Crushed Vol Boosts Dollar, Commodities; Futures Flat


Asian stocks declined, while European stocks rose to the highest since 2015, led by a rebound in commodities and basic resource stocks. U.S. stock-index futures were little changed at 2,395 – just shy of all time highs – as investors focused on corporate earnings after the French election, while the VIX hovered near its lowest level since 1993.

In another mostly quiet overnight session, the Bloomberg Dollar Spot Index rose a second day as the greenback hit multi-week highs versus the Australian dollar, with the USDJPY reaching 103.83, the strongest since March 15, and the EURUSD sliding below 1.09, the lowest since March 30, as the aftermath of the French vote saw no further catalyst and the common currency consolidates near the 1.09 handle. A drop in Treasuries supported the dollar amid speculation that a hawkish speech by the Federal Reserve Bank of Cleveland President Loretta Mester on Monday may have been the opener of a series of hawkish commentary by Fed officials this week. The Fed official said that the Fed needed to be vigilant against “falling behind the curve”, while Mester also said with regards to the balance sheet that “we could probably end re-investments and not see a big impact, as long we articulate it well”.

The odds of a move in June have already risen to 80 percent from 68 percent last week, based on overnight indexed swaps and the Fed funds effective rate, and speeches by Fed’s Neel Kashkari and James Bullard among others could cement expectations of a 25-basis-point increase by policy makers in nearly a month’s time. However according to Bloomberg’s FX team, further dollar gains aren’t that straightforward as strong resistance lies ahead, while a robust labor market isn’t coupled with relatively strong wage growth. The market is looking for two more increases by the Fed this year and the repricing of such expectations could be pivotal for the greenback to revert its downward trajectory since January.

Crude reversed an earlier decline ahead of government data which is expected to show inventories fell for a fifth week, while natural gas futures rebounded from the biggest loss in eight weeks. Copper for delivery in three months also bounced after the lowest close since December. That helped ensure basic resources shares were the biggest winners as the Stoxx Europe 600 Index advanced.

The big story, however, remains the near record low volatility, with the VIX dropping to a level not seen since 1993 and shares are trading at record levels.

Looking around global market, European stocks and bond yields rose on Tuesday, boosted by higher commodity prices and basid industries stocks, as well as record low volatility, continuing relief from this weekend’s French presidential election and solid corporate earnings. The Stoxx Europe 600 rose 0.4 percent, Germany’s DAX Germany’s DAX rose 0.3 percent, France’s CAC 40 and Britain’s FTSE 100 added 0.4 percent.

Asian stocks did not perform as well, with MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent and Japan’s Nikkei fell 0.26 percent. China’s Shanghai Composite narrowly avoiding a seventh consecutive loss, the longest losing streak for four years,  weighing on the region more broadly.

U.S. futures pointed to a slightly higher opening on Wall Street, which would see the S&P 500 moving even higher than Monday’s record 2,401 points.

“It’s calm sailing today for stock markets after the VIX had its lowest close since 1993,” ETX Capital senior markets analyst, Neil Wilson, said. Victory for business-friendly centrist Emmanuel Macron in France and earnings were also supportive for equities, he said. “So far, there is precious little to halt the rotation from bonds to stocks,” he said.

The FTSEuroFirst hit its highest for nearly two years, and the index of top 50 euro zone stocks its highest for 18 months. Germany’s DAX hugged close to Monday’s record high. Shares in Germany’s Commerzbank rose more than 2% after the bank posted forecast-beating profits in the first quarter, and mining companies were among the leading gainers.

The MSCI World index, which touched a record high overnight, dropped about 0.1 percent.

In bond markets the 10-year U.S. Treasury yield rose to 2.394 percent, its highest in a month. The two-year yield held steady at 1.33 percent, meaning the yield curve rose to its steepest for more than two weeks. The yield curve had flattened last week to its lowest since the U.S. presidential election in November as investors fretted over the impact higher interest rates will have on the economy.

In commodities, oil market sentiment swung between optimism over statements from major oil-producing countries that supply cuts could be extended into 2018 and lingering concerns over slowing demand and a rise in U.S. crude output. U.S. crude rose 0.5 percent to $46.66 a barrel, and global benchmark Brent also rose 0.5 percent to $49.57. Copper bounced from the four-month low touched on Monday after data showed a sharp drop on imports into China, the world’s biggest consumer. London copper rose 0.5 percent to $5,515 a ton on Tuesday, after falling to as low as $5,462.50 on Monday. Gold recovered from a seven-week trough touched on Monday. Spot gold rose about 0.1 percent to $1,226.60 an ounce.

