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Futures Reverse Overnight Losses On Fresh “Reopening Hopes” As Euro Tumbles

Courtesy of ZeroHedge View original post here.

After some early jitters sent S&P futures sliding on Tuesday evening, the E-mini rebounded over 1% and traded near yesterday's session highs after President Donald Trump pushed again to reopen the economy warning that it would lead to deaths, while stocks in Europe turned higher despite mixed earnings, doubts about the easing of coronavirus lockdowns and simmering U.S.-China tensions, not to mention dismal economic data. Contracts on all three major American equities gauges rose as did the dollar while Treasuries edged lower, and oil traded unchanged after yesterday's tremendous rally.

The S&P 500 on Tuesday saw a gain of almost 2% cut in half in the last hour of trading after Fed Vice Chairman Richard Clarida warned the economy will need more government support. Walt Disney fell in after-hours trading, becoming the latest firm to detail the severity of the pandemic’s impact on its business. General Motors reported earnings that while a big drop from a year ago, beat on the top and bottom line.

Separately, President Trump said Tuesday Americans should begin returning to their everyday lives even if it leads to more sickness and death. Meanwhile, data from Germany provided further evidence of the pandemic’s devastating effect, as new cases in the euro area’s biggest economy rose ahead of talks on easing restrictions. Traders may have seen a glimmer of hope in earnings from drugmakers and online grocers, though insurers, banks and carmakers added to the chorus of companies taking a heavy hit.

“As we ease these lockdowns there remains the risk that of course you then have to tighten up the controls,” said Andrew Wilson, chairman of global fixed income at Goldman Sachs Asset Management, said on Bloomberg TV. “It is absolutely dependent on what happens with respect to infection rates and whether there is the so-called second wave,” he said of the market and economic outlook.

MSCI’s index of global shares was trading slightly in the green, while the pan-European STOXX 600 was 0.3% higher, with increases for health-care and insurance stocks offsetting losses for oil and travel companies. Shares in UniCredit fell about 1% after Italy’s biggest bank posted a 2.7 billion-euro loss in the first quarter amid loan writedowns in anticipation of the damage caused by the pandemic. The Final Eurozone PMIs came in and while posting a modest improvement from the flash numbers, remained deep in record low territory.

Earlier in the session, MSCI’s broadest index of Asia Pacific shares outside of Japan climbed 0.7%. Volumes were light with Japanese markets closed for a holiday.  China, opening for the first time since Thursday, reversed early losses, sending the blue-chip index up 0.6%. Australian equities fell, while Hong Kong and Korean benchmarks advanced. Japanese markets were shut for a public holiday.

In a move that was seen by analysts as offering a olive branch to Washington amid the trade tensions, China's central bank set the yuan at a broadly neutral midpoint. The exchange rate has been a contentious point in Sino-U.S. ties. “The People’s Bank of China went a long way to extinguishing one major trade war hotspot by setting the yuan reference rate on a more risk-friendly level,” said Stephen Innes, chief markets strategist at AxiCorp.

“USD/CNH dropped about 200 pips on the stable fix, and a recovery in risk sentiment ensued, and there was no follow-through on U.S. President Trump’s threat to China.”

"Earnings season is not great, but it’s really the issue of the virus and the end of the lockdown, and sentiment towards that will push the market,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners. "We think there’ll be a consolidation for the equity market. It won’t take us back to the lows we saw in March, but markets are waiting for a clearer outlook on how the lockdown will end."

Donald Trump has repeatedly taken aim at China as the source of the pandemic and warned that it would be held to account. On Tuesday, he urged China to be transparent about the origins of the coronavirus, which began in the Chinese city of Wuhan late last year.

In rates, bonds across the euro region extended losses sparked by Tuesday’s German court ruling criticizing the European Central Bank’s easing measures, while 10Y yield continued to trade in a narrow range, rising about 1.7bps to 0.676%. German borrowing costs rose before the country’s first syndicated bond sale in half a decade. Germany’s benchmark 10-year yields rose two basis points to -0.55%, though they remain close to Tuesday’s seven-week low. Treasuries are slightly cheaper on the day following gains for S&P 500 futures and oil in European trading. Cash Treasuries were closed during Asia session with Japan on holiday. Long end has underperformed this week ahead of today’s quarterly refunding announcement at 8:30am ET, at which significant increases in auction sizes are expected.

