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Europe Slides For Third Day As Oil Attempts A Rebound; US Futures Flat

Courtesy of ZeroHedge. View original post here.

US equity futures were marginally in the red, while Asian markets rose and European stocks dropped. WTI oil rose 0.6% to $42.79 as some suggest the time to go long has arrived; oil tumbled 2.3% in the previous session. The Bloomberg Dollar Spot Index fell 0.1 percent.

Here are the main market developments while you were sleeping.

In Asia, the MSCI’s index of Asia-Pacific shares ex-Japan climbed 0.6% but Japan’s Nikkei ended a touch lower as a stronger yen and a plunge in the shares of auto air bag-maker Takata Corp took a toll on sentiment. The kiwi jumped after RBNZ kept rates on hold and focused on the positive growth outlook. The yen gained for the third day, its longest winning streak since May, after dovish comments from the Fed’s Harker supported Treasury futures. Australian 10-year sovereign yield declines a basis point; ASX 200 stabilizes after two days of losses. the PBOC drained a net 80 billion yuan via open market operations; CNY drops for sixth straight day; the Shanghai Composite dropped 0.3% in a late day selloff after advancing 0.8% earlier, as the MSCI index inclusion is now just a memory. Still, the blue-chip CSI300 index rose to the highest level in 1-1/2 years. Dalian iron ore futures unchanged. Also in China, the onshore yuan falls for a sixth day, the longest stretch of losses in eight months, as China’s Yield curve steepened following longest-ever period of inversion. CNY edges 0.03% lower to 6.8319 per dollar, poised for sixth straight day of declines, the longest since Oct. 18;

In Europe, stock markets fell for a third straight day on Thursday, as a selloff in energy shares continued and miners resumed declines. Energy companies led the Stoxx Europe 600 Index lower by 0.2% as of 6:45am EDT, after crude Wednesday dropped further into a bear market.2 out of 19 Stoxx 600 sectors rise; insurance is the most active -0.7% on 120% 30-day average volume followed by retail -0.1% on 112% average volume; autos is the least active sector -0.3% on 72% average volume. 196 Stoxx 600 members gain, 388 decline

In the US, S&P futures fell 0.1 percent. The cash index fell 0.1% on Wednesday, with Exxon Mobil and Chevron hit hardest in the decline. The Nasdaq 100 Index climbed 1%, continuing its rebound from a two-week selloff.

Elsewhere, all eyes remain on oil, where prices tried to stage a modest rebound even as investors’ doubts that OPEC-led output cuts would dent a three-year glut offset data showing a drop in U.S. inventories. WTI was a touch higher at $42.79 after sliding 2.3% on Wednesday, touching the lowest price since August. Brent was also higher at around $45.22 but within striking distance of seven-month lows hit on Wednesday. Since peaking in late February, crude has dropped over 20%, with only brief rallies, completely erasing gains at the end of the year in the wake of the initial OPEC-led production cut. OPEC and its allies focused on rising output from Libya and Nigeria, rather than deeper cuts, at a meeting in Vienna. Tropical Storm Cindy makes landfall near Texas-Louisiana border, disrupting energy shipments. OPEC: Talks this week in Vienna between OPEC and non-OPEC producers said to highlight rising Libyan and Nigerian production. There was no serious discussion of making further production cuts, according to delegates; while the option came up briefly, no numbers were mentioned.

“After the massive price drops in the last days we are asking ourselves how far this excessive pessimism goes on,” says Eugen Weinberg, head of commodities research at Commerzbank. “The market has seemed to ignore positive news in the same way it ignored negative news earlier in the year”  and says today’s gains likely result of traders focusing on inventory data and changes in Saudi leadership, both of which he perceives as bullish.

“In a longer-term perspective current levels are attractive,” though prices likely to remain under pressure in short-term.

“The time for contrarian trades in oil is fast approaching, but I would want to see some stability in price and the technicals start to become more convincing,” said Chris Weston, chief market strategist at IG in Melbourne.

