Stock whisperer Yellen said all the right things yesterday, when she sounded more optimistic than pessimistic on the economy but while the economy is “strong” it is most likely not strong enough to weather a rate hike in the immediate future. As a result, the S&P 500 climbed toward a record on Monday (and continued rising overnight) after Yellen said she expects to raise interest rates only gradually and held off from specifying any timeframe, a shift from her May 27 stance that a move was probable “in the coming months.” This was interpreted that both a June and July rate hike are now off the table, with September odds rising modestly.

And in a world where a hawkish Fed is bullish but a dovish Fed is even more bullish, stocks took their cue from Janet and sprang higher first in the US, and then across the globe, rallying with emerging markets because as Bloomberg put it, Yellen won’t “derail the recovery with a premature interest-rate increase.” If by premature BBG means a second hike one in a decade, then yes. 

Of course, what Yellen really meant is to give algos a green light to trigger all stops at the new 2016 highs, and then to continue to the fresh all time high in the S&P500, which as of this moment is less than 1% away, and will likely be taken out today.

Thanks to Yellen, the MSCI All Country World Index headed for its strongest close since April, led by gains in energy companies and raw-materials producers. Emerging-market stocks and currencies advanced for a fourth day. The Bloomberg Commodity Index snapped a four-day gain that had pushed it to a bull market. The South Korean won surged the most in six years, and the currencies of Australia and India also rose after the nations’ central banks kept interest rates unchanged. The pound advanced as a poll showed the campaign to keep Britain in the European Union ahead. The odds of a rate hike by July dropped to 22 percent in the futures market, after halving to 27 percent on Friday as a report showed U.S. jobs growth in May was the weakest in almost six years. S&P 500 futures advanced 0.3%, indicating U.S. equities will extend gains on Monday that were propelled by Yellen’s remarks, and close at new 2016 highs, if not new all time highs entirely.

“It seems likely that we will get at most one rate hike this year and that’s positive for equities and commodities,” said Ric Spooner, chief analyst at CMC Markets in Sydney. “Of the beaten-down commodities, the oil market is the best place. We’re already seeing supply cutbacks.”

While a Brexit will ultimately not be allowed, analysts continue to pay attention to the latest polls out of the UK. According to the latest Times/YouGov poll, 43% would vote to remain in EU and 42% would vote to leave. ORB/Telegraph poll showed 48% would vote to remain in EU and 47% would vote to leave. Furthermore, the Telegraph wrote: Leave campaign closes gap to narrowest margin yet as latest poll shows Brexit vote will go down to the wire.

“While polls suggest the ‘‘remain’’ campaign has established at least a modest lead, one persistent concern has been that low turnout could skew the result in the direction of those who care most about the issues surrounding Brexit,” JP Morgan’s Allan Monks says in note. “Turnout could prove decisive, however, in a very close outcome.”

Finally, for commodity watchers, WTI advanced 0.4% to $49.90 a barrel, having risen above $50 earlier in the session. API data later on Wednesday is forecast to show crude stockpiles dropped for a third week, declining by roughly 3 million barrels. The reason for the latest leg higher in oil was the dollar weakness in the past 24 hours. Also, Eni SpA said 65,000 barrels a day of supply was halted Friday after a militant attack in Nigeria.

Market Snapshot

• S&P 500 futures up 0.3% to 2115
• Stoxx 600 up 1.3% to 347
• FTSE 100 up 0.7% to 6315
• DAX up 1.5% to 10278
• German 10Yr yield down less than 1bp to 0.09%
• Italian 10Yr yield down 2bps to 1.45%
• Spanish 10Yr yield down 4bps to 1.48%
• S&P GSCI Index up 0.2% to 379.6
• MSCI Asia Pacific up 1% to 131
• Nikkei 225 up 0.6% to 16675
• Hang Seng up 1.4% to 21328
• Shanghai Composite up less than 0.1% to 2936
• S&P/ASX 200 up 0.2% to 5371
• US 10-yr yieldunchanged at 1.74%
• Dollar Index down 0.11% to 93.8
• WTI Crude futures up 0.5% to $49.95
• Brent Futures up 0.6% to $50.87
• Gold spot down 0.3% to $1,242
• Silver spot down 0.9% to $16.32

