Frontrunning: June 17

  • Obama prepares for chilly talks with Putin over Syria (Reuters)
  • G8 opens amid dispute on Syria arms (FT)
  • Economists Blame Fed for Higher Bond Yields (WSJ) - wait... what? Isn't the "stronger economy" to blame?
  • What a novel concept - In the Czech Republic, a spying scandal has forced the PM to resign (BBG)
  • Rigged-Benchmark Probes Proliferate From Singapore to UK (BBG)
  • Economists Wary as Fed's Next Forecast Looms  (Hilsenleak)
  • Banks Balk at New Rules for Small Loans (WSJ)
  • Sporadic clashes in Turkey as Erdogan asserts authority (Reuters)
  • India Holds Rates as Rupee Drop Risks Fueling Inflation (BBG)
  • Smithfield Pressed to Carve Itself Up (WSJ)
  • Bank Profits Seen Buffeted by Rates Rising Without Growth (BBG)
  • Bank of England says foreign banks made UK’s credit crunch worse (FT)
  • Apple got up to 5,000 data requests in six months (Reuters)
  • Airbus on Track to Double Profit Margin by 2015 (WSJ)
  • West to Press Iran on Nukes (WSJ)
  • Suntory Shows Caution on IPO Price (WSJ)


Overnight Media Digest


* The United States and Europe plan to push for nuclear talks with Iran following the surprise victory of centrist Hassan Rohani in presidential elections.

* Airbus is on track to more than double its profit margin by 2015 through greater efficiency and restructured management, said Chief Executive Fabrice Bregier.

* Large banks are pushing back against regulators' plans to toughen rules on short-term, high-interest consumer loans.

* Starboard Value LP, a large activist investor in Smithfield Foods Inc, is pressuring the company to explore a break-up rather than go ahead with a planned $4.7 billion takeover by Chinese meat producer Shuanghui.

* Home-improvement retailer Lowe's Cos Inc agreed to buy Orchard Supply Hardware Stores for $205 million, potentially throwing a lifeline to the struggling West Coast hardware-and-garden chain.

* Co-op Bank is expected to unveil plans this week to fill a capital hole, estimated at 1.25 billion pounds ($1.96 billion), by imposing losses on bondholders and selling loan portfolios, a person familiar with the plans said.

* General Electric Co is expanding its ability to produce ceramic-based parts for its jet-engine business, betting that the risks of using a novel material are outweighed by the expected fuel savings.

* Liberty Media Corp Chief Executive Greg Maffei recently met with Time Warner Cable Inc Chief Executive Glenn Britt to discuss the benefits of mergers in the cable sector, said a person familiar with the situation, the latest sign that Liberty is interested in sparking consolidation in the industry.

* Congress is gearing up to tackle an issue that Washington has mostly ignored for nearly five years: What to do with Fannie Mae and Freddie Mac, the bailed-out but now-profitable mortgage companies.



The United Kingdom's biggest shareholders such as Schroders , pension funds and charities are looking at setting up a joint investor forum to check boardroom excesses and in turn improve performance and returns of companies.

The car market in western Europe will not begin to grow until at least 2019, according to a report to be released by AlixPartners on Monday, raising fears of further plant closures. The total capital raised on Brazil's stock exchange during the first half of 2013 is set to cross $10.6 billion this week when the country's largest cement producer, Votorantim Cimentos lists on Wednesday.

Private equity owners of Germany's Grohe, Europe's biggest bathroom fittings maker, have appointed bankers to evaluate strategic options including an initial public offering or sale, that could value the company at 4 billion euros, including debt.

Co-operative Bank is close to agreeing a rescue package with the Bank of England that will plug a capital shortfall of up to 1.5 billion pounds ($2.35 billion) without state help. EADS, Finmeccanica and Dassault - three of Europe's biggest defence companies - have called up governments to set up a European drone programme to compete with U.S. and Israeli companies that dominate the sector.



* A record seven million students will graduate from universities and colleges across China in the coming weeks, but their job prospects appear bleak - the latest sign of a troubled Chinese economy.

* Only months before Americans start buying coverage through new state insurance exchanges, it is becoming clear that choices will vary sharply depending on where people live.

* A long-running economic policy debate over austerity versus stimulus was expected to be muted at the Group of Eight summit as participants concentrated on addressing the escalating civil war in Syria.

* After posting a loss in the first quarter, Martha Stewart Living Omnimedia redesigned its print and digital offerings in hopes of returning to profitability.

* Boeing Co's full-court press to address the risk of battery fire on its flagship 787 Dreamliner jet this year has not slowed progress on the company's other planes in development, including a revamped version of its popular 777 wide-body, Raymond Conner, chief executive of Boeing's civil aircraft division, said on Sunday.




* New Mexican President Enrique Pena Nieto wants ties with Canada to be a priority in the country's foreign policy, rather than the on-again, off-again interest of two countries distracted by relations with the United States, Mexico's ambassador says.

* Canadian Prime Minister Stephen Harper is lashing out at Russian President Vladimir Putin over his support for "thugs" in Syria, a public sign of the divisions that have broken out between Russia and the other G8 members over the future of the Middle East country torn by civil war.

Reports in the business section:

* The proposed Northern Gateway pipeline project has spurred a fierce national debate about whether heavy oil spilled in sea water floats or sinks, how much disaster insurance pipeline projects should carry and the economic rewards of shipping oil sands bitumen across the ocean to foreign markets.

* The growing debt burdens of Ontario and Quebec look alarmingly large compared to most other regional and local governments around the world. But a report to be released Monday by Moody's Investors Service argues that the two provinces' unique fiscal and economic characteristics mean they can carry heavy debt loads while still enjoying relatively high credit ratings.

* Montreal's pharmaceutical industry has been hit hard by lab closings and layoffs, but the Canadian CEO of French drug giant Sanofi sees a possible cure.


* Justin Trudeau, the leader of the Liberal Party of Canada, is promising to compensate all groups that paid him hefty speaking fees to participate in fundraising events since he became an MP.


* The International Monetary Fund sees the Federal Reserve maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets.

* Yoga wear giant Lululemon Athletica Inc is on the hunt for a new chief executive whose credentials include holding a "headstand for at least 10 minutes", fluency in Sanskrit and the ability to do "wheatgrass and tequila shots" on Fridays.




- A report published by the Institute of Economic Research of Renmin University forecast that the GDP growth rate this year will reach 8.1 percent, while the consumer price index would rise 2.3 percent.

- China will put forward new electricity price subsidies on the solar industry as soon as end-June, sources said.


- The People's Bank of China will promote cross-border yuan settlement to facilitate trade and investment for personal businesses, said an official with the PBOC's Monetary Policy Committee.


- Fujian should seize the opportunity of national support in the economic zone and promote economic and trade exchanges and cooperation across the Taiwan Straits, said Yu Zhengsheng, the head of Chinese People's Political Consultative Conference, during a visit to the province.


- The Chinese embassy in France strongly condemned an attack on six Chinese students in the Bordeaux region which France's Interior Ministry described as an "act of xenophobia".

Fly On The Wall 7:00 AM Market Snapshot



CIT Group (CIT) upgraded to Buy from Hold at Drexel Hamilton
CYS Investments (CYS) upgraded to Buy from Hold at Wunderlich
Century Aluminum (CENX) upgraded to Equal Weight from Underweight at Morgan Stanley
CubeSmart (CUBE) upgraded to Strong Buy from Outperform at Raymond James
Extra Space Storage (EXR) upgraded to Strong Buy from Outperform at Raymond James
Fidelity Southern (LION) upgraded to Outperform from Market Perform at Keefe Bruyette
Heartland Payment (HPY) upgraded to Overweight from Neutral at Piper Jaffray
Philips (PHG) upgraded to Buy from Hold at Deutsche Bank
ProLogis (PLD) upgraded to Outperform from Market Perform at Wells Fargo
Public Storage (PSA) upgraded to Outperform from Market Perform at Raymond James
Ryman Hospitality (RHP) upgraded to Overweight from Neutral at JPMorgan
Spectra Energy Partners (SEP) upgraded to Outperform at Raymond James
TIBCO (TIBX) upgraded to Outperform from Market Perform at Wells Fargo
Transmontaigne Partners (TLP) upgraded to Buy from Neutral at BofA/Merrill


American Capital Agency (AGNC) downgraded to Equal Weight from Overweight at Barclays
CYS Investments (CYS) downgraded to Equal Weight from Overweight at Barclays
Encore Capital (ECPG) downgraded to Neutral from Overweight at Piper Jaffray
Health Management (HMA) downgraded to Neutral from Buy at Mizuho
Infinera (INFN) downgraded to Hold from Buy at Jefferies
JAVELIN Mortgage (JMI) downgraded to Underweight from Equal Weight at Barclays
MICROS (MCRS) downgraded to Neutral from Buy at Compass Point
Novo Nordisk (NVO) downgraded to Neutral from Buy at BofA/Merrill
Time Warner Cable (TWC) downgraded to Market Perform at Raymond James


Blackstone Mortgage Trust (BXMT) initiated with an Overweight at JPMorgan
ChannelAdvisor (ECOM) initiated with a Buy at Goldman
IHS Inc. (IHS) initiated with a Hold at Deutsche Bank
Synergy Pharmaceuticals (SGYP) initiated with a Buy at Citigroup
T-Mobile (TMUS) initiated with a Neutral at RW Baird
Teradata (TDC) initiated with an Underperform at Cowen
Tesla (TSLA) initiated with an Overweight at Global Equities
U.S. Silica (SLCA) initiated with an Outperform at Wells Fargo
Ubiquiti Networks (UBNT) initiated with an Outperform at BMO Capital


