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“Goldilocks Is Back”: Futures Spike As Dollar Tumbles; Curve Flattening Accelerates

Courtesy of ZeroHedge. View original post here.

Following several days of torrid newsflow, which markets digested without a glitch and continued their recent grind higher, the overnight session has been relatively quiet, and while trading was subdued post the European open, a burst of buying was observed in generally illiquid conditions as US traders walked in, sending S&P futures sharply to session highs as volatility continues to dip with the VIX now erasing its elevated level seen in 1Q.

Global equities are generally in the green this morning, with some exceptions across Europe.

There was no immediate catalyst for the move, although an acceleration in the slide of the dollar may have been the catalyst: after hitting a 2018 high on Wednesday, the BBDXY has been sliding since, dropping the most since March on Thursday, and then once again accelerating on the downside during the overnight session.

Aside from the recent burst in US buying, it was a lackluster European session as most markets drift with little momentum; earlier Asian stocks jumped after a disappointing US CPI print eased some pressure from the Fed to step up the pace of monetary tightening. 

Europe's Stoxx 600 Index erased an early advance, as a result of the sharp jump in the EURUSD this morning pressuring European exporters, although the index is still headed for its seventh week of increases, the longest streak in more than three years. In addition to exporter weakness, declines in the healthcare sector weighed on by a string of negative drug-trial results offset gains for basic resources as commodities, and oil in particular, continued to rise. After yesterday's drubbing, Italian banks were supported by good earnings from Monte Dei Paschi (+13.5%),

As Bloomberg notes, investors have been weighing most recent economic data releases to judge the most likely path for global interest rates: in this regard Thursday’s U.S. CPI miss, which came as U.K. money markets priced out a hike this year after the Bank of England forecast slower price rises, suggests fears about accelerating tightening may have been premature, which in turn reincarnates the goldilocks "buy everything" thesis. Comments from European Central Bank Governor Mario Draghi at a conference in Italy will be the focus later.

Easing geopolitical fears also helped, and aided gains in Asian stocks after Trump and Kim set for their landmark meeting in Singapore on June 12. Meanwhile, Malaysian assets trading offshore began to stabilize after the shock election win for the opposition. Emerging-market stocks headed for the best week since February and most developing-nation currencies extended a rebound from the past month’s selloff, thanks to the sharp move lower in the dollar in the past 2 days.

While 10-Year TSY yields remained below 3%, the continued flattening in the curve after yesterday's unexpectedly strong 30Y auction has put some traders on edge: this morning the 5s30s curve has flattened to the lowest level since August 2007, breaking 30bps to trade at 27bps now, a level technicians have predicted would lead to an acceleration in the move, especially if some of the record short overhang decides to finally cover. Meanwhile, 10s30s swaps are on the verge of inversion with the move continuing in Europe trading.

Some believe it's only a matter of time before yields and the dollar resume their rise: the "mismatch between higher U.S rate differentials and a weaker USD is starting to reverse," as the Fed looks likely to match its “dots,” while other central banks across G-10 face challenges to begin or extend their tightening process, David Bloom and Paul Mackel, strategists at HSBC Holdings. Needless to say, unless US yields resume their move higher, dollar gains may be capped for the time being.

And with the dollar sliding, WTI found new bids this morning, now on the verge of $72, and heading for a second week of gains after the U.S. pulled out of the Iran nuclear deal.

In metals, gold is currently trading flat on the day, with aluminum witnessing a slide for the second session in a row. Copper also slipping on the day, after peaks on Thursday due to shortened inventories, but still set to close positively for the week. Steel in the green for the day on growing Chinese demand.

In geopolitical developments, the 5 Star Movement and League government may be formed next week, and the parties will pass a flat tax and citizens income in 2019. Meanwhile, a top 5 Star member said the next Italian PM could be an independent figure who is not part of either 5 Star or League.  Elsewhere, Iran Foreign Minister Zarif is to meet with Chinese Foreign Minister Wang on Sunday, Russian Foreign Minister Lavrov on Monday and EU officials on Tuesday to discuss preserving nuclear agreement.

Ten companies are on the earnings list on Friday, while macro investors can look forward to Michigan sentiment and data on import and export price indexes.