In FX, the euro weakened amid a slew of bleak economic forecasts by the European Union, declining to a six-day low of $1.0816 on Wednesday and heading toward its lowest close since mid-March, back when markets were roiled by demand for the U.S. currency. The currency was still under pressure after Germany's top court on Tuesday ruled that the European Central Bank's quantitative-easing programme "partially violated" the German constitution.

The pound also slumped on poor economic data, helping the dollar extend its advance amid lingering concerns about renewed U.S.-China tensions. The yen rose 0.2% to 106.35, having earlier reached 106.20, its strongest since March 17. The dollar index was flat at 99.810.

In commodities, U.S. crude futures fell 22 cents to $24.34 a barrel after five straight sessions of gains. Brent crude dropped 25 cents $30.72.  The decline was prompted by a higher-than-expected rise in U.S. inventories, refocusing investors on the risk of oversupply amid a slump in fuel demand. Analysts cautioned the rebalancing of the market would be choppy.

“We’re talking about normalisation of supply and demand’ but we’ve got a long way to go,” said Lachlan Shaw, National Australia Bank’s head of commodity strategy. "There are a lot of supply cuts that have come through. That combined with some early signs of demand lifting has meant the rate of inventory build is slowing.”

Elsewhere, spot gold eased 0.1% to $1,704 an ounce.

Looking ahead, today's ADP National Employment Report of private U.S. payrolls on Wednesday could foretell the damage to be revealed on Friday in the U.S. government’s measure of jobs in April. It’s expected to show nearly 22 million jobs were lost last month.  Scheduled earnings include T-Mobile, Shopify, Barrick Gold and GM

Market Snapshot

  • S&P 500 futures up 0.6% to 2,875.50
  • STOXX Europe 600 up 0.2% to 336.06
  • MXAP up 0.4% to 144.33
  • MXAPJ up 0.6% to 465.52
  • Nikkei down 2.8% to 19,619.35
  • Topix down 2.2% to 1,431.26
  • Hang Seng Index up 1.1% to 24,137.48
  • Shanghai Composite up 0.6% to 2,878.14
  • Sensex up 0.9% to 31,736.63
  • Australia S&P/ASX 200 down 0.4% to 5,384.61
  • Kospi up 1.8% to 1,928.76
  • German 10Y yield rose 2.0 bps to -0.558%
  • Euro down 0.4% to $1.0793
  • Brent Futures up 1.4% to $31.40/bbl
  • Italian 10Y yield rose 9.9 bps to 1.692%
  • Spanish 10Y yield rose 2.0 bps to 0.801%
  • Brent Futures up 1.4% to $31.40/bbl
  • Gold spot down 0.09% to $1,704.45
  • U.S. Dollar Index up 0.4% to 100.15

