Copper Slides To Three Month Low Despite Flat Futures, Oil; Dollar Rise Continues

After two violently volatile days in which the market soared (Monday) then promptly retraced all gains (Tuesday), the overnight session has been relatively calm with futures and oil both unchanged even as the BBG dollar index rose to the highest level since April 4. This took place despite a substantial amount of macro data from both Japan, where the GDP came well above the expected 0.3%, instead printing 1.7% annualized, which pushed stocks lower as it meant the probability of more BOJ interventions or a delay of the sales tax hike both dropped. Meanwhile, in China we got proof of the ongoing housing bubble when new property prices were reported to have soared 12.4% Y/Y in April, which in turn pushed the local stock market to two month lows amid concerns the rampant housing bubble sector could divert funds from stocks. Yes, China is trading on the “risk” one bubble will burst another bubble.

At the end of the day, however, it was all about two Fed speakers yesterday and, as Bloomberg put it, financial markets reawakening to the risk that the U.S. expedites interest-rate increases, and that’s buoying the dollar while denting emerging markets and commodities. Additionally, the US 2s10s curve hit its flattest level since 2007. As noted above, the USD has risen rapidly in the past few weeks and as of this morning climbed to a seven-week high and Treasuries fell, pushing two-year yields to highest since April, after Atlanta Federal Reserve President Dennis Lockhart and San Francisco’s John Williams said Tuesday two rate hikes may be warranted this year. Chinese stocks tumbled to a two-month low, while the rand led the selloff versus the greenback amid mounting political tension in South Africa. Copper and gold fell for the first time in four days.

Looking at markets, DB’s Jim Reid summarized the situation relatively well as follows:

The mood of markets is pretty temperamental at the moment with sudden reversals in sentiment seemingly occurring every few days. The S&P 500 closed -0.94% last night, wiping out Monday’s gains. Fedspeak seemed to be a driver and it was interesting to see the US 2s10s curve hit its flattest level since 2007. Specifically it was the joint comments from Atlanta Fed President Lockhart and also San Francisco Fed President Williams that sparked interest after both suggested that they continue to see two to three rate hikes this year. Lockhart also added that markets are currently more pessimistic than he is, while Williams made mention of June being a live meeting and even went as far as to say that his view of gradual hikes also means 3-4 hikes in 2017. Balancing all this were comments from Dallas Fed President Kaplan shortly after who said that a hike may well be warranted in the ‘not-too-distant future’ but warned of the need to consider uncertainty including Brexit risk.

In any case it was the initial hawkish comments which helped to fuel a decent flattening across the Treasury curve. 2y yields ended 4.5bps higher at 0.833% with 10y yields ‘just’ 1.9bps higher at 1.773%. That means the current 2s10s spread of 94bps has marked a new tight for the year and you have to go back to December 2007 to find the last time the spread was this narrow. All of this has also resulted in a decent repricing in Fed Funds futures. The probability of a hike next month has now risen to 12% from 4% on Monday while a July hike has increased to 28% from 19%. The December meeting odds are now sitting at 65% from 56%.

And while oil is largely unchanged as of this moment with WTI trading in the mid-$48 range, buoyed by renewed fears from the Canadian wildfires which appear set to keep millions of barrels of production offline for several more days, keep a close eye on copper, which this morning is down 1.6% to $2.06/lb, hitting its lowest price in three months.

But going back to the story of the day, especially ahead of today’s only notable news release the FOMC April minutes, all eyes remain on the dollar and the suddenly renewed probability of a rate hike. The dollar has rebounded in May after declining in the previous three months as the Fed pushed back expectations for rate increases this year. A strengthening U.S. economy and the biggest jump in consumer prices in three years have led traders to boost the odds of a move in June threefold to 12 percent. The Fed will release the minutes of its April policy meeting on Wednesday.

“Expectations appear to be that minutes will signal that a summer hike is on the cards,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. The “solidly hawkish” rhetoric from Fed non-voting members of late is proving to be dollar positive, as the possibility of a hike is not priced in by markets, he said.

