*Big oil selloff:
Oil down big for second time this week. WTI crude closed lower by 4.4%. Inventory data in focus. DOE data showed crude stockpiles down 2.5M barrels, largely in line with expectations and better than unexpected 2.2M build in API report last night. However, gasoline stocks unexpectedly increased 1.2M barrels. In addition, distillates jumped 4.1M barrels, well ahead of Reuters consensus for a 256K barrel build and biggest increase since early January. In terms of some other developments today, nothing particularly surprising in IEA monthly report that left forecasts largely unchanged. However, did note signs of demand momentum easing and said record-high inventories remain threat to recent stability of oil prices.Reuters article also said mounting evidence markets will not rebalance anytime soon due to elevated inventory and softer demand. WSJ discussed flood of diesel and gasoline products from Chinese refiners.
*China concessions may dampen impact South China Sea ruling:
While not a market mover, lot of attention on yesterday’s ruling from an international tribunal in the Hague that China’s claim to historic rights in most of the South China Sea has no legal basis. The decision, in favor of the Philippines, was met with the predictable backlash from Beijing. President Xi noted territorial sovereignty and marine rights would not be affected. In addition, an editorial in the state-run Global Times and Beijing's US ambassador (see Reuters) urged military preparedness and cited risk of conflict. However, FT said Beijing working behind the scene to dampen the impact of the ruling. Noted it is offering economic inducements if the Philippines would “set aside” the decision. Added this could undercut US efforts to put pressure on Beijing to dial back its reclamation push.
*Defensives resume outperformance:
Defensive sectors outperformed. Helped by some reprieve for Treasuries. Precious metals the standouts.Utilities and telecom best performing sectors. REITsoutperformed. Energy weaker with big selloff in oilfollowing DOE inventory data. Consumer discretionaryunderperformed. Retail lagged. Housing related names among big decliners. No signs of meaningful rotation out of cyclicals. however. Industrials beat tape on rail strength (CSXUS beat). Financials a tad firmer, though banking group saw slight pullback into earnings. Healthcare unchanged. TEVAUS and managed caredeal names outperformed. VRX-US hit by short-seller comments. Tech slightly weaker with a number of moving pieces. Software and Internet lagged, while semicap equipment (Semicon West takeaways) better.
*Status quo from Fed’s Beige Book:
No surprises in Fed’s Beige Book. Noted economic activity continued to expand at a modest pace across most regions. Employment continued to grow modestly. Wage pressures remained modest to moderate in most districts, with strongest pressures linked to skilled workers and difficult-to-fill positions. Still no signs of corporate pricing power. Consumer spending positive, but with signs of softening. However, outlook largely optimistic. Manufacturing mixed since prior report. Districts said outlook remained positive, but deteriorated. Several districts highlighted strength in aircraft and autos (though Cleveland noted lower ytd auto production). Residential real estate continued to strengthen. Low inventories still a big theme. Commercial real estate remained stable or improved in most districts. Banks highlighted better loan demand and largely unchanged asset quality. Brexit mentioned a few times, but nothing particularly meaningful.
*Japanese government not discussing helicopter money:
Japan’s top government spokesman, Yoshihide Suga, said government not considering “helicopter money” (direct financing of fiscal stimulus to private sector by BoJ). Followed an earlier report in the Sankei newspaper that said officials around Prime Minister are considering helicopter money as a policy option (recent Bernanke meetings also fueled speculation). Noted BoJ would decide on monetary policy measures based on market movements and economic backdrop. In addition, Koichi Hamada, an adviser to Prime Minister Abe, argued in a Bloomberg interview that helicopter money would be a “very risky gamble”, noting history has shown dangers of unstoppable inflation. However, did stress need to keep policy options open, including coordinated action by government and central bank.