“As far as the market mentality is concerned, as long as the oil price keeps weakening, this is going to tell us something about the underlying capacity of the global economy to generate inflation on a sustained basis,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

In rates, the gap between yields on U.S. five-year notes and 30-year bonds flattened to 95 bps, its narrowest since December 2007. As Gundlach explained on Wednesday, a flattening yield curve is often viewed as a negative economic indicator as it shows concerns about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.     The yield on 10-year Treasuries fell one basis point to 2.15 percent. Yields on European government bonds were broadly lower, with benchmark gilts in the U.K. falling two basis points and those in France and Germany slipping one basis point.

In currency markets, the New Zealand dollar gained 0.5 percent to $0.7257 after the central bank held official cash rates at record lows but sounded less dovish than bears in the market had wagered on. The U.S. dollar eased against the Yen, while the dollar index was roughly flat at 97.54, having retreated from a one-month high of 97.871 set on Tuesday. The euro EUR was also flat at $1.1167, after Wednesday’s 0.3 percent gain. The weaker dollar lifted spot gold 0.6% to $1,253.20 an ounce

Central Banks remained on hold:

Norway’s Norges Bank kept rates at 0.50% as expected. The Executive Board’s current assessment of the outlook and the balance of risks suggests that the key policy rate will remain at today’s level in the period ahead,” says Governor Oystein Olsen.

RBNZ kept the OCR Unchanged at 1.75% as expected and said that policy is to remain accommodative for some time. RBNZ also commented that uncertainties remain and that policies may need to adjust accordingly, although it was upbeat on the economy as it stated that the outlook for domestic economic growth remains positive and that changes announced in the 2017 budget should support growth.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,430.25
  • STOXX Europe 600 down 0.2% to 387.68
  • MXAP up 0.4% to 155.06
  • MXAPJ up 0.4% to 504.07
  • Nikkei down 0.1% to 20,110.51
  • Topix down 0.07% to 1,610.38
  • Hang Seng Index down 0.08% to 25,674.53
  • Shanghai Composite down 0.3% to 3,147.45
  • Sensex up 0.5% to 31,449.47
  • Australia S&P/ASX 200 up 0.7% to 5,705.95
  • Kospi up 0.5% to 2,370.37
  • German 10Y yield fell 1.1 bps to 0.254%
  • Euro down 0.04% to 1.1163 per US$
  • Italian 10Y yield fell 0.2 bps to 1.618%
  • Spanish 10Y yield fell 0.5 bps to 1.365%
  • Gold spot up 0.4% to $1,251.87
  • U.S. Dollar Index down 0.03% to 97.53

Bulletin Headline Summary from RanSquawk

  • EU bourses trade lower, weighed upon by energy prices, particularly Oil, where global supply concerns continue
  • GBP is struggling for direction as traders do not know how to take the latest developments surrounding fresh challenges to Theresa May’s approach to EU negotiations.
  • Looking ahead, highlights include US weekly jobs and Fed’s Powell

Top Overnight News

  • Norway’s central bank signaled that it has finished cutting interest rates amid signs the economy weathered the collapse of its oil industry over the past three years
  • New Zealand’s central bank kept interest rates at a record low and indicated it won’t raise them anytime soon
  • The European Central Bank won’t overhaul or substitute Euribor, insisting instead that the financial industry take the lead, according to a euro-area official familiar with the matter
  • Bank of Japan Deputy Governor Kikuo Iwata says it’s better for the central bank to keep its rough guideline for the pace of increasing its JGB holdings
  • The Conservatives and Democratic Unionist Party are close to a deal to keep U.K. Prime Minister Theresa May in power, senior figures on both sides signaled
  • Yellen’s candidacy for another term is encountering resistance from some Trump administration advisers who want a new leader at the U.S. central bank, according to two administration officials, even as the Treasury secretary indicated she may still be in the running
  • Fed’s Harker says ’prudent’ to pause on the next rate increase
  • Germany’s May tax revenue rises 1.4%, economy in ’solid upturn’: Finance Ministry
  • BOJ’s Iwata says too early to hike rates, risks are skewed to the downside
  • PBOC won’t unwind balance sheet like Fed, adviser says: Securities News
  • RBNZ keeps rates unchanged, policy to remain accommodative for considerable period
  • Global Bank-Capital Talks Falter as Germany Hardens Dissent
  • Boeing Wins $14b Commitment for 125 737 Max 8 Airliners
  • Saudi Gain Is Loss for Qatar Reeling From $13 Billion Slump
  • Bonds Get Junkier, Yields Fall and Funds Don’t Seem to Mind
  • Berkshire Hathaway Invests in Embattled Lender Home Capital
  • Alibaba To Sell Shipment of U.S. Beef in China on Virtual Mall
  • Uber’s Hired Forensics Firm Must Reveal Downloaded Waymo Files
  • Braskem Approves New Plant in Texas With $675m Investment
  • Altice USA IPO Prices 63.9m Shares at $30: IPO Boutique
  • Caterpillar Shares Dragged Down by Oil as Energy Outlook Dims
  • House Armed Services Panel Adopts Measure Backing Key Weapons

