China’s Nauseating Volatility Continues, US Futures Flat Ahead Of Disastrous GDP Report


The most prominent market event overnight was once again the action in China’s penny-index, which after tumbling at the open and briefly entering a 10% correction from the highs hit just two days ago, promptly saw the BTFDers rush in, whether retail, institutional or central bankers, and after rebounding strongly from the -3% lows, the SHCOMP closed practically unchanged following a 2% jump to complete yet another 5% intraday swing on absolutely no news, but merely concerns what the PBOC is doing with liquidity, reverse repos, margin debt, etc. Needless to say, this is one of the world’s largest stock markets, not the Pink Sheets.

Just to put thing in perspective again:

Elsewhere, European equities opened firmly in the red after Greece stated yet again they are expecting a deal to be agreed on Sunday ahead of their IMF payment due on June 5th, thereby seeing markets using the excuse of month-end to take risk of the table ahead of this key risk event, with Greek banks among the worst performers. Over the last few minutes the selling ceased and Europe has rebounded on a bout of buying, which has pushed both the EUR lower and US equity futures into the green.

And just to complete the confusion, it also sent the yield on the German 5Y bond negative once agagin for the first time since April, as NIRP is back once again. Whether this was a consequence of month-end demand or uncertainty surrounding Greece is unclear, but should the entire German curve go subzero again, expect the ECB to instill another panic selling episode as the more negative German yields go, the less purchasing capacity the ECB has in an already collateral constrained market.

In FX, month-end buying is a prominent factor in market movements during the last Europeans session of the month amid light news flow elsewhere. GBP has underperformed so far today with EUR and USD relatively flat on the day amid desks reporting monthend demand in EUR/GBP.

Fed’s Kocherlakota reiterated his dovish stance yesterday by repeating his belief that the FOMC should delay a rate hike until 2016 and that the central bank risk the health of the labor market by hiking raising rates in 2015. Looking ahead, today’s US GDP (Q1 S) reading is expected to show a substantial revision (Exp. -0.9%, Prev. 0.2%) given the recent slew of worse than expected US data, while other highlights include US Chicago Purchasing Manager Index and University of Michigan Sentiment as well as Canadian GDP and comments from ECB’s Mersch.

The energy complex resides in positive territory, with WTI bolstered by yesterday’s better than expected DoE inventories
(-2802k vs. Exp. -2000k, Prev. -2674k), while the metals complex is relatively flat in line with the greenback.

On today’s calendar we have the Chicago PMI and the UMich Consumer Confidence, but the biggest variable will be the first Q1 GDP revision which is expected to crash from 0.2% to -0.9%. This will be the third quarterly GDP contraction of the “recovery.” As a reminder, Q2 GDP according to the Atlanta Fed is trending at 0.8% suggesting GDP in the first half of 2015 was negative. And that is including the $122 billion inventory boost carryover from Q1: should inventory clearance accelerate, Q2 GDP may easily drop negative as well.

In summary: European shares stay negative, though above session lows, with all sectors declining; food, resources stocks are weakest; oil & gas outperforms. Greece creditors say no deal near as frustration vented at G-7. Swedish 1Q GDP growth below ests. Ukraine creditors said to offer coupon cuts, 10-year extension. The French and German markets are the worst-performing larger bourses, the Italy the best. The euro is little changed against the dollar. German 10yr bond yields fall. Oil advances. U.S. Chicago purchasing manager, Michigan confidence, GDP, personal consumption, core PCE, ISM Milwaukee due later.

Market Wrap

  • S&P 500 futures down 0.1% to 2119.8
  • Stoxx 600 down 0.4% to 405
  • US 10Yr yield down 1bps to 2.12%
  • German 10Yr yield down 3bps to 0.5%
  • MSCI Asia Pacific up 0.2% to 151.6
  • Gold spot up 0.1% to $1189.9/oz
  • Eurostoxx 50 -0.4%, FTSE 100 flat, CAC 40 -1%, DAX -1%, IBEX -0.6%, FTSEMIB -0.1%, SMI -0.5%
  • Asian stocks rise with the ASX outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific up 0.2% to 151.6
  • Nikkei 225 up 0.1%, Hang Seng down 0.1%, Kospi up 0.2%, Shanghai Composite down 0.2%, ASX up 1.1%, Sensex up 1.2%
  • Steris to Contest U.S. Effort to Block Acquisition of Synergy
  • Syngenta Said to Build Defenses Against a Higher Bid by Monsanto
  • Douglas AG Plans 2015 IPO as Cosmetics-Market Expansion Forecast
  • GE Said to Work With Deutsche Bank on Sale of Italy’s Interbanca
  • Euro up 0.25% to $1.0976
  • Dollar Index down 0.08% to 96.89
  • Italian 10Yr yield down 2bps to 1.85%
  • Spanish 10Yr yield down 1bps to 1.83%
  • French 10Yr yield down 3bps to 0.81%
  • S&P GSCI Index up 0.7% to 432.3
  • Brent Futures up 1.1% to $63.3/bbl, WTI Futures up 1.4% to $58.5/bbl
  • LME 3m Copper up 0% to $6098/MT
  • LME 3m Nickel down 0.5% to $12750/MT
  • Wheat futures down 0.6% to 485.8 USd/bu