Earnings continue to be released with Walt Disney Co., Mitsubishi Corp., Toyota Motor Corp. and Deutsche Telekom AG among those notable.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,396
  • STOXX Europe 600 up 0.3% to 395.37Brent Futures up 0.2% to $49.45/bbl
  • MXAP down 0.5% to 149.85
  • MXAPJ down 0.09% to 488.04
  • Nikkei down 0.3% to 19,843.00
  • Topix down 0.3% to 1,581.77
  • Hang Seng Index up 1.3% to 24,889.03
  • Shanghai Composite up 0.06% to 3,080.53
  • Sensex up 0.09% to 29,953.37
  • Australia S&P/ASX 200 down 0.5% to 5,839.90
  • Kospi up 2.3% to 2,292.76
  • Gold spot down 0.05% to $1,225.61
  • U.S. Dollar Index up 0.2% to 99.25
  • German 10Y yield rose 2.2 bps to 0.44%
  • Euro down 0.09% to 1.0914 per US$
  • Brent Futures up 0.2% to $49.45/bbl
  • Italian 10Y yield rose 7.7 bps to 1.949%
  • Spanish 10Y yield rose 2.0 bps to 1.608%

Top Overnight News

  • Elliott Takes Akzo to Court to Oust Chairman in PPG Battle; Toshiba Warns Western Digital to Stop Impeding Chip Sale
  • Western Digital Aims to Acquire Majority of Toshiba Chips: NHK
  • Trump Names Picks for U.S. Energy Agency Crippled Without Quorum
  • NRG Board Members Said to Consider Sale of Entire Renewable Unit
  • Pandora Creates Independent Committee, Gets $150m KKR Investment
  • Facebook Says Fixed Issue That Triggered Outages for Some Users
  • SEC Probes Rental Home Values Backing Private-Equity Bond Deals
  • CIT Says New York Attorney General Is Probing Reverse Mortgages
  • Boeing Planning to Trim Another 580 Jobs From Seattle- Area Hub

Bulletin Headine Summary from RanSquawk

  • A modest rise in European equities this morning, as gains are supported by the upside in the commodities sector.
  • Another quiet London session, where limited data/event drivers have seen traders focusing on yield and to that end, the US dominate
  • Looking ahead, highlights include US JOLTS, APIs, Fed’s Kaplan, Kashkari and Rosengren

Major Asian stock indices traded mostly lower following a muted lead from the US where S&P 500 and DJIA closed unchanged, although the Nasdaq 100 posted a fresh record high as Apple surmounted the USD 800bIn market cap level. ASX 200 (-0.6%) underperformed following earnings from CBA. Furthermore, all Big 4 banks traded with firm losses ahead of the upcoming budget announcement which Treasurer Morrison signalled would fund the Productivity Commission enquiry into banks’ financial product sales and possible conflicts of interests. Nikkei 225 (-0.3%) was negative on pull-back from yesterday’s surge, while Shanghai Comp (+0.1%) and Hang Seng (+0.8%) were tentative after the PBoC refrained from liquidity injections for the 3rd consecutive day. South Korean markets were shut due to Presidential Elections and 10yr JGBs traded flat following weakness in T-notes, while today’s 10yr JGB auction also failed to support demand with the b/c slightly lower than prior. Australian Retail Sales (Mar) M/M -0.1% vs. Exp. 0.3% (Prey. -0.1%).

Top Asian News

  • China’s Deleveraging Pain Puts Investors on Alert for Contagion
  • China Stock Shakeout Creates Most Divided Market in 15 Years
  • China’s $9 Trillion Bond Market Lures Neuberger, Fidelity
  • India Auto Lobby Group Sees Post-GST Levy to Remain Unchanged
  • Jakarta Governor Verdict Dents Confidence on Stocks: Street Wrap
  • Real-Estate Agency Reported to Shutter 87 Outlets in Beijing
  • South Koreans Vote for a New Leader After Months of Turmoil
  • Temasek’s Fullerton Warns of Singapore Oil Bond Defaults
  • Japan Stocks Retreat From 17-Month High Amid Earnings Reports
  • Rupee Drops Most in a Month; State-Run Banks Buying Dollars: RBL

A modest rise in European equities this morning, as gains are supported by the upside in the commodities sector. The relief rally in oil prices continues with Brent crude futures looking to reclaim USD 50/bbl as investors grow optimistic that an extension to the current oil production cut is on the horizon. In stock specific news, Commerzbank is higher after the German bank beat analyst expectations with a 28% rise in Q1 net profit, as such, financial names are among the best performers. The laggard for the session has been the utilities sector following reports in UK press that if PM May is to be re-elected she will place a cap on unfair energy price rises, subsequently Centrica shares has slipped some 5%, while a soft earnings update from E.ON has also weighed on sentiment. In credit markets, the mild risk on sentiment has sapped demand safe haven flow with EGB yields ticking higher. The German curve has seen some mild bear steepening with the Schatz eying -0.64% (level not seen since mid-Jan) in which a break above this could see the next level of -0.58% tested in the near term. Across the UK curve, slight underperformance in the 10-yr benchmark with yields ticking higher by 0.34bps with the 10-yr looking to test 1.2%.