In the US, Republican leaders in the Senate are set to unveil a closely held plan to replace Obamacare today that includes a longer transition period than a House-passed bill, though there’s no indication they have enough support for it to pass in a vote that could come as early as next week. US policymakers are set to offer Congress means to ease regulations of banks, according to a testimony released yesterday.

In Asia, stocks were mostly higher after the region gradually shrugged-off an indecisive tone which lingered from Wall Street where energy dragged the majority of indices lower, but the Nasdaq deviated from its peers amid tech strength. This initially saw a lack of unison in the region, although sentiment eventually picked up with ASX 200 (+0.75%) the outperformer amid a rebound in financials and basic materials, while Nikkei 225 (-0.1%) traded choppy with upside capped by a firmer JPY. Shanghai Comp. (-0.3%) and Hang Seng (flat) initially conformed to the improved risk-tone despite the PBoC keeping liquidity operations to a minimal, as some reports suggested that liquidity in the banking sector was very high due to recent fiscal expenditure. However, gains were trimmed heading into their respective closes. 10yr JGBs were marginally lower amid an improvement in risk appetite and reduced demand at today’s enhanced liquidity auction for longer dated bonds. In addition, the latest weekly securities transactions data also showed foreign investors turned net sellers of Japanese bonds in the prior week.

Top Asian News

  • CBRC Said to Ask Banks to Provide Details on Wanda, Fosun Loans
  • Tesla Signs Framework Agreement With Shanghai Lingang Govt: 21st
  • Shell in Talks With ONGC to Collaborate on Enhanced Oil Recovery
  • India’s Modi to Discuss Visas With Trump During U.S. Visit
  • China Tower Said to Pick CICC, Goldman Sachs for $10 Billion IPO
  • China’s MSCI Rally Fizzles as Billionaire Rout Highlights Risks
  • India’s Nasscom Sees FY18 Outsourcing Revenue Growth 7-8%
  • Australia’s Biggest Banks Blindsided by Another New Tax Demand

In Europe, markets trade with subdued behaviour as the quiet week begins to edge to a close, the UK continues to take centre stage, with PM May facing a constitutional crisis after Labour and the Liberal Democrats threatened to use the House of Lords to water down Brexit. EU bourses trade lower, weighed upon by energy prices, particularly Oil, where global supply concerns continue. Reports yesterday stated that three OPEC delegates reject the idea of deeper production cuts, as referenced by Iran OilMin Zanganeh, further one OPEC delegate doesn’t think OPEC would agree to deeper cuts unless Iran is included. The comments resulted in Brent to trade through USD 45.00/bbl for the first time this year. Fixed Income markets trade marginally higher, amid the risk tone. It is worth noting that there has been a steady rally in BTPs, with the coupon being the noticeably strengthening paper. Gilts have also been bid, as they slowly recover following Haldane’s hawkish comments yesterday, and the Sep’17 future looks to retest 128.60 – 70, the current long-term range high.

