S&P Futures Flat As Europe, Asia Lifted By Banks, Yen; All Eyes On The Bank Of England

In a mostly quiet session, European and Asian stocks rose, pushed higher by financial stocks and the USDJPY which initially dipped on some hawkish comments by BOJ deputy governor Iwata, only to rebound later in the session, lifting the Nikkei 1.1%, while the Stoxx 600 rose 0.4% led higher by the banking sector. S&P futures are unchnaged after yesterday’s last hour ramp. The key event is the BOE decision due in half an hour, which saw the pound dip initially only for cable to regain all losses in recent trading, despite a 100% price in expectation that Mark Carny will deliver the first interest rate cut in seven years.

Ahead of the BOE Super Thursday, currency traders are bracing for the BOE to provoke share price swings: a measure of overnight volatility for sterling against the dollar was near the highest since Britain voted to leave the European Union in June according to a Bloomberg report. After holding fire last month, the BOE is expected to cut rates amid mounting evidence that the prospect of Brexit is already hurting economic growth. There are a suite of other measures, including an expansion of its bond-purchase program, which the BOE may also adopt to tackle the fallout, and which would weigh on the pound.

“I think a cut plus 100 billion pounds in new quantitative easing is probably the barrier (to more falls),” said Richard Benson, co-head of portfolio investment at currency fund Millennium Global in London.

“There is quite a lot of speculation regarding what the BOE might do today, so the short-term volatility is to be expected,” said Mark Dowding, a London-based partner and money manager at BlueBay Asset Management LLP. “We doubt the BOE would be opposed to the idea of the pound falling further as it would support the growth outlook, which is deteriorating markedly. We see the pound falling to $1.20 or lower by the end of the year.”

The Stoxx 600 advanced 0.4 percent in London, after falling 1.9 percent in the first three days of the week. Gauges of lenders and oil companies rallied at least 1.4 percent.  Banks led the Stoxx Europe 600 Index higher, while mining shares and energy producers drove the Asian index up from its lowest level since June 24. U.S. crude held above $40 a barrel after the steepest drop in gasoline supplies since April soothed concern over a glut. Industrial metals fell as maintenance-related disruptions in China’s stainless-steel production decreased demand for the raw materials. Siemens AG rose 4.1 percent after increasing its profit outlook for the second time this year. Societe BIC SA jumped 5.6 percent as the maker of pens said sales rose in the second quarter. Aviva Plc advanced 5.1 percent as the British insurer reported a gain in profit and increased its dividend. Randgold Resources Ltd. tumbled 9.5 percent, pacing declines on a measure of Stoxx 600 miners, as a decline in gold output arising from disruptions at two of its African operations led to lower profit.

The MSCI Emerging Markets Index climbed 0.7 percent, after sliding 1.6 percent in the previous two days. Benchmarks in Russia, Dubai and the Philippines gained at least 0.8 percent. S&P 500 futures were little changed, after U.S. equities Wednesday snapped a two-day losing streak amid the rally in oil prices. The index is trading near its highest multiple in more than a decade. Still, investors are looking for clear signs of economic progress after last week’s disappointing growth report, and will asses releases on jobless claims and factory orders due Thursday for clues on the strength of the U.S. economy.  The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose 0.3 percent, rebounding from the biggest drop in four weeks. The Shanghai Composite Index ended the day up 0.1 percent, after falling as much as 0.7 percent.

Treasuries were little changed, with yields on notes due in a decade steady at 1.55 percent. Ten-year rates jumped at the start of this week, as the record-setting rally in global bonds appeared to falter. Yields on German 10-year bunds lost 1 basis point to minus 0.05 percent.

After yesterday’s torrid rally, WTI fell back under $41, slipping 0.5 percent to $40.50 per barrel, after Wednesday’s 3.3 percent rebound that came when U.S. government data showed gasoline stockpiles fell by 3.26 million barrels last week, the most since April. Brent crude dropped 0.7 percent to $42.82 a barrel.