Weyerhaeuser (WY) to acquire Longview Timber (BAM) for $2.65B, intends to increase dividend
Weyerhaeuser (WY) to explore strategic alternatives for WRECO business
Brookfield (BAM) to sell Longview Fibre Paper and Packaging to KapStone (KS) for $1.03B
Boeing (BA), Qatar Airways announced agreement worth up to $2.8B for nine 777-300ERs
Lowe's (LOW) entered $205M purchase agreement with Orchard Supply Hardware (OSH)
ING (ING) to sell Mexican mortgage business to Banco Santander (SAN)
Elan (ELN) announced Royalty Pharma bid lapses in accordance with terms
Royalty Pharma expressed disappointment in letter to Elan (ELN) board
Transition Therapeutics (TTHI) announced exercise of TT-401 rights by Eli Lilly (LLY)
Netflix (NFLX) to premiere DreamWorks Animation (DWA) brand slate of new original TV series


  • Activist investment fund Starboard Value LP,  a major Smithfield Foods (SFD) investor, is pressuring the company to explore a breakup rather than follow through with its planned takeover by a Chinese meat producer, according to a letter reviewed by the Wall Street Journal
  • Large banks are pushing back against regulators' plans to toughen rules on short-term, high-interest consumer loans. Wells Fargo (WFC), the largest bank to offer "deposit-advance loans," told regulators that it will discontinue the loans if plans for tougher rules are completed, the Wall Street Journal reports
  • Apple (AAPL) received over the last six months between 4,000 and 5,000 requests for customer data from U.S. law enforcement authorities relating to criminal investigations and national security matters, Reuters reports
  • Telefonica (TEF) said it had not received any indication of interest from AT&T (T), following an El Mundo newspaper report that the government had stopped a $93B offer from the U.S. company, Reuters reports
  • Brazil’s Vale (VALE) said further local currency depreciation could counter cost rises and a slowdown in Chinese iron-ore demand as it seeks to regain market share from Rio Tinto (RIO) and BHP Billiton (BHP), Bloomberg reports
  • Rising bond yields are typically indicators of stronger economic growth and higher profits for banks (JPM, BAC). That might not be the case this time, as a 30-year bull market in U.S. government debt shows signs of coming to an end. Higher long-term interest rates can discourage mortgage lending and cause losses in the securities portfolios of banks, Bloomberg reports


Eastman Chemical (EMN) could rise over 35%
BB&T (BBT) looks ready to regain favor with investors
AMD (AMD) could double from entry into 'microserver' market
Amgen (AMGN) still looks attractive
Big Lots (BIG) shares look cheap
Linn (LINE) deal with Berry (BRY) in jeopardy (LNCO)
Iron Mountain (IRM) could drop towards the teens


DCP Midstream (DPM) files to sell $300M of common units
Intercept (ICPT) files to sell 1.73M shares of common stock
OPKO Health (OPK) files to sell 24.76M shares of common stock for holders
PVR Partners (PVR) files to sell $150M of common units
SL Green Realty (SLG) files to sell 68,973 shares of common stock
Weyerhaeuser (WY) files to sell 28M shares of common stock
WhiteWave Foods (WWAV) files to sell 29.91M shares of Class A common for holders

Yen Soars Most In Over Three Years, Nikkei Futures Plummet

Two days ago we made a very simple observation: "Whenever Goldman openly commands the muppets to buy, you know the situation is serious, and Goldman has a lot of unwinding to do. Which is precisely what just happened following the Squid's reco to buy Nikkei September futures (NKU3) ahead of the BOJ meeting. What is Goldman's thesis in a nutshell: hope may be fading in Abenomics, but the "incentives for Governor Kuroda to use the [upcoming BOJ] meeting to signal a firmer and clearer commitment to the easing course, and to highlight the potential to do more, are high and rising." In other words, please bet the farm on more of the same jawboning that lead to a 20% loss for anyone who bought as recently as 2 weeks ago. Oh, and by the way, complete the sentence, whenever a client is buying from a Goldman flow trader, the Goldman flow trader is [____]." The answer, by the way, was "selling", as any muppet who may have taken Goldman's most recent advice just found out.

Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.

Of course, all of the above wouldn't be quite as hilarious if one didn't keep the following primary objective of the Bank of Japan in mind:

Price Stability


The Bank of Japan Act states that the Bank's monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy."


Price stability is important because it provides the foundation for the nation's economic activity. In a market economy, individuals and firms make decisions on whether to consume or invest, based on the prices of goods and services. When prices fluctuate, individuals and firms find it hard to make appropriate consumption and investment decisions, and this can hinder the efficient allocation of resources in the economy. Unstable prices can also distort income distribution. For example, in times of high inflation, people holding only financial assets whose value is fixed in nominal terms, such as bank deposits, will suffer a decline in the value of these assets in real terms.

Funny, nowhere in the above does it say "maximizing year end bonuses for Goldman traders and partners"...

There was little else notable with the world's attention now focusing on the German Constitutional Court's hearing of the constitutionality of the ECB's OMT operation. Spoiler alert: nothing will happen. Why? Because the biggest beneficiary of the ECB's generosity is not Greece, not Italy, not Spain. The beneficiary is best captured by the following chart (hint: DB stands for Deutshce Bank):

The key overnight news bulletin highlights, via Bloomberg:

  • Treasuries fall as JPY surges as much as 2.3% vs USD after BoJ kept its stimulus unchanged and refrained from expanding tools to address bond-market volatility.
  • BoJ left unaltered its one-year fixed-rate loan facility and plan for JPY60t-70t annual rise in monetary base; Governor Kuroda said the central bank will discuss longer funding operations if they become necessary
  • Turkish riot police retook Istanbul’s Taksim Square, the center of nearly two weeks of unrest, from anti-government activists today, using tear gas and water cannons to break pockets of resistance
  • The Turkish central bank said it will tighten monetary policy to support currency
  • Former Goldman Sachs Asset Management chairman Jim O’Neill said investors should get used to U.S. yields nearer 4% than 2%, sees recovery of “equity culture” and end to bond market rally
  • The ECB’s OMT bond-buying plan may force Germany’s top court to choose between market stability and the principles of democracy, lawyers for political groups that oppose the plan said at a hearing; court will consider the case starting today
  • Germany’s finance minister Schaeuble said the ECB can’t be targeted in a German court; ECB’s Draghi said he trusts the constitutional court
  • Citigroup could lose as much as $7b on currency swings if Portales Partners analyst Charles Charles Peabody is right, putting the analyst at odds with peers who say the stock will be the best performer among big U.S. banks in the year ahead
  • U.K. industrial production unexpectedly rose in April, boosted by increased output at oil and water companies. Manufacturing fell after gains in February and March
  • Sovereign yields surge. Nikkei -1.5%; China closed for holiday. European stock markets, U.S. equity index futures gain. WTI crude, metals fall

SocGen's FX team lays out the key macro events:

The week got off to a calm start for financial markets, but will the German Constitutional Court hearings unsettle them today?

German Finance Minister Schaeuble, ECB member Joerg Asmussen and Bundesbank President Jens Weidmann will speak. The question is whether Germany will consider the ECB's Outright Monetary Transactions (OMT) program constitutional, given that the country is attempting to limit its potential commitment in the event OMT is activated. Although the German position has been known for a long time, any move to block the process could prompt tension on peripheral yields. We note that 10Y Bonos and BTPs yields increased last week, as the ECB indicated that it was in no hurry to activate OMT or use other non conventional measures. Although fire walls were put in place last year to contend with the euro debt crisis, they still have not been tested: until proven effective, the euro debt crisis will remain a downward risk factor for the EUR.

Turning to the UK, we will be looking out for industrial production data: any positive surprise will continue to put off further Quantitative Easing by the BoE. Could the EUR/GBP rapidly fall back to recent lows of 0.8430/0.84? That is the main risk.

* * *

DB's Jim Reid concludes the overnight event recap:

The Japanese central bank wrapped up its two-day policy meeting overnight by sticking to its target of increasing the monetary base by JPY60-70 trillion a year and keeping other policy unchanged. In what is likely to disappoint those looking for measures to stem to the volatility in JGBs, the BoJ refrained from making any reference to extending the duration of fixed-rate fundsupplying operations, as was expected by some forecasters. Also in terms of JREIT and ETF purchases, the BoJ refrained from expanding the pace of purchases which will likely disappoint equity markets. The central bank left the door open to future changes though, saying that it will “make (policy) adjustments as needed”.

The immediate market reaction following the BoJ’s policy statement saw the USDJPY and Nikkei futures lose 1% and 2.5% respectively but both have recovered some losses since. Japan 30yr yields are now unchanged after initially spiking 2bp. In its outlook, the BoJ described the economy as being on a moderate recovery path and that some indicators suggest a rise in inflation expectations. In terms of other measures, the BoJ said that it will disperse loans totalling JPY3.15trillion to 70 financial institutions under a scheme to help stimulate bank lending.

This all follows a remarkably steady session yesterday where the S&P500 closed broadly unchanged (-0.03%) after spending virtually all of the session range-trading within 4pts of its closing level of 1642.8. Sentiment in equities was buoyed at the open after S&P announced that it had changed its outlook on the US sovereign rating to “stable” from “negative”. S&P appeared to dampen the notion that the US could regain its AAA rating soon though, noting that no sovereign has ever recouped its AAA rating in less than 9 years. Indeed, it took Finland and Canada nine years to return to AAA according to the agency. S&P expects that net general government debt as a share of GDP will stabilise at around 84% for the next few years, allowing policymakers some additional time to take steps to address pentup age-related spending pressures.

Outside of equities, fixed income asset classes were again pressured by the rise in rates after 7yr, 10yr and 30yr UST yields hit fresh 1 year highs yesterday. This came despite dovish comments from St Louis Fed president James Bullard who said that he would support the continuation of QE in its current form if inflation remains below the Fed’s 2% target. Bullard said he wants “to see some reassurance” from inflation data “before we start to taper”. With the rates backdrop, protection in the major credit indices remained fairly well bid with CDX IG (+3bp), European iTraxx (+2.4bp) and Crossover (+14bp) all wider on the day while cash markets traded with a softer tone.

