In an overnight session dominated by the latest political developments out of the US where Hillary Clinton officially claimed the democratic nomination, the financial newsflow focused on China’s trade data, where exports fell 4.1% from a year earlier, in line with expectations, but imports dropped 0.4% from a year earlier, the smallest decline since they turned negative in November 2014, likely reflecting higher commodities prices but really driven by “imports” from Hong Kong which rose to $2.48b, the highest since at least 1999; and a 243% y/y surge in dollar term, also a historical high. This means that not only is China’s economy not improving as the “rebound in imports” would suggest, but that instead Chinese trade overinvoicing continues to be used quietly transfer capital out of the country. 

For now however, emerging markets equities and currencies rose for a fifth day, boosted by the “stronger” Chinese trade data, while commodities gained for a sixth day, the longest run in three months, as oil climbed to an eight-month high and metals advanced.  Moments ago, oil rose above $51, climbing 1.4%, to fresh 2016 highs, on the same supply disruption narrative which according to PK  Verleger now accounts for $15 in premium.

The other main news was the official launch of the ECB’s corporate bond buying, which helped drive government bonds yields in German to new record lows, and the average yields on investment-grade corporate debt below 1%. Germany’s 10-year bund yields, already at a record-low, approached zero.  Among the bonds supposedly purchased by the central bank were bonds belonging to Engie, Telefonica, Generali, AB InBev, Siemens, Renault, RWE, and others.  On the back of the ECB’s latest intervention, Germany’s 10-year yield fell to as low as 0.033 percent, the least on record, and was at 0.05 percent as of 10:57 a.m. London time. The yield is likely to test zero as soon as this week, according to the top-ranked primary dealer of the nation’s debt. “The market looks poised to test the level,” said Michael Leister, the Frankfurt-based head of rates strategy at Commerzbank AG. “It can happen over this week. Momentum is quite strong, we’re not that far away from the zero line.”

Meanwhile, the recently dovish Fed is now seen as the catalyst for the next leg higher in stocks: “with global growth moderating, the Fed will be more gradual in its approach to raising interest rates,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital. “That’s going to help boost equities, particularly in emerging markets.” And to think just a week ago it was the hawkish Fed that was boosting equities.

Others disagreed: “markets are generally struggling to find a direction at a time when economic data is not bad, but it’s not great either,” said Michael Hewson, a market analyst at CMC Markets in London. “Ultimately, the global outlook remains pretty weak. The World Bank did not just cut the forecast, it suggested that the risks were tilted to the downside. Now we are getting a little bit of profit taking.”

Judging by futures at session highs as of the moment, the algos don’t really care about the economic data. In fact, global stocks are trading near their highest levels of 2016, having rallied since February as commodities recovered from a quarter-century low to enter into a bull market this week. Government bonds, corporate credit, gold and emerging markets are also rallying, indicating that investors aren’t deterred by a deteriorating U.S. labor market or a cut by the World Bank on its forecast for global growth this year. Central bank stimulus helps explain the moves, with traders adding to bets this week that the Federal Reserve will keep interest rates lower for longer.

“Following the payrolls, clearly the expectations for rate hikes have been scaled back and it gives investors more room to look for more carry,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Given the weak payrolls and that Fed hikes are probably not going to come this summer — maybe in September but at least for the next couple of months it seems less likely — that’s clearly supporting demand for bonds.”

For now, however, the trade is simple: with the ECB backstopping bond purchases, traders are shifting up and down on the balance sheet, and this morning continue to aggressively buying everything from bonds, to commodities, and most certainly, to stocks.

Market Wrap

• S&P 500 futures up 0.1% to 2113
• Stoxx 600 down 0.4% to 345
• FTSE 100 down less than 0.1% to 6283
• DAX down 0.5% to 10239
• German 10Yr yield unchanged at 0.05%
• Italian 10Yr yield down 3bps to 1.39%
• Spanish 10Yr yield down 4bps to 1.42%
• S&P GSCI Index up 0.7% to 385.2
• MSCI Asia Pacific up 0.5% to 132
• Nikkei 225 up 0.9% to 16831
• Hang Seng down 0.1% to 21298
• Shanghai Composite down 0.3% to 2927
• S&P/ASX 200 down less than 0.1% to 5370
• US 10-yr yield down 1bp to 1.71%
• Dollar Index down 0.07% to 93.77
• WTI Crude futures up 0.7% to $50.71
• Brent Futures up 0.9% to $51.90
• Gold spot up 0.7% to $1,253
• Silver spot up 2.1% to $16.73