Bulletin Headline Summary from RanSquawk

  • Major FX pairs trading within short ranges. EM currencies finding some respite
  • European bourses flat on thin news flow ahead of the weekend
  • Looking ahead, highlights include Canadian jobs report, Uni of Michigan, Baker Hughes, Fed’s Bullard and ECB’s Draghi

Market Snapshot

  • S&P 500 futures up 0.3% to 2,726.25
  • STOXX Europe 600 down 0.01% to 391.95
  • MXAP up 1% to 175.74
  • MXAPJ up 0.9% to 573.81
  • Nikkei up 1.2% to 22,758.48
  • Topix up 1% to 1,794.96
  • Hang Seng Index up 1% to 31,122.06
  • Shanghai Composite down 0.4% to 3,163.26
  • Sensex up 0.4% to 35,382.05
  • Australia S&P/ASX 200 down 0.04% to 6,116.19
  • Kospi up 0.6% to 2,477.71
  • German 10Y yield fell 1.4 bps to 0.543%
  • Euro up 0.07% to $1.1923
  • Italian 10Y yield rose 5.2 bps to 1.678%
  • Spanish 10Y yield fell 2.0 bps to 1.293%
  • Brent Futures unchanged at $77.47/bbl
  • Gold spot up 0.1% to $1,323.34
  • U.S. Dollar Index down 0.02% to 92.63

Top Overnight News from Bloomberg

  • Trump: Administration will have “great health plans” coming out within four weeks; plans to release a proposal to bring down U.S. drug prices
  • BOE’s Broadbent: 1Q weakness partly due to weather, still seen as temporary
  • Corriere: if Five Star/Northern League talks go well, new government would be sworn in by end of next week
  • As President Trump games out a historic summit with North Korea’s Kim Jong Un in Singapore next month, he is gambling he can construct a complicated pact to dismantle Pyongyang’s nuclear program. This is even though Trump’s track record shows he’s better at breaking than making deals
  • The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record bond auction bolstered investor confidence in owning long-dated securities
  • The global backlash against wages and migrants has hits the heart of Europe with Italy’s anti-establishment Five Star Movement and anti-immigrant League now taking until Monday to finish their plan to form a government in Rome
  • Russia’s president, Putin said a “break” from the dollar is necessary to bolster the nation’s “economic sovereignty,” especially in light of recent penalties. But data show his central bank’s dollar reserves are rising, while the euro’s share is sliding
  • Mark Carney’s window to raise interest rates before Brexit is closing. As the U.K. draws nearer to its divorce from the EU at the end of March with little certainty as to the economic repercussions, BOE policy makers with a benchmark interest rate of just 0.5 percent could be left with limited room to cut should they need to act
  • Emerging markets with the weakest financial metrics, especially those with high inflation, tend to be the worst affected by U.S. interest-rate shocks, according to a study by Federal Reserve Board economists
  • The lightest part of the refinery barrel may be the hardest hit by U.S. sanctions on Iran. Asian buyers have been scrambling to get both condensate and naphtha this year amid speculation that Iran sanctions will be renewed
  • Former U.K. Prime Minister John Major said Theresa May’s quest for a post-Brexit alternative to the European Union’s Customs Union that provides for frictionless trade is one that’s doomed to fail
  • United Nations Secretary-General Antonio Guterres said he’s optimistic that the U.S. and North Korea can reach a historic nuclear deal, crediting a toughened sanctions regime pushed by President Donald Trump at the UN Security Council for the isolated country’s willingness to negotiate
  • The U.K. government has asked business groups to map their supply chains to flag the areas of the economy most at risk if Brexit imposes additional trading costs on exporters, two people familiar with the matter said
  • Squeezed by ever-expanding U.S. sanctions, Vladimir Putin says he wants to dump the dollar. His central bank has been doing just the opposite