On a related note, EM weakness remains one of the main market themes globally. Mexican peso bonds are garnering a fair amount of attention following yesterday’s selloff that saw 10yr mbono yields add 17bp to close at 5.66%. The magnitude of the selloff has caught a number of investors off guard. Foreign holdings of fixedrate peso bonds reached a 13yr peak of 58% of outstanding in May 7th, around the time that 10yr yields reached their a record low of 4.43%. Since that point, 10yr yields have sold off by almost 120bp as foreign investors trim positions in a market that has been described as “one-directional”. The fact that the Mexican peso is 7.8% weaker during the same time frame is not helping matters for foreign investors either. The Mexican finance ministry will be auctioning 3yr, 5yr and 30yr bonds today as is probably worth looking out for.

Elsewhere Asian credit spreads are another leg wider overnight as the pressure continues to build. The Asia iTraxx IG index is 10bp wider on the day as we type and is about +40bp off its recent tights in early May. Indonesia and Philippine 5-year sovereign CDS are also 18bp and 15bps wider respectively in overnight trading and have now widened by about 60bps and 20bp since Bernanke’s JCE testimony on the 22nd May. Indonesia 10yr local rates are about 25bps higher overnight at 6.60% or about 110bps more than where they were a month ago. In corporate credit Asian HY is generally about 1pt lower overnight.

Elsewhere in Asia, equities are trading with a cautious tone with the Hang Seng (-0.8%) and KOSPI (-0.6%) seeing moderate losses. The Australian dollar is 0.5% weaker against the USD after disappointing housing finance numbers, extending its two month losing streak against the USD to almost 11%.

Turning to the day ahead, attention will turn to the German constitutional court’s hearings on the ECB’s OMT programme which will be attended by the Bundesbank’s Jens Weiddman and the ECB’s Joerg Asmussen. The two-day hearing begins today. The US data calendar features wholesale inventories, JOLTs job openings and the NFIB business optimism survey. The market's reaction to the BoJ and the price action in EM will likely dominate the agenda though.

Bank Of China Close To Responding To Goldbug Prayers On Friday… But Not Yet

As we already reported yesterday, Chinese trade data for May came out about as abysmally as we predicted it would one month ago.  The reason: the Chinese Customs Administration was humiliated at the epic discrepancy in data between Chinese Hong Kong exports and Hong Kong imports from China, with the delta resulting from that other variable we discussed two weeks ago: the Chinese Copper Financing Deals which serve(d) as an interest rate arbitrage conduit. The outcome was a prompt "fix" by SAFE leading to a "normalization" in trade data, which plunged and missed almost all expectations.

It only got worse as the weekend progressed. SocGen recaps the entirety of this weekend's data dump from Beijing:

"The entire set of weekend releases from China was disappointing. Trade growth collapsed in May, revealing the actual picture of subdued external demand. CPI inflation was nowhere to be seen, while PPI deflation intensified. Activity growth largely disappointed as well on soft domestic demand and supported our call for further GDP growth deceleration in Q2. We expect policymakers to provide modestly more policy easing, including interbank liquidity injection and a stop of fast yuan appreciation."


There are some problems with the above, the most obvious one being so obvious that we should hardly mention it: if China was indeed manipulating its trade data, as is now widely accepted (not like there wa any doubt but like with the NSA, an official admission is critical to make the conspiracy theory to fact conversion complete), it is obviously manipulating everything else too. Such as inflation data.

What we do know about China is that the government is desperate to mask the unprecedented influx of hot central-bank created credit-money, which for now at least is being parked mostly in the local real estate market leading to 12 consecutive months of house prices increases.

What we also know is that the PBOC in the past has never been shy about lowering the RRR rate in times when liquidity was truly perceived to be insufficient without an offsetting opportunity cost, nor was it timid to cut rates when deflation was suddenly becoming an issue. Such as now if one believes the conventional narrative and the sellside. Of course, China is doing neither because contrary to what is being (mis)reported, inflation - not from an overheating economy but from hot money flowing courtesy of the Fed and the BOJ - has been and is still a valid concern for the Chinese Politburo.

However there is only so much lack of liquidity that the country's banking system, deprived of its lifeblood and hooked to waves of de-novo created credit money like any other developed world liquidity junkie, can take.

Which is why as we also reported citing Bloomberg, "a lack of liquidity in China’s banking system may threaten some companies’ ability to roll over debt, deteriorating banks’ non-performing loans and increasing risks of hard-landing in economy." Indeed, there was speculation on Friday that the PBOC may be forced to inject liquidity via open market operations to offset surging money-market rates.

The catalyst, as Market News reported, was that China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in market overnight.

There was more: "Rumours that several mid-sized banks had defaulted on interbank loans added an element of fear to an acute liquidity shortage related to a coming national holiday and a slowdown in capital inflows. The rumours couldn't be verified."

What happened was an immediate lock up in the overnight loan rate which exploded to as high as 15%. Elsewhere, 7 Day SHIBOR as shown below, has doubled from 3% to 6% in a few days as the PBOC's stubborn refusal to join in the liquidity party may soon cost the banking sector, which suddenly can't roll overnight liquidity, dearly:

All of the above we have previously touched upon. Which brings us to the topic of this article.

Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool.

That injection appeared designed to bring down money market rates, which have surged to multi-year highs due to a liquidity shortage blamed on short-term factors such as reserve payments and holiday demand but PBOC mismanagement as well. Newspaper cited research at the weekend from China International Capital Corp saying the PBOC doesn't want to ease policy with M2 above the full-year 13% target.

In other words, for now at least the PBOC refuses to openly engage in liquidity provision: a step which one etaken, should bring back memories of 2011 and the great inflationary scare that sent ripples through China, leading to rumors of a Chinese Spring, open violence in major cities, and, of course, gold exploding from $1300 to $1900 in a few months.

But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available?

Because when China finally does join what is already an historic liquidity tsunami, courtesy of the Fed, the BOJ, and the BOE in one month, then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.

Markets On Edge Following No Dead Japanese Cat Bounce, Eyeing ECB And Payrolls

Another day, another sell off in Japan. The Nikkei index closed down 0.9%, just off its lows and less than 1% away from officially entering a bear market, but not before another vomit-inducing volatile session, which saw the high to low swing at nearly 400 points. Hopes that a USDJPY short-covering squeeze would push the Nikkei, and thus the S&P futures higher did not materialize. And while the weakness in Japan is well-known and tracked by all, what may come as a surprise is that the Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Elsewhere in macro land, the Aussie Dollar continues to get pounded on China derivative weakness, tumbling to multi-year lows of just above 94 as Druckenmiller, who called the AUDUSD short nearly a month ago at parity shows he still has it.

There was little news out of Europe except for another disappointing factory order print this time out of Germany (April -2.3%, Exp. -1.0%, March +2.3%), although the continent is focused squarely on the ECB meeting today, when nothing much is expected to happen. The US will be pretending to care about Initial claims as the last economic data point before tomorrow's NFP report, although trading will be be defined largely by Mrs Watanabe whose every Nikkei move translates into the S&P500.

Previewing Mario's monthly presentation, SocGen says that the ECB meeting today must not be downplayed given its relevance for policy signals and future intentions as the economic landscape in the eurozone changes; however, we suspect the bar for another move today is quite a bit higher following the May rate cut. With no visibility yet on the July updated inflation and growth forecasts, it is the ongoing state of flux in FX, bonds and stocks driven by developments across the pond and in Asia, not across the Channel, that will determine where we end up today. The signs are not good as risk assets continue to fret over a Fed exit, and the Nikkei has just lost another 0.9%. The BoJ's ‘super easing' effort is starting to backfire as the Nikkei sits only a handful of points above the 3 April close before the central bank announced its ambitious QQM programme.

"We do not wish to detract from the ECB's active discussion on the level of interest rates or negative deposit rates, but we were told by central bank sources this week that there is no agreement on further stimulus or narrowing of the rate corridor. Instead, we are looking for Draghi to elaborate a bit more during the Q&A on plans to revive credit growth, or the intention not to put the ECB balance at the heart of an effort to revive lending growth and narrow the borrowing gulf between the North and South. Overcoming German resistance to fresh stimulus has been the least of the ECB's worries as we have found but with the election a mere three months away, the cards may soon be stacked differently than six months ago."

As to the palpable shift in the global mood in recent days, here are Jim Reid's (Deutsche) summary thoughts:

The prevailing mood in markets has definitely changed since Bernanke's congressional Q&A session on May 22nd. This was where the question around the potential for tapering by "Labor Day" was not dismissed. Prior to this point the ever increasing wedge between the technicals and fundamentals was being aided by a benign view on the Fed's 2013's actions. So for us the last two weeks are a reminder of just how important liquidity is to the health of markets around the globe. Yes markets can continue to go up but the odds of this lowers dramatically if central bankers start trying to withdraw support. My personal view is that the Fed is somewhat trapped into keeping high levels of QE going for longer than most expect and although they may indeed want to take more of a step back the risks are high if they do due to 1) the whole spectrum of global assets that will be impacted (as an example look at EM of late), and 2) the fact that other countries will likely continue to be regularly pumping on the liquidity gas. The Fed is not operating in a vacuum.


If I'm correct then the liquidity story isn't likely to go away but it now feels like we've moved into a new phase where the perception of unconditional  liquidity has been replaced by the belief that we might only be a few good data points away from the Fed taking a step back. It’s going to be tough to put the tapering genie back totally in the bottle for a while now. This probably calls for more volatility over the summer and data sensitivity being high. Indeed tomorrow's payrolls number kicks off a summer of high impact data. Before this, today brings what should be an interesting ECB meeting which will tell us a bit more about how dovish the ECB might be over the next few months.


For the record, DB’s Wall and Moec do not expect any policy announcements from the ECB today, but they expect the tone to remain dovish with the likelihood that they will keep their options open. They continue to expect another 25bp refi rate cut in either July or August. Nevertheless, Wall and Moec believe that negative deposit rates may be a closer call than the market thinks given that the debate has moved on from one focused on “the unintended consequences” to the ECB seeking to better understand the costs and benefits. So this discussion on negative deposit rates will probably be the most important thing to listen out for today.