Market Snapshot

• S&P 500 futures down less than 0.1% to 2157
• Stoxx 600 up 0.5% to 337
• FTSE 100 up less than 0.1% to 6638
• DAX up 0.7% to 10237
• German 10Yr yield down 1bp to -0.05%
• Italian 10Yr yield down 3bps to 1.19%
• Spanish 10Yr yield down 2bps to 1.07%
• S&P GSCI Index down 0.3% to 335.9
• MSCI Asia Pacific up 0.7% to 135
• Nikkei 225 up 1.1% to 16255
• Hang Seng up 0.4% to 21832
• Shanghai Composite up 0.1% to 2982
• S&P/ASX 200 up 0.2% to 5476
• U.S. 10-yr yield up less than 1bp to 1.55%
• Dollar Index up 0.13% to 95.69
• WTI Crude futures down 0.8% to $40.50
• Brent Futures down 0.9% to $42.60
• Gold spot down 0.5% to $1,351
• Silver spot down 1% to $20.20

Top Headline News

• What to Watch as Carney Kicks Off Defense Against Brexit Fallout: Most economists predict reduction in key rate to 0.25%
• Berkshire Said to Draw Fed Scrutiny Over Wells Fargo Investment: Agencies weigh whether insider-credit limits exceeded at bank
• New York State to Require Hearing on Proposed Anthem-Cigna Deal: Regulator says purchase would reduce competition, hurt firms
• This Time, 3D Printer Makers Think They’ve Found a Sweet Spot: HP says new device cheaper, works 10 times faster than rivals’
• Goldman Employees to Pull $350m From Och-Ziff Fund: Setback for Och as clients pull assets, U.S. probe continues
• Tesla Forecasts Ease Sting as Quarterly Loss Trails Estimate: Loss was $1.06-share on added engineering costs for Model 3
• Musk Declares Tesla Free From Factory Hell With Targets Intact: Assembly of electric semi, bus could begin in a few years
• MetLife Profit Falls 90% on Review of Annuities Slated for Exit: CEO cites progress in plan to separate business
• Fox Profit Tops Estimates as Broadcast TV Registers Gain: Film earnings slump on marketing costs for big summer pictures
• Allstate 2Q Adj. EPS, Revenue Top Estimates: Net investment down $27m y/y
• Ackman’s Pershing Square Sells Position in Canadian Pacific: Move comes after transformation of Canadian railway firm

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Looking at regional markets, Asia traded mostly positive, tracking the US oil inspired gains where WTI rose above USD 41/bbl and the Dow snapped a 7-day losing streak. ASX 200 (+0.2%) was underpinned by the gains in energy after oil’s 3% surge whilst mining names also supported the advances in Australia. Nikkei 225 (+1.1%) saw choppy trade with fluctuations in JPY driving price action. Chinese markets were mixed with bargain-buying observed in the Hang Seng (+0.5%), while the Shanghai Comp (+0.1%) underperformed following a reserved liquidity injection and after yesterday’s NDRC comments regarding lower rates and RRR were retracted from the statement. 10yr JGBs resumed its post-BoJ downtrend with demand dampened as participants awaited a 10yr inflation-linked auction, which was relatively mixed with the lowest accepted price falling from prior, although b/c slightly improved and there was a lower portion of bids allotted at the bottom price.

Top Asian News

• Offshore Yuan Forwards Signal Depreciation Bets at Two-Year Low: Bears surrendering, getting out of short trades, Mizuho says
• $75b Stock Binge Looms After Japan Pension Whales’ Losses: Pension funds combined managed $1.9t as of March
• Toyota Cuts Net Forecast as Yen Gains, Americans Snub Cars: Stronger yen drags on earnings after 3-year tailwind
• SunEdison India Sale Said to Draw Khazanah, Hinduja Brothers: U.S. clean-energy giant selling $700m of India projects
• Yum! Brands, McDonald’s Look for Buyers as Chinese Tastes Shift: Both eye spinoffs of their China operations
• BOJ Seen Buying More Often to Reach $59b ETF Target: Bank boosts daily purchase amount only slightly this month

European equities have seen some modest upside this morning (Euro Stoxx: +0.5%) with earnings yet again dictating the latest state of play, while the FTSE 100 underperforms relative to its counterparts with pressure from mining and energy names. Financials lead the pack as analysts and traders look to the BoE’s Super Thursday (full preview posted here). Fixed income markets are also relatively quiet ahead of the key risk event of the BoE and with Spanish and French supply now absorbed by the market. Heading into 1200BST Gilts will likely take focus amid speculation that asset purchasing could be re-introduced by the BoE.