Top Overnight News from Bloomberg

  • President Donald Trump launched headlong into his push to reopen the country on Tuesday, saying Americans should begin returning to their everyday lives even if it leads to more sickness and death from the pandemic
  • China fired back at U.S. Secretary of State Michael Pompeo, saying he has no evidence to back up claims that the virus that causes Covid-19 escaped from a lab in the central city of Wuhan
  • The euro-region economy is set to shrink 7.7% this year, sending unemployment and public debt levels surging, after governments put in place drastic measures to limit the spread of the coronavirus, the European Commission said Wednesday
  • Italy and Spain, the two European countries most severely hit by the coronavirus, are suffering even deeper slumps after record contractions in the first quarter. Companies experienced unprecedented declines in output and new orders in April, according to IHS Markit’s Purchasing Managers’ Surveys. Jobs were also cut at the fastest pace in the index’s 22 years
  • Gold holdings in exchange-traded funds surged above 3,000 tons to an all-time high, according to preliminary data compiled by Bloomberg. Year-to-date inflows of more than 420 tons have far eclipsed the volume added over all of 2019
  • Germany’s debt agency is stepping out of its comfort zone, making its first syndicated bond offering since 2015 and for a previously untapped maturity period of 15 years
  • Italy’s Giuseppe Conte is insisting that he’ll serve out his full term as premier as tensions within his ruling coalition build up amid a struggle to restart the crippled economy
  • Qatar’s sovereign fund is borrowing around 7 billion euros ($7.6 billion) against its stock holdings, as the top liquefied natural gas exporter seeks to bolster its cash reserves at a time of plunging energy prices, people with knowledge of the matter said
  • German factories saw demand collapse in March, when measures to contain the coronavirus brought the economy to a sudden halt. Orders fell 15.6% from the previous month, the most since data collection started in 1991 and more than economists predicted
  • When the shock of Germany’s top-court ruling on the European Central Bank bond-buying program subsides, policy makers should find that arguing their way out of a tight spot isn’t so hard
  • A flurry of drug companies stepped up efforts to tackle the virus. Gilead Sciences Inc. is working to ensure access to a treatment drug in Asia, Europe and the developing world. Pfizer Inc. administered the first U.S. patients with its experimental vaccine, and Regeneron Pharmaceuticals Inc.said an antibody treatment could be available as soon as this fall.
  • Federal Reserve Vice Chairman Richard Clarida mixed a sobering acknowledgment of the damage inflicted on the U.S. economy by the coronavirus pandemic with an optimistic outlook for the second half of the year
  • Australian retail sales have been buttressed by a purchasing frenzy as households stocked up ahead of the coronavirus lockdown; the quarterly retail figure reflects volumes
  • New Zealand’s jobless rate rose and wage growth slowed in the first quarter as the Covid-19 pandemic started to push the economy toward recession
  • Oil’s rally ran out of steam — after prices doubled over five days — as optimism that output cuts are easing the supply glut was balanced by trepidation over what promises to be a long and uncertain recovery

Asian equity markets traded predominantly firmer with the region lacking solid conviction after the choppy price action on Wall St where all major indices finished higher despite the late slip heading into the close, and amid cautiousness on China’s return against the backdrop of the increased tensions with the US. ASX 200 (-0.5%) retreated below the 5400 level with the declines led by weakness across the large banking names, although losses in the index were cushioned by strength in gold miners as the precious metal held above USD 1700/oz and with tech names galvanized by outperformance of the sector stateside. Hang Seng (+1.1%) and Shanghai Comp. (+0.6%) were varied with the ongoing easing of lockdown restrictions in Hong Kong helping the local bourse weather the 42% slump in retail sales, while mainland China was subdued on reopen from the 5-day closure as it took its first opportunity to react to the increased tensions with US after President Trump’s recent tariff threat and finger-pointing at China for the coronavirus outbreak. Finally, India’s NIFTY (+1.0%) was indecisive and swung between gains and losses with early momentarily wiped out amid a slump in energy names after the government hiked duties on petrol and diesel prices before the index rallied again, while Japan remained closed but is due to return from Golden Week tomorrow.

Top Asian News

  • Singapore Air Soars Most Since 1987 on Hopes of Easing Lockdowns
  • Jokowi Vows to Flatten Indonesia Virus Curve ‘At All Costs’
  • India’s Services Industry Grinds to Halt, Sending GDP Down 15%
  • Emerging-Market Watchers Say Another Sell-Off Is Approaching