Top European News

  • Nomura Said to Choose Frankfurt as EU Base Following Brexit
  • Europe’s Next Housing Boom Raises Red Flags in Ex- Communist East
  • ECB Says Substantial Stimulus Still Needed: Economic Bulletin
  • Novartis Drug Shows Unlikely Heart Benefit, Blockbuster Promise
  • European Coal Rally Poised to Fizzle Out as Production Rises
  • Norges Bank Abandons All Talk of Easing as Oil Crisis Fades
  • Swiss Watch Exports Jump Most in Four Years on Asia Recovery
  • Imagination Soars as Buyer Interest Spurs Formal Sale Talks

In currencies, it has been a very quiet morning with all the major currencies holding tight ranges in familiar territory. After the RBNZ, traders have been trying to extend the favourable outlook from the central bank through NZD/USD and AUD/NZD, pushing on key resistance levels at 0.7270 and 1.0380 respectively, but with limited success as yet. There is little reason to reverse these moves in the interim, so the grind higher looks set to continue. GBP is struggling for direction as traders do not know how to take the latest developments surrounding fresh challenges to Theresa May’s approach to EU negotiations. On the one hand, we have the prospect of a softer Brexit ahead, but on the other, is tempered by the overall uncertainty factor. Heavy congestion in the mid 1.2600′s in Cable, but EUR/GBP is grinding higher again to set up another challenge on the upper 0.8800′s. Tight trade in EUFt/USD and USD/JPY is purely reflective on the mixed messages on the US rate path, with the more optimistic/hawkish Yellen and Dudley met with scepticism and more relaxed tone by Messrs Evans, Harker and Kaplan.

In commodities, there is no escaping the rout in Oil price as the concerns over supply have been overrun by US production levels on the rise. Their drive towards self-sufficiency also has implications for the demand side economics, so this combined impact has driving WTI ever closer to the USD40.00 mark which will surely crank up the (attempted) verbal interventions from the major producers led by OPEC. Lows ahead of USD42.00 seen so far, but no sign of a bounce. Elsewhere, base metals are showing some resilience again. Copper has moved up to USD2.60+ levels, but we saw strong resistance at these levels last time around. Zinc is the outperformer on the day and is 2.0% up on the day. Gold has recovered back above USD1250.00, in line with the downturn in the USD.

US event calendar

  • 8:30am: Initial Jobless Claims, est. 240,000, prior 237,000; Continuing Claims, est. 1.93m, prior 1.94m
  • 9am: FHFA House Price Index MoM, est. 0.5%, prior 0.6%
  • 9:45am: Bloomberg Consumer Comfort, prior 50; Economic Expectations, prior 49.5
  • 10am: Leading Index, est. 0.3%, prior 0.3%
  • 11am: Kansas City Fed Manf. Activity, est. 8.5, prior 8

DB’s Jim Reid concludes the overnight wrap

The main story in markets over the last 24 hours has again been the beating drumof falling Oil prices. Brent (-2.61%) fell below $45/bbl yesterday and joined WTI (-2.25%) in falling into a bear market having slid 21% from its highs of over $56/bbl back in February. WTI is now down 22% from the February highs based on closing prices and a little over 23% based on intraday prices. Oil had actually bounced higher yesterday afternoon and traded up as much as +1.50% but then reversed nearly 5% off its highs to hit its lows for the session in the early evening. Yesterday’s better than expected EIA data failed to provide the helping hand the Oil market needed with the market continuing to question the response, or lack of it, from major producers in providing the cutbacks needed. Indeed Oil is now back to the lowest level since August 10th and a quick refresh of the analysis we did yesterday shows that WTI has only ever traded lower than this on 5% or 168 days since the start 2005 (most of which came in 2008/09 and 2015/16). So as we noted yesterday, these are pretty stressed levels relative to the last twelve and a half years.