*Bank earnings season kicks off tomorrow:
JPM-US kicks off Q2 earnings season for the banks on Thursday, followed by WFC-US and C-US on Friday. Sell-side preview commentary has been fairly consistent in terms of expectations. Headwinds continue to revolve around depressed rate backdrop, flatter yield curve and dampened Fed policy normalization expectations. Analysts expressed even more concern about a continuation of these trends in 2H and 2017 and risks to consensus estimates. Investment banking was flagged as another negative for Q2 given weaker M&A activity and equity underwriting. Not all bad news, however. Some thoughts late-Q Brexit volatility helped trading. Mortgage banking revenue and loan growth (particularly CRE and C&I) the widely discussed bright spots. Too early for oil bounce to drive energy reserve releases, though Street still not looking for any spillover.
*Better 30-year Treasury bond auction; Germany sells 10-year bunds with a negative yield:
Treasuries stronger Wednesday after a big backup in yields over last two sessions. Following weak $20B 10-year note auction on Tuesday that produced lowest bid-to-cover since March 2009, today’s $12B 30-year bond sale much better received. High yield came in below when-issued, bid-to-cover highest since last September, and indirect bidders took down 68.5% of the available paper, the most on record. Fits with ongoing flattening tread as investors move out the curve to pick up yield. Also some attention on Germany today as government sold ten-year bunds at a yield of (0.05%). First Eurozone country to sell 10-year debt with a negative yield. Elsewhere, Switzerland sold over $133M of bonds due in 2058 at yield of (0.023%).
*Japanese fiscal stimulus talk continues to heat up:
While Japanese government today pushed back against speculation it is considering helicopter money as a policy option, fiscal stimulus talk continues to heat up. Nikkeireported Prime Minister Abe ordered Economic and Fiscal Policy Minister Nobuteru Ishihara to draw up a new set of economic stimulus measures by the end of July. Paper said new package expected to revolve infrastructure development, financial support for small businesses, mobilization of underutilized resources and disaster prevention measures. Added that once stimulus measures are presented, Abe expected to instruct cabinet to draft proposals for second supplementary budget to provide interim financing. Article did not discuss size of the package, though a number of reports have said it will total ¥10T+.
*Buybacks continue to provide a tailwind for US equities:
Cautious investor sentiment and positioning continues to put focus on corporate buybacks as key tailwind for US equities. WSJ discussed this dynamic, Noted that shares outstanding in S&P 500 gave fallen this year from year-ago levels, on track for first yearly decline since 2011. Pointed out that S&P companies repurchased ~$161B of shares in Q1, second-highest quarterly amount on record. Added repurchasing does not appear to be over with companies authorizing $357B in buybacks in 2016 through end of last month. However, did point out that this is down 28% y/y. In addition, BofA Merrill Lynch said earlier this week that after a strong start this year, four-week average trend for buybacks by corporate clients suggests a slowdown in S&P 500 buybacks in Q2.
*BoE could consider corporate bond purchases:
The FT said a growing number of economists are highlighting the prospect of BoE purchases of corporate debt as it looks to support the economy. It noted that when the BoE meets tomorrow there are a range of measures under consideration and it could cut rates and announce measures for August. Recall that BoE Governor Carney has said July and August policy announcements should be seen as a package of measures. The FT said the BoE has in the past purchased a small amount of high quality bonds and short term commercial paper, but if they want to revive investment this could be one of the measures. Meanwhile, the London Times noted that former BoE MPC member Goodhart and other leading economists criticized Carney for preparing the market for easing due to fact that it will make it difficult for other MPC members to dissent.
*Credit Suisse survey shows dramatic deterioration in corporate sentiment post-Brexit vote:
Credit Suisse conducted an ad-hoc corporate spending survey (of 80 European corporates) to capture sentiment following Brexit vote. Noted spending intentions across its survey slipped into negative territory for first time since 2013 with negative balance of -8.8% expecting to raise vs cut in spending in next 6 months versus +4.7% before referendum. Flagged sharp contraction UK intentions to -52.5%. However, did note no signs of broader contagion in Europe. While two-thirds of respondents said they will either postpone or reduce spending UK in next six months, proposed cuts or postponements in Continental Europe half that figure. Firm said other messages include more UK policy stimulus, weaker sterling (with costs and benefits) and cyclical story in Europe better underpinned vs UK.