Some more overnight highlights in bulletin format via Bloomberg:

  • Treasuries gain before BoE and ECB rate decisions, Draghi press coference, with USD/JPY holding below 100 and EUR/USD retreating from session highs after German factory orders miss forecasts.
  • ECB will probably keep rates on hold today as economic data haven’t been bad enough to trigger fresh action; likely discussion of possible deposit rate cut may benefit short-end rates, economists and strategists say
  • German factory orders fell 2.3% in April vs expectations for 1% drop
  • BoJ divided over whether to authorize a measure designed to quell bond-market volatility, with some officials concerned it would return the BOJ to a pattern of incremental steps that failed in the past, according to people familiar with the discussions
  • The EU is considering whether to hand oversight of scandal-ridden Libor to the European Securities and Markets Authority
  • Levels of investor concern in equities, commodities, bonds and currencies as measured by Bank of America Corp.’s Market Risk index of cross-asset volatility are below readings from about 75% of days since 2000, according to data compiled by Bloomberg
  • Supporters of Turkey’s government attacked a group of protesters in Prime Minister Erdogan’s hometown of Rize on  the Black Sea, and in Ankara clashes between demonstrators and police extended into the night
  • Sovereign yields mostly lower. Nikkei -0.85%, leading Asia equity markets lower; Shanghai Composite fell for sixth day, longest losing streak this year.  European stock markets, U.S. equity index futures gain. WTI crude gains, copper and gold fall

Recapping the rest of the overnight action with DB:

Back to markets yesterday was a very poor day for risk assets. The S&P 500 (- 1.38%) fell to a one-month low whilst the Dow (-1.43%) closed below 15,000 for the first time in a month. We continue to get somewhat mixed signals about the US recovery which perhaps added more uncertainty to all the Fed taper chat. Indeed the latest ADP employment headline disappointed on the downside (135k v 165k) but the Fed’s Beige Book sounded a little bit more positive on the manufacturing and the retail sectors. The ISM non-manufacturing (53.7 v 53.5) came in broadly in line with consensus but we do note that the employment component fell to the lowest level since July 2012. On the back of this and a riskoff mode in equities we saw the 10yr UST rally 6bp on the day to 2.089%. The 10yr is now about 14bp off the recent highs. The rates story was quite different in EM though which continues to come under selling pressure. The 10yr USD yields of Mexico and Venezuela rose 31bp and 45bp respectively.

Moving on to the overnight session the risk sell-off is extending into Asian trading with equities lower across the region. The Nikkei (-1.0%) is down for  he second straight day and is trading below the 13,000 mark for the first time in about 2 months. The index has fallen about 17% from its recent peak and all eyes continue to see if we break into bear market territory on Japan anytime soon. Elsewhere in Asia, the Hang Seng and Shanghai Composite are down -1.1% and -0.6% respectively. Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Similarly Asian credit continues to come pressure with the Asia iTraxx 6bp wider on the day as the technical picture on EM hard currency debt flows continue to worsen. In Asian FX, the Indian Rupee is now at a one year low against the Dollar while the JPY continues to strengthen and has now appreciated about 4% against the Greenback from its recent lows.

In other headlines, the FT is reporting that a number of quant hedge funds have been hit by the recent selloff in US bond yields during the month of May. Shares in Man Group closed 17% lower yesterday after it was reported that one of its flagship funds lost more than 10% of its NAV in the last two weeks (FT). Returning to Europe, the ESM is likely to set a cap on the amount of funds it can use for direct bank recap at between EUR50-70bn, a relatively small percentage of its EUR500bn lending capacity, according to a Reuters article. The cap is designed to “preserve the ESM’s high creditworthiness and its lending capacity for other instruments”. We’ll likely get further details on this when the Eurogroup meets later this month.

In terms of today, German factory orders and US jobless claims are the main data highlights. All eyes will be on the ECB and Draghi though. The ECB’s policy announcement is expected at 12.45pm today London time with Draghi’s press conference to be followed 45 minutes later. The Bank of England’s policy statement is also due at noon but the market is expecting no changes in Governor King’s final rate meeting. Elsewhere we will hear from Philly Fed’s Plosser (a nonvoter) later today but the key event for markets will likely be the payrolls report tomorrow.

Frontrunning: June 3

  • BIS lays out "simple" plan for how to handle bank failures (Reuters) - Are we still holding our breath on Basel III?
  • Deficit Deal Even Less Likely - Improving U.S. Fiscal Health Eases Pressure for a 'Grand Bargain' Amid Gridlock (WSJ)
  • IRS Faulted on Conference Spending (WSJ)
  • Deadly MERS-CoV virus spreads to Italy (CNN)
  • Turkish PM Erdogan calls for calm after days of protests (Reuters)
  • Financial system ‘waiting for next crisis’ (FT)
  • Russia to send nuclear submarines to southern seas (Reuters)
  • China Nuclear Stockpile Grows as India Matches Pakistan Rise (BBG)
  • Bonds’ Point of No Return About a Standard Deviation Away (BBG)
  • Trial of U.S. soldier in WikiLeaks case to get under way (Reuters)
  • China returns to global metals market (FT)
  • Outgoing BOE head Sir Mervyn King: Public are right to be angry at banks (BBC)
  • The European data is about to "go BLS": Spain Prime Minister sees hope for unemployment on day of protests (Reuters)
  • Microsoft Said to Cut Windows for Tablet Prices (BBG)
  • Tax Probe in France Targets UBS Unit (WSJ)

Overnight Media Digest


* Shrinking near-term federal deficits, slowing health care cost increases and partisan gridlock have all but wiped out the likelihood for a deal this year to cut long-term deficits, perhaps delaying a compromise until after the 2014 midterm elections.

* SAC Capital Advisors is bracing for investors to pull an estimated $3.5 billion from the firm as the hedge-fund giant continues to battle fallout from an intensifying insider-trading probe.

* Glencore Xstrata and Blackstone Group are among the suitors circling the Canadian iron ore operations that Rio Tinto has put on the block. The 59 percent stake in Iron Ore Co of Canada could fetch about $4 billion.

* Prosecutors are probing whether UBS's French unit helped bankers from the parent company in Switzerland approach and encourage French clients to open Swiss bank accounts that allowed them to evade taxes.

* A month of rising U.S. Treasury yields spurred a selloff last week among dividend-rich stocks such as utilities and REITs that had benefited from rock-bottom interest rates. Now the question is: Will Treasury yields go higher?

* The U.S. Justice Department appears to have an early edge as Apple heads to court Monday to face civil accusations that it conspired with five publishers to drive up the price of e-books.

* Apple signed a music-streaming licensing deal with Warner Music Group, possibly paving the way for other publishers to follow and getting Apple's Internet radio plan closer to reality.

* A prominent proxy adviser said Sprint Nextel shareholders should vote for a $20.1 billion acquisition by SoftBank, but set aside the question of whether the deal is better than a rival proposal from Dish Network



Debt-weary Telefonica SA is considering the potential sale of its O2 Ireland mobile operator after receiving "expressions of interest" from suitors including Hutchison Whampoa, the Hong Kong-based owner of rival mobile business Three.

The New York state supreme court will on Monday hear arguments from some of the largest American financial institutions -- including Bank of America and AIG -- as they battle it out over subprime mortgages.

Telecoms group Vodafone is planning to hike up its UK capital expenditure by more than 50 percent to almost 1 billion pounds ($1.52 billion) this year.

Less than a year after the World Trade Organisation raised concerns over Beijing discriminating against foreign card companies, a document shows that the Chinese central bank has blocked MasterCard from processing credit card transactions in renminbi.

The billionaire founders of Eurasian Natural Resources Corp have requested more time to submit a formal takeover bid for the Kazakh miner, according to people familiar with the matter.

Britain's Co-operative Group is cooking up a plan to raise capital at its banking arm that might involve slashing the coupon paid to the bank's junior bondholders.



* Government officials, drug companies and medical experts are considering options to speed development of medicines to combat infections that have developed resistance to available countermeasures.

* The Justice Department's lawsuit that accuses Apple Inc of colluding with publishers to raise e-book prices will begin this week.

* Steven Cohen's SAC Capital Advisors faces billions of dollars in withdrawals from investors by a Monday deadline, as over the next several weeks authorities decide whether to bring a criminal case against the hedge fund related to suspicious trading in two drug stocks.

* In a highly unusual move, the Food and Drug Administration has decided to reopen the case on GlaxoSmithKline's diabetes pill Avandia and will ask a committee whether it should reconsider the restrictions on the drug.

* Behind the bid for Smithfield Foods, America's biggest pork producer, was a group of savvy investors and global deal makers who hold a substantial stake in the Chinese company.

* MSNBC experienced a ratings decline in the last two months as viewers turned away from politics.




* Canada's "middle-skill" employment sector continues to erode alongside the growth of high-skill jobs, an indication that the labor market is splintering between well-paid, interesting, permanent jobs - and the rest.

* Civic leaders gathered in Vancouver at the annual meeting of the Federation of Canadian Municipalities, taking time to mark their progress on securing greater financial commitments from Ottawa to battle gridlock and to set new priorities.

Reports in the business section:

* Canada's largest wireless provider Rogers Communications Inc is launching a program in the back-to-school season aimed at bridging the digital divide that separates the poorest of Canada's poor from the Internet.

* HudBay Minerals Inc is making its first big bet overseas with a C$1.5 billion ($1.45 billion) copper mine in Peru. As its engineers work on mine construction, the Toronto-based company's accountants are proceeding with a related project -- preparing to lay out, under contentious new U.S. securities regulations, precisely what revenues it pay.


* An internal review of the immigration files of two men accused of plotting an al-Qaeda-linked attack against a VIA Rail train has prompted the government to order up new legislation narrowing access to the criminal pardon system.

