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Bond Rout Fades With Futures Flat Ahead Of Payrolls; Pound, Yen, Oil Tumble

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S&P futures are little changed following yesterday’s rout even as Asian and European markets continued selling; the pound slid on poor factory data, the yen tumbled after the BOJ intervened to stabilize the JGB bond market, precious metals flash crashed early in the session, while the selloff in oil accelerated despite yesterday’s massive inventory draw, although at least yesterday’s sharp bond tantrum has stabilized.

MSCI’s gauge of global stocks was at its lowest since late May’s record highs and down 0.6% for the week. Global stocks are poised to end the week at six-week lows in the face of oil weakness, a spike in bond yields and anticipation of tighter monetary policy, particularly in the United States. Concerns that the world’s central banks are moving closer to unwinding ultra-loose monetary policies have roiled markets and ECB minutes released on Wednesday indicate its policymakers are open to further steps. This sent German government bond yields to 18-month highs, lifted the euro and weighed on stocks.  “Once again, bond markets are ruling FX and having an increasing impact on equity markets,” strategists at Morgan Stanley, led by Hans Redeker, said, drawing parallels with moves seen in 2013 during the so-called “taper tantrum,” when Fed signals about withdrawing liquidity hit markets.

The dollar rose against a basket of major currencies and hit a seven-week high against the yen after the Bank of Japan increased its government bond buying, expanding monetary policy when other central banks are moving towards tightening. Despite Thursday’s massive DOE inventory draw, oil was unable to sustain gains and Brent dropped to $47.26.

S&P futures held steady as investors await the June jobs report and the first official meeting between Donald Trump and Vladimir Putin.  S&P futures traded at 2,410 after the cash index dropped to a a six-week low on Thursday, when real estate stocks had their biggest daily drop in 2017. Both Dow Jones and Nasdaq 100 futures are also little changed.

Looking at Asia, the yen fell sharply and JGB yields pulled back from five-month highs after the BOJ announced its first unlimited fixed-rate bond purchases since February. As discussed last night, this morning the BoJ offered to buy unlimited fixed-rate purchases for the first time since February to cap the move, offering specifically to buy 10y bonds at 0.110%. While no bids were subsequently tendered, the offer has resulted in yields dropping as low as 0.081%. It’s worth noting that this is the third time that the BoJ has flexed its muscles in controlling the yield curve since introducing the policy in September.

The JGB 10s30s re-approaches steepest levels YTD in reaction. Despite the BOJ intervention, Australian sovereign bonds were under heavy selling pressure with the 10-year yield jumping as much as ten basis points to 2.736%; shares in Sydney 1% lower. In China the 7-day repo rate fell seven basis points despite PBOC skipping liquidity operations for eleventh session and draining a whopping CNY 750 billion over the same period; the onshore yuan little was changed. Overnight, China reported that its FX reserves rose for the 5th month in a row, rising another $3bn in June to $3.057TN, however the increase was driven mostly by non-USD currency appreciation.

European stocks fell even as the Utilities sector supported risk with Centrica up 4.4% following reported M&A interest. German 10-year Bund yields climbing to an 18-month high as Treasuries also slipped modestly, both rising by 1bp. Italian BTPs underperform due to bond exchange operation increasing duration.

The Euro continued its upward move while sterling dropped sharply below 1.29 after U.K. May industrial and construction outputs both dropped, missing an expected increase; core bonds opened steady after yesterday’s sharp technical driven sell-off

A quick preview of today’s payrolls report courtesy of Deutsche Bank (a detailed breakdown can be found here):

Looking ahead to payrolls then, following the low 138k print in May the consensus for June is currently sitting at 178k. Our US economists expect a slightly more meaningful rebound to 210k which would be likely sufficient to keep the unemployment rate steady at 4.3% assuming a slight nudge up in the participation rate. Yesterday’s ADP print (158k vs. 188k expected) was a little less than what the market had expected (and included 33k of downward revisions) however it’s worth noting that the employment components in both of the ISM’s this week have been overall fairly solid (57.2 for the  manufacturing sector and 55.8 for the services sector) and also that the ADP hasn’t necessarily been the best predictor of payrolls in recent months. As always also keep an eye on other elements of the  report including average hourly earnings (+0.3% mom expected).