Futures on the S&P 500 were little changed after equities tumbled on Tuesday. Investors will look Wednesday to earnings from retailers including Target Corp., Staples Inc., Lowe’s Cos. and Urban Outfitters Inc. for further indications on the health of U.S. consumers after a slew of disappointing results cast doubt on their willingness to spend. The Stoxx Europe 600 Index slipped 0.1 percent. Burberry Group Plc dropped 3.7 percent after the luxury-goods retailer added to the industry’s gloom by posting a second straight drop in annual earnings. Sonova Holding AG tumbled 7.1 percent after the Swiss hearing-aid maker’s second-half earnings missed estimates.

Minutes from the Fed’s April meeting will also be in focus for clues on the trajectory of interest rates after hawkish comments from regional presidents. The first month with even odds of higher borrowing costs also moved up to November from December.

Market Snapshot Summary

• S&P 500 futures down less than 0.1% to 2043
• Stoxx 600 down 0.1% to 335
• FTSE 100 down 0.4% to 6141
• DAX down 0.3% to 9864
• MSCI Asia Pacific down 0.7% to 127
• Nikkei 225 down less than 0.1% to 16645
• Hang Seng down 1.5% to 19826
• Shanghai Composite down 1.3% to 2808
• S&P/ASX 200 down 0.7% to 5356
• US 10-yr yield up 1bp to 1.78%
• German 10Yr yield up 1bp to 0.14%
• Italian 10Yr yield down less than 1bp to 1.45%
• Spanish 10Yr yield up less than 1bp to 1.57%
• Dollar Index up 0.37% to 94.9
• WTI Crude futures down 0.3% to $48.16
• Brent Futures down 0.5% to $49.05
• Gold spot down 0.5% to $1,272
• Silver spot down 1.2% to $17.04

Top Global News

• Mitsubishi Motors President Resign as Mileage Scandal Widens
• Eletrobras Sees U.S. Delisting on Deadline Miss Amid Graft Probe
• Nasdaq Bears at 5-Year High Just as Berkshire Sees Apple Bargain
• Goldman’s Hatzius Says Flattest Yields Since 2007 Misprice Fed
• Goldman’s India Blue-Chip Bond Picks Gain After 2015 Junk Flop
• BlackRock Hires Ex-Hedge Fund Founder Ferrier for Private Credit
• Goldman Sachs Asset Said to Consider Aussie Equities Unit Sale
• Fed Alarm Has $8.5b Swedish Fund Manager Dumping Risk

Looking at regional markets, Asia stocks traded mostly lower following losses on Wall St. where several Fed speakers suggested prospects for a June hike were still alive. This pressured ASX 200 (-0.7%) & Nikkei 225 (-0.1%) at the open, however Japanese stocks briefly staged a recovery as participants digested better than expected GDP with the annualised figure printing at a 1 year high at 1.7% vs. Exp. 0.3%, although selling later resumed. Shanghai Comp (-1.8%) was negative despite continued gains in Chinese property prices amid concerns the rampant sector could divert funds from stocks, while tech names underperformed after reports overseas users of Alipay may be restricted from the service from Friday. In addition, some analysts also noticed disappointment as NPC Head Zhang was did not mention the HK-Shenzhen stock connect at a speech in Hong Kong. 10yr JGBs were mildly lower with the increased risk appetite for Japanese equities dampening demand for the paper, despite the BoJ also entering the market to purchase over JPY 1.2tr of JGBs.

Japanese GDP SA (Q1 P) Q/Q 0.4% vs. Exp. 0.1% (Prey. -0.3%, Rev. -0.4%)

• GDP Annualised SA (Q1 P) Q/Q 1.7% vs. Exp. 0.3% (Prey. -1.1%, Rev. -1.7%)
• GDP Nominal SA (Q1 P) Q/Q 0.5% vs. Exp. 0.5% (Prey. -0.2%). (BBG)

China April New Home prices rose 6.2% Y/Y vs. Prey. 4.9% in March. (BBG)