Top Global News

• Yahoo Offering More Than 3,000 Patents Amid Strategic Reviews: Intellectual property covers search, ads, cloud technology, co. to keep more than 1,000 patents for its core business
• Clinton Claims Historic Victory as Battle With Trump Opens: Declared herself the victor in the Democratic nominating race
• VeriFone Cuts Year Adj. EPS, Rev. Views; Shares Fall 23%: Sees FY2016 adj. EPS $1.85, saw $2.21-$2.24 (March 10); sees FY2016 adj. net rev. $2.1b, saw $2.15b-$2.17b
• Ingenico Leads Payment Companies’ Drop After VeriFone Warns
• Valeant Walks Knife’s Edge of Debt Limits With Forecast Cut: New Ebitda projects are close to limit of debt agreements; files 10-Q report, avoiding nearest risk of default
• Ex-LendingClub CEO Laplanche Has Explored Takeover, Reuters Says: Founder said to approach buyout funds, banks on financing
• Blackstone Said to Be in Advanced Talks to Buy Acrisure: Reuters: Deal could value Acrisure at over $2b incl. debt, Reuters reports, citing unidentified people familiar
• Hiring Plans Axed Amid Election-Year Uncertainty, U.S. CFOs Say: Almost half of U.S. financial chiefs report pullback in plans
• Alstom, GE Accused of Decade-Old Bribes by Ex-Petrobras Official: GE denies wrongdoing; Alstom said no longer in energy business
• IEA Cuts Gas Demand Outlook Again as Glut Seen to End of Decade: Gas use in power generation slows, especially in U.S.
• Amazon Targets India Growth With $3 Billion Investment Boost: Company employs 45,000 in India, sees ‘huge potential’
• Musk: Tesla Working Exclusively With Panasonic on Model 3 Cells
• Gannett May Sweeten $15/Shr Bid for Tribune Publishing: NYP: May only sweeten bid if it looks like it would help close deal, NYP reports, citing unidentified person familiar
• Youtube CEO Sees Snapchat, Facebook, Netflix as Main Rivals: WSJ
• GM Canada to Hire Up to 1k Engineers in R&D Push: Globe & Mail

Looking at regional markets, we start in Asia where the Shanghai Composite Index slipped 0.3% while the Hang Seng China Enterprises Index in Hong Kong gained 0.3 percent. Mainland markets will be closed for holidays for the rest of the week, while Hong Kong’s will shut on Thursday. The MSCI Asia Pacific Index rose 0.5 percent, having been 0.1 percent lower before the Chinese trade figures were released. Japan’s Topix and South Korea’s Kospi advanced 0.8 percent, with the latter capping its highest close since November. Japan’s 20-year bonds advanced, pushing their yield as low as 0.205 percent. South Korean bonds rose on a plan to create an 11 trillion won ($9.5 billion) fund to bolster finances at state lenders. The yield on 10-year sovereign securities dropped two basis points to 1.72 percent.

Top Asia News

• China Exports Stabilize as Imports Hint at Improving Demand: Trade figures look better in yuan terms as currency weakens
• China May Retail Auto Sales Rise 11.4% on Year: China’s retail auto sales in May rose to 1.76m units, Passenger Car Association says
• Yuan Fixing Is Back in Focus as Declines Deepen Against Peers: Central bank surprises traders with reference rate this week
• Japan’s Biggest Bank Considers Exit as Primary JGB Dealer: Move poses questions over BOJ’s negative-rate policy, Iwashita says
• Apple Raises $1.4 Billion in Taiwan on Larger Insurer Appetite: Canada’s Manulife also sells $1b of bonds in Taiwan
• Nissan, Takata Face Criminal Complaint on Japan Air-Bag Rupture: Cos. said they were cooperating with investigation
• 1MDB Defends Liquidity Position After Moody’s Removes Rating: Malaysian fund defaulted on debt in April amid dispute
• StanChart Said to Mull Asia Non-Life Insurance Distribution Deal: Considering inviting bids from insurers to distribute their non-life products through its hundreds of branches and outlets in Asia, according to people with knowledge of matter

In Europe, the Stoxx Europe 600 Index was an outlier as it retreated 0.5%. Roche Holding AG and Novartis AG were the biggest drags, down at least 1 percent. Travel-and-leisure companies and banks posted the biggest declines of the 19 industry groups on the equity gauge. Erste Group Bank AG lost 3 percent after one of its holders sold a stake in the Austrian lender. Miners bucked the trend, with Glencore Plc leading industry gains as commodity prices advanced. Engie added 2.3 percent after the ECB was said to have purchased 3 million euros ($3.4 million) of the French utility company’s debt. German power producers EON SE and RWE AG also climbed. The ECB made its first purchases of corporate debt, including notes issued by Telefonica SA, power company Engie SA and insurer Assicurazioni Generali SpA, according to people familiar with the matter. The central bank is buying non-bank company debt in euros as part of efforts to revive investment and inflation in the region. Its program has helped drive average yields on investment-grade corporate debt in the single currency to below 1 percent, the lowest in more than a year, according to Bank of America Merrill Lynch index data.