* Toronto's mayor has passed up another chance to directly address allegations of a video in which he appears to be smoking crack cocaine. Rob Ford used his weekly radio show (on Newstalk 1010) to take a swipe at Ontario's governing Liberals and media pundits who have questioned his ability to govern amid the video scandal.


* Western Potash Corp said on Sunday that a Chinese joint venture company agreed to make a strategic investment that will result in its owning a 19.9 percent stake in the fertilizer company and a seat on its board.

* Police in Algeria raided the country headquarters of SNC-Lavalin Group Inc as the Canadian engineering giant tries to resolve questions about its activity in the North African nation.




- China's Safe Administration of Foreign Exchange has approved $1.335 billion of Renminbi Qualified Foreign Institutional Investor quotas in May, bringing the total to $42.56 billion.

- The Dalian Commodity Exchange will look into launching new futures contracts for natural gas and liquefied petroleum gas to provide a hedging tool for industry participants.


- China's policymakers need to urgently strengthen their oversight of the country's debt as it could become a serious problem if the economy continues to slow, the paper said in an editorial.


- China will aim to accelerate the building of high-quality milk production bases and strengthen scrutiny over the quality and safety of milk products this year.


Fly On The Wall 7:00 AM Market Snapshot



American Campus (ACC) upgraded to Buy from Neutral at ISI Group
Best Buy (BBY) upgraded to Buy from Neutral at SunTrust
Cobalt (CIE) upgraded to Strong Buy from Buy at ISI Group
Healthways (HWAY) upgraded to Overweight from Neutral at Piper Jaffray
ITC Holdings (ITC) upgraded to Buy from Neutral at UBS
MetLife (MET) upgraded to Buy from Hold at Deutsche Bank
Plum Creek Timber (PCL) upgraded to Buy from Neutral at BofA/Merrill
Woodward (WWD) upgraded to Buy from Hold at Jefferies


Actuant (ATU) downgraded to Neutral from Buy at UBS
F5 Networks (FFIV) downgraded to Equal Weight from Overweight at Morgan Stanley
Golar LNG (GMLP) downgraded to Market Perform from Outperform at Raymond James
Koppers Holdings (KOP) downgraded to Hold from Buy at Jefferies
Torchmark (TMK) downgraded to Neutral from Buy at Janney Capital


American Residential Properties (ARPI) initiated with a Hold at Jefferies
American Residential Properties (ARPI) initiated with an Outperform at FBR Capital
Apollo Commercial (ARI) initiated with a Market Perform at Keefe Bruyette
Blackstone Mortgage Trust (BXMT) initiated with an Outperform at Keefe Bruyette
Copa Holdings (CPA) initiated with a Buy at Goldman
Cyan (CYNI) initiated with a Neutral at Goldman
Emerge Energy Services (EMES) initiated with an Outperform at Wells Fargo
Freeport McMoRan (FCX) coverage resumed with an Overweight at Barclays
Gol Linhas (GOL) initiated with a Neutral at Goldman
LATAM Airlines (LFL) initiated with a Neutral at Goldman
Laclede (LG) initiated with an Outperform at Wells Fargo
LinkedIn (LNKD) initiated with an Outperform at Credit Suisse
PGT, Inc. (PGTI) initiated with an Outperform at RBC Capital
PennyMac Financial (PFSI) initiated with a Buy at Citigroup
Receptos (RCPT) initiated with an Outperform at Leerink


Mid-America Apartment (MAA), Colonial Properties (CLP) to merge in $8.6B transaction
Sprint (S), SoftBank (SFTBF) confirmed ISS recommendation on transaction
Fujifilm (FUJIY), Dr. Reddy's Labs (RDY) called off JV for generic drugs in Japan
Assured Guaranty (AG) repurchased shares from WL Ross & Co
Penn National (PENN) venture submitted proposal for $225M racing, gaming facility in PA
McGraw Hill Financial (MHFI) seeks to increase investment in CRISIL
Cooper Companies’ (COO) CooperVision to divest Aime
Macerich (MAC) announced sale of five assets for $470M, recent equity issuance
Exeter Resource’s (XRA) Minera Eton in JV with Chilean subsidiary of Atacama Pacific Gold


  • Rocked by the mobile-device movement, PC makers (MSFT, INTL, AMD, SSNLF, GOOG, QCOM, AMZN) and their partners are planning a counterattack that leans heavily on two weapons: lower prices and power consumption, and by emulating more of those devices' features, the Wall Street Journal reports
  • Under Armour (UA) wants the same global recognition as Nike (NKE) and Adidas (ADDYY). The company has little following abroad but hopes to change that with a new global strategy to be unveiled at its investor conference Wednesday, the Wall Street Journal reports
  • Telecom Italia’s (TI) board won’t make a decision on a possible tie-up with Hutchison Whampoa at its next meeting on Wednesday, according to Chairman Franco Bernabe, Reuters reports
  • Goldman Sachs (GS) joined Alibaba Group's $8B loan with $500M in financing as the Chinese e-commerce giant prepares for a huge IPO expected as early as Q4. Goldman will be mandated lead arranger and book runner on the three-tranche loan, which has a June 7 deadline, sources say, Reuters reports
  • The worst month in a year for emerging-market currencies will prove to be more than a momentary bout of weakness to strategists at firms from UBS (UBS) to Societe Generale (SCGLY) who see the Fed weaning investors off its extraordinary stimulus, Bloomberg reports
  • Microsoft (MSFT) is lowering the price of its Windows software for small tablets, seeking to shore up foundering efforts to combat Apple (AAPL) in the mobile-computing market, sources say, Bloomberg reports


Intel's (INTC) price could double in five years
Quality Distribution (QLTY) could rally 30% in the next year
Crimson Wine Group (CWGL) shares look appealing
With many companies divesting in the form of spin-offs, Ingersoll-Rand (IR), Valero Energy's (VLO) spin-off, CST Brands (CST), and Safeway's (SWY) Blackhawk (HAWK) are good ways to take action

Superconductor Technologies (SCON) files to offer $12M of common units
TG Therapeutics (TGTX) files $175M common stock shelf

US Futures Bid On Strong China PMI; Europe Markets Offered On Weak China PMI

Nothing like a solid dose of schizophrenia to start the week, following Chinese PMI news which showed that once again the Chinese economy was both contracting and expanding at the same time. Sure, one can justify it by saying HSBC looks at smaller companies while the official data tracks larger SMEs but the reality is that just like in the US, so China has learned when all else fails, baffle with BS is the best strategy. As a result the media is attributing he drop in European stocks to the weaker than expected China PMI, while the green prints in US futures are due to... stronger than expected China PMI.

There were no split-personalities in Japan, however, where Mrs. Watanable's revulsion with recent euphoria led the Nikkei to tumble over 500 points, to closed down another 3.72%, and is now on the verge from a 20% bear market from its May 23 multi-year highs. The fact that the USDJPY reached within 3 pips of the Abenomics "fail" zone of USDJPY 100 didn't help overnight sentiment.

Following Friday's last minute plunge, US futures are pointing solidly higher for the time being: we can only assume Stevie Cohen hasn't started liquidating yet. Some point to stronger than expected European PMI as the reason for US strength, and sure enough, virtually across the board as if by magic Europe reported stronger than expected manufacturing PMIs. As Markit reports, "at a 15-month high of 48.3 in May, up from April’s four-month low of 46.7, the seasonally adjusted Markit Eurozone Manufacturing PMI indicated the slowest pace of contraction since February 2012. Business conditions still deteriorated overall, however, with the current downturn extended to a twenty-second month."

Broken down by nation, Here is hope this 15 month 48.3 Mfg PMI was calculated:

  • Germany 49.4 (flash 49.0) 3-month high, Last 49.0
  • Netherlands 48.7 3-month high,
  • Austria 48.2 3-month high,
  • Spain 48.1 24-month high, Last 44.7
  • Italy 47.3 4-month high, Exp. 46.2
  • France 46.4 (flash 45.5) 13-month high, Last 45.5
  • Greece 45.3 23-month high, Last 45.0

And visually:

Also, let's not forget that Spain PM has essentially assured his economic data will be fudged going forward, promising stronger unemployment figures in the days to come, which one can only assume means the BLS "strategic truth department" has opened a Madrid office. We can only hope that when fudging its labor data, Spain remembers to also adjust its matching NPL data accordingly.

This is just the start of a very busy week. As Deutsche recaps, stand by for a bumper couple of days as markets get ready for an eventful week of US data. Indeed we’ll kick off with today’s ISM report and finish it all off with Friday’s payrolls print. We also have a handful of Fed speeches throughout the week as well as the latest Beige Book on Wednesday. Given the rise in rates volatility and focus on the US government bond market these will clearly be closely watched as potential tone-setters of any Fed “taper on, taper off” discussions. Across the Atlantic, the focus will be on the ECB and BoE policy meetings. Markets are expecting no policy changes from either central bank and a negative deposit rate is not DB economists’ base case. That said there will still be particular attention paid to Draghi's post-meeting press conference for any mention of nonstandard policies. Notably, the BoE meeting will be the last for Governor Mervyn King before he retires at the end of June. We’ll preview more of the week ahead below together with our usual Asset Performance Review for the month of May.

The balance of highlights in bulletin format courtesy of Bloomberg:

European markets drop led by Swiss, Irish stocks; utilities, telecom and insurance shares underperform. German, U.S. bond yields rise. Commodities up led by nickel. U.S. PMI, construction spending, ISM manufacturing data are released later today. Apple e-books antitrust trial begins today.