Top European News

• Siemens Raises Outlook After Quarterly Profit Beats Estimate: 3Q industrial operations profit rises 20%
• Anheuser-Busch InBev to Dominate Combined Brewer’s Leaders: Board to include 1 executive from SABMiller
• Merck KGaA Quarterly Profit Beats Estimates: Forecast raised
• Nokia Raises Merger Savings Target as Sales Trail Estimates: CEO Suri promises more cut costs after Alcatel-Lucent deal
• London Stock Exchange Says Brexit May Erode Trading Volume: Work on regulatory consent for Deutsche Boerse deal underway
• Adidas’s North America Sales Jump 26% After Outlook Raised: Greater China is fastest-growing region with 30% growth
• Samsung Said in Talks to Buy Assets of Fiat Auto-Parts Unit: Company most interested in lighting, entertainment, telematics

In FX, sterling declined 0.2 percent to $1.3295 in early trading as swaps pricing showed a 100 percent chance of a rate reduction. The BOE is forecast to cut its benchmark from a record low of 0.5 percent and may boost an asset purchase program that stands at 375 billion pounds ($500 billion).The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was up 0.1 percent after rising 0.3 percent on Wednesday, when emerging-market currencies led declines. Chicago Federal Reserve President Charles Evans told reporters Wednesday that a U.S. rate hike “could be appropriate this year.” Odds on the Fed boosting benchmark borrowing costs in 2016 have dropped to 39 percent, with last week’s weaker-than-expected U.S. growth data damping prospects for tightening. The yen weakened 0.3 percent to 101.54 per dollar, adding to its 0.4 percent slide on Wednesday. Japan’s currency has gained about 0.5 percent this week, as traders weigh the BOJ’s decision last Friday to only bolster purchases of exchange-traded funds, as well as a fiscal package flagged Tuesday by Prime Minister Shinzo Abe.

In commodities, WTI crude slipped 0.3% to $40.72 per barrel, after Wednesday’s 3.3% reboundthat came when U.S. government data showed gasoline stockpiles fell by 3.26 million barrels last week, the most since April. Brent crude dropped 0.7 percent to $42.82 a barrel. WTI is still down more than 1 percent this week, after the commodity sold off on Monday and Tuesday amid resurgent concern over a global glut. Citigroup Inc. to Bank of America Merrill Lynch predicted the slump would be short-lived, while Societe Generale SA said the price correction would be limited due to a better balance between supply and demand. “We’re seeing rebalancing,” Scott Darling, regional head of oil and gas at JPMorgan Chase & Co., said in a Bloomberg TV interview. “We think in the near-term, oil will be under pressure because demand is moderating.” Gold for immediate delivery dropped 0.5 percent to $1,351.47 an ounce, after declining 0.4 percent on Wednesday. Last session’s retreat halted the precious metal’s longest rally in a month. Copper dropped 1.2 percent on the London Metal Exchange and nickel fell 2.2 percent. Wheat added 1.3 percent to $415.50 a bushel as use of the crop to feed cows, chickens and pigs is set to rise to the highest level since 2007 after heavy rains in France left crops unfit for human consumption. Noble Group Ltd. rebounded as much as 16 percent in Singapore as the company’s new rights shares began trading on the exchange, extending a roller-coaster ride ahead of quarterly results next week that’ll shed light on the commodity trader’s performance, funding and plans for asset sales.

On today’s calendar, the key event is the aforementioned BoE monetary policy meeting outcome followed by Governor Carney’s press conference. Away from that, in the US we’ll firstly get the latest initial jobless claims numbers, shortly followed by June factory orders data where headline orders are expected to have fallen -1.9% mom. We’ll also get confirmation of any final revisions to the June durable and capital goods orders data. Away from the data the Fed’s Kaplan is due to speak this morning in Shanghai while the IMF’s Lagarde will speak this afternoon in Brazil. There will be more corporate earnings released too with 28 S&P 500 companies scheduled including Kraft Heinz. In Europe we’ll get numbers from Adidas, Nokia and Siemens.