Top European News

• Draghi Fires Starting Gun on Corporate Bond Purchases in Europe: ECB started buying corporate bonds on Wednesday, according to people familiar with the matter; Engie, Telefonica, Generali bonds among those bought by ECB
• U.K. Industrial Output Has Biggest Monthly Gain Since 2012: Output rose 2% from March, when it gained 0.3%, economists in a Bloomberg survey had predicted no change
• Fiat Said in Talks With Uber as Marchionne Seeks Tech Ventures: Cos. said to consider partnership on driverless cars
• Daimler Trucks Widens Global Parts Sharing to Bolster Earnings: Aims to boost future earnings with a plan to cut costs by sharing engines, axles and other components across units in North America, Europe and Asia
• Sainsbury Sales Beat Estimates as Price Cuts Stem Decline: Cut prices permanently to stem a loss of customers to cheaper competitors
• Europe’s Political Anguish Spreads From Spanish to Italian Bonds: Spread between two countries narrows to least since Dec.
• Brexit TV Special Sees Cameron, Farage Push Core Messages

In FX, the Bloomberg Dollar Spot Index fell 0.1 percent as the yen strengthened
0.3 percent, buoyed by a government report showing Japan’s economy grew
faster last quarter than was initially estimated. the won strengthened 0.5 percent versus the greenback, after a 1.8 percent surge on Tuesday that marked its biggest jump in six years, while Taiwan’s dollar appreciated 0.3 percent. The countries count China as their No. 1 export market. The MSCI Emerging Markets Currency Index advanced 0.3 percent, poised for the highest close since May 3. Poland’s zloty strengthened 0.2 percent against the euro as the central bank left monetary policy unchanged in Governor Marek Belka’s last meeting before his term ends this month. Gross domestic product expanded by an annualized 1.9 percent, more than a preliminary reading of 1.7 percent.

In commodities, the Bloomberg Commodity Index rose another 0.7% to the highest since October, after entering a bull market on Monday. West Texas Intermediate crude climbed as much as 0.9 percent to $50.81 a barrel. U.S. stockpiles are estimated to have fallen for a third week, a Bloomberg survey showed before official data on Wednesday. Oil has surged about 90 percent from a 12-year low in February amid unexpected disruptions and a continuous slide in U.S. output, which is under pressure from the Organization of Petroleum Exporting Countries’ policy of pumping without limits.  Aluminum rose 2.1 percent on the London Metal Exchange, with zinc, nickel and lead also climbing more than 1 percent. Gold added 0.7 percent, advancing for the third time in four days.

Looking at today’s US calendar, the main release is the JOLTS job opening report for April .

Bulletin Headline Summary From Bloomberg

• Bonds rose with commodities and emerging markets on speculation that central banks will persist with policies that support financial markets
• Treasury 10-year notes are in the highest demand in half a century by one measure as investors prepared to bid at a $20 billion sale of the securities today
• Germany’s 10-year bond yields, already at a record-low, are likely to test zero as soon as this week, according to the top-ranked primary dealer of the nation’s debt
• Mitsubishi UFJ Financial Group Inc. may quit as one of the 22 primary dealers that underwrite auctions of the nation’s bonds; the bank’s President Nobuyuki Hirano has been among the most vocal critics of the negative-rate policy
• The European Central Bank entered a new phase in its efforts to stimulate the flagging euro region’s economy, plunging into the corporate bond market for the first time
• Greek bonds will soon become eligible for the European Central Bank’s asset-purchase program, paving the way for an easing of capital controls, and the gradual recovery of investor confidence, Finance Minister Euclid Tsakalotos said
• U.K. industrial production posted its biggest monthly gain in almost four years in April as manufacturing surged. Output rose 2% from March, when it gained 0.3%
• Hillary Clinton declared herself the victor in the Democratic nominating race and

DB’s Jim Reid Concludes the Overnight Wrap

Markets continue to react reasonably well to Friday’s weak payrolls and Yellen’s relatively dovish tone on Monday night. It remains an odd one though as markets recovered their poise in May after the Fed minutes were more hawkish than expected thus repricing the front end and signalling a summer hike. The narrative was that markets welcomed the confidence the Fed had in the economy. However now we’ve gone back almost full circle markets seem to be happy there is no imminent rate rise. It’s not clear which is the correct interpretation but can both be right? I suppose it boils down to the fact that rate rises can be absorbed if the data is firm and expected to stay that way but less so if data is still ambiguous. For now we’re back in the ‘ambiguous but not awful but with no imminent rate rise’ channel.

