After a head-scratching S&P500 rally – which not even Goldman has been able to justify – pushed stocks to new all time highs with seemingly daily record highs regardless of fundamentals or geopolitical troubles, overnight US equity futures dipped modestly, tracking weak European stocks as demand for safe haven assets including U.S. Treasuries and gold rises. Asian stocks outside Japan fall. Crude oil trades near $45 a barrel. 

Europe’s Stoxx 600 Index slid 0.9% following equity declines in Hong Kong and Singapore. The Aussie tumbled 1 percent as the Reserve Bank of Australia said the jobs market was losing momentum amid weak inflation. The kiwi lost ground against all 31 major peers after policy makers moved to rein in the nation’s housing boom, clearing an obstacle to lowering borrowing costs. Treasuries gained as Morgan Stanley predicted the yield on 10-year debt will sink to 1 percent in the first quarter of 2017.

Some of the European weakness was due to a ruling by the European Union’s top court which backed EU guidelines designed to prevent taxpayers from footing the bill for bailing out stricken lenders, strengthening the hand of Brussels regulators as Italy fights to shield some bondholders caught up in the nation’s banking crisis. As Bloomberg reports, Tuesday’s decision is a show of support for the European Commission, which updated its crisis rules for banks in 2013 as part of a shift from taxpayer-funded bailouts to bail-in, the practice of imposing losses on investors before public money can flow.

“Burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorization, by the commission, of state aid to a bank with a shortfall is not contrary to EU law,” according to the EU Court of Justice. The Luxembourg-based court’s decision is binding and can’t be appealed. The European Commission, which checks whether state aid violates EU rules, welcomed the ruling, which it said “confirms the commission’s current case practice and application of EU state aid rules to the banking sector.” The ruling also made the case for a bailout as opposed to a bail in more difficult and Italian banks dropped after the decision with Banca Monte dei Paschi declining as much as 7.1%. UniCredit SpA slipped 3.2% in early trading, while Intesa Sanpaolo SpA decreased 2.5%. 

In addition to Italy’s banking slump, European mining companies led losses with Rio Tinto Group sliding 2.1% in London after reporting that second-quarter iron-ore production rose a weaker-than-expected 7 percent. Worse-than-estimated quarterly results from Akzo Nobel and Trelleborg dragged European stocks lower.

European weakness dragged down US equities, with futures on the S&P 500 Index dropping 0.4% after another all time high close yesterday.

As a result, some wondered if the hopium inspired rally is finally coming to an end: “The market is taking a pause,” said Tony Farnham, a strategist at Paterson Securities in Sydney. “There isn’t much of a catalyst out there. People are starting to question if there’s still value in the market following the post-Brexit rally.”

Others chime in: “There is a lot of hope built into U.K. share prices currently – hope on economic growth and hope on the political side,” said Robert Parkes, HSBC’s head of European equity strategy. “There is an unprecedented level of uncertainty on both of those issues. U.K. shares, including the FTSE 100, are in for a bumpy ride over the course of the next few months – in a downward direction.”

Some expressed outright skepticism: “On current sentiment it seems likely that any pullbacks will be shallow and a buying opportunity,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne. “We will need to see good earnings, or the market is at risk of rolling over.”

Still, for now the prevailing sentiment is that all dips are to be bought until proven otherwise by algos. This won’t happen, however, if central banks finally unleash the much-jawboned additional stimulus, especially now that the IMF is also in the fray. As Bloomberg adds, policy makers are under pressure to unleash stimulus as the global economic outlook shows signs of worsening. The IMF is set to update its projections for world growth on Tuesday and Managing Director Christine Lagarde warned last week that estimates may be cut. Nonetheless, global equities have recovered to above where they were at the time of the U.K.’s vote to leave the European Union and the U.S. earnings season has so far delivered more positive surprises than negative ones.

Elsewhere, the MSCI Asia Pacific excluding Japan Index fell 0.4%, with benchmark gauges in Hong Kong and Singapore losing at least 0.5%. Japan’s Topix index rose 1.1% from Friday’s close, buoyed by Monday’s slide in the yen. SoftBank Group Corp. tumbled 10%, its biggest loss since 2012, after agreeing to pay $32 billion for ARM Holdings Plc. The U.K-listed chipmaker was little changed after soaring 41% on Monday.