*Italian and EU officials say bank crisis can be averted:
Italian banks remain front and center of the Eurozone macro story. German Chancellor Merkel on Tuesday dismissed concerns of an escalating crisis and expressed confidence talks between Rome and Brussels could be “resolved well.” Italian Finance Minister Padoan also said yesterday Rome looking to put instruments in place to boost market confidence and safeguard savers. Also reports that Monte Paschi (BMPS-IT) working on a €26B NPL securitization. Sole24Ore said after this deal, market expects another €3B of fresh capital for the bank. La Stampa noted Atlante fund currently negotiating the purchase of €10B of Monte Paschi's NPLs. Latest report from Reuters also said Altante in talks with Monte Paschi over deal to reduce bad debts. Bank hoping for an agreement by end of July when stress tests results are unveiled.
*S&P 500 has moved five standard deviations relative to its 50-DMA in just ten sessions:
Some good color on magnitude of post-Brexit swing in stocks. Bespoke Investment Group noted that S&P 500 went from 1.6 standard deviations above its 50-DMA just before the Brexit vote to 3.2 standard deviations below in the span of just the next two trading days. Added that in the ten trading days since then, index has jumped to 2.5 standard deviations above. Noted that magnitude of this move in S&P 500’s overbought/oversold reading has been exceeded only one other time in S&P’s history, in August of 1982. Added that there have only been three other periods when S&P 500 saw its overbought/oversold reading shift by five standard deviation points or more in a ten-day trading period. Pointed out S&P 500 showed positive returns over next three, six and twelve months in all those cases.
*Goldman Sachs says bond convergence has its limits:
Goldman Sachs discussed the popular view that Treasury yields can remain low even as US economy approaches full employment, given that rates remain well above those in other developed markets. However, pointed out that when the cost of currency hedges, shape of global yield curves and higher volatility of US rates are taken into account, the relative value of US Treasuries is not so obvious. Added that while a deterioration in US economic fundamentals or more policy easing overseas could push Treasury yields lower, the case for further declines in yields looks limited, even when considering low levels of rates overseas. Note notion of an external drag on Treasury yields has fit into recent risk-on narrative given influence on both Fed policy and relative valuation dynamics for equities.
*BHP Billiton Ltd (BHP); Fortescue Metals Group Ltd (FMG):
The fortune of Fortescue Metals Group chairman Andrew Forrest surged by $228 million on Wednesday after a jump in the iron ore price to a two-month high helped push up resources stocks. FMG shares rose 5.5 per cent to $4.40 and have now almost tripled since January. Mr Forrest’s stake in the group is now worth $4.6 billion. The company confirmed late on Wednesday it has beaten its shipping target of 165 million tonnes for 2015-16, shipping 169.4 million tonnes. The benchmark iron ore price soared nearly 7 per cent to $US59.38 per tonne on Wednesday, the highest price since May 5.BHP Billiton shares climbed 3.3 per cent to $20.58 on Wednesday, while Rio Tinto rose 2.8 per cent to $50.78.
*BHP Billiton Ltd (BHP); Rio Tinto Ltd (RIO):
Queensland’s Natural Resources and Mines Minister Dr Anthony Lynham said on Wednesday that ‘‘everyone has been at fault’’, which both damns the entire industry and means individual companies aren’t in the gun, at least today. We don’t know officially whose mines the 11 confirmed and 18 possible cases came from. The state’s eight biggest coalminers – Anglo American, Caledon, BHP Billiton, Glencore, Idemitsu, Peabody, Rio Tinto and Vale – have committed to an ‘‘interim protocol’’ for chest X-rays to provide ‘‘reassurance’’ to their workforces. This will include new X-ray regimes, including digital scans and a move to having each X-ray checked by two professionals.