Mixed trade in the equity-sphere in Europe (Euro Stoxx 50 Unch) as the region follows suit from a similar APAC performance – which are experiencing a lack of conviction as markets balance reopening economies with the resurfacing of a potential escalation in protectionism. That being said, US equity futures continue their grind higher in EU trade. FTSE 100 (+0.6%) has been leading the gains across the region, potentially aided by a softer Sterling alongside the recovery in the energy markets. The cash index briefly dipped below its 38.2% Fib (move from 6151 to 5702) at 5873 to a low of 5838, before regaining a footing above the level. Sectors also see a mixed performance with no clear standouts or reflection of the current risk sentiment. The energy sector nursed earlier losses but remains a laggard alongside Consumer Discretionary. In terms of the breakdown, Travel & Leisure resides at the bottom but does not see significant underperformance. In terms of individual movers, Dialog Semiconductor (+5.3%), ITV (+4%) and Hannover Re (+4.2%) are among the top post-earning gainers in the Stoxx 600, with the former also aiding the likes of Infineon (+4%) in sympathy. BMW (-3.1%) extends on losses after noting that the highest negative impact is expected in Q2 2020 and PBT is still predicted to be significantly lower. Wirecard (-1.5%) holds onto losses after a 4.4% stakeholder called for a board shakeup.

Top European News

  • National Express, Hiscox Join U.K. Equity Rush as Stocks Rally
  • Supercar Maker McLaren Said to Seek $374 Million in New Funding
  • Recession Deepens in Europe’s South Amid Lockdown Damage
  • European Banks Seek Sovereign Debt Relief in Lobbying Push

In FX, having held up relatively well when German factory orders fell around 50% more than forecast, the Euro couldn’t ignore single digit services PMIs in the Eurozone periphery or weaker than expected pan retail sales that accompanied bleak Spring economic projections from the EC. However, Eur/Usd has contained losses below 1.0800 unlike Cable that extended declines from circa 1.2450 through the 50 DMA (1.2411) and 1.2400 on the way to a new low for May around 1.2360. Some suspicions that a significantly worse than anticipated UK construction PMI was pressuring Sterling prior to the official release, while fix-related demand for Eur/Gbp was likely compounded by stops when the cross breached a key technical level in the form of the 200 DMA yet again (0.8722). Next up for the Pound, BoE super Thursday that kicks off at the unusually early time of 7.00BST and comes with the latest MPR and FSR.

  • USD – The Dollar is revelling in the plight of others and fragile risk sentiment, with the DXY back on the 100.00 handle ahead of ADP that offers the first monthly US jobs data proxy for Friday’s NFP release, albeit not always a reliable indicator for the BLS headline number. From a technical perspective, 100.209 forms near term resistance for the index and represents pre-month end highs before the Greenback succumbed to the weight or rebalancing sales to hit a 98.645 low on May 1, and the peak so far is 100.200 vs 99.749 at the other extreme.
  • CHF/NZD/CAD/AUD – The Franc has been caught in the cross-fire of Buck strength vs Euro weakness, as Usd/Chf hovers near 0.9750 in contrast to Eur/Chf trending back down towards 1.0500, while the Kiwi, Aussie and Loonie are all paring gains vs their US counterpart, with Nzd/Usd retreating from 0.6072 in wake of mixed NZ jobs data overnight, Aud/Usd fading from 0.6451 after similar conflicting retail sales figures for March and Q1 overall, and Usd/Cad losing some crude attraction following a close test of 1.4000 yesterday on the back of a better Canadian trade balance compared to consensus and the US.
  • JPY/SEK/NOK – In contrast to the broad G10 trend, the Yen is outperforming and edging closer to 106.00, albeit still without the usual level/depth of domestic input given the final day of Golden Week ahead of tomorrow’s return from the extended holiday break. Similarly, the Scandinavian Crowns retain bullish momentum against the backdrop of widespread single currency depreciation that has seen Eur/Jpy trade at 3 year lows well under 115.00, with Eur/Sek testing 10.6200 and Eur/Nok sub-11.0900 at one stage in the run up to tomorrow’s Norges Bank policy meeting.
  • EM – Usd/Try is extending its apparent unstoppable mission to revisit record highs at 7.2362 vs 7.1680 or so thus far today, even though Turkish banks are still selling the pair and the banking authority has tightened limits on trade with foreign institutions further in an attempt to stop the rally. Perhaps Treasury and Finance Minister Albayrak can turn the tide for the Lira via a conference call to global investors from 13.00GMT, but it’s seemingly a tall order. Elsewhere, the Real could fall prey to bears in the aftermath of Fitch downgrading Brazil’s BB- rating to negative amidst the rising political instability that has already propelled Usd/Brl beyond 5.5700.