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Headline Summary Bulletin from RanSquawk and Bloomberg

• European equities trade modestly higher heading into the North American crossover with some participants choosing to sit on the sidelines ahead of the BoE rate decision at 1200BST
• FX markets have also seen a relatively tame start to the session with markets pricing in a 25bps cut by the BoE later today
• Looking ahead, highlights include BoE rate decision, minutes, QIR and press conference, US Factory Orders, Durable Goods and Initial Jobless Claims, Fed’s Kaplan
• Treasuries steady in overnight trading as global equities rally, oil and gold drop ahead of this morning’s BOE announcement.
  When the BOE publishes their first full assessment of what the Brexit vote means for the economy and their defensive plan, almost all economists in a Bloomberg survey believe the benchmark rate will be reduced to a record low
• Negative rates “won’t happen at this meeting” but “I certainly don’t rule it out,” former Bank of England policy maker Danny Blanchflower said on BBC Radio’s Today program
• U.S. regulators are examining whether Berkshire’s stake in one of its biggest holdings, Wells Fargo, violates rules for how much credit banks can extend to corporate insiders, according to two people familiar with the review
• The BOJ doubled its exchange-traded fund purchases, suggesting it’s opting to increase the daily amount from now on rather than how often it buys. Investors are watching how the bank will reach its new target as Japanese equities struggle in 2016
• Kozo Yamamoto hasn’t wasted any time pushing his policy prescriptions since Japanese PM Abe brought him into his cabinet. “I think it might be necessary to encourage a discussion throughout all ministries about a wage target policy,” Yamamoto told reporters
• Six weeks since U.K. voters rebuked Europe’s political elite by choosing to leave the EU, the region’s establishment has reacted by carrying on as before. The revolving door of former policy makers joining the finance industry has spun again

Economic Event Calendar

• 6:15am: Fed’s Kaplan speaks in Shanghai
• 7am: Bank of England Bank Rate, est. 0.25% (prior 0.50%)
• 7:30am: Challenger Job Cuts y/y, July (prior -14.1%)
• 8:30am: Initial Jobless Claims, July 30, est. 265k (prior 266k)
• 9:45am: Bloomberg Consumer Comfort, July 31 (prior 42.9)
• 10am: Factory Orders, June, est. -1.9% (prior -1%)
• 10am: Freddie Mac mortgage rates
• 10:30am: EIA natural-gas storage changes

DB’s Jim Reid concludes the overnight wrap

As many Olympians will tell you over the next couple of weeks, records are there to be broken and another one is likely to fall in financial markets today. The Bank of England is widely expected to cut rates by 25bps and this will place them as fresh 322 year lows from the original inception of the BoE. At this stage I’d normally quote the latest hot off the press piece from our UK economist George Buckley. However George had his first child last week and is on paternity leave. If he’s anything like me 11 months ago he currently won’t know what’s hit him.

Before he left he reaffirmed his view of a 25bps cut and that they will leave all other policy levers untouched for now. In September, as the economic news deteriorates more forcefully in response to Brexit, he expects the Bank to supplement that with another cut in the Bank Rate to the lowest he thinks they are willing to go: to 0.10%. But this further 15bps easing is likely to be insufficient, and thus he expects it to be accompanied by a restart of the QE programme (£50bn or £75bn of purchases over the following three months). So lots of easing to come.

We’ll also get the latest Inflation Report and new macroeconomic forecasts from the BoE which will be released alongside the outcome of the monetary policy meeting. It would be hard to imagine that the BoE won’t downgrade its growth forecasts in light of Brexit although the extent to which will be interesting. The inflation numbers will also be important given the big 10% drop in Sterling post the vote. What will be interesting here is how long the BoE believes that deprecation gets passed through to consumer prices.

One of George’s reasons justifying the BoE holding last month and instead waiting for today’s meeting is the benefit of seeing more post-Brexit data. Yesterday we got final confirmation of the July PMI’s and there was no change to the UK’s weak 47.4 services reading which is the lowest reading since March 2009. It meant the composite ended up at 47.5 (revised down another 0.2pts) which is a 5pt drop from June. Believe it or not the Citigroup economic surprise index has done nothing but rise post Brexit. In fact, with the reading at 58.8 it is up some 56pts post the referendum and at the highest since 2013. The current UK reading is actually well ahead of similar readings for the US and Euro area however this more than likely reflects beats on much lower expectations and also the still relatively limited post Brexit survey releases. So while interesting, probably not worth reading into that much.