The modest unwind in risk-on positions, meant that 10Y U.S. Treasuries gained for the first time in four days, pushing their yield down by three basis points to 1.56 percent. The yield reached 1.60 percent in the last session, the highest it’s been since June 24, when the Brexit vote count was announced.

Market Snapshot

• S&P 500 futures down 0.4% to 2153
• Stoxx 600 down 0.9% to 335
• MSCI Asia Pacific up less than 0.1% to 134
• US 10-yr yield down 4bps to 1.54%
• Dollar Index up 0.16% to 96.71
• WTI Crude futures down 0.3% to $45.12
• Brent Futures down 0.4% to $46.79
• Gold spot up 0.4% to $1,334
• Silver spot down 0.4% to $19.97

Top Global News

• Turkey’s central bank will likely slow the pace of interest rate cuts after the failed coup attempt triggered a selloff in TRY and sovereign debt
• Turkey Baa3 Ratings May Be Cut to Junk by Moody’s
• U.K. inflation accelerated more than economists forecast in June boosted by airfares on trips to continental Europe
• German ZEW investor sentiment deteriorates in Brexit aftermath
• New Zealand’s central bank is moving to quell the country’s housing boom by restricting the amount of money property investors can borrow, paving the way for another cut in interest rates
• Honda Audit Finds Takata Engineers Manipulated Air-Bag Data: Takata engineers gave ‘prettier shortened version’ to Honda
• Oil Trades Near $45 Amid Speculation U.S. Output May Climb: Nationwide supplies to decline by 2.1 million barrels: survey
• U.K. Inflation Rate Rises More Than Forecast on Airfare Surge: Rate rose to 0.5 percent from 0.3 percent in May, partly due to Euro 2016 football championship in France
• Investor Challenges Baidu on Sale of Video Service to CEO: Hedge fund urges Chairman Robin Li to withdraw iQiyi bid
• Morgan Stanley Says Year of the Bull Will Push U.S. Yield to 1%: Hornbach says yield will fall to 1% in 1Q 2017, more bullish than any of 61 economists surveyed
• Netflix Stumbles on Path to World Domination With Price Hike: Results show subscribers more sensitive to costs than thought
• Murray Energy Working to Renegotiate Credit Terms: Reuters
• Thrive Capital Said to Have Raised $700m for Fifth Fund: NYT
• Lufthansa Said to Join Airbus, Honeywell on Runway System: WSJ

Looking at regional markets, Asian stocks outside Japan fell from their highest levels in almost nine months as commodity producers led losses.  4 out of 10 sectors fall with industrials, energy underperforming and telcos, financials outperforming.  The MSCI Asia Pacific was up less than 0.1% to 134, unmoved by the latest Nikkei 225 jump 1.4% higher to 16723. Elsehwere the Hang Seng down 0.6% to 21673, while the Shanghai Composite was down modestly by 0.2% to 3037 and the S&P/ASX 200 down 0.1% to 5451

Top Asian News

• Son Invokes Yoda of Star Wars on SoftBank Debt as Bonds Fall: SoftBank 5.375% bond yield jumped most since issuance Monday
• Asia Embraces Bullet Trains as Singapore, Malaysia Sign Deal: Singapore-KL link will follow projects in Indonesia, India
• Vietnam Faults as ‘Untruthful’ China Media Reports on Sea Ruling: China claims nations support its stance on South China Sea
• India to Inject $3.4 Billion to Boost Capital of 13 State Banks: State Bank of India, Indian Overseas Bank among lenders
• Bank of East Asia Shares Fall After Elliott’s Legal Action: action escalates battle against BEA management
• China Said to Create Immigration Office to Lure Overseas Talent: First-of-its-kind agency could be set up before year’s end

Over in Europe, the Stoxx Europe 600 Index retreated 0.4 percent as of 8:12 a.m. in London, following equity declines in Hong Kong and Singapore. The Aussie tumbled 1 percent as the Reserve Bank of Australia said the jobs market was losing momentum amid weak inflation. The kiwi lost ground against all 31 major peers after policy makers moved to rein in the nation’s housing boom, clearing an obstacle to lowering borrowing costs. Treasuries gained as Morgan Stanley predicted the yield on 10-year debt will sink to 1 percent in the first quarter of 2017, lower than any of the 61 estimates in a Bloomberg survey.