Top Asian News

• Japan Dodges Recession on Modest Increase in Consumer Spending: Expansion of GDP exceeds forecasts by all surveyed economists
• Suzuki Plunges After Finding Flaw in Mileage Testing Method: co. used improper method to test fuel efficiency of its vehicles
• Goldman Sachs Asset Said to Consider Aussie Equities Unit Sale: Sale or management buyout of unit said to be among options
• China Leader Asks Hong Kong for ‘Broader Mind’ Amid Protests: Communists’ No. 3 urges integration with Beijing’s development
• Malaysia May Bar Overseas Travel for Those Who Insult Government: Human rights activist prevented from going to South Korea
• Midea Makes Offer to Become Biggest Shareholder in Kuka: German robot maker already helping Midea to automate factories
• Forget About Shenzhen Link Date, Just Buy In, Legg Mason Says: Investors should seize opportunity to position for it instead of guessing a start date

European equities have followed on from yesterday’s trend to trade lower this morning (Euro Stoxx: -0.4%), with energy and material sectors weighing on the index. As such, the FTSE 100 is the worst performing of the major indices, with the likes of Glencore, Anglo America and Rio Tinto among the worst performers in Europe. Bunds have continued to trade within a relatively tight range around the 164.00 level , with the German benchmark initially seeing downside given the supply due out today, combined with the recent downside in T-notes given the rise in expectations of a potential rate hike from the Fed in June. However, heading back into mid-morning , Bunds have pared some of their losses and are moving back towards the aforementioned 164.00 level.

Top European News

• Stoxx 600 down 0.2% to 334
• FTSE 100 down 0.4% to 6141
• DAX down 0.3% to 9864
• German 10Yr yield up 1bp to 0.14%
• Italian 10Yr yield down less than 1bp to 1.45%
• Spanish 10Yr yield up less than 1bp to 1.57%
• S&P GSCI Index down 0.6% to 368.7

In FX, the Bloomberg Dollar Spot Index advanced 0.4 percent at 6:04 a.m in New York, hitting the highest since April 6 in early trade. Australia’s dollar lost 0.8%. The yen slipped 0.3 percent to 109.43 per dollar, after earlier strengthening as much as 0.4 percent. The euro weakened 0.4 percent to $1.1268. The MSCI Emerging Markets Currency Index fell 0.5 percent, the most in two weeks. South Korea’s won, Russia’s ruble, the Mexican peso and Malaysian ringgit dropped at least 0.8 percent.

The UK jobs report was a risk for GBP this morning, and duly continued the healthy data series to show the employment change rising a more than expected +44k, while jobless claims also fell. Earnings were healthy, but a little more mixed when looking at ex-bonus. Nevertheless, the initial Cable response was positive, but extremely short lived, with the look above 1.4450 brief and sellers keen to get long USD’s against the Pound. Elsewhere, EUR/USD made fresh cycle lows just ahead of 1.1255, but USD/JPY gains — so far – have stopped just short of the 109.65 highs seen yesterday . AUD, NZD and CAD have all pushed lower again, but held off their respective (recent) lows. AUD/USD is finding buyers ahead of .7250, as is NZD/USD ahead of .6750. USD/CAD continues to eye 1.3000+ again but Oil prices keep ratcheting higher to deter a full on attack. FOMC minutes ahead are also adding to hesitation, and we expect ranges to tighten up after midday.

In commodities, WTI and Brent had been advancing overnight after draw in API’s last night, but in the EU session prices have fallen from overbought levels with Brent at USD 49.00/bbl and WTI at USD 48.79/bbl respectively. Gold and Silver have also been falling in the European session alongside a broad based sell off in commodities, with Silver testing the USD 17.00/oz level and starting to consolidate at around USD 17.050/oz. Copper fell along with other metals amid rising supplies and an uncertain demand outlook in China, the world’s top consumer. Antofagasta Plc, a Chilean copper producer, said it isn’t counting on an improving global economy and expects low copper prices for another year or two, according to a statement from Chairman Jean-Paul Luksic.

There’s no data due out in the US this afternoon so the focus will be on the FOMC minutes at 7.00pm (BST) a nice warm up for the kick off in Basel 45 minutes later. Away from the data we’ll also hear from the BoE’s Haldane this evening.