Top Global News

• Clinton Clinches Nomination, Becoming First Woman to Lead Ticket: Hillary Clinton secured the delegates required to claim the Democratic presidential nomination Monday, according to the Associated Press; Obama, Sanders Said to Speak as Endorsement of Clinton Planned
• Verizon Bidding $3b for Yahoo Assets, WSJ Reports: co. will bid $3b for Yahoo’s main internet assets, the WSJ reported, seeking to edge out AT&T, TPG and other potential buyers
• Samsung Said to Consider Bendable-Screen Phones for 2017: co. considering introducing 2 new smartphone models that will feature bendable screens, including a version that folds in half like a cosmetic compact
• Lotte Chemical Offers Plan to Buy Axiall to Diversify: offer to buy polyethelene maker Axiall as South Korean based petrochemical co. seeks to build on its takeover of Samsung Group’s chemicals arm
• GM CEO Says ‘Undervalued’ Carmaker Can Sustain Profit Long Term: Barra sees GM breaking even in 10 million-unit U.S. market
• Raytheon Says $1b Cyber Contract Confirmed After Protests: co. will keep contract that affects more than 100 agencies
• Ralph Lauren holds first investor day, expected to give 1Q, FY2017 forecasts; Ralph Lauren Said to Plan to Cut Up to 10% of Jobs: WWD
• Merck’s Patent Win Over Gilead Reversed Over False Testimony: judge throws out $200m jury verdict in hepatitis C case
• Oil Holds Near 10-Month High as U.S. Stockpiles Seen Declining: U.S. inventories estimated to drop 3 million barrels last week
• Zillow Settles Suit With Murdoch’s News Corp. Over Trulia: Zillow to pay Murdoch’s Move $130m in settlement
• Tropical Storm Colin Knocks Out Power as It Moves Across Florida: some areas already soaked with rain, experiencing high winds

Looking at regional markets, Asia stocks traded mostly positive following Fed Chair Yellen’s comments which were “cautiously optimistic” on the economy, yet dovish at the same time, and dampened the likelihood of an imminent rate hike as she omitted mentioning a timeframe. Energy dictated sentiment in the ASX 200 (+0.2%) and Nikkei 225 (+0.6%) as both indices coat-tailed on the gains seen in oil prices, with the latter also supported by a bout of JPY weakness. Chinese markets traded mixed as the Hang Seng (+1.4%) advanced on strong property and automaker sales while the Shanghai Comp (+0.1%) lagged after the PBoC kept its liquidity injections reserved ahead of its holiday closures beginning on Thursday. 10yr JGBs traded marginally lower as gains in stocks dampened demand for safer assets, while a stronger 30yr auction in which the b/c rose from prior and tail in price narrowed, also failed to lift demand for 10yr JGBs.

Top Asia News

• China to Give $38 Billion RQFII Quota to U.S. in First-Ever Move: U.S. gets largest Chinese investment quota after Hong Kong
• Rajan Holds India Rate as Speculation Swirls on His Future: RBI to stay accommodative as inflation uncertainties abound
• Australia Holds Rate; Lack of Policy Guidance Spurs Currency: Traders pare bets to 46% for an August cut from 64% Monday
• Everbright Shuts China Hedge Fund After Returns Stumble in Rout: Firm will reallocate funds’ assets to another China strategy
• Australian Regulator Starts BBSW Civil Proceedings Versus: ASIC starts legal proceedings in the Federal Court in Melbourne

European equities have taken the firm lead from Asian bourses with the Euro Stoxx 50 firmly in the green (+1.3%) after comments from Fed Chair Yellen which were optimistic on the economy while also dampening the likelihood of an imminent rate hike. Additionally, upside in equities this morning has been further bolstered by the upside in crude prices with WTI edging towards USD 50/bbl. Bunds have traded relatively flat despite the increased risk-on tone across the region, as well as the slew of supply expected to hit the market (Approximately EUR 9.6bIn) with German paper benefiting from the aforementioned Yellen comments. Additionally, peripheral bonds have been notable outperformers to lead Euro-area yields lower.

Top European News

• Euro-Area Economy Grows Faster as Consumer Spending Gathers Pace: 1Q GDP increases 0.6% vs. May 13 reading of 0.5%; expansion driven by household consumption, investment
• German Industry Output Recovers in April on Investment Surge: production expanded 0.8% versus estimated 0.7% increase
• Shell Deepens Spending Cuts, Promises More Savings From BG: trims expected 2016 capex by $1b to $29b; free cash flow, return on capital to rise at $60-a-barrel oil
• Deutsche Bank Is Only Thing Missing From Germany’s Biggest Deal: bank said not to advise on, finance Bayer’s Monsanto bid
• Brexit Is No Issue for U.K. Stocks With Traders Doubting Polls: British equities near cheapest of year versus global shares; Brexit Threatens to Destroy 18 Months of Swiss Toil in a Stroke