Asian stocks traded mostly positive after sentiment rolled over from the US where soft CPI data spurred hopes the Fed may have to slow the pace of hikes, while all sectors in the S&P 500 finished in the green with gains led by tech, telecoms and pharmaceuticals, which in turn underpinned NDX outperformance. ASX 200 (+0.2%) and Nikkei 225 (+1.0%) were positive with earnings also a key driver of price action and the top performing stocks in Japan spurred by corporate updates including KDDI, Panasonic and Suzuki. Hang Seng (+1.5%) and Shanghai Comp. (-0.2%) were mixed as Hong Kong sustained its outperformance streak, while the mainland lagged after the PBoC refrained from open market operations and widened the amount of liquidity it drained for the week. Finally, 10yr JGBs were quiet amid similar flat trade witnessed in T-notes and heightened appetite for riskier assets, while the BoJ’s rinban announcement also failed to spur demand with the amounts kept unchanged and at paltry JPY 285bln total for the day. PBoC skipped open market operations for a net weekly drain of CNY 140bln vs. last week's net drain of CNY 110bln.

Top Asian News

  • Hong Kong 1Q GDP Expands 2.2% Q/q; Est. 0.8%
  • Q Technology Slumps by Record After Warning Its Profit May Halve
  • Singapore Regulator Fines Ex-Genting Exec for Insider Trading
  • Sri Lanka Holds Benchmark Rates as Consumer Prices Ease

European equities are mixed (Eurostoxx 50 -0.2%) with the exception of Spain’s IBEX (+0.2%). Looking at the sectors, health care is a noticeable underperformer amid negative drug updates from AstraZeneca (-0.3%) and Roche (-1.7%), subsequently dragging other health names across Europe (Novartis -0.7%, GSK -0.8%, Merck -0.9%) in sympathy. On the flip side, material names outperform following strong earnings from the world’s largest steelmaker ArcelorMittal (+1.7%) as it lifts the likes of Thyssenkrupp (+1.2%) with it. Elsewhere, Sika (+10%) rose to the top of the Stoxx 600 after striking a deal with France’s Saint Gobain (+2.4%) who are also seen higher on the news

Top European News

  • Silver Lake Agrees to Buy Property Portal ZPG for $3 Billion
  • Sika, Saint-Gobain Reach Deal to End Bitter Takeover Battle
  • Interserve’s Woes Deepen as U.K. Watchdog Opens Probe
  • AstraZeneca’s Fasenra Fails in Trial of Severe Lung Disease

In FX, the Greenback is down vs G10 rivals and the index rangebound between 92.630-840 after its retracement from new ytd highs just shy of 93.500 to around 92.500 in wake of some softer than expected components in the latest CPI release and ahead of more price indicators via import/export data and inflation expectations in the Michigan survey. AUD: A marginal outperformer, with Aud/Usd back up near 0.7550 and Aud/Nzd seemingly forming a more solid base above 1.0800. No lasting adverse effects on the back of weak housing data overnight as the broader risk tone remains relatively positive, while OTM option bids and hedge fund buying interest has been reported on dips;  GBP/EUR/JPY/CHF: All slightly stronger vs the Dollar, with Cable sustaining recovery gains above 1.3500 in consolidative trade after initial post-BoE super Thursday losses and getting another M&A boost from US-based Silver Lake’s purchase of Zoopla (Gbp2.2 bn deal). Eur/Usd looks hemmed in between 1.1900-50 amidst heavy expiry option interest at either strike and 1.1925 (3.8 bn in total) and awaiting a speech from ECB President Draghi. Usd/Jpy has retreated a bit further from recent 110.00 or so multi-top peaks, but appears supported just ahead of 109.00, while Usd/Chf has also slipped back towards the base of a 1.0000-50 band after briefly touching parity on Thursday.

In commodities, oil is seeing profit taking heading into weekend as both WTI and Brent come off of recent highs, currently both down 0.3% and 0.1% respectively with newsflow relatively muted ahead of today's Baker Hughes rig count. In the metals scope, gold is currently trading flat on the day, with aluminium witnessing a slide for the second session in a row. Copper also slipping on the day, after peaks on Thursday due to shortened inventories, but still set to close positively for the week. Steel in the green for the day on growing Chinese demand.