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities have followed suit from US and Asian equity performance with material and energy names also lagging in the region
• GBP failed to benefit from a largely upbeat employment report with the USD remaining firmer against its major counterparts following relatively hawkish Fed speak
• Looking ahead, highlight include US Fed Releases Minutes, DOE Inventories & BoE’s Haldan
• Treasuries fall during overnight trading with global equities, while USD strengthened after Fed’s Williams and Lockhart said Tuesday two rate hikes may be warranted this year; April 26-27 FOMC minutes will be released at 2pm ET.
• Fed fund futures fully pricing next rate hike around Jan. 2017, implied rate 63bps, near midpoint of 50-75bp target range
• A decision by the British electorate to withdraw from the European Union in a June 23 referendum could delay the next tightening move from U.S. policy makers by about three months, according to an economic model designed by analysts Jamie Murray, Carl Riccadonna and Dan Hanson
• Jan Hatzius, the chief economist at Goldman Sachs Group Inc., warned bond investors aren’t prepared for the Federal Reserve to raise interest rates
• The U.K. jobs market showed signs of cooling in the first quarter as Britain prepares for an increasingly bitter referendum on its European Union membership
• A thicket of risks from the U.K.’s Brexit vote next month to the U.S. presidential election may lift gold prices even further by year-end, according to Denmark’s Saxo Bank A/S
• With $2.7 trillion of European bonds yielding less than zero, some of the biggest fixed-income investors are looking 50 years ahead to buy government debt they consider decent value
• Haruhiko Kuroda’s pain is China’s gain. The BOJ’s efforts to bolster economic growth have been undermined by the yen’s surge, which is a tailwind for China after the yuan dropped this month to the lowest level versus the yen since 2014
• $28.2b IG Credit priced yesterday, brings weekly volume to $35.475b as May tops $100b mark at $120.26b; YTD $713.715b

DB’s Jim Reid concludes the overnight wrap

The mood of markets is pretty temperamental at the moment with sudden reversals in sentiment seemingly occurring every few days. The S&P 500 closed -0.94% last night, wiping out Monday’s gains. Fedspeak seemed to be a driver and it was interesting to see the US 2s10s curve hit its flattest level since 2007. Specifically it was the joint comments from Atlanta Fed President Lockhart and also San Francisco Fed President Williams that sparked interest after both suggested that they continue to see two to three rate hikes this year. Lockhart also added that markets are currently more pessimistic than he is, while Williams made mention of June being a live meeting and even went as far as to say that his view of gradual hikes also means 3-4 hikes in 2017. Balancing all this were comments from Dallas Fed President Kaplan shortly after who said that a hike may well be warranted in the ‘not-too-distant future’ but warned of the need to consider uncertainty including Brexit risk.

In any case it was the initial hawkish comments which helped to fuel a decent flattening across the Treasury curve. 2y yields ended 4.5bps higher at 0.833% with 10y yields ‘just’ 1.9bps higher at 1.773%. That means the current 2s10s spread of 94bps has marked a new tight for the year and you have to go back to December 2007 to find the last time the spread was this narrow. All of this has also resulted in a decent repricing in Fed Funds futures. The probability of a hike next month has now risen to 12% from 4% on Monday while a July hike has increased to 28% from 19%. The December meeting odds are now sitting at 65% from 56%.

Notwithstanding those moves, there’s still a clearly large gap between where the market is and the recent rhetoric from the Fed. In our view though this is just in keeping with the Fed holding on to full optionality. Importantly we’re still yet to hear from either the Fed President Yellen or Vice-Chair Fischer recently. That will change tomorrow though when the latter is scheduled to speak, while Yellen is pencilled in for a talk at Harvard University on the 27th of this month and then again on June 6th. As we’ve highlighted previously there are a number of big events in June so it looks set to be an interesting six weeks or so ahead.

Meanwhile all this chatter also comes before this evening’s FOMC minutes from the April meeting. They are likely to be a bit outdated now given what we’ve heard from Fed officials and it wouldn’t be a great surprise to see the text as relatively balanced versus the more dovish tone in prior statements.