  • Today: U.S. ISM factory index, no change expected; Fed’s Williams speaks in Stockholm
  • Euro-zone final May manufacturing PMI rises to 48.3 vs initial release of 47.8
  • ECB President Draghi says he still expects gradual recovery in latter part of year though economic outlook in euro area is “challenging”
  • U.K. May manufacturing PMI beats est. to hit 14-mo. high, rising to 51.3 vs est. 50.3 and previously revised 50.2 in April
  • Bank of England Governor King says economic recovery in U.K. appears underway, advises successor Carney to “be himself”
  • China’s HSBC manufacturing PMI falls to 49.2 in May vs est. 49.6; that contrasts with official PMI released June 1 (50.8 vs est. 50), which focuses on larger companies
  • South Korean Finance Minister Hyun says weakening yen is hurting economy; BOK Governor Kim calls for coordination on QE exit
  • SNB President Jordan says franc remains strong even after recent weakness, and pressure to appreciate may return, Schweiz am Sonntag reported, citing interview
  • Turkish PM Erdogan says protests organized by “extreme elements,” unlike Arab Spring


  • S&P 500 futures up 0.2% to 1632.8
  • Stoxx 600 down 0.4% to 299.6
  • US 10Yr yield up 3bps to 2.16%
  • German 10Yr yield up 5bps to 1.55%
  • MSCI Asia Pacific down 1.5% to 132.9
  • Gold spot up 0.7% to $1397.2/oz
  • Dollar Index declines before today’s ISM Manufacturing index, forecast to stay at 50.7 in May; USD/JPY drops to 100.03 low in Europe as JGB yields ease and Nikkei declines 3.7%
  • EUR/USD extends gain after euro-zone final May manufacturing PMI beat initial est., adding to Draghi’s comments
  • AUD/USD up most in more than a week
  • Treasuries fall for second day; 10Y yield +3bps to 2.157% before May non-farm payrolls this week, est. 165K vs previous 165K
  • Asia stocks drop for 3rd straight day, led by Nikkei, as improving U.S. data adds to concern of Fed scaling back QE

SocGen covers today's macro highlights:

The month of June in 2011 and 2012 proved a vintage one for the EUR as it logged tidy gains vs most of its principal counterparts including the USD, but the likelihood of a ‘three-peat' will not come across much support and belief from the fx community this time around, we suspect.

We don't think the ECB is up to something at this week's council meeting, but there is no escaping from the dovish headlines, with the latest coming from Mr Visco who reaffirmed on Friday that the ECB is ready to do what is necessary. If anything, the data has improved a tad since the May meeting and the extension of deficit deadlines for EU member states and lifting of the EDP may not count on the full support of Frankfurt. The central bank has made fiscal consolidation a focal point of its communication strategy over the last decade and may not be too impressed at how the EC has yielded to EU governments. At the margin this makes the ECB less inclined to send a particularly dovish message (inflation crept up too in May for the first time in eight months), and so the EUR continues to be well placed to consolidate its positions vs carry currencies like the AUD and NZD. The flip side of the coin is that excess liquidity in the eurozone continues to diminish after the latest combined LTRO1 and two repayments of EUR3.081bn are taken into account, but no matter what the ECB says on Thursday, of course US payrolls and the Fed are the big elephants in this week's room. Peripheral bond yields are putting in a tentative bottom whilst EU swaps closed the week on Friday near two month-highs.

A strong manufacturing PMI from the US today will set the tone for the week and could heap more pressure on bonds (and EM FX), prompting perhaps a less violent but steady return towards last week's lows (yield and swap highs). Technically the picture continues to look ominous for yields (Chart Alert), and confirmation that last week's spike was not a flash in the pan should put the Dollar index (DXY) back in the ascendency and end two consecutive weeks of losses. The DXY has not declined for three weeks in succession since September last year.

* * *

Finally, the full overnight summary from Deutsche's Jim Reid

Turning to markets firstly, the far-from-constructive end to the US session on Friday (S&P 500 -1.43%) is providing a somewhat mixed backdrop for risk assets
overnight. The Nikkei is leading the region’s losses (--2.9%) and currently stands about 13% lower than its mid-May cyclical peak. On a more positive note, the
Shanghai Composite (+0.3%) and Hang Seng (+0.3%) are both trading a touch firmer helped by the weekend’s surprisingly robust official manufacturing PMI reading in China (50.8 in May vs 50.0 expected). The data comes after a sub-50 HSBC flash Chinese manufacturing PMI reading published on 23rd May, which declined from 50.4 in April to 49.6 (and which has subsequently been revised down to 49.2 overnight). Nevertheless, DB’s Chief China economist notes the sampling differences between the official and HSBC survey and believes that the better-than-expected official manufacturing PMI points to an end of recent inventory destocking. He reiterates his GDP growth forecast of 7.7% yoy in Q2 before recovering to 7.8% in Q3 and 8.2% in Q4. In the fixed income space, Asian IG credit is generally trading about 2-3bp wider, continuing the theme of EM weakness which saw the South African Rand and Polish Zloty lose 0.5% and 0.4% on Friday. Relative to the big intraday move in UST yields on Friday (range: 2.064%-2.146%), the 10-year yield is relatively steady overnight at 2.145% or nearly 2bp higher.

In terms of weekend news flow, the headlines were relatively thin, though comments from Draghi overnight have garnered some attention. In a text of speech prepared for the IMF Conference held today in Shanghai, the ECB president defended the OMT programme by saying that “virtually all economic agents, including corporations, banks and households” were benefitting from the calm that had returned to financial markets since August 2012. He also deflected criticism that OMT had replaced the need for fiscal consolidation or would reintroduce excessive compression of Euro area bond yield spreads. Draghi added that OMTs are designed to keep government bond yields just below ‘panic’ levels, not to bring them down to levels that would somehow help government solvency. These comments come ahead of a court hearing which will hear objections to the OMT on June 11-12, to be held in Germany's Constitutional Court in Karlsruhe.

Taking a slightly closer look at this week’s data flow, the market consensus for US payrolls is for a +165k and +175k gain in the headline and private payrolls respectively. The unemployment rate is expected to hold steady at 7.5%. Outside of payrolls, markets are also expecting the ISM manufacturing headline to remain unchanged at 50.7. Elsewhere we also have April’s US trade report on Tuesday, factory orders and ADP employment report both on Wednesday. In Euroland, May’s PMI manufacturing reports will be the main highlight today. The final revisions to the Euroarea reading as well as the first breakdown of Spain’s and Italy’s print will be the focus. That aside we also have Spanish unemployment on Tuesday, Euroarea Q1 GDP revisions, retail sales and services PMIs on Wednesday, German factory orders on Thursday, and German/French trade reports on Friday. In Asia, Japan's PM is likely to outline his structural reform policies in a speech on Wednesday. China's May trade report is scheduled for Saturday. On the political front, President Obama will be hosting two days of talks with Chinese President Xi Jinping in California on Friday – trade, North Korea and Asian regional security are expected to top the agenda.

Capital Market Drivers

There have been two overreaching forces that have driven the global capital markets in recent weeks. Within the context of substantial positions established on the basis of both US and Japanese unorthodox easing, the markets have responded dramatically to speculation of near-term Fed tapering and concerns that BOJ is caught in a contradiction; a reduction in the dangerous volatility in the bond market has comes at the price of a stronger yen and weaker Nikkei.

These forces remain very much in play. The Nikkei slumped another 3.7% today to bring its 10-day decline to 17%. Today's decline was led by a 6.1% decline in financials and a 5.2% decline in consumer services.

The yield on the 10-year JGB eased 4 bp while the dollar fell to almost JPY100 and recorded its lowest level since May 9. This general area provided formidable resistance on the way up and is expected to offer support. With the RBA, BOE and ECB meetings this week and US jobs data, news from Japan itself may be overshadowed, but on Wednesday, Prime Minister Abe is expected to unveil a new growth strategy.

The US reports the ISMs, ADP and factory orders, while the Fed releases the Beige Book, but the employment report at the end of the week has taken on greater significance, given the heightened speculation of tapering.

We have argued that market is getting ahead of itself and do not think any slowing long-term asset purchases until late this year at the earliest. Even then the issue is the pace of purchases not stoppage or reversal.  The consensus forecast of about 165k non-farm payroll would be the third consecutive month below 200k.   If close to the mark, would likely diminish tapering ideas. 

In this broader context, we place the three central bank meeting this week.  Neither the RBA, BOE nor ECB are likely to change policy.  The slide in the in Australian dollar and the fact that banks passed on the last rate cut in full has discouraged expectations of a back-to-back rate cuts.   This is BOE King's last meeting.  He will likely go out in a minority voting for additional gilt purchases.  Carney takes the helm next month and many are looking for new guidance and perhaps new gilt purchases in August. 

The ECB will be gratified by the small uptick in the euro area manufacturing PMI to 48.3 from the 47.8 flash and the 46.7 reading in April.  While still below the 50 boom/bust level, it is the highest since Feb last year.  Moreover, the gains were broadly experienced.  Germany and France improved from their flash readings (and German output and orders were above 50 for the first time in 3-months).  Italy, Spain and the Netherlands all reported stronger gains than the consensus expected.   The ECB is likely to see the news as consistent with it expectation that the recovery will solidify in H2. 

We note that this modest improvement is European wide.  Switzerland, the UK, Norway and Sweden also reported better than expect May PMIs.  The improvement extends to central Europe, except for Hungary, which slipped back below 50. 

Lastly in Europe, we note that the fourth day of widening protests/demonstrations in Turkey has seen the lira not benefit from the recovery seen in other emerging market currencies, including the South African rand.   The lira bonds are being crushed and yield on the 10-year bond is up 23 bp to almost 7%.  The Turkish stock market is off nearly 6.7%.

Another force that has helped shape the investment climate has been the slowing of the Chinese economy.  The official May PMI data suggests some stabilization as the manufacturing reading rose to 50.8 from 50.6 and the service reading slipped slightly to 54.3 from 54.5.   On the other hand, the HSBC measure, with its emphasis on small businesses fell to 49.2 from the 49.6 flash and 50.4 reading in April. 

The Chinese news seemed to help lift the Australian dollar from the start of today's activity.  With the first US-China summit between US President Obama and new Chinese President Xi speculation that China will widen the dollar-yuan band are running high, but may be disappointed.   We note that up a minor 1.6% this year against the US dollar, makes the Chinese yuan the strongest among the emerging market currencies this year.