In Rates, German 10-year yields climbed one basis point to 0.57 percent as of 10:50 a.m. in London after rising 9 basis points on Thursday. The yield on 10-year Treasuries added one basis point to 2.38 percent, after climbing four basis points on Thursday. Yields in the Bloomberg USD Emerging Market Sovereign Bond Index advanced 17 basis points to 4.81 percent this week, the most since the week ending Nov. 18. EM sovereign dollar bonds posted their worst week since November.

In commodity markets, Brent crude futures, the international benchmark for oil prices, were trading down 1.2 percent, at $47.55 per barrel. Oil prices are down more than 16 percent this year, muddying the outlook for inflation expectations globally.  WTI crude slips below $45 on rising output: West Texas Intermediate tumbled 2.5% to $44.38 a barrel, more than erasing Thursday’s 0.9 percent gain. Oil is down 3.6 percent for the week as a decline in U.S. stockpiles failed to convince investors that global markets are rebalancing. Gold slipped 0.3% to 1,221.62 an ounce. The precious metal is down 1.6 percent for the week, its worst performance since early May. Dalian iron ore erases early loss to trade 1.1% stronger

The yen dropped 0.4 percent to 113.70 per dollar, reversing an earlier gain of 0.1 percent. The currency is down 1.1 percent for the week, heading for the biggest drop since the end of April. The Bloomberg Dollar Spot Index rose less than 0.1 percent after dropping 0.3 percent on Thursday. The euro was little changed at $1.1420 after jumping 0.6 percent in the previous session, while the pound slipped 0.4% to $1.2918.

The main economic event is the June non-farm payroll data is expected later, there are no major earnings. All eyes will be on the G-20 meeting in Hamburg.

Bulletin headline summary from RanSquawk

  • USD-index was contained below 96.00. Precious metals pressured by a flash crash in silver
  • Poor UK Data weighs on GBP
  • Looking ahead, highlights include US and Canadian job reports

Market Snapshot

  • S&P 500 futures up 0.05% at 2,409.50
  • STOXX Europe 600 down 0.2% to 379.54
  • MXAP down 0.6% to 152.84
  • MXAPJ down 0.4% to 500.36
  • Nikkei down 0.3% to 19,929.09
  • Topix down 0.5% to 1,607.06
  • Hang Seng Index down 0.5% to 25,340.85
  • Shanghai Composite up 0.2% to 3,217.96
  • Sensex up 0.1% to 31,400.50
  • Australia S&P/ASX 200 down 1% to 5,703.57
  • Kospi down 0.3% to 2,379.87
  • German 10Y yield fell 0.2 bps to 0.56%
  • Euro down 0.06% to 1.1416 per US$
  • Brent Futures down 1.8% to $47.26/bbl
  • WTI Futures down to $44.38/bbl
  • Italian 10Y yield rose 10.7 bps to 1.973%
  • Spanish 10Y yield fell 1.4 bps to 1.664%
  • Gold spot down 0.3% to $1,221.55
  • U.S. Dollar Index up 0.2% to 95.96

Top Overnight News

  • Chinese President Xi Jinping took a swipe at the U.S. for retreating from globalization, exposing the tensions before a meeting of world leaders divided over everything from trade and climate change to handling North Korea’s provocations
  • Hedge-fund investor Ray Dalio called time on the era of central bank stimulus, saying the global economy is heading toward a new stage where markets won’t get the same level of support from monetary policy makers
  • The BOJ asserted control over the nation’s bond yields, sending borrowing costs lower with its first fixed-rate purchase operation since February after a global debt selloff
  • Wal-Mart Stores sold yen bonds for the first time in seven years, taking advantage of falling fundraising costs and Japanese demand for securities issued by well-known U.S. firms
  • Apple fires back at supplier Imagination in contract dispute
    European May Industrial Production m/m: Germany 1.2% vs 0.2% est; France 1.9% vs 0.6% est; Spain 1.2% vs 0.5% est.
  • ECB’s Coeure: underlying inflation pressure still weak; fears regarding side of effects of negative rates not justified at present
  • ECB’s Knot: policy decisions will always be dictated by the economic circumstances and not instrument availability
  • U.K. May Industrial Production m/m: -0.1% vs +0.4% est; motor vehicle production -4.4%, most since Feb. 2016
  • BOJ: announces first unlimited fixed-rate bond purchase operation since February; receives no tendered bids
  • China June FX Reserves rise $3.2b from May to $3.056t; fifth consecutive monthly rise
  • Merkel Girds for G-20 Discord as Trump-Putin Meeting Looms
  • Trump Says Had ’Great Meeting’ With Merkel, Abe, Moon
  • Russians Are Said to Be Suspects in Nuclear Site Hackings
  • Russia ready to weigh any market proposal at July 24 summit
  • China teapot refinery runs fall to lowest in two months: SCI99
  • Icahn’s Tropicana Purchases Chelsea Hotel in Atlantic City