Top European News

  • UBS Chief Weber Sees ECB Announcing a Taper Around September
  • EON Profit Misses Estimate in Green Utility Earnings Debut
  • Munich Re Misses Estimates as Higher Claims Weigh on Profit
  • Renault Chief Ghosn Sees ‘Good News’ in Macron’s France Win
  • Micro Focus Falls Most in 5 Years as HPE Software Revenue Drops
  • Commerzbank Beats Estimates as Earnings From Trading Surge
  • Pandora A/S Shares Reverse Early Gains as Charm Growth Slows
  • Centrica Slumps After Conservatives Pledge Energy Price Cap
  • Austria Considers F-16, Rafale and Saab to Replace Eurofighters

In currencies, the Bloomberg Dollar Spot Index rose 0.2 percent after jumping 0.5 percent on Monday. The euro traded at $1.0917, down 0.1 percent. The currency fell 0.7 percent Monday following Macron’s victory as France’s next president, after trading at the highest level since November. It has been another quiet London session, where limited data/event drivers have seen traders focusing on yield and to that end, the US dominate. The belly of the curve has seen notable gains to push the 5yr above 190bps, with the 10yr approaching 240bps again. This has prompted a sustained move through the mid 113.00’s, and we are looking at test on 114.00 at some stage in the day. Strong resistance seen here. The fade in EUFt/USD also continues as a result, and we are now testing below 1.0900, but we ran into strong demand here last week, and this will prove a tougher test given the improving conditions in the Euro zone which have supported more longer term thinking. This is largely a USD move however, so all eyes on differentials.

In commodities, gold was little changed at $1,225.94 an ounce. The China Gold Association said demand in the biggest consumer could jump to a four-year high. West Texas Intermediate oil added 0.3 percent to $46.57 a barrel, reversing an earlier decline. Copper for delivery in three months rose 0.6 percent on the London Metal Exchange after Monday closing at the lowest level since Dec. 23. Looking across the commodity spectrum, we see the familiar drivers dampening prices across the board. As such, we can pretty much look to yesterday’s assessment over the market, but downside momentum has slowed. Oil prices are notably heavy despite the consistent run of comments from OPEC that output cut extensions are being mulled over — with a 9 month deal being discussed if the latest rhetoric is to be believed. The market is sceptical, so WTI struggles ahead of USD47.00 and Brent pre USD50.00. Copper continues to grapple with support in the USD2.45-50 zone, but oversupply will dictate as Chinese demand is in question after the recent run of PM! numbers. Gold has lost modest ground despite the fresh selling in Treasuries, but Silver is now closer to USD16.00 after failing to hold onto the (USD16.) 50 level.

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where the March industrial production print came in at -0.4% (Exp. -0.6%), while the March trade report showed a €19.6BN trade surplus, less than expected and down from €21.2BN the month prior. There are a few data releases in the US also. The early release is the NFIB small business optimism reading for April which declined to 104.5 from 104.7, however beating expectations of 104. Following that we then get the March JOLTS survey and then the March wholesale inventories report. Away from the data it is another busy day of Fedspeak with Kashkari, George, Rosengren and Kaplan all scheduled. Earnings today are headlined by Walt-Disney.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 104, prior 104.7
  • 10am: JOLTS Job Openings, est. 5,725, prior 5,743
  • 10am: Wholesale Inventories MoM, est. -0.1%, prior -0.1%; Wholesale Trade Sales MoM, prior 0.6%

Central Bank Speakers

  • May 8-May 9: Fed’s Bullard Speaks on Panel on Interest Rate Policy
  • 9am: Fed’s Kashkari to Speak to Minnesota High Tech Conference
  • 11:40am: Fed’s George Speaks in Santa Barbara
  • 1pm: Fed’s Rosengren Speaks at NYU Conference on Risk Management
  • 4:15pm: Fed’s Kaplan Speaks at Summit in Dallas

DB’s Jim Reid concludes the overnight wrap

At the moment we have more ducklings than digits on the VIX with the most noteworthy feature of the last 24 hours being its further collapse, closing down -7.57% last night to 9.77, the lowest close since December 1993. It last closed below 10 in November 2006 and of the 6889 trading days since data was first recorded in 1990, last night’s close was the 4th lowest one. The years that there has been a below 10 close are 2007 (1 day), 2006 (3 days), 1994 (1 day) and 1993 (4 days). On a similar note the S&P 500’s 30-day implied volatility tumbled below 7.5% to close at 7.22% last night, the lowest ever.