Traders Taunted By „20 Out Of 20“ Turbo Tuesday (With POMO)

First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it.

In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script, this time adding the following pearl:


... And the MOF's pronouncement that Japan would sell 5 and 10 year bonds direct to individuals each month.

In other words, the 2% inflation is coming so buy stocks and hedge by... buying bonds and duration risk. And fear not, because while the stock market should rise on expectations of inflation, please don't sell your JGBs, which just happen to be nearly four time more in notional than stocks, because the central bank promises it will keep yields low. Just look in the US. Oh, but ignore that the USD is the world's reserve currency (for now), and that US Paper is what is considered High Quality Collateral for a severely collateral deficient shadow banking system, while JGBs are merely ticking timebombs on Japanese bank balance sheets.

Those sick of Japan will have a tough time this week, as there is much more on deck from the island country: it will remain in the spotlight with Kuroda speaking tomorrow at a BoJ Conference in Tokyo, on the same day that the BoJ has scheduled a meeting with JGB-market participants to discuss the recent rise in bond yields. According to a BoJ official, the central bank will be using this meeting to help it decide its schedule for JGB purchases starting from June. This Friday’s Japanese data releases including household spending, employment, inflation and industrial production will be important in order to justify the mood that the economy is improving when in reality it is merely leading to soaring import prices and broader deflation.

All that said, it is truly spectacular to follow the Japanese script, which is obviously dictated by the Fed, to see what the Fed thinks is a successful strategy and has been accomplished over four+ years, and what it is trying to get Japan to complete in a few months.

As Weidmann said, "good luck with the experiment" indeed. And certainly ignore the statement overnight from Lewis Sanders, who resigned as chief executive officer of Alliance-Bernstein Holding LP in 2008, who was speaking in Sydney at conference. and who simply said that QE in Japan will fail.

Overnight, macro news was largely missing, but when it comes to "news", fundamental developments are the most meaningless of all, and either way, are always positive. The Taiwanese government unveiled a number of measures to boost domestic demand, among which a rerun of that spectacular US failure, "cash for clunkers." However, this move had been well signaled and priced in, and the TAIEX was largely flat following the announcement.

Here is what little news was bulletin worthy, via Bloomberg:

  • Treasuries fell before supply and as stock markets in Asia and Europe gained for first time in five days; USD strengthened vs JPY; Treasury sells $35b in 2Y notes today, WI yield 0.255%.
  • Abe adviser Koichi Hamada says BoJ can add to already unprecedented stimulus if necessary to drive an economic revival
  • BoJ policy board member Miyao said central bank has taken all the necessary easing steps for now; better economic outlook may drive up yields
  • Auction of 1.2t JPY 20Y JGBs saw weakest demand in 9 mos., with bid-to-cover of 2.54 vs 3.68 at previous sale; high yield 1.6940%
  • Chinese Premier Li said China is targeting 7% growth this decade, faces huge challenges
  • Employment at the U.K.’s four biggest banks set to fall to 9-yr low by end-year as banks eliminate about 189,000 jobs amid a dearth of revenue
  • ECB’s Noyer said no major central bank has tried negative rates; such rates have had varying results in smaller countries
  • Europe finds itself in a similar position to Japan as the     continent faces a “lost decade,” said Pacific Investment Management Co., which manages the world’s biggest fixed-income fund
  • China is studying the possibility of investing a portion of its $3.4t FX reserves in U.S. real estate, said two people with direct knowledge of the situation
  • Sovereign yields mixed, core yields higher, 10Y JGBs at 0.896%, +7.6bps, peripheral European yields lower. Asian, European stocks higher; U.S. stock index futures higher. WTI crude, metals higher; gold lower

To summarize, it's a central bank world indeed with central banks in the Central European Union having cut interest rates to record lows in recent months and a further adjustment is possible. Central banks in Hungary (MNB) and Poland (NBP) may still cut key interest rates. MNB may today cut by 25bp to 4.50% while next week NBP may cut its key rate by 25bp to 2.75%. The Czech central bank's key interest rate is close to zero, so its next policy tool could be FX intervention.

And since nothing but asset bubbles remains, the FT reminds readers that the proportion of “covenant-lite” loans has soared to more than 50% of all leveraged loan issuance so far this year, twice the level seen during the last boom in 2007. So far this year, $129bn of leveraged loans have been sold with covenant-lite features, up from $22bn in the same period last year, and $96bn for the whole of 2007 according to S&P Capital IQ data. On a related note, Bloomberg reported that an ever increasing number of companies are tapping the loan market to pay dividends.

And just to make sure that the market closes well green today, the only actual "data" will be yet another reading of consumer "confidence" this time from the Conference Board. Expect this to surge on news that it is Tuesday and stocks have nowhere to go but up, which in turn will send stocks, where else but, up.

Some additional color on today's macro catalysts out of SocGen:

Activity should pick up today as the UK and US markets open again following the holiday, but a decent bounce back in the Nikkei despite volatile JGBs is giving European markets the thumbs up for a positive risk on start. The move in US rates commands close attention after 10y swaps returned over 2.20% for the first time since April last year. A break of 2.25% would clear the path for a return to 2.42% and inevitably this level will have bears talking of 2.50%. All the more reason to concentrate on US consumer confidence today (SG forecast 74.0 vs consensus 71.0) and upcoming UST supply.

Indeed, US conditions will be more of a deciding factor today and in the coming two weeks as markets remain nervous on the timing of a change in Fed policy. Managing expectations about the pace of QE is a topic that the WSJ's Hilsenrath comments on this morning and is something that could cause volatility in rates to command a premium in the foreseeable future. US long-term interest rates are currently driving the USD complex including EUR/USD but the correlation across fixed income assets has also consequences for EUR rates. Notwithstanding the clouded macro outlook in the eurozone, 10y swaps are backing up and now approach the key 1.71%-1.75% area. Thus, we will be watching the 10Y UST yield today with short positions set to be squeezed by strong confidence data. A move through 2.06-2.09% area would see buyers of USD dips return and could see a test of the post-Bernanke/FOMC minutes high for the dollar index (84.498).

In the UK, gilts also have been driven by US bond markets recently. More of the same is expected this week as no major indicators are scheduled to be announced. MPC's Haldane and Tucker are scheduled to speak today. As for GBP/USD, it has been on the defensive for four weeks in succession, the longest stretch since February. For the time being, sterling is likely to struggle vs its main counterparts as the market awaits the arrival of the new BoE governor Carney at the beginning of July.

DB's Jim Reid completes the overnight recap:

Ahead of us this week in Europe, the European Commission announces economic policy recommendations for EU members on Wednesday. Recent reports suggest that the Commission may shift its emphasis from one of fiscal consolidation to structural reforms. The Commission has indicated that it may give France and Spain two extra years to bring their budget deficits below the EU ceiling of 3% of GDP, while other countries such as Italy and Portugal are reportedly expected to get additional time to meet deficit targets (Reuters). In terms of the week’s dataflow, credit and money aggregates for the Euroarea is scheduled for Wednesday, followed on Thursday by the European Commission’s economic sentiment survey. Inflation and unemployment data for the Euroarea are due on Friday.

After a slow start to the week, the data flow picks up in the US on Thursday when the latest Q1 GDP revisions and jobless claims are due. The week’s data calendar will conclude with Friday’s Chicago PMI, PCE inflation, consumer income and spending data.

Turning to markets, one of the key themes overnight has been USD strength which has seen the dollar index up 0.2%. Dollar strength is also evident in the major crosses including AUDUSD (-0.1%), USDJPY (+0.9%) and EURUSD (--0.1%). Elsewhere the weaker yen is helping the Nikkei (+1.1%) reverse some of Monday’s losses when it finished down 3.2%. The recent Nikkei weakness prompted Japan’s economy minister Amari to reassure the market today that stocks are in an “adjustment phase after recent sharp gains”. In the JGB market, 10yr yields are up another 5bp in Asian trading (0.88% as we type) after a lacklustre 20yr JGB auction. The move comes after weekend comments from Kuroda who warned of the risks from a rise in bond yields if not accompanied by
an improvement in the underlying economy.

Outside of Japan, Asian equities are trading mostly higher helped by the positive lead-in from the Stoxx600 which closed near the day’s highs of +0.33% yesterday. Gains on Asian bourses are being led by the Hang Seng (+0.1%), KOSPI (+0.4%) and ASX200 (+0.4%). Asian credit markets are unchanged to slightly tighter overnight, in line with the performance of Asian equities.

Turning to the day ahead, the main data releases are the Conference Board’s consumer confidence numbers in US and the latest activity readings from the
Dallas and Richmond Fed.

It’s Central Banker Appreciation Day

Today is one on those rare days in which everyone stops pretending fundamentals matter, and admits every market uptick is purely a function of what side of the bed Bernanke wakes up on, how loudly Kuroda sneezes, or how much coffee Mark Carney has had before lunch, but more importantly: that all "risk" is in the hands of a few good central-planners. Following last night's uneventful Bank of Japan meeting, in which Kuroda announced no changes to the "full speed ahead" policy of inflation or bust(ed bank sector following soaring JGB yields) and which pushed the Nikkei225 to surge above the DJIA closing at 15,627, today it is Bernanke's turn not once but twice, when he first takes the chair in the Joint Economic Committee's "Economic Outlook" hearing at 10 am, followed by the May 1 minutes release at 2pm (which may or may not have been previously leaked like last month). As a reminder, Politico reported last night that Ben Bernanke had previously met in secret with Darrell Issa and other lawmakers "to discuss the central bank’s efforts to stimulate the economy and how it could exit this strategy in the future, according to people who attended the meeting."  And since we know how important transparency is to Bernanke and the Congress, "Participants in the meeting declined to disclose specifically what Bernanke told lawmakers beyond saying there was discussion about the Fed’s bond buying programs and other issues." But as long as Mr. Issa, the wealthiest man in the House, has his advance marching orders, all is well.

