounce in stocks given the price action in bonds. Goldman Sachs looked at the divergence using its market factor models. Noted rebound in risky assets likely reflects fact that negative growth implications from Brexit vote were offset by expectations for easier monetary (mostly overseas, but to some extent in US as well). Pointed out market implied probability of a Fed rate hike in 2016 has declined from about 50% on eve of Brexit vote to ~10% today. However, added that it still thinks odds of a Fed tightening this year are substantially higher at 70%. Noted if Fed does continue to normalize, impact of Brexit vote on US financial conditions could be more adverse than muted impact seen thus far.
*Low rates, flat curve exacerbate profit worries for banks; M&A catalyst?:
Banking sector has struggled in the wake of the unexpected Brexit vote. Big concern has revolved around lower-for-longer rate environment and the accompanying headwinds on margins/profits. This has overshadowed some of the latest positive takeaways surrounding balance sheet strength and capital return dynamics out of the recent Fed stress tests. WSJ had latest article on bank profit woes. Did not break any new ground, but along with low rates, also discussed the adverse impact from a flat yield curve. Separate WSJ article noted low rate backdrop putting the kind of pressure on banks that could drive a pickup in M&A activity. Highlighted recent acquisition of rate-sensitive PVTB. Also mentioned CMA under pressure from investors and analysts to consider selling off parts of its business.
*Riksbank shifts repo rate path after leaving policy on hold:
Riksbank revised down its repo rate path and said there will now be a longer delay until the repo rate begins to be raised after it kept it key rate unchanged at (0.5%) and maintained the current pace of QE at SEK45B in H2'16. Front and center in the Riksbank statement was uncertainty over economic developments abroad due to the Brexit vote. It continued to talk up the potential for further easing if needed to safeguard its inflation target. It said it can make policy even more expansionary by cutting rates, increasing asset purchases or carrying out FX intervention. The Riksbank repo rate forecast for Q3 2017 is now at (0.45%) vs prior (0.30%) and Q3 2018 at 0.06% vs prior 0.28%. Recall that Governor Ingves said in May that rates would rise gradually from mid- 2017, but this looks unlikely now.
*BoJ sidelined ahead of upper house election:
Upper house election in Japan this weekend. Despite declining approval rating for Prime Minister Abe and the heightened skepticism surrounding Abenomics, ruling LDP could still capture enough seats to secure a stand-alone majority. Nikkei highlighted possibility that Abe may ultimately be able to secure enough support for the two-thirds majority needed to revise the constitution (regarding national defense). Reuters also discussed how with little to show for three years of massive stimulus, BoJ has found itself sidelined ahead of the election. Noted central bank’s negative rate policy has been shunned by the government, which wants to shift focus to fiscal stimulus. Fits with concern BoJ increasingly pushing on a string. Also plays into doubts about effectiveness of both monetary and fiscal policy support in the absence of structural reform.
*Pension funds may further underpin support for Treasuries:
Yield on 10-year Treasury continues to hit new record lows. Touched 1.32% level earlier today. Strength a function of post-Brexit vote uncertainty, and expectations for more foreign central bank easing and a slower Fed policy normalization process. Bloomberg noted that despite depressed yield backdrop, BofA Merrill Lynch believes additional support for Treasuries could come from pension funds. Cited interview with Shyam Rajan, firm’s head of US rates strategy, who said pensions are likely to embrace the lower-for-longer mantra. Noted that pensions only have 6% of assets in Treasuries, half the peak seen in the 1980s. Article also pointed out that bond market not signaling much risk with term premium at an unprecedented -0.61%. Turned negative at start of year after holding in positive territory for nearly all of past 50 years.
*National Australia Bank Ltd (NAB):
National Australia Bank has raised $5.4 billion in the US bond market. Commonwealth Bank is said to be lining up a five-year Australian bond issue. Australia’s big banks have brushed off the threats of global and domestic political uncertainty by braving volatile funding markets to raise billions of dollars of debt. On Tuesday night, National Australia Bank raised $US4 billion ($5.4 billion) in the US bond market, one of the larger offshore debt raisings, which marked the first issuance by a big bank since the Brexit vote roiled global markets. While NAB was said to have paid a ‘‘new issuance premium’’ above the equivalent rate of existing five-year bonds to lure investors and compensate for market uncertainty, the size of the deal showed that funding markets remain open to big lenders.
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