Bulletin Headline Summary From Bloomberg and RanSquawk

  • USD remains relatively flat during the European morning amid light newsflow, while GBP has underperformed amid desks reporting month-end demand in EUR/GBP
  • European equities reside firmly in the red, with Greek banks the worst performers after Greece stated they are expecting a deal to be agreed on Sunday ahead of their IMF payment due on June 5th
  • Today’s US GDP (Q1 S) reading is expected to show a substantial revision (Exp. -0.9%, Prev. 0.2%) given the recent slew of worse than expected US data
  • Long-end Treasury yields drop in overnight trading before release of 1Q GDP revision; yesterday’s 7Y auction was awarded at 1.888%, highest 7Y stop since Dec. and second straight to stop through after previous seven tailed.
  • Greece’s creditors said the government must make hard commitments to overhaul its finances or it won’t get a deal to unlock bailout payments
  • Ukraine’s creditors put forward a restructuring proposal that includes maturity extensions of up to 10 years and reductions in interest payments of about $500 million
  • Young traders who’ve known nothing but rock-bottom interest rates and rising markets are about to learn what higher rates from the Fed look like — and their older, more experienced colleagues wonder how the youngsters will fare
  • JPMorgan will cut thousands of jobs over the next year as the biggest U.S. bank by assets seeks to contain expenses and sells businesses, said a person with knowledge of the plans
  • Support for Sepp Blatter extending his 17-year hold over  global soccer weakened before his re-election bid, while the FIFA  president blamed countries missing out on hosting the World Cup for his organization’s troubles
  • Sovereign 10Y bond yields mostly lower except Portugal which is ~3bps higher. Asian stocks mixed; European stocks, U.S. equity-index futures fall. Crude oil, gold and copper higher

US Event Calendar

  • 8:30am: GDP Annualized q/q, 1Q second, est. -0.9% (prior 0.2%)
  • Personal Consumption, 1Q second, est. 2.0% (prior 1.9%)
  • GDP Price Index, 1Q second, est. -0.1% (prior -0.1%)
  • Core PCE q/q, 1Q second, est. 0.9% (prior 0.9%)
  • 9:00am: ISM Milwaukee, May, est. 50 (prior 48.08)
  • 9:45am: Chicago Purchasing Manager, May, est. 53.0 (prior 52.3)
  • 10:00am: U. of Mich. Sentiment, May final, est. 89.5 (prior 88.6)
  • Current Conditions, May final (prior 99.8)
  • Expectations, May final (prior 81.5)
  • 1 Yr Inflation, May final (prior 2.9%)
  • 5-10 Yr Inflation, May final (prior 2.8%)

As usual, here is DB’s Jim Reid with the balance of the overnight summary

One thing I’ve noticed with China is that a lot of the days with big equity moves sees big swings late in the day and after we publish the EMR. Yesterday was a prime example as the Shanghai Comp was only down -1.4% as we went to print. Two and a half hours later at the close it was down -6.5%. So experience tells us that informing you that the same index is trading +0.12% this morning could be out of date by the close! Indeed as we discuss below we opened around -4% down before recovering.

As briefly touched upon at the top, the Shanghai Comp actually tumbled as much as 4.2% in early trading before fighting back towards flat. Other China equities markets are up also this morning with the CSI 300 +0.61% and Shenzen Composite +1.04%. Elsewhere, the Nikkei (+0.19%) has extended its run of up days to 11 as it stands. On only 5 other occasions has such a run occurred, the longest being 15 days in 1988. The run is being helped by a weaker Yen of late, although this morning the currency is actually +0.15% firmer against the Dollar after slightly higher than expected inflation data. Despite the headline April print coming in as expected at +0.6% yoy, the core (+0.3% vs. +0.2% expected) and core-core (+0.4% vs. +0.3% expected) were above consensus. Household spending for the month was disappointing however (-1.3% yoy vs. +3.0% expected) while industrial production (+1.0% mom) was in line. Elsewhere in markets this morning, the Hang Seng (+0.30%) and Kospi (+0.32%) are both higher.

Moving on, the Greece saga continues with headlines aplenty. Yesterday we heard more push back from the European side that Greece and its Creditors are still not in agreement and seemingly still struggling to come to terms on reforms. The IMF’s Lagarde was noted as saying that ‘things have moved, but there is still a lot of work to do’ in comments on German TV ARD. The European Economic Commissioner Moscovi said that the two sides are ‘certainly not the three quarters of the way’ and that ‘we need to work day and night’. The comments from the Greek side continue to paint a picture of progress and hope that a deal is imminent, which has been in stark contrast to the comments from the Creditors for some time now. Greek government spokesman Sakellaridis said yesterday that ‘this optimism is not just words, it is based on the experience of the previous weeks and the progress achieved’. Greece has seemingly over emphasised the ‘progress’ and achievement in negotiations for months now, so it’s worth being careful over interpreting most headlines coming from the Greece side.