Oil down big for second time this week. WTI crude closed lower by 4.4%. Inventory data in focus. DOE data showed crude stockpiles down 2.5M barrels, largely in line with expectations and better than unexpected 2.2M build in API report last night. However, gasoline stocks unexpectedly increased 1.2M barrels. In addition, distillates jumped 4.1M barrels, well ahead of Reuters consensus for a 256K barrel build and biggest increase since early January. In terms of some other developments today, nothing particularly surprising in IEA monthly report that left forecasts largely unchanged. However, did note signs of demand momentum easing and said record-high inventories remain threat to recent stability of oil prices.Reuters article also said mounting evidence markets will not rebalance anytime soon due to elevated inventory and softer demand. WSJ discussed flood of diesel and gasoline products from Chinese refiners.
*China concessions may dampen impact South China Sea ruling:
While not a market mover, lot of attention on yesterday’s ruling from an international tribunal in the Hague that China’s claim to historic rights in most of the South China Sea has no legal basis. The decision, in favor of the Philippines, was met with the predictable backlash from Beijing. President Xi noted territorial sovereignty and marine rights would not be affected. In addition, an editorial in the state-run Global Times and Beijing's US ambassador (see Reuters) urged military preparedness and cited risk of conflict. However, FT said Beijing working behind the scene to dampen the impact of the ruling. Noted it is offering economic inducements if the Philippines would “set aside” the decision. Added this could undercut US efforts to put pressure on Beijing to dial back its reclamation push.
*Defensives resume outperformance:
Defensive sectors outperformed. Helped by some reprieve for Treasuries. Precious metals the standouts.Utilities and telecom best performing sectors. REITsoutperformed. Energy weaker with big selloff in oilfollowing DOE inventory data. Consumer discretionaryunderperformed. Retail lagged. Housing related names among big decliners. No signs of meaningful rotation out of cyclicals. however. Industrials beat tape on rail strength (CSXUS beat). Financials a tad firmer, though banking group saw slight pullback into earnings. Healthcare unchanged. TEVAUS and managed caredeal names outperformed. VRX-US hit by short-seller comments. Tech slightly weaker with a number of moving pieces. Software and Internet lagged, while semicap equipment (Semicon West takeaways) better.
*Status quo from Fed’s Beige Book:
No surprises in Fed’s Beige Book. Noted economic activity continued to expand at a modest pace across most regions. Employment continued to grow modestly. Wage pressures remained modest to moderate in most districts, with strongest pressures linked to skilled workers and difficult-to-fill positions. Still no signs of corporate pricing power. Consumer spending positive, but with signs of softening. However, outlook largely optimistic. Manufacturing mixed since prior report. Districts said outlook remained positive, but deteriorated. Several districts highlighted strength in aircraft and autos (though Cleveland noted lower ytd auto production). Residential real estate continued to strengthen. Low inventories still a big theme. Commercial real estate remained stable or improved in most districts. Banks highlighted better loan demand and largely unchanged asset quality. Brexit mentioned a few times, but nothing particularly meaningful.
*Japanese government not discussing helicopter money:
Japan’s top government spokesman, Yoshihide Suga, said government not considering “helicopter money” (direct financing of fiscal stimulus to private sector by BoJ). Followed an earlier report in the Sankei newspaper that said officials around Prime Minister are considering helicopter money as a policy option (recent Bernanke meetings also fueled speculation). Noted BoJ would decide on monetary policy measures based on market movements and economic backdrop. In addition, Koichi Hamada, an adviser to Prime Minister Abe, argued in a Bloomberg interview that helicopter money would be a “very risky gamble”, noting history has shown dangers of unstoppable inflation. However, did stress need to keep policy options open, including coordinated action by government and central bank.