In FX, the Aussie strengthened almost 1 percent versus the greenback, having been little changed prior to the Reserve Bank of Australia’s policy meeting. The authority refrained from giving any guidance on whether it will consider adding to May’s interest-rate cut. India’s rupee gained 0.3 percent, reaching a three-week high after central bank Governor Raghuram Rajan left borrowing costs unchanged as widely expected. The pound was 1.1 percent higher, the strongest gain since March 17. Sterling has fluctuated in recent weeks, depending on which side of the EU referendum argument was gaining momentum. Sterling’s climb comes after it dropped in early trading Monday, as three polls were released showing more Britons favor quitting the EU than staying. Two more surveys that came later the same day showed slim leads for the “Remain” camp. The Bloomberg Dollar Spot Index slipped 0.2 percent, set for its weakest close since May 11 based on closing prices. The yuan fell for a second day after the People’s Bank of China weakened its daily reference rate by the most in a week.

In commodities, the Bloomberg Commodity Index declined for the first time in a week, having ended Monday more than 20 percent higher than its January low. A four-year bear market that pushed raw materials to the lowest level in a quarter century has drawn to an end after supply constraints drove a recovery from soybeans to zinc. Gold slipped 0.3 percent, trimming this month’s advance to 2.3 percent. Zinc fell 0.1 percent on the London Metal Exchange, retreating from its highest close since July 2015. Copper fell 1.5 percent, while aluminum was little changed. Aluminum prices are likely to decline as smelters in China, the biggest producer, restart capacity to take advantage of thicker margins, Goldman Sachs Group Inc. said in a report Monday. West Texas Intermediate crude oil advanced 0.2 percent to $49.81 a barrel, having climbed 2.2 percent to a 10-month high on Monday. U.S. government data due Wednesday is forecast to show crude stockpiles dropped for a third week, trimming a glut. Eni SpA said 65,000 barrels a day of supply was halted Friday after a militant attack in Nigeria.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade higher across the board in a continuation of the dovish sentiment seen yesterday and overnight in Asia
• Once again we see GBP taking centre stage, swinging higher today as EU polls from the Times and the Telegraph now showing the Remain camp showing a small lead
• Looking ahead, highlights include API Inventories and potential comments from ECB’s Makuch and Knot
• Treasuries little changed overnight as global equities and WTI oil rally; week’s auctions begin with $24b 3Y notes, WI 0.97%; sold at 0.875% in April, was biggest stop through by a 3Y since 2009.
• June is out. July might be too soon. The Federal Reserve’s next interest-rate increase is coming, but even September isn’t a sure bet. That’s the message investors and economists are taking from Chair Janet Yellen’s remarks Monday
• A Federal Reserve interest-rate increase would be good for China because it would signal demand is rising and the U.S. economy is improving, People’s Bank of China Deputy Governor Yi Gang said at a briefing
• China’s foreign-exchange reserves slipped to the lowest level since late 2011 as a rallying dollar ate into the value of its holdings. The world’s largest currency hoard fell by $28 billion to $3.19 trillion in May
• Euro-area GDP grew 0.6% in 1Q, faster than previously estimated, driven by investment and a pickup in consumer spending, according to the European Union’s statistics office
• German industrial production rebounded in April to 0.8% from -1.1% in March in a sign that Europe’s largest economy is benefiting from a pick-up in investment
• Even before Mario Draghi starts his corporate-bond buying program on Wednesday, he’s pushed down borrowing costs in Europe toward unprecedented levels. The average yield on investment-grade company notes in euros tumbled to 1.002%
• Saudi Arabia approved its National Transformation Program, a key part of a blueprint to prepare the kingdom for the post- oil era. The plan outlines a number of initiatives to be undertaken by different ministries
• House Financial Services Committee Chairman Jeb Hensarling wants to cut a deal with U.S. banks: Raise several hundred billions of dollars in additional capital and Washington will let you break free from a litany of burdensome rules
• With Democrats in six states still to make their choices on Tuesday, the Associated Press said that its count shows Clinton had secured the number of pledged delegates and superdelegates required to claim the Democratic nomination

DB’s Jim Reid concludes the overnight wrap

Well it looks like the round trip in Fed tightening expectations is pretty much complete now with Yellen’s straight bat approach yesterday bringing the focus back to the data while at the same time also keeping full optionality on the table. Rewind ten days or so ago when Yellen said at Harvard University that a rate hike might be appropriate in the coming months, well yesterday any mention of timing was rightly avoided and instead the mantra of ‘further gradual increases in the federal funds rate will probably be appropriate’ was provided. It did feel like the ‘probably’ part of that by itself came across as a little bit softer in nature though.