Asia stock markets traded negative across the board amid spill-over selling after global central banks continued strike a hawkish tone. ASX 200 (-1.8%) and Nikkei 225 (-0.3%) were pressured from the open with energy among the laggards after oil prices failed to maintain post-DoE gains, while miners were also spooked following a flash crash in silver, and to a much lesser extent gold, which was speculated to have been caused by a fat finger early in the session. Shanghai Comp. (-0.2%) and Hang Seng (-0.5%) conformed to the downbeat tone after the PBoC refrained from OMOs for the 11th consecutive day which resulted to a net liquidity drain of CNY 250bn for the week and was shortly followed by surges in money market rates, with the CNH overnight HIBOR up by over 70bps and at a 1-month high. 10yr JGBs were supported following the Rinban operation in which the BoJ increased its purchases in the 5yr-10yr by JPY 50bIn and offered to buy an unlimited amount at a fixed yield of 0.11%. This measure was in response to an increase in 10yr yields which initially rose to their highest since February, alongside gains across global yields. However, upside in 10yr JGBs then petered out as the BoJ’s fixed rate operation received no bids, considering that market prices were above the BoJ’s offer. BoJ offered to buy unlimited amount of 10yr JGBs at yield of 0.110%.

  • Top Asian News
  • Hong Kong Braces for Higher Rates as Currency Losses Quicken
  • World’s Biggest Pension Fund Has Best Performance in Two Years
  • Japanese Yields Retreat After BOJ Offer While Aussie Bonds Slide
  • China Foreign Reserves Rise for a Fifth Month as Yuan Stabilizes
  • Bank Indonesia Sees 2017 Budget Deficit at 2.6% of GDP at Most
  • Citi Is Said to Start Shutting Down Branches in S. Korea: Yonhap

EUR bourses have not taken any real direction; trading marginally lower for the session, as Energy names lag following the evening bearish pressure seen in oil markets. A miss from the UK proved to add no real concern in equity markets, as the FTSE shrugged off concerns, possibly trading solitude in the figures potentially delaying the BoE. European fixed income markets have taken small direction from the bid seen in the Asian session, following the BoJ’s offer to buy unlimited about of lOy JGBs. The German bund still trades above 0.50%, however, the yield does underperform across the curve; with the global 10 years lagging against the rest of the maturities. Gilts took much of the morning attention, as the poor UK figures resulted support for buying in the UK 10y. BTPs are slipping however, many have touted this to expected ahead of today’s exchange tapping the 2.33 to lift front end paper. The 10 years remain in focus due to the aforementioned BoJ comments; with the BTP/Bunds spread now at 1.6bps and BTP/Bonos 1bps cheaper.

Top European News

  • German Industry Output Rises for Fifth Month Amid Solid Upswing
  • U.K. Factories, Builders Cut Output, Clouding Growth Outlook
  • U.K. Says Enormously Disappointed at Failure of Cyprus Talks
  • U.K. House Prices Increase at Slowest Pace in Four Years
  • Scale Into Long Positions in Bunds Around 0.62%, Citigroup Says
  • Inflation ‘Shock’ Gives Bank of Russia Food for Thought on Rates
  • Activist Fund Elliott Is Said to Build Stada Stake Amid Bids

In currencies, the headline number coming into US jobs data was UK Manufacturing and Industrial Production taking the morning spotlight with the UK missing across the board. The concern is interesting, as the BoE has taken a more hawkish tone of late, leaving focus now on the BoE, if they will continue to indicate that the UK economy is ready for a 25bps move. The NFP report will take the vast focus today, alongside CAD watchers looking out for the Canadian employment figures. Price action across FX markets has followed the usual pre-NFP tone, seeing subdued trade as participants await. EUR has continued to gain and will be likely the main focus into the NFP report, optimism for EUR is clear with United Overseas Bank the latest to follow Deutsche and Morgan Stanley in taking EUR/USD long positions. The CAD recovery has slowed, largely due to the increased oil production out of the US, as 1.3202 behaves as the next key resistance level in USD/CAD. Loony watchers will await the Canadian employment figures, with the BoC very much taking centre court on men’s quarter finals day. The headline employment change is expected at 10K and unemployment 6.6%, any drastic change here could potentially hinder the BoCs plans.