Anything energy related was hit pretty hard yesterday. EM currencies were big underperformers while the S&P 500 energy sector fell -1.60% and has now declined -3.49% this week. However some support from the tech (Nasdaq +0.74%) and healthcare sectors did help to offset the move for the broader S&P 500 which helped it finish only a smidgen lower (-0.06%) by the closing bell. Europe was softer too (Stoxx 600 -0.18%) although the move in Oil was mostly felt after markets on the continent had closed. Perhaps the most notable standout yesterday was the underperformance for US credit and particularly HY. CDX IG was 1.3bps wider while CDX HY was 12bps wider and is now at the widest level since mid-April. The two big HY ETF’s also had their worst days in three months. Meanwhile US HY energy cash spreads leaked 21bps wider yesterday and are now 46bps wider in the last two days and 82bps wider in June to date. The current spread level of 531bps is also easily the widest this year although the extent of the recent move is worth putting in some context relative to the 2016 sell-off when spreads blew out as wide as 1932bps (from about 650bps prior to the sell-off). It’s worth watching but we are a long way away from the stress levels of just over 12 months ago.

The other big story for markets yesterday was the hawkish comments from BoE Chief Economist Andy Haldane. He said that “the risks of tightening too early have shrunk as growth and, to a lesser extent, inflation have shown greater resilience than expected”. In terms of what this means for policy Haldane said that “provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent into the second half of the year”. Gilt yields spiked higher on the comments with 2y yields in particular darting up over 7bps to finish at 0.193%. 10y yields finished a little under 4bps higher at 1.029% while Sterling was at one stage up as much as +0.96% from its intraday lows before settling up +0.33% at $1.267.

Remember that Haldane’s comments follow a slightly more hawkish BoE statement last week and then a much more dovish Carney on Tuesday. Deciphering BoE communication is becoming a bigger challenge  and there is little doubt that there is disagreement within the committee. Indeed it’s becoming clearer that one can no longer consider Carney as representing the centre of the committee given all the recent talk. So this is causing a bit of debate about the UK’s policy outlook for the rest of the year and it’s perhaps not ironic that all this comes as the first week of the still very early stage Brexit negotiations get underway with only small snippets of information so far being released with the much more material updates still to come. On that PM May suggested yesterday that Scotland could get a separate vote on Brexit law with officials in talks over whether the Scottish Parliament will be legally required to give consent on the Repeal Bill. This followed a mostly uneventful Queen’s Speech while there was no further update on the Conservatives-DUP talks although the BBC ran a story yesterday suggesting that the DUP is seeking £2bn in health services and infrastructure projects in Northern Ireland as part of a parliamentary deal, suggesting a still tough negotiating stance.

Meanwhile over at the Fed there was a bit of focus on comments from Philadelphia Fed President Harker in an interview with the FT. Harker argued that it might be prudent to “pause on the next rate increase” while forging ahead on balance sheet reduction. He also said that unwinding the balance sheet could begin in September however “I wouldn’t want to do it if we are starting to see further erosion of inflation and other negative economic data”. Treasuries weren’t hugely moved by the comments with the 10y consolidating around 2.164%. This morning in Asia the lack of any further declines for Oil appears to be helping to support a modest rebound for most equity markets in the region. The Hang Seng (+0.44%), Kospi (+0.29%) and ASX (+0.80%) are all up while in China, having joined the MSCI club, the CSI 300 (+1.04%) and Shanghai Comp (+0.76%) have bounced for the second consecutive day. Markets in Japan are little changed with the Yen strengthening this morning.

Wrapping up, in terms of yesterday’s economic data, in the US we learned that existing home sales climbed +1.1% mom in May which was a beat compared to market expectations for a small decline.  Meanwhile in the UK a public sector net borrowing requirement of £6bn in May was a little smaller than expected but left the 12-month running deficit essentially unchanged.

Looking at the day ahead, this morning in Europe we’ll be kicking off in France where we are due to receive various June confidence indicators before the UK then releases the latest CBI business survey results for June. In the afternoon we’ll then get the flash consumer confidence reading for the Euro area in June. In the US the data includes initial jobless claims, FHFA house price index, conference board’s leading index and Kansas City Fed’s manufacturing activity index. Away from the data the Fed’s Powell is scheduled to speak before the Senate Banking Committee at 3pm BST while the BoE’s soon to depart Kristin Forbes also speaks this evening. The other event to keep an eye on today is the start of the two-day EU leaders’ summit in Brussels.

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