Top European News

• Airbus Said to Cut in Half A400M Deliveries for 2016 to Germany: Planemaker grappling with gearbox, engine, fuselage faults
• EU State-Aid Rules for Banks in Crisis Backed by Top Court: Decision comes as Italy and EU seek solution on investor burden-sharing
• Ericsson Plans More Cost Cuts as Revenue Trails Estimates: Network maker to reduce research on Internet products as demand for wireless gear falling in Europe, Russia, Brazil
• Volvo Cuts North American Market Outlook as Orders Slump: Truck orders in North America fell 29% in second quarter
• Akzo Signals Europe Paint Demand Slowed, Marring Profit Run: Slowdown in U.K. paint sales has yet to recover, customers are reporting increased volatility in order patterns

In FX, the Aussie slipped 1 percent to 75.16 U.S. cents, after strengthening in each of the last seven weeks. Minutes published Tuesday from the RBA’s July 5 policy meeting showed that the central bank estimated the economy to have slowed last quarter and policy makers were concerned about currency appreciation. The likelihood of an August rate cut has increased to 56 percent from 45 percent over the past week, derivatives indicate.  New Zealand’s dollar dropped 1.3 percent. The central bank said it will require property investors buying housing in the nation to have a deposit of at least 40 percent from Sept. 1, compared with an existing requirement that such buyers in Auckland have at least a 30 percent deposit. Swaps traders are pricing in a 77 percent chance of an RBNZ rate cut on Aug. 11, compared with 39 percent a week ago. The yen strengthened 0.1 percent to 106.10 versus the greenback, after sliding 1.2 percent in the last session. It was trading at about 106 prior before the outcome of the Brexit vote. The currency tumbled 4.1 percent last week as Japanese Prime Minister Shinzo Abe outlined plans for a “bold”stimulus package in the wake of an election victory. Poland’s zloty led losses among emerging-market currencies, weakening by 0.4 percent. Malaysia’s ringgit fell 0.3 percent. China’s yuan was among the best performers with a 0.1 percent gain.

In commodities, crude oil fluctuated around $45 a barrel. It slid 1.6 percent on Monday after a failed coup attempt in Turkey failed to disrupt shipments through the country, a vital conduit for moving from Russia and Iraq to the Mediterranean Sea. Gold rose from a two-week low, while copper declined 0.1 percent in London.

Bulletin Headline Summary from RanSquawk and Bloomberg

• Treasuries higher in overnight trading as global equities drop with oil and gold rises. Today’s data includes housing starts and building permits.
• Morgan Stanley’s Matthew Hornbach called this year’s Treasury market rally. Now he’s revising his forecasts and is more bullish than just about anyone else, calling for 10Y U.S. yields to fall to 1% in the first quarter of 2017
• Republican Party approved a platform Monday that ostensibly calls for breaking up the biggest banks by reinstating the Glass-Steagall Act
• German investor confidence deteriorated in July on concern that Britain’s decision to leave the European Union could weaken the region’s fragile economic recovery
• The EU’s top court backed EU guidelines designed to prevent taxpayers from footing the bill for bailing out stricken lenders, strengthening the hand of Brussels regulators as Italy fights to shield some bondholders caught up in the nation’s banking crisis
• China’s cabinet fueled speculation that the nation is pressing ahead with debt-to-equity swaps that would give lenders stakes in some companies as part of tackling a build-up in corporate leverage and bad loans
• Sales of London homes under construction slumped 34 percent in the second quarter as the prospect of a vote to leave the European Union damped demand already hurt by higher taxes

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DB’s Jim Reid concludes the overnight wrap

The hot weather seemed to make for bit of a lethargic session in markets yesterday, although some M&A activity in the tech space and also another better than expected earnings report in the bank sector – this time from BofA – helped stocks eke out modest gains. The S&P 500 finished +0.24% by the time the closing bell came around with the Nasdaq (+0.52%) up a little more. The intraday high-to-low range for the former has not exceeded 0.65% in the last four sessions, a sign perhaps that we’re finally starting to see a little bit of consolidation in markets ahead of the summer lull. Treasury yields also inched a few basis points higher although rate hike expectations actually dipped ever so slightly. The European session was a little more mixed, although again moves were fairly modest for the most part. The Stoxx 600 ended +0.23%, while the DAX (-0.04%) nudged slightly into the red. Turkish equities plummeted over 7% following the failed coup late on Friday although that was about the extent of the fallout with markets elsewhere fairly resilient.