In commodities, precious metals garnered much of the attention overnight — stemmed by a Silver flash crash, with many accounting this to a fat Finger’, a mistake that is seemingly becoming more and more common. Silver fell from 16.140, printing a low of 14.328, however, a huge bounce was evident and the metal trades near pre-crash levels. The silver move weighed on the other precious metals, with Gold and Platinum seeing selling pressure off the back of the overnight fat finger. Oil has continued to reside near session lows through today’s trade, as increased output continues to overshadow the DoE report. Production being ramped-up by the USA, alongside rebel problems lowering in Syria and Nigeria a further lmin BPD is being pumped. The increased production from these countries have put a huge dent in the agreed combined 1.8min BPD cut across the OPEC nations and Russia.

Looking at the day ahead, this morning in Europe we are due get May industrial production reports from Germany, France and the UK as well as trade data from the latter two countries. Over in the US it’s all about the June employment report due out at 8.30am. It’s also worth keeping an eye on the Fed’s July 2017 monetary policy report due to be delivered to Congress at 11am. This will form the basis for Yellen’s testimony in front of Congress and the Senate next week which is almost always a closely watched event. Finally the other potentially significant event for markets is the G-20 leaders gathering in Hamburg. The gathering kicks off today and continues into the weekend with Merkel, Trump and Putin amongst the leaders attending.

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, est. 178,000, prior 138,000
    • Unemployment Rate, est. 4.3%, prior 4.3%
    • Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; YoY, est. 2.6%, prior 2.5%
    • Average Weekly Hours All Employees, est. 34.4, prior 34.4
    • Labor Force Participation Rate, est. 62.71%, prior 62.7%
    • Underemployment Rate, prior 8.4%

DB’s Jim Reid concludes the overnight wrap

Payrolls Friday comes today at an intriguing time for markets. If you’d chosen these last two weeks to have been on your compulsory time away then you’d be coming back to a very different atmosphere to the one you’d left. It was only last Tuesday morning that we were casually waiting for Draghi to speak in Sintra. Innocent days indeed. Yesterday saw another sharp sell-off in bonds and we again recap the 10 year moves yesterday alongside the moves since the open on Tuesday 27th June – aka Draghi Day. The first number in brackets refers to yesterday’s move while the second number is since the open on Draghi Day. The moves are as follows: Germany (+9.1bps and +31.7bps), US (+4.3bps +22.9bps), France (+9.9bps and +32.0bps), Italy (+10.9bps and +36.9bps), Spain (+10.4bps and +30.1bps) and UK (+5.5bps and +30.5bps).

Although the moves in Japan have been far less extreme, this morning 10y JGBs touched a high of 0.103% and crucially edged above 0.10% and what is seen as the upper limit of the BoJ’s target range. By comparison on the start of Draghi Day yields were hovering around 0.049%. However, early this morning the BoJ offered to buy unlimited fixed-rate purchases for the first time since February to cap the move, offering specifically to buy 10y bonds at 0.110%. While no bids were subsequently tendered, the offer has resulted in yields dropping to 0.081% as we go to print. It’s worth noting that this is the third  time that the BoJ has flexed its muscles in controlling the yield curve since introducing the policy in September.

Putting Japan to one side, there’s no doubt that there has been a significant repricing in the last week and a half across global bond markets. 10y Bunds cleared 0.500% with some ease yesterday before closing at 0.562% and to the highest since January 2016. Unsurprisingly some of the longer duration assets stand out with this rate move. Argentina’s 100y bond issued last month is down over 4pts during the rout. The longest dated Gilt (July 2068 maturity) is off 13pts. The longest dated OAT (May 2066 maturity) is off 9pts and the longest dated BTP (March 2067 maturity) is off 6pts.