With 7 days to go now until the first June IMF repayment, and what’s seen as something of a make-or-break date, DB’s resident Greece expert George Saravelos yesterday published an update looking at the current state of play. George’s baseline remains the same, that an agreement between the government and its creditors is the marginally higher probability outcome. The difference now remains timing, with cash essentially exhausted and the potential for an agreement being needed to go through a referendum or parliamentary approval meaning non-payment to the IMF over the course of June is a distinct possibility. Ultimately, George believes that agreement without capital controls is the baseline (with a 60% probability). The alternative is that no agreement is reached and time/politics breaks down resulting in a suspension of ECB financing and imposition of capital controls (40% probability). Assuming an agreement is reached in some form, George believes that there is a roughly even split between this being done in 1.) a timely manner through Greek parliament (best case scenario) and 2.) not in time to pass through parliament before the IMF payment. In the case of the second scenario (a last minute agreement), any agreement in insufficient time essentially boils down to the domestic political situation and whether or not a change in coalition would be required. In this event, it is possible that the ECB provides interim financing to pay back the IMF via raising T-Bill issuance, but George considers it more likely that they allow Greece to fall into arrears at the IMF and the ECB makes a less binding increase in haircuts on ELA collateral, thus keeping the pressure on. One other point to note is that a number of reports have suggested that the IMF June payments could be bundled (for example in the Tovima report). George considers this unlikely and the IMF said yesterday that they have not been asked such a request from Greece, but it any case even if such an event materializes, it would only buy Greece a matter of a few weeks.

Ultimately the factors driving this still remain deeply political and the relative outcome paths are still far from certain. Importantly though, next Friday’s IMF repayment due provides a key date and by then we should have a decent idea of where things stand.

Back to markets yesterday, it was a softer day in equities as the initial China weakness and more Greece headlines reverberated. In the US the S&P 500 and Dow closed -0.13% and -0.20% respectively, while in Europe the Stoxx 600 (-0.50%), DAX (-0.79%) and CAC (-0.86%) all fell. Oil markets seemed to play their part dragging down energy and industrial names. Brent (+0.84%) and WTI (+0.30%) eventually finished up on the day at $62.58/bbl and $57.68/bbl, however both traded as much as 1.5% down intraday and in turn reached the lowest levels since April 15th. With WTI and Brent -2.1% and -5.4% MTD respectively, the recovery seems to have stuttered somewhat of late with US output in particular still at 30-year highs. A report on Bloomberg that the biggest US ETF that tracks oil is heading for the largest two-month outflow in six years will not have helped sentiment.

Over in Greece the ASE closed -1.69% to snap 2 consecutive days of gains, while Greek 2y and 10y yields were 27.5bps and 15.9bps higher respectively. Bond markets in Europe were mixed, influenced by the sentiment out of Greece. Core markets largely firmed with 10y Bund yields 2.4bps lower at 0.527%. Other core markets had similar gains while in the periphery Italy (+0.8bp), Spain (+3.6bps) and Portugal (+5.1bps) all ended higher. 10y Treasuries ended relatively unchanged on the day at 2.136% (+0.7bps) having traded in a fairly tight range. Indeed, yesterday’s data didn’t appear to offer too many surprises. Pending home sales for April rose +3.4% mom, ahead of expectations of +0.9% which helped push the annualized rate up to +13.4% yoy. Initial jobless claims (282k vs. 270k expected) meanwhile were solid if unspectacular and probably did little to sway payrolls expectations next week. The print did however mark the 12th consecutive week of a sub-300k reading.

Fedspeak yesterday was focused on the divergent views of Minneapolis Fed President Kocherlakota and St Louis Fed President Bullard. The latter suggested that holding off on a rate rise would be a ‘recipe for asset price bubbles and a lot of mischief to happen’, before going on to say that his base case is for liftoff sometime this year. That compares to a 2016 timeline for Kocherlakota, who said that he still needs more evidence that the labour market conditions are returning to their 2006 levels before the Fed should move.

Wrapping up yesterday’s data, Euro area economic confidence for May was slightly better than expected (103.8 vs. 103.5 expected) while the final consumer confidence reading was unchanged at -5.5. The German import price index was a tad better than expected (+0.6% mom vs. +0.5% expected) while in the UK the second reading of the Q1 GDP report confirmed the +0.3% qoq reading. 10y Gilts closed 5.8bps lower yesterday.

Looking at the day ahead now, the early data releases in Europe this morning include Euro area money supply, German retail sales and also French PPI and consumer spending. Italy Q1 GDP is also expected. Over in the US this afternoon, eyes will be glued to the second revision for Q1 GDP in the US with the market expecting the report to be revised down to -0.9% qoq from the initial +0.2% print. DB’s Joe Lavorgna is a little bit more skeptical and has a forecast of -1.0%. It’s quite interesting to see that there was a similar trend in Q1 2014 GDP when the initial +0.1% reading was then downgraded to -1.0% at the second revision and then finally revised down to -2.1%. With the seasonal adjustment weightings being revised in the summer the sting may be taken out of the print for now. Also in the US today, we’ve got the ISM Milwaukee, Chicago PMI and final University of Michigan consumer sentiment reading for May.

Source: zerohedge

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