US Event Calendar

  • 8:30am: Import Price Index MoM, est. 0.5%, prior 0.0%; Import Price Index ex Petroleum MoM, est. 0.2%, prior 0.1%

    • Export Price Index MoM, est. 0.35%, prior 0.3%; Export Price Index YoY, prior 3.4%
  • 10am: U. of Mich. Sentiment, est. 98.3, prior 98.8; Current Conditions, prior 114.9; Expectations, prior 88.4

    • U. of Mich. 1 Yr Inflation, prior 2.7%; U. of Mich. 5-10 Yr Inflation, prior 2.5%

DB's Jim Reid concludes the overnight wrap

So populism is back. The people have spoken and will continue to do so in Europe over the next 36 hours. Many behind the scenes deals will be struck and old tensions will resurface. Political bloc voting will dominate as will glitter! Yes tomorrow sees the 63rd annual Eurovision Song Contest – the largest singing (if you can call it that) competition in the world and one watched by hundreds of millions of people on TV worldwide.

It seems like the favourites are Cyprus, Norway and Israel. I’ve seen Cyprus’s entry and it reminds me of being in Ibiza circa 1992. The lead singer has very very big hair and a tight five piece dance troop behind her. In fact as I was watching I was petrified that one of the dancers would be slightly out of sync as slipping one beat behind could ensure being lassoed by the singer’s hair and having their eye taken out. Anyway one to watch if you have nothing better to do tomorrow night across Europe (and Australia).

Staying with the popular vote, it’s looking increasingly likely that Northern League and Five Star will form an anti-euro, anti-austerity full on populist coalition in Italy perhaps over the weekend, per Bloomberg. This is a pretty monumental political moment but its impact is likely more slow burning than immediate. In terms of implications, the shock value has been limited by the fact that neither campaigned to leave the Euro. However their fiscal pledges – if pursued – will put them on a collision course with the EU as will their desire to reverse pension and labour market reforms. So we’ll see if they can make good on their populists promises or whether they get watered down by the realities of power. It will also be interesting to see how it politicises the ECB end of QE decision. So lots to consider.

See DB’s Clemente De Lucia note from last night for more info (Link). For now, Italian risk is a bit soft. The MIB -0.96% underperformed a risk-on market yesterday and BTP 10yr yields rose +5.2bp on a day of falling yields (US 10yr -4.2bps) due to soft US inflation and a BoE hold that clearly wasn’t fully priced into 10yr Gilts (-2.7bps).

The core US CPI was on the softer side in April at +0.1% mom (vs. +0.2% expected). The unrounded number was +0.098% so it was also a genuine miss as opposed to just rounding. The monthly reading also meant that the annual rate remained unchanged at +2.1% yoy after expectations were for a lift to +2.2%, while the 6-month annualized rate nudged down to +2.35%. The details of the data showed that weakness was fairly broad based across core goods and core services with the biggest declines coming in airfares and car inflation. It’s worth noting that following the average hourly earnings miss in last week’s payrolls report, that now means that we’ve had two softer than expected US inflation prints in close succession. Combined with the healthcare component of the PPI on Wednesday, the read through for core PCE also looks soft for later this month. We still think higher inflation is inevitable in the US this year but there’s no doubt that the last week increases the risks to our view.

The weaker inflation helped risk and reduce vol with all US bourses ending higher (S&P +0.94%, Dow +0.80%; Nasdaq +0.89%). The S&P is now at the highest since mid-March, with all sectors up yesterday and gains led by the telco, utilities and tech stocks. Apple’s share price rose +1.43% to a record high while the VIX is below its 200 days moving average for the first time since mid-January.

In Europe, the DAX (+0.62%) and FTSE (+0.50%) also firmed but the Stoxx 600 dipped -0.12%, weighed down by the Italian MIB (-0.96%) as Italy’s Five Star and League parties said they’ve taken “significant steps forward” to form a  new government.

In FX, the USD dollar index pared back losses to end -0.42% lower while the Euro jumped 0.54%. The Sterling fluctuated within a 1.2% intraday range before closing -0.21% lower after the dovish BOE meeting. Emerging markets benefited from the USD weakness and risk on tone too, with the 10y bond yields for Turkey (-12bp), Argentina (-20bp) and Russia (-23bp) all down. In commodities, WTI oil firmed +0.31% while precious metals also advanced (Gold +0.68%; Silver +1.38%).