Looking ahead to payrolls then, following the low 138k print in May the consensus for June is currently sitting at 178k. Our US economists expect a slightly more meaningful rebound to 210k which would be likely sufficient to keep the unemployment rate steady at 4.3% assuming a slight nudge up in the participation rate. Yesterday’s ADP print (158k vs. 188k expected) was a little less than what the market had expected (and included 33k of downward revisions) however it’s worth noting that the employment components in both of the ISM’s this week have been overall fairly solid (57.2 for the manufacturing sector and 55.8 for the services sector) and also that the ADP hasn’t necessarily been the best predictor of payrolls in recent months. As always also keep an eye on other elements of the report including average hourly earnings (+0.3% mom expected).

Back to the bond moves yesterday, the initial selloff appeared to be sparked by a weak 30y auction in France which attracted a bid to cover ratio of just 1.53x compared to 1.93x at the previous sale last month. Not long after that we got the ECB minutes which appeared to suggest some debate amongst policy members about removing the reference to the easing bias around QE. While it was subsequently left in, with the minutes also cautioning to the fact that “even small and incremental changes in the communication could be misperceived as signalling a more fundamental change in policy direction”, the  discussion did appear to add more fuel to the fire around the normalization debate. The ECB’s Praet also spoke although his comments didn’t seem to garner much interest (mostly referencing the need to adopt a steady hand with policy). The Bundesbank’s Weidmann spoke after the European close however and said that “the continued economic recovery is opening the perspective of a monetary policy normalization” and that “it is decisive that the expansionary monetary policy is ended when it becomes necessary from a price stability perspective”. The BoE’s Ian McCafferty (hawkish) also said that we could see a couple of “modest rate rises” at the BoE over the next couple of years if the economy evolves along the lines of the forecasts put out in May.

The end result of another 24-hour bond rout has also been a similarly weak session for equities. The S&P 500 closed -0.94% yesterday after rate-sensitive sectors took a hit and that move means that the index is now down -1.80% from the all-time high recorded intraday back on June 19th. The Dow and Nasdaq also finished -0.74% and -1.00% respectively while the Stoxx 600 closed -0.67% prior to this. European Banks did however rise another +0.65% and have now gained in 7 of the last 9 sessions. Commodities took a breather yesterday with Gold ending -0.15% and WTI Oil rebounding a modest +0.86%.  This morning in Asia the Nikkei (-0.14%), Hang Seng (-0.38%), Shanghai Com (-0.24%), Kospi (-0.19%) and ASX (-1.15%) are all in the red while outside of JGBs yields across Asia Pac are also sharply higher.

With regards to the remaining data in the US yesterday, the other notable release was the ISM non-manufacturing print for June which came in half a point higher relative to May at 57.4 (vs. 56.5 expected). In the details the new orders component rose 2.8pts to 60.5 while, as noted earlier, the employment component dipped 2pts to 55.8 albeit to a still relatively solid level. The final services PMI also surprised to the upside after being revised up 1.2pts from the initial flash reading to 54.2 which leaves it 0.6pts above the May reading. The rest of the data included a largely in line trade deficit for May ($46.5bn) and a  248k initial jobless claims reading (which was up 4k on the week prior). The latest batch of data has seen the Atlanta Fed revise down their Q2 GDP print to 2.7% (versus the 3.0% estimate a few days prior).

Looking at the day ahead, this morning in Europe we are due get May industrial production reports from Germany, France and the UK as well as trade data from the latter two countries. Over in the US this  afternoon it’s all about the aforementioned June employment report due out at 1.30pm BST. It’s also worth keeping an eye on the Fed’s July 2017 monetary policy report due to be delivered to Congress. This will form the basis for Yellen’s testimony in front of Congress and the Senate next week which is almost always a closely watched event. Finally the other potentially significant event for markets is the G-20 leaders gathering in Hamburg. The gathering kicks off today and continues into the weekend with Merkel, Trump and Putin amongst the leaders attending. So we’ll see if there are any interesting headlines to emerge from that. It’s worth also noting that the ECB’s Coeure is scheduled to take part in an annual economics forum on Sunday.


Source: http://silveristhenew.com/2017/07/07/bond-rout-fades-with-futures-flat-ahead-of-payrolls-pound-yen-oil-tumble/


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