It was a similar story for volatility in Europe too yesterday. With the event risk of Sunday’s French election passing with no surprises, the VSTOXX tumbled 15% yesterday to close at 14.39. That’s near the bottom of the YTD range with the low mark set back on March 17th at 11.16 (the average in 2017 so far has been 19.98). FX Vol meanwhile, as measured by the CVIX Index, hit the lowest since October 2014.

No prizes for guessing that it wasn’t a hugely exciting day in equity markets yesterday then. In France the CAC spent all of about 4 minutes in positive territory before a wave of profit taking saw the index stoop to a -0.91% loss by the end of play. In fairness that was a reasonable underperformance relative to other European markets with the Stoxx 600 down a much more modest -0.13%. It was much the same in the US session where the S&P 500 spent most of the day in the red before paring losses to close unchanged by the closing bell. That means that the S&P 500 has closed with a daily move of less than 0.20% (up or down) in 8 of the last 9 trading days, with last Friday being the only exception.

Price action was only a little bit more exciting in sovereign bond markets yesterday. Bunds and OATs traded in tight ranges for much of the session before ending little changed in yield terms. Peripherals were weaker however with Spain and Portugal yields up nearly 3bps and Italy up just shy of 7bps. That underperformance appeared to be largely a result of supply pressure with the expectation of new BTP deals coming, although perhaps also a reflection that with France now out of the way the risk story could now turn over to Italy’s election, albeit one that is still some way off for now. Elsewhere, the Euro pared a very early gain in the Asia session to close down -0.67% versus the Greenback for its weakest day since March 30th. In Treasuries 10y yields edged up 3.8bps to close at 2.387% and the highest also since the end of March. Comments from the Cleveland Fed’s Mester may have contributed to that. The Fed official said that the Fed needed to be vigilant against “falling behind the curve”, while Mester also said with regards to the balance sheet that “we could probably end re-investments and not see a big impact, as long we articulate it well”.

Staying with the Fed, yesterday we got the release of the Fed’s Senior Loan Officer Survey. It showed that banks left their standards on commercial and industrial loans (C&I) essentially unchanged, whilst demand for C&I was also little changed. Interestingly though loan officers reported tightening their lending standards for commercial real estate loans (CRE), as well as reduced demand. Banks reported concerns about vacancy rates, property prices and capitalization rates.

Changing tune and refreshing our screens this morning, it’s been a similarly subdued session in Asia this morning. The Nikkei (-0.08%), Shanghai Comp (-0.03%) and ASX (-0.39%) are all modestly in the red, while the Hang Seng (+0.33%) is a touch firmer. Markets in South Korea are closed with residents going to the polls to elect the country’s next president. Commodity markets have remained relatively stable overnight with Oil holding in around the $46.50/bbl level.

Moving on. Yesterday we saw the latest ECB CSPP/PSPP numbers and it’s increasingly looking like they are tapering corporate purchases in line with Government bonds. It terms of CSPP, the average daily  purchases last week was €288mn well below the €364mn average since the program started. The CSPP/ PSPP ratio was 10.7% last week which is actually lower than the 11.64% average since July last year – the first full month of CSPP. It’s been at 12.23% over the 5 weeks of tapering so far. By my crude calculations if they’d decided not to taper CSPP at all the ratio between the two programs would be around 17%. So the proof of a relatively equal taper gets stronger each week. See Michal Jezek’s piece last week’s on the relative dynamics between the two programs albeit before yesterday’s numbers.

In terms of the other data in Europe yesterday, the most notable was the decent rise in the Sentix investor confidence reading for the Euro area by 3.5pts to 27.4, which is the highest reading since July 2007. Away from that factory orders in Germany rose a bit more than expected in March (+1.0% mom vs. +0.7% expected), driven largely by big ticket items. In the US the sole release was the Fed’s labour market conditions index which was reported as rising 3.5pts in April following an upwardly revised 3.6pt gain in March.

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where the March industrial production print is due out along with the March trade report. Also out in Europe this morning is the Bank of France business sentiment reading for April. There are a few data releases in the US this afternoon also. The early release is the NFIB small business optimism reading for April which is expected to show a small decline to 104.0. Following that we then get the March JOLTS survey and then the March wholesale inventories report. Away from the data it is another busy day of Fedspeak with Kashkari (2pm BST), George (4.40pm BST), Rosengren (6pm BST) and Kaplan (9.15pm BST) all scheduled. Earnings today are headlined by Walt-Disney.