Staying with the data, ahead of the second main risk event of this week – that being Friday’s payrolls – the July ADP employment change reading in the US didn’t spring too many surprises after coming in slightly ahead of estimates at 179k (vs. 170k expected). That compares to 176k in the prior month. The ISM non-manufacturing reading for last month was a bit more interesting though. The headline reading fell 1pt and a little more than expected to 55.5 (vs. 55.9 expected). The focus was on the employment component and having risen from 49.7 in May to 52.7 in June, it was back down to 51.4 in July. As we noted yesterday the series isn’t necessarily a great predictor of immediate monthly changes in payrolls, but it was interesting to see our US economists highlight that the six-month trailing average of the non-manufacturing employment series (51.1) is at its lowest level since October 2010 (50.2). At that time, the six-month trailing average of private service-sector hiring was 115k, well below the 166k average as of June.

So with the two big risk events of the week looming, markets were a bit more muted yesterday although they were helped by a decent rebound for Oil and also a much better session for European Banks. Indeed WTI Oil rallied +3.34% yesterday and is up another +1% or so this morning at slightly north of $41/bbl having actually touched an intraday low of $39.19/bbl yesterday. The trigger for the bounceback appeared to be the latest US inventory data which showed a surprising steep fall in gasoline stockpiles last week. That sent energy stocks soaring and helped the S&P (+0.31%) to its first positive day in August. The Dow (+0.23%) also closed higher and finally brought to an end a run of seven consecutive daily losses.

The rally for Oil came a bit later in the day so European markets missed out on most of it, although European Banks had a much better session following a raft of earnings reports. While the Stoxx 600 (+0.03%) was little changed, the Stoxx 600 Banks index rebounded +1.77%. ING Group (+8.20%) and Societe Generale (+3.16%) rose on better than expected profit numbers, Standard Chartered (+4.19%) surged after loan impairment charges dropped and operating costs fell, while HSBC (+4.47%), despite reporting mixed results, was higher following a share buyback announcement.

In bond markets meanwhile two days of surging bond yields took a pause for breath with government bond markets little changed by the close. Credit was a smidgen tighter (the US outperforming Europe given the moves for Oil) and it was interesting to see UBS come to market with a new USD AT1 bond which according to Bloomberg was Europe’s first sale of bonds in the AT1 market since Brexit.

Turning over to the latest in markets this morning, after initially dropping lower earlier in the session Japanese equities have bounced back in the hour or so as we to print. Having been down as much as half a percent, the Nikkei and Topix are now +0.38% and +0.35% respectively, while JGB yields are unchanged and the Yen is back to flat after initially strengthening. The rest of Asia is also broadly higher, likely reflecting those gains in the energy complex. The Hang Seng (+0.56%), Kospi (+0.19%) and ASX (+0.37%) in particular are up. China is lagging a bit, with the Shanghai Comp currently -0.19%.

In terms of the rest of the data yesterday, the final services PMI in the US was revised up half a point to 51.4 which left the composite at 51.8 (vs. 51.2 in June) and the highest since April. The European session was all about the final PMI revisions. The Euro area services PMI was revised up 0.2pts to 52.9 which left it ever so slightly ahead of June (52.8). The resulting composite print of 53.2 was up from 53.1 in June. Regionally the only country to see a big decline was Spain (composite down 2pts) with the rest of Europe ex UK resilient. Indeed our European economists noted that the July composite reading for the Euro area suggests GDP growth of between 0.3% and 0.4% qoq which is in line with their 0.3% projection.

Away from the data we also heard from one of the more dovish Fed officials in the form of the Chicago Fed’s Evans. He said that one rate hike this year ‘could be appropriate’ given his outlook and improving data in comments at a media briefing. He also said that he would prefer no hikes until ‘we saw inflation much more strongly’. On this, the Minneapolis Fed President Kashkari (who it feels like has spoken every day this week) said that he’s not seeing much inflationary pressure in the data and that we ‘have the luxury of time’ in raising rates.

ASIA MARKETS