Just in case there is still any doubt that the Fed is just as clueless as everyone else in this uncharted territory, Bill Dudley appeared minutes ago on Bloomberg TV with the following key observations:

  • Says QE tapering possible by autumn if economy improves, speaking in interview on Bloomberg TV. Or, if it doesn't as it won't as it is the Fed that is preventing growth, then impossible
  • Says Fed wants to make sure markets don’t overreact to taper
  • Says Fed hasn’t decided yet on tapering timing, steps
  • Says he is “very much in sync” with Bernanke on policy
  • Says fiscal drag obscuring stronger economic fundamentals
  • Sees lot of real positive things underneath the surface
  • Says economy not quite at “self-reinforcing” stage yet
  • Says 2%-2.5% growth “pretty good” given fiscal restraint
  • Says he’s “not very nervous” about slower inflation rate

And so on.

In other, irrelevant but still notable news, UK retail sales plunged -1.3% and -1.4% ex autos, on expectations of a +0.1% print for both, while the BOE announced it had voted 6-3 to keep QE unchanged. This will certainly change once Mark Carney takes the helm in just under two months.

And in somewhat strange news, Russia pulled a 33.6 billion ruble bond auction of 2019 OFZ bonds with a yield of 6.33%-6.38% due to lack of bids. A failed bond auction in this carry chasing environment? Surely this can't happen, and if it did, there is something more than meets the eye. Oh well, let's just ignore it as it does not fit the narrative of all is well, as confirmed by the EURCHF passing 1.26 for the first time in years, following rumblings out of the SNB's Jordan about a possible negative deposit rate. Wait, did we say "all is well" - we meant all is centrally-planned.

The remainder of the key events summarized in bulletin format courtesy of Bloomberg:

  • Treasuries little changed before Bernanke speaks on economic outlook, Fed releases May 1 meeting minutes; NY Fed’s Bill Dudley said policy makers will know in three to four months whether economy is healthy enough for QE to be tapered.
  • Dudley cited “tug-of-war between the fiscal drag and the improving economy” in an interview with Bloomberg TV; said that his views and Bernanke’s were “very much in sync”
  • The Bank of Japan pledged to adjust its unprecedented stimulus program as needed after a jump in bond yields that highlighted risks linked to policy makers’ campaign to revive the world’s third-largest economy
  • BoJ maintained pledge to double monetary base in two years; link to statement
  • BoE Governor Mervyn King was defeated for a fourth month in his bid to expand stimulus as the majority of officials cautioned against the danger of stoking inflation expectations
  • U.K. retail sales fell 1.3% in April (est. +0.1%), led by drop in food sales
  • CHF weakened through 1.26 vs EUR for first time in two years; SNB President Thomas Jordan yesterday said a shift of the cap on the franc and negative interest rates are among steps the central bank could take to prevent a tightening of monetary conditions
  • Government bonds should be excluded from the EU’s planned financial-transaction tax because the levy would drive up sovereign borrowing costs, a panel of European debt-management officials said
  • Apple Inc.’s bonds have lost $280.6m of market value since buyers snapped up $17b of the iPhone maker’s debt last month, declining as yields climb from record lows.

SocGen recaps the already noted key highlights, only better:

Fed chairman Bernanke's testimony before the Joint Economic Committee last year (7/6/12) produced no fireworks, with the exception of gold. A run of open and closing prices for that day reads as follows: EUR/USD 1.2559/1.2566, USD/JPY 79.13/79.60, UST 10y 1.6541%/1.6388%, gold $1,634/$1,592, S&P 1,316/1,314. What on earth is all the fuss about today, if you are really keen sell JPY and gold. But that's no rocket science and corresponds neatly with the view any USD bull has today, and there quite a few. Except that the last leg of the dollar rally has not been led by speculative accounts (see chart). Does that mean the rally is running out of steam and a dovish Bernanke reignites risk on and a weaker USD?

Strategically our secular view for a stronger USD has not changed, but the question is whether Bernanke calls for a short-term tactical switch after a 3.7% rally in the USD this month. The currency is by no means technically overbought and bright prospect of additional gains are unchanged over a 6 to12 month time horizon based on our expectations that the Fed will start tapering bond purchases later this year (Q3). However, planning ahead for stimulus exit is not the same as pledging to exit and for Bernanke (and other FOMC voters), the bar is likely to be pretty high before steps are undertaken to dial back from the current purchase rate of $85bn per month.

The FOMC minutes could include an updated guidance of how a roadmap would look once the Fed decides the time has come to take its foot off the monetary accelerator. Speculation has been building steadily since the start of the year but is only a few weeks since FOMC voters and non-voters alike have stepped up the rhetoric with some calling for tapering at soon as the June meeting. We believe Bernanke will stick to the last FOMC statement to allow the central bank maximum flexibility, and in doing so, keep bullish conditions intact for risk assets. Watch the 2.00% level in UST 10y.

It has not been a one-way street for the USD and UST yields despite speculation that 2013 could be a watershed for Fed policy. There have been a few bumps along the road which caused the USD and UST yields to give back some of the early 2013 gains, notably in March and April. In contrast, the equity and credit markets have been on a planet of their own, supported by concerted central bank efforts to support global demand. The S&P gave up 2.8% in February and 3.8% in April over one-week periods but other than that it's been fairly smooth sailing. With inflation subdued and the labour market still not satisfactory, Bernanke will be careful not to spoil the party.

* * *

And DB's recap of the past 24 hours.

Central banks are also the key focus over the next 24 hours with the Fed minutes and Bernanke speaking later. However as I type the BoJ have just concluded their latest policy meeting by reaffirming their target to double the monetary base over two years and the inflation target of 2%. In terms of the economic outlook, the BoJ said that exports and business fixed investment have stopped weakening amid improving consumer sentiment. The central bank added that indicators are suggesting a rise in inflation expectations. There was no reference made to the recent JGB volatility which was probably behind the 4bp sell-off in 10yr JGB yields (to 0.895%) in the minutes following the BoJ’s statement. We will probably get more on this at Governor Kuroda’s post-meeting press conference scheduled for 7:30am London time today. USDJPY is steady at 102.5 following the announcement.

Returning to the Fed, relatively dovish comments from the NY Fed’s Dudley and St Louis Fed’s Bullard, both FOMC voters, helped put a floor on risk assets yesterday. Starting with Bullard, who is not generally known for his dovishness, remarked that the Fed should “continue with the present QE program” because it is the best available option for policy makers to boost growth. Bullard added that he doesn’t see a good case for QE tapering unless inflation risks pick up. On the topic of IOER, Bullard said that he advocates negative interest rates arguing that paying interest on excess reserves was “mildly counterproductive”. Dudley backed up some of those comments about the pace of easing but stressed that QE should be largely data-dependent.

In terms of the market reaction, the S&P500 was trading near a session low of -0.1% yesterday, but rallied as Bullard and Dudley spoke to close at another record high of 1669.16 (+0.17%). Sectorally, healthcare (+1.1%), consumer discretionary (+0.5%) and financials (+0.2%) enjoyed the best of the gains. The latter was buoyed by news that JPMorgan’s Jamie Dimon had survived a proposal to split his role of CEO and Chairman. The proposal to split the roles drew only 32% of votes this year, was down from 40% last year, which helped propel JPM’s stock to a 1.4% gain yesterday. Better than expected earnings from Home Depot underscored a strong day for consumer discretionary stocks. As US earnings season draws to a close, it’s fair to say to that results have been somewhat mixed this quarter with 71% of US firms beating estimates, but only about half managing to do the same on the top line.

Outside of equities, 10yr UST yields threatened to breakthrough the 2.00% level yesterday before rallying 7.5bp from the intraday high to close at 1.93%. In addition to the Fedspeak, the volatility was also attributed to short covering ahead of Chairman Bernanke’s testimony today. The USD index closed higher (+0.2%) in an up and down session. Gold (-1.3%) and silver (-2%) gave up most of yesterday’s rebound amid the stronger risk sentiment and stronger USD.

Turning to Asian markets, equities are trading mostly higher overnight led by gains on the Nikkei (+1.2%). The Nikkei traded through the 15,500 mark for the first time since December 2007. The KOSPI (+0.8%) and Shanghai Comp (+0.2%) are also firmer, but the ASX200 (-0.3%) is lagging the region’s broader moves. The Hong Kong equity markets remain shut due to inclement weather (“black rain”) but are due to reopen in the afternoon. I’m glad I flew out last night from there. I did one meeting yesterday where I was so high up that I was practically in the middle of the violent thunderstorm! I was trying to convince the client that I wasn’t in the slightest bit scared!! The reality was a bit different.

In the day ahead, Ben Bernanke takes centre stage when he speaks before the congressional Joint Economic Committee on the US economic outlook at 3pm
London time. The Committee is bipartisan, and it’s safe to say that will be an effort by lawmakers on both sides of politics to prise more detail with respect to the Fed Chairman’s QE plans. The Fed minutes from its Apr30/May1st FOMC meeting are published at 7pm London today. The BoE’s will also publish its latest meeting minutes this morning. US existing homes in April and UK retail sales are the highlights on the data calendar.

So You Want To Work In JPMorgan’s Legendary Gold Vault? This Is Your Chance

For all those whose lifelong ambition has been to work with the recently reappointed joint Chairman/CEO of JPMorgan in the firm's legendary and infamous gold 'clearing' operation (whose formerly classified New York, the largest in the world, and London vault locations were exposed here and here), today is your lucky day:


But more important than what the firm is looking for, is what is willing to provide. Information. Such as:

  • JPM currently holds a 45 % market share of the London Clearing: not quite a monopoly but close enough
  • The London clearing transacts approx $ 40 bn value in metal transfers each day on behalf of participants in the London market
  • It conducts Location swaps: literally, what it sounds like
  • The firm has consignment agreements in India, China, Thailan, and... Turkey: the infamous gateway to Iran?
  • The firm's gold clearing and physical desk engages in liquidity management between London, Zurich and... the Bank of England?

h/t Ro

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