Changing tact now and switching over to Asia this morning where the bulk of bourses are following the weak lead from the US last night. Indeed the Hang Seng (-1.27%), Shanghai Comp (-1.45%), Kospi (-0.59%) and ASX (-0.19%) are in the red, while Japanese equities initially advanced with the better than expected GDP print, but have now followed the moves elsewhere and are down as we type with the Nikkei and Topix currently -0.46% and -0.14% respectively. Japan’s Q1 GDP printed at +0.4% qoq after expectations were for just +0.1% growth and it means the annualized pace has been lifted to +1.7% qoq from -1.7% previously. That data should provide some relief to an under pressure BoJ although the Yen is starting to strengthen as we type and is perhaps contributing to some of the volatile moves.

There’s also been data out of China this morning too in the form of the latest house price data. April new house prices were reported as climbing in 65 of the 70 cities tracked, compared with 62 in March. It’s the most since December 2013.

Moving on. The latest “Credit Bites” was just out around an hour ago. In it we take a brief look at the basis between CDS and cash in HY by looking at the spread level of the iTraxx Crossover index vs. the asset swap spread of the iBoxx EUR HY Non-Fin index. We specifically highlight that while the two series have followed very similar paths, the CDS-cash basis has turned consistently negative since September 2013 and has generally been lower than -100bps over the past 8-9 months. Given slightly higher ratings for the cash index the stretched relationship poses the question as to whether this highlights relative value for the cash market over CDS or simply a reflection of deteriorating liquidity. All thoughts welcome.

Staying with credit, while price action yesterday in the market largely reflected what was a weaker session for risk assets in the US (CDX IG ending 1bp wider) and a benign session in Europe (Main unchanged), the big news was the pricing of the hotly anticipated bumper deal from Dell. With a reported $85bn of orders according to the FT, the all senior secured deal was eventually upsized to $20bn from $16bn and priced across 6 tranches. Bonds eventually priced at the tight end of guidance with secondary trading said to be supportive. The same FT article suggests that this was the fourth biggest corporate bond sale on record.

Meanwhile, it wasn’t just the Fedspeak that markets had to contend with yesterday, with it also being a relatively busy day for data. Specifically it was the inflation data in the US which the market was most focused on. Headline CPI printed at +0.4% mom in April and slightly ahead of expectations (+0.3% expected) after being boosted by rising fuel prices. That had the effect of lifting the YoY rate by two-tenths to +1.1%. Meanwhile the core print of +0.2% was bang on estimates, although it did cause the YoY rate to edge down one-tenth to +2.1%. Our US economists noted that the details of the latest CPI report provide preliminary evidence that core inflation may level out as rents and medical prices, which together make up 50% of the core CPI, are possibly in the midst of stabilising.

As well as the inflation data, industrial production was reported as increasing more than expected in April (+0.7% mom vs. +0.3% expected) with capacity utilization also edging up five-tenths to 75.4% (vs. 75.0% expected). The April housing starts data showed a +6.6% mom rebound in sales (vs. +3.3% expected) to an annualized rate of 1172k. Building permits rebounded a slightly less than expected +3.6% mom (vs. +5.5% expected).

Elsewhere in Europe it was another fairly uninspiring day of price action with the Stoxx 600 (0.00%) unchanged again (it was +0.01% on Monday) after giving up gains of as much as +1.2% early in the session. While there’s been some reasonable intraday volatility the index is still effectively unchanged since May 3rd now. In the commodity space the day was characterised by yet another advance for Oil. WTI rose another +1.24% to take it past $48/bbl, while Brent closed +0.63% and is creeping closer to testing that $50/bbl level (currently $49.39/bbl). The data in Europe yesterday was focused in the UK and specifically the April inflation data docket. CPI rose less than expected last month (+0.1% mom vs. +0.3% expected) meaning the YoY rate has edged down two-tenths to +0.3%. Meanwhile the core print of +1.2% yoy also missed (+1.4% expected) and is a decline of three-tenths from March.

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