Employment numbers are going to be closely watched for a break out from this channel and today brings the monthly JOLTS report – a firm Yellen favourite. As our US economists point out, the data that goes into the JOLTS report are derived from the Establishment Survey which is also used to construct nonfarm payrolls. However it’s worth noting that JOLTS is released with a one-month lag, meaning today’s report corresponds to April. Given the downward revision to the April payrolls report (-37k to 123k) as well as a similar revision lower in March, they expect to see mild deterioration in the three series within the JOLTS that the Fed is focused on, namely the job openings, hirings and quits rates. They also note that the diffusion index of private payrolls has declined meaningfully over the past three months. Our colleagues highlight that the percentage of industries hiring over the three months ending in May (53.2%) fell to the lowest level since March 2010 (47.5%) when the economy was just emerging from recession. With this coinciding with the recent weakness in payrolls growth, a soft number today would be more food for thought for the Fed.

Changing tact now and switching straight over to Asia where there have been a couple of important data releases this morning. In China the trade numbers for May have been released a short time ago. The numbers make for slightly disappointing reading however. In USD terms exports have weakened further during the month to -4.1% yoy (vs. -4.0% expected) from -1.8% in April. Meanwhile, imports have declined -0.4% yoy but that’s a lot less than what was expected (-6.8%) and also relative to April (-10.9%). The end result is a trade surplus of $50bn which is about $4.5bn higher than that of April. There was a similar trend for the numbers in CNY terms. Chinese equity markets were already lower prior to the data and have held onto those losses as we go to print. The Shanghai Comp is currently -0.44%.

Meanwhile we’ve also had some data out of Japan where the final Q1 GDP report was revised up one-tenth as expected to +0.5% qoq, or a quarterly annualized rate of +1.9%. Our economists in Japan note that we should treat the data with caution given the potential overestimate due to the leap-year effect.

The Yen was immediately stronger post the data but has pared back a little now, although is still +0.2% firmer as we type. It’s been alot more volatile for Japanese equity markets however where the Nikkei was down as much as -0.50% post the release, only to now have jumped to a +0.55% as we type. Elsewhere, the Hang Seng is -0.33% while the Kospi and ASX are little changed. It’s hard to gauge how much of an effect, if at all, the new World Bank forecasts released late last night have had. The Bank cut its forecast for global growth this year to 2.4% from the initial 2.9% estimate made in January, with growth for 2017 sketched in as 2.7%.

Moving on. Our latest Credit Bite should have hit your inbox yesterday at around 9pm London time. It is called “Nykredit Bite – The First Tier 3 Bond”. The Danish mortgage provider Nykredit has issued a new type of bond that ranks between senior unsecured and subordinated Tier 2 bonds, hence Tier 3, which the authorities can write down or convert to equity in resolution. Eventually, the latest regulatory requirements on loss absorbency are likely to give rise to a new asset class: Tier 3 bonds of European banks. Please see the note for more details.

Staying with credit, today sees the start of DB’s 20th European Leverage Finance conference which is a huge two day event. I’ll be around for most of it so if you’re about please say hello. I’m kicking off day 2 tomorrow over breakfast so please come along to that. Ahead of the conference yesterday we published our latest Euro HY strategy monthly which takes stock of the market (fundamentals, technicals and valuations) ahead of a busy June. Overall valuations look OK but given the EUR HY index has rallied more than 7.5% from the February lows they are not as attractive as they have been. We remain comfortable with our year-end forecasts (tighter) for now but at some point late cycle will turn into a recession so we have to be vigilant. We still think it’s more a 2017 story but the recent payrolls report raises some risks.
Back to markets. As we highlighted earlier the relatively positive performance post-payrolls continued again yesterday. Despite a late slip into the close, the S&P 500 (+0.13%) still closed a touch higher on the day and in the process is creeping closer and closer to breaking that all time record high in the index set in May last year. Markets in Europe had actually closed with more impressive gains earlier in the day (Stoxx 600 +1.12%) with some of the data there helping. It was another decent performance for Oil however which fuelled much of the positive sentiment. Indeed WTI was up +1.35% yesterday and in doing so closed above $50/bbl (at $50.36/bbl) for the first time since July last year. That means it’s now up a fairly remarkable 93% from the intraday February lows with the recent supply disruptions in Nigeria still seemingly driving the recent support.