Indeed there was a familiar balancing act feeling to the tone with the Chair clearly trying to balance the nervousness of Friday’s employment report with trying not to read too much into one piece of data. While the Fed Chair said that ‘I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones’, Yellen also made mention to recent signs in job creation bearing ‘close watching’ with the Friday jobs report being described as ‘disappointing’ and ‘concerning’. She also listed a number of ‘considerable and unavoidable’ uncertainties which may have the potential to affect the outlook and path ahead. This appeared to include doubts about the resiliency of domestic demand as well as potential ‘significant economic repercussions’ from this month’s Brexit referendum and also the ‘considerable’ challenges in China.

In fact Yellen interestingly offered a number of relevant questions herself without actually answering them, instead saying that ‘my colleagues and I will be wrestling with these and other related questions going forward’. The end result of all that was decline in summer tightening expectations though, albeit not quite to the extent as that seen post payrolls on Friday. June (2%) is now more or less completely out of play, while the probability of a hike in July is back down to 22% this morning after finishing at 27% on Friday. Further afield September is currently sitting at 42%.

Interestingly risk assets in the US had another resilient day. US equities dipped temporarily but the S&P 500 still ended up +0.49% (and at one stage hit a high for the year) although it was the outperformance for credit markets which caught the eye with CDX IG rallying to the tune of 3bps. Oil markets appeared to be a helping hand there as WTI rebounded just over 2% to edge back up close to $50/bbl as more supply disruption concerns in Nigeria and price hikes in Saudi Arabia dictated moves in energy markets. It was a quieter day for the US Dollar with the Dollar index (-0.14%) ending with a much more modest move lower, while over in the Treasury market yields backed up a couple of basis points higher.

This morning in Asia and China aside the majority of bourses appear to be following that positive lead from the close in the US last night. Indeed the Nikkei (+0.36%), Hang Seng (+0.61%), Kospi (+0.93%) and ASX (+0.50%) are all up although in China the Shanghai Comp (-0.33%) and CSI 300 (-0.28%) have failed to hold onto early gains. It’s not entirely obvious what’s causing the move lower in China although the lack of direction may in part reflect investors waiting for the latest foreign reserves data due out at some point this morning.

FX markets have also been the subject of some early focus this morning. The Aussie Dollar is +0.45% after the RBA left rates on hold as expected. Meanwhile Sterling (+0.76%) has rebounded well on the back of another Brexit poll late last night. The YouGov run poll for the Times newspaper has the remain camp with a 1 point lead over the leave camp at 43% to 42%. Elsewhere, the Associated Press is reporting that Hilary Clinton has now secured enough delegates to claim the Democratic nomination. That comes ahead of tonight’s six scheduled primaries, including California.

Back to China where yesterday our China Chief Economist Zhiwei Zhang published part four of his China tail series report. In it he highlights that China’s government has started to tighten credit control which is starting to feed through to financial markets with a slowdown in corporate bond issuance being felt. Zhiwei thinks that the government’s strategy is to contain the build-up of leverage within the financial sector and bolster direct financing through policy banks. In his view this could lead to a divergence in the second half of this year with property sector investment likely to slow. Overall Zhiwei believes tightened credit will leader to slower growth in the next half year, putting depreciation pressure on the RMB, while he also expects property prices to soften.

Moving on. As well as those comments from Fed Chair Yellen yesterday, we also heard from a couple of her colleagues. Atlanta Fed President Lockhart, who is usually fairly centrist in his views, said that he doesn’t personally see a lot of cost to being patient to the July meeting and that ‘I think we can be watchful and see how things develop over the next few weeks’. Meanwhile Boston Fed President Rosengren (usually dovish) said that the latest jobs report was disappointing and that ‘it will be important to see whether the weakness in this report is an anomaly or reflects a broader slowing in labour markets’.
Elsewhere yesterday, the calendar was a lot lighter for economic data with the only release coming out of the labour market again with the labour market conditions index reading for May. The data showed the index declining another 1.4pts to -4.8 (vs. -0.8 expected) and as a result touching the lowest level since 2009. It’s not clear how much weight the Fed give to the data series but with the index declining at a relatively fast rate since the turn of the year, it may start to make a few heads turn.

The European session yesterday was fairly quiet although risk assets did manage to rebound following Friday’s weakness. The Stoxx 600 finished up +0.33%, although much like in the US it was the performance for credit markets which stood out with Main and Crossover rallying 3bps and 9bps tighter respectively. Data in the region didn’t add much to the debate. The Sentix investor confidence reading for the Euro area bounced 3.7pts to 9.9 (vs. 7.0 expected) while German factory orders declined more than expected in April (-2.0% mom vs. -0.5% expected).