That M&A activity we mention came in the form of Japanese telecom group Softbank’s takeover of the UK’s semiconductor designer ARM Holdings in a bumper £24.3bn deal. The deal would be one of the largest European technology deals and SoftBank’s largest acquisition to date. Much of the chatter is that this would likely be seen as a bit of post-Brexit confidence for deal activity in the UK although it’s worth noting that ARM derives the vast majority of its revenues outside the UK (mainly Asia and North America) and would likely have been relatively immune from Brexit. On the face of it the roughly 11% fall for Sterling (vs. the Yen) would also make the deal more attractive although this has been more than offset by the c.16% move higher for ARM’s shares since the vote to Friday’s close. Yesterday ARM’s share price rallied 41% following the news.

Meanwhile, on the earnings front Bank of America continued what’s been a fairly decent start for US bank earnings after reporting Q2 results ahead of both earnings and revenue expectations, with better than expected fixed income trading revenues again being a big driver of that as we saw with JPM and Citi. It’s worth noting however that while BofA’s Q2 EPS of 0.36c was above the 0.32c expected, that Bloomberg consensus forecast was at 0.36c just two week ago, so another good example of how last minute analyst revisions can help to boost the initial headline numbers.

Away from this the tech sector also kicked off with a few earnings reports of its own. Coming after the closing bell, the slide in IBM’s revenue was not quite as bad as feared, although another quarter of negative revenue growth made it 17 consecutive quarters that revenue has fallen in YoY terms. Meanwhile Yahoo’s results were a bit more mixed, while Netflix disappointed on subscriber numbers, sending shares down some 17% in extended trading at one stage.

Switching over to Asia this morning, Japan aside the bulk of bourses are trading with a weaker tone as we go to print. The Hang Seng (-0.59%), Shanghai Comp (-0.60%), Kospi (-0.41%) and ASX (-0.21%) are all in the red, with a second consecutive daily decline for Oil weighing slightly. In Japan the Nikkei (+0.47%) is up although is playing catch up somewhat having just reopened from a public holiday. That performance is more impressive given the 10% slide in SoftBank shares this morning. Elsewhere US equity index futures are also slightly in the red following those earnings last night after the bell. In FX the Aussie Dollar is -0.85% after the RBA meeting minutes came across as slightly dovish, while the Kiwi Dollar is -1.08% after the RBNZ announced its intention to tighten existing LVR restrictions on residential mortgage lending from September.

Moving on. Over in credit markets yesterday one headline which caught our eye came from the Canadian Imperial Bank of Commerce (CIBC) which became the first non-German and non-CBPP3 eligible EUR benchmark to issue a covered bond with a negative yield. Indeed the €1.25bn 6y bond was issued at -0.009% according to Bloomberg. Another incredible statistic from the current era of negative rates.
Staying with credit, yesterday the ECB released its holdings from its CSPP program for the first time. There didn’t appear to be any surprises on the list but there was confirmation that they’ve purchased split IG rated names like Telecom Italia and Lufthansa which shows they’re happy to buy what are effectively HY names in index terms. By also buying Glencore they’ve shown that they’re not afraid to buy names that have been under pressure and are not sticking strictly to Eurozone only entities. So it’s confirmation that we expect them to take a rules based approach over a credit selection process.

In terms of run rate, their holdings as of 15 July 2016 were €10.427bn. This implies net purchases settled last week of €1.953bn with an average daily run rate of €391m. This compares favourably with an average daily run of €401m since the program started. So there has been no real sign of let up in their buying in July in spite of holiday season starting. August might be trickier and then the run rate in the autumn might depend on the volume of new issuance as secondary will get increasingly more challenging as the easy looser bonds are purchased.

In data terms the calendar was relatively quiet yesterday with a 1pt fall in the NAHB housing market index in the US to 59 (vs. 60 expected) the only data of note. There was a bit of chatter over at the BoE however where we heard from the MPC’s Martin Weale. The committee member said with regards to the uncertainty stemming from Brexit, that ‘this uncertainty points to the argument that we should wait for firmer evidence before making any policy change and least in the absence of any strong arguments for an immediate change’. It’s worth highlighting that the post-Brexit data flow is limited still although this Friday we will get the flash July PMI’s in the UK where expectations are for a decent leg lower.