Also helping is a slightly softer US Dollar despite the post payrolls weakening for the Greenback starting to show signs of fatigue. Some of the more eye catching moves yesterday though came in rates markets and particularly in Europe. Most notable of the bunch was the move in the 10y Bund with the yield closing 3.6bps lower on the day at 0.048% – a new all time record low. With the ‘umlaufrendite’ already in negative territory at -0.01%, the move yesterday for the 10y means it is one step closer to joining Switzerland and Japan in the negative 10y yield camp. There’s still some way to go to matching that of the Swiss though with yields there in negative territory up until the 21y maturity. Remarkable. Bloomberg in fact reported yesterday that 42% of bonds in its Eurozone Sovereign Bond Index have negative yields.
Meanwhile, over in credit markets price action yesterday was relatively subdued although there were plenty of headlines being generated from US HY giant Valeant. Earlier in the day the company again slashed its earnings outlook for this year (the second time it has done so) with the bonds taking another dip lower as a result. The share price also plummeted nearly 15%. Post the close though we then got the announcement from the company that it has filed its delayed 10-Q report and so actually beating a self-imposed deadline. That of course comes after creditors had sent the company notices of default due to the breach. This saga looks set to continue for some time though.

Away from this, the positive takeaway from yesterday’s data flow was largely focused in Europe. In Germany we saw industrial production for April come in a little better than expected during the month (+0.8% mom vs. +0.7% expected) which has helped lift the YoY rate to +1.2% from +0.3%. Meanwhile, the final take of the Q1 GDP report for the Euro area saw growth revised up a tenth from the initial estimate to +0.6% qoq. That has had the effect of keeping the YoY rate unchanged at +1.7%. Meanwhile across the pond yesterday the final Q1 reading for nonfarm productivity was revised up four-tenths to -0.6% qoq, while unit labour costs for the first quarter was also revised up an equal amount to +4.5% qoq. Elsewhere the IBD/TIPP economic optimism came in bang in line with expectations at 48.2, although that was disappointingly down half a point from last month. Finally credit growth was reported as $13.4bn in April (vs. $18.0bn expected) with the gain in revolving credit being the smallest in three months.

When the machines saw that US crude production rose by the most since Jan 1st, prices plunged back below $51… but the machines didn’t like that, and following last night’s API-reported draw, DOE confirmed the 3rd weekly drop in inventories for overall crude and Cushing (the latter more than expected) which juiced oil prices back higher. However, DOE also showed considerably larger than expected builds in Gasoline and Distillates(biggest in 2 months).

API

• Crude -3.56mm (-3mm exp)
• Cushing -1.3mm (-900k exp)
• Gasoline +760k (-100k exp)
• Distillates +270k

DOE

• Crude -3.23mm (-3mm exp)
• Cushing -1.36mm (-900k exp)
• Gasoline +1.01mm (-100k exp)
• Distillates +1.75mm

Third weekly draw in a row for overall crude inventories and Cushing but Distillates and Gasoline surprised with large builds.

Sore more details: while commercial stocks did decline by 3.3MM barrels, this was less than last night’s 3.6MM API drop. This was to be expected as May-July are traditionally a period of aggressive draws in the physical market.

However, it is noteworthy that total crude and product stocks rose +3.2 million bbl last week reversing the prior week -2.7 million bbl decline

Gasoline stocks rose by 1MM, well above the expected 2.0MM draw.

Also notable was the increase in distillate inventory, which rose 1.754MM, far above the -700K expected…

And also notable is that distillate demand for this week was only +0.004 mbpd higher than the lowest level in the past 12 years seen in 2009 at 3.572 mbpd

But most importantly, production rose for the first time in 18 weeks and by the most since Jan 1st:

Have shale companies balanced out already?

Don’t look at the market for the answer where the reaction is pure chaos:

For the 6th day in a row, the fact that the US equity market is ‘open’ has been a panic-buying event for “investors” – no matter what the overnight trading activity or news…

Another day, another vertical ramp at the open to tag stops…

Is this what human traders do? Perhaps now that the BTFD no matter what doctrine has been written into the constitution (no matter what fundamentals are doing).

Bonds and FX still are not buying whatever stocks are drinking…

Treasury yields are testing post-payrolls lows wioth 10Y below 1.70% once more – crushing Fed credibility.