This morning in Asia, markets are following US markets higher with the Nikkei (+0.90%), Kospi (+0.61%) and Hang Seng (+1.28%) all up, while the Shanghai Comp. is down -0.13%. Elsewhere, President Trump has confirmed that he  and North Korea’s Kim Jong-Un will meet in Singapore on 12 June and he has high hopes of “doing something very meaningful” on denuclearisation.

Moving back to the BoE yesterday. The bank kept rates on hold as widely expected, but the vote was not unanimous (7-2), with both Saunders and McCafferty dissenting as they did in February. Our UK economists noted that the meeting brought out mixed messages from the BoE. On the one hand, the Bank retained its hawkish rhetoric by remaining relatively upbeat in its forecasts for growth in the medium term and likened the weakening in Q1 to noise.

Furthermore, the Bank was relatively sanguine on the softer wage growth to date emphasizing the continued erosion in slack, which will lift inflation in the forecast horizon. On the other hand, the BoE revised down its inflation forecasts both in the short and medium term, while reducing growth this year by 40bps. Later  on, BoE’s Carney told the BBC that a rate hike was “likely by the end of the year”. Following all the above, the Bloomberg implied odds of a rate hike in the August meeting fell 12ppt to 42%. Overall, our UK team noted that given the lower urgency for a rate hike due to the need for "limited tightening" over the forecast horizon, they see an increase in rates contingent on growth bouncing back and negotiations on the Brexit front staying positive, while their call for an August rate hike stands.

Turning to US equities, DB’s Binky Chadha noted that equity markets are broadly flat post corporate results despite reporting the strongest earnings session in 8 years as investors’ focus shifts to rising cost pressure and its impacts on margins. He argued that cost pressures do not rise in isolation. Corporates respond through pricing and productivity measures, which combined with operating leverage to sales growth have historically more than offset rising costs. Overall, his team see the recent rise in cost pressures as a natural late cycle phenomenon while corporates can employ several levers in response as they have done historically. They believe that its much too early to be pricing in peak earnings and reiterate their S&P target of 3,000 by the end of 2018 (+10% from current levels)

Our European equity strategist Sebastian Raedler highlights that European equities have rebounded by 8% since late March even as European growth momentum has continued to soften. The main reason for the rebound is the weakness in the euro, with the EUR/USD falling by 5% over the same period. The team sees only marginal further EUR downside over the coming months however, in line with our FX strategists’ tactically neutral stance. In combination with the assumption of a continued fade in the Euro area PMI, this would imply a level of around 390 for the Stoxx 600 by end-Q2 (in line with current levels) before a decline to below 360 by end-Q3 (8% below current levels). The main upside risk for European equities is a further fall in the EUR. If the EUR/USD were to decline below 1.10, as implied by the recent moves in Euro area versus US PMIs, this would push up the implied fair-value for the Stoxx 600 to 415 by early Q3 (6% above current levels).

Before we take a look at today’s calendar, let’s wrap up with other data releases from yesterday. In the US, the weekly initial jobless claims (211k vs. 219k expected) and continuing claims (1,790k vs. 1,800k expected) were both lower than consensus. The four week moving average for the former is now the lowest for 49 years. Elsewhere, the April monthly budget surplus was slightly above expectations ($214bln vs. $212bln expected) and also the highest monthly print on record.

In the UK, the March IP was below consensus at 2.9% yoy (vs 3.1% expected) while manufacturing production was in line at 2.9% yoy. The March trade deficit widened more than expected to -£3.1bln (vs. -£2bln), partly due to a stronger rebound in imports. The RICS house price balance fell to -8 in April, which is the weakest since November 2012. On balance, surveyors expect prices to continue to decline over the next three months despite fewer reporting declining buyer interest. Finally, Italy’s March IP was above expectations at 1.2% mom (vs. 0.5%).

Looking at the day ahead, the only significant data coming from the US will be the April import price index and preliminary May University of Michigan consumer sentiment report. Elsewhere, the Spanish April CPI print is also due. ECB President Draghi will address an audience at the ADEMU conference in Florence.

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