*Bank earnings season kicks off tomorrow:
JPM-US kicks off Q2 earnings season for the banks on Thursday, followed by WFC-US and C-US on Friday. Sell-side preview commentary has been fairly consistent in terms of expectations. Headwinds continue to revolve around depressed rate backdrop, flatter yield curve and dampened Fed policy normalization expectations. Analysts expressed even more concern about a continuation of these trends in 2H and 2017 and risks to consensus estimates. Investment banking was flagged as another negative for Q2 given weaker M&A activity and equity underwriting. Not all bad news, however. Some thoughts late-Q Brexit volatility helped trading. Mortgage banking revenue and loan growth (particularly CRE and C&I) the widely discussed bright spots. Too early for oil bounce to drive energy reserve releases, though Street still not looking for any spillover.
*Better 30-year Treasury bond auction; Germany sells 10-year bunds with a negative yield:
Treasuries stronger Wednesday after a big backup in yields over last two sessions. Following weak $20B 10-year note auction on Tuesday that produced lowest bid-to-cover since March 2009, today’s $12B 30-year bond sale much better received. High yield came in below when-issued, bid-to-cover highest since last September, and indirect bidders took down 68.5% of the available paper, the most on record. Fits with ongoing flattening tread as investors move out the curve to pick up yield. Also some attention on Germany today as government sold ten-year bunds at a yield of (0.05%). First Eurozone country to sell 10-year debt with a negative yield. Elsewhere, Switzerland sold over $133M of bonds due in 2058 at yield of (0.023%).
*Japanese fiscal stimulus talk continues to heat up:
While Japanese government today pushed back against speculation it is considering helicopter money as a policy option, fiscal stimulus talk continues to heat up. Nikkeireported Prime Minister Abe ordered Economic and Fiscal Policy Minister Nobuteru Ishihara to draw up a new set of economic stimulus measures by the end of July. Paper said new package expected to revolve infrastructure development, financial support for small businesses, mobilization of underutilized resources and disaster prevention measures. Added that once stimulus measures are presented, Abe expected to instruct cabinet to draft proposals for second supplementary budget to provide interim financing. Article did not discuss size of the package, though a number of reports have said it will total ¥10T+.
*Buybacks continue to provide a tailwind for US equities:
Cautious investor sentiment and positioning continues to put focus on corporate buybacks as key tailwind for US equities. WSJ discussed this dynamic, Noted that shares outstanding in S&P 500 gave fallen this year from year-ago levels, on track for first yearly decline since 2011. Pointed out that S&P companies repurchased ~$161B of shares in Q1, second-highest quarterly amount on record. Added repurchasing does not appear to be over with companies authorizing $357B in buybacks in 2016 through end of last month. However, did point out that this is down 28% y/y. In addition, BofA Merrill Lynch said earlier this week that after a strong start this year, four-week average trend for buybacks by corporate clients suggests a slowdown in S&P 500 buybacks in Q2.
*BoE could consider corporate bond purchases:
The FT said a growing number of economists are highlighting the prospect of BoE purchases of corporate debt as it looks to support the economy. It noted that when the BoE meets tomorrow there are a range of measures under consideration and it could cut rates and announce measures for August. Recall that BoE Governor Carney has said July and August policy announcements should be seen as a package of measures. The FT said the BoE has in the past purchased a small amount of high quality bonds and short term commercial paper, but if they want to revive investment this could be one of the measures. Meanwhile, the London Times noted that former BoE MPC member Goodhart and other leading economists criticized Carney for preparing the market for easing due to fact that it will make it difficult for other MPC members to dissent.
*Credit Suisse survey shows dramatic deterioration in corporate sentiment post-Brexit vote:
Credit Suisse conducted an ad-hoc corporate spending survey (of 80 European corporates) to capture sentiment following Brexit vote. Noted spending intentions across its survey slipped into negative territory for first time since 2013 with negative balance of -8.8% expecting to raise vs cut in spending in next 6 months versus +4.7% before referendum. Flagged sharp contraction UK intentions to -52.5%. However, did note no signs of broader contagion in Europe. While two-thirds of respondents said they will either postpone or reduce spending UK in next six months, proposed cuts or postponements in Continental Europe half that figure. Firm said other messages include more UK policy stimulus, weaker sterling (with costs and benefits) and cyclical story in Europe better underpinned vs UK.