In commodities, WTI and Brent front month futures are back on the rise after some ovrnight consolidation from the prior day’s mammoth gains which saw the contracts settle north of USD 24.50/bbl and USD 30/bbl respectively – aided by the demand side of the equation looking brighter as global economies plan to come back online. Meanwhile, supply side issues appear to be tempering amid the OPEC+ pact, whilst sources also noted that Saudi’s May exports are expected to fall to around 6mln BPD vs. ~9.4mln BPD in April. Over in the US, Texas regulators decided against curtailing the state’s output of over 5mln BPD, albeit this was expected. WTI June resides just under USD 25.50/bbl and towards the middle of its current USD 24-26/bbl intraday band. Brent July meanders south of USD 32/bbl after waning off its USD 32.27/bbl overnight high. Spot gold remains in limbo within a tight USD 7/oz range amid an indecisive risk tone heading into key risk events later this week including the US Labour Market report. Copper meanwhile tracks the gains in US equity futures and sees some support after dipping below but failing to close below its 21 DMA for three consecutive sessions.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -3.3%
  • 8:15am: ADP Employment Change, est. -21m, prior -27,000

DB's Jim Reid concludes the overnight wrap

My postage stamp size knowledge of German constitutional law that I talked about in the preview on Monday that became postcard size later that day has now moved on to becoming the size of a small leaflet as we all scrambled round yesterday to understand the German Federal Constitutional Court (GCC) ruling.

As we suggested yesterday we did expect the court to issue a veiled warning to the ECB but this was perhaps more explicit than expected. They suggested that the ECB’s public sector purchase programme (PSPP) is partly violating the country’s constitution. This is actually a rejection of the European Court of Justice’s (ECJ) decision back in December 2018, when they ruled that the PSPP was acceptable as an instrument of monetary policy. However, the court in Germany said that the ECJ review on whether the ECB’s decisions on PSPP satisfied the principle of proportionality was “not comprehensible”. Furthermore, they said that in the next 3 months, unless the ECB Governing Council “adopts a new decision that demonstrates … that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme”, then the Bundesbank “may thus no longer participate in the implementation and execution of the ECB decisions at issue”. That said, in a more positive sign for markets, the GCC didn’t find a violation when it came to the prohibition on the monetary financing of member state budgets.

In terms of the implications, our Germany team have a full writeup (link here), but the move puts the ball in the ECB’s and German government’s court. They expect that the ECB will be able to offer comprehensible and substantiated arguments for the proportionality of the PSPP. And though the rulings from the GCC yesterday relate to the PSPP and not to the more recent measures undertaken during the coronavirus pandemic, including the Pandemic Emergency Purchase Programme (PEPP), our Germany team also say that we can expect further challenges to the legality of the PEPP at some point, particularly given that compared to the PSPP the ECB issued a waiver on the eligibility criteria and introduced flexibility regarding the capital key of the national central banks. Overall this shouldn’t have a great short-term impact but it makes the longer term financing of Southern European debt via the ECB more complicated and one thing we know for sure is that without fiscal burden sharing there is little doubt that they will need a lot of ECB funding in the years ahead.

In terms of the market reaction to the news, the euro moved sharply lower, down to an intraday low of -0.74% against the US dollar, though by the end of the session it had recovered somewhat to be down -0.61%. The bigger reactions were seen in sovereign debt markets, where spreads spiked back up yesterday as the ruling led investors to ponder the tail risk implications for the sustainability of the Euro Area. The spread of 10yr Italian BTPs over bunds rose by +11.5bps to 244bps, its largest move wider in two weeks. Furthermore, the spreads of 10yr Spanish (+3.7bps), Portuguese (+4.8bps) and Greek (+4.7bps) debt over bunds also widened, showing that concerns aren’t entirely isolated to Italy, even if they are the biggest risk at the moment.

Partly on the back of the German ruling, our FX team changed their view on EURUSD from bullish to neutral yesterday (link here), and have revised their mid-year forecast to 1.08, down from 1.13 previously. They argue that the recent newsflow has been disappointing, with the GCC ruling yesterday adding to the existing failure to agree on a European recovery fund, along with ECB President Lagarde’s signal last week that the ECB doesn’t want to use OMT.

Meanwhile our rates strategists write (link here) that the ruling means that BTPs are now facing additional headwinds, and the decision further weakens the case for a positive BTP bias. According to them, while the short term is likely to see the ECB continue to support the market and deviate from capital keys as necessary, the ruling raises medium-term questions over the effectiveness of ECB policies.

In spite of the ruling, sentiment more broadly on global markets wasn’t really affected, and global equities advanced yesterday, with the S&P 500 up +0.90%, while the STOXX 600 climbed +2.15%. The equity rally in Europe was broad based, with every industry group higher and roughly 80% of individual stocks up. Energy companies particularly led the rally, with the Oil and Gas in Europe up +6.45% on the continued recovery in oil prices. By the end of the session WTI had risen +20.45% to $24.56/barrel, while Brent was also up +13.86% at $30.97/barrel. That’s the 6th day in a row Brent has moved higher, and the 5th for WTI. The rally even caught the attention of President Trump, who tweeted yesterday that “Oil prices moving up nicely as demand begins again!” Unsurprisingly, the currencies of oil producers outperformed, with the Russian Ruble up +1.41% against the US Dollar, while the Norwegian Krone also strengthened by +0.63%.

The S&P was up as much as +1.90% with less than an hour left in the US session, but then fell 100 bps over the last 45 minutes or so while Fed Governor Clarida spoke. Clarida did not offer ominous projections for the global economy, though he did say that further fiscal support would likely be needed for the economy to recover. Meanwhile St. Louis Fed President Bullard called the recent central bank actions, “very much an experiment.” Even with the pullback, all but two industry groups in the index were higher on the day – Banks and Consumer Staples were the two lone laggards.

This morning the Hang Seng (+0.64%) and Kospi (+1.02%) are both posting gains while the Shanghai Comp (+0.08%) and CSI 300 (+0.01%) are little changed as Chinese markets reopened after an extended holiday. Markets in Japan are still shut. In FX, the Turkish Lira is trading down -0.22% bringing the 5 day decline to -1.930% at 7.0887 while the onshore Chinese yuan is trading down -0.39% at 7.0907. Elsewhere, futures on the S&P 500 are little changed and WTI crude oil prices are down -0.61% to trade at $24.40.

In other overnight news, Fitch revised Brazil’s rating outlook to negative from stable while affirming the country’s BB- rating citing tensions between President Jair Bolsonaro and Congress that have hindered the government’s capacity to implement economic reforms that are needed to trim the fiscal deficit and put the country’s debt in a sustainable trajectory.

There was another predictably poor round of economic data from around the world yesterday, with fresh record lows being set once again. From the US, the ISM non-manufacturing index for April fell to a slightly higher-than-expected 41.8 (vs. 38.0 expected), though this was still its lowest reading since March 2009. Also in the US, the trade deficit in March widened to $44.4bn (vs. $44.2bn expected). The move was driven by a decline of -9.6% in exports, the largest monthly decline on record, while imports fell by a smaller -6.2%. Over in the UK, the final composite PMI came in at 13.8, which was clearly a record low since the series began in 1998, though above the flash reading of 12.9. And in Brazil, industrial production in March fell by -9.1% (vs. -3.7% expected).

To the day ahead now, and the data highlights include a number of further services and composite PMIs for April, including for the Euro Area, France, Germany, Italy and Brazil, along with the UK’s construction PMI for April. Elsewhere, there’ll be March’s German factory orders and Euro Area retail sales, while the US will see the release of April’s ADP employment change and the weekly MBA mortgage applications. From central banks, we’ll hear from the ECB’s Muller and Villeroy, along with the Fed’s Bostic, while the Brazilian central bank will also be deciding on rates. Finally, earnings releases today include General Motors, T-Mobile and PayPal, and the EU Commission will be releasing their latest economic forecasts.

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