*Italian and EU officials say bank crisis can be averted:
Italian banks remain front and center of the Eurozone macro story. German Chancellor Merkel on Tuesday dismissed concerns of an escalating crisis and expressed confidence talks between Rome and Brussels could be “resolved well.” Italian Finance Minister Padoan also said yesterday Rome looking to put instruments in place to boost market confidence and safeguard savers. Also reports that Monte Paschi (BMPS-IT) working on a €26B NPL securitization. Sole24Ore said after this deal, market expects another €3B of fresh capital for the bank. La Stampa noted Atlante fund currently negotiating the purchase of €10B of Monte Paschi's NPLs. Latest report from Reuters also said Altante in talks with Monte Paschi over deal to reduce bad debts. Bank hoping for an agreement by end of July when stress tests results are unveiled.
*S&P 500 has moved five standard deviations relative to its 50-DMA in just ten sessions:
Some good color on magnitude of post-Brexit swing in stocks. Bespoke Investment Group noted that S&P 500 went from 1.6 standard deviations above its 50-DMA just before the Brexit vote to 3.2 standard deviations below in the span of just the next two trading days. Added that in the ten trading days since then, index has jumped to 2.5 standard deviations above. Noted that magnitude of this move in S&P 500’s overbought/oversold reading has been exceeded only one other time in S&P’s history, in August of 1982. Added that there have only been three other periods when S&P 500 saw its overbought/oversold reading shift by five standard deviation points or more in a ten-day trading period. Pointed out S&P 500 showed positive returns over next three, six and twelve months in all those cases.
*Goldman Sachs says bond convergence has its limits:
Goldman Sachs discussed the popular view that Treasury yields can remain low even as US economy approaches full employment, given that rates remain well above those in other developed markets. However, pointed out that when the cost of currency hedges, shape of global yield curves and higher volatility of US rates are taken into account, the relative value of US Treasuries is not so obvious. Added that while a deterioration in US economic fundamentals or more policy easing overseas could push Treasury yields lower, the case for further declines in yields looks limited, even when considering low levels of rates overseas. Note notion of an external drag on Treasury yields has fit into recent risk-on narrative given influence on both Fed policy and relative valuation dynamics for equities.
*BHP Billiton Ltd (BHP); Fortescue Metals Group Ltd (FMG):
The fortune of Fortescue Metals Group chairman Andrew Forrest surged by $228 million on Wednesday after a jump in the iron ore price to a two-month high helped push up resources stocks. FMG shares rose 5.5 per cent to $4.40 and have now almost tripled since January. Mr Forrest’s stake in the group is now worth $4.6 billion. The company confirmed late on Wednesday it has beaten its shipping target of 165 million tonnes for 2015-16, shipping 169.4 million tonnes. The benchmark iron ore price soared nearly 7 per cent to $US59.38 per tonne on Wednesday, the highest price since May 5.BHP Billiton shares climbed 3.3 per cent to $20.58 on Wednesday, while Rio Tinto rose 2.8 per cent to $50.78.
*BHP Billiton Ltd (BHP); Rio Tinto Ltd (RIO):
Queensland’s Natural Resources and Mines Minister Dr Anthony Lynham said on Wednesday that ‘‘everyone has been at fault’’, which both damns the entire industry and means individual companies aren’t in the gun, at least today. We don’t know officially whose mines the 11 confirmed and 18 possible cases came from. The state’s eight biggest coalminers – Anglo American, Caledon, BHP Billiton, Glencore, Idemitsu, Peabody, Rio Tinto and Vale – have committed to an ‘‘interim protocol’’ for chest X-rays to provide ‘‘reassurance’’ to their workforces. This will include new X-ray regimes, including digital scans and a move to having each X-ray checked by two professionals.
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