Market’s initial reaction to the FOMC minutes last night clearly reflects a desire for more policy easing. Indeed the S&P 500 dipped around 10pts on the first read of the release before trimming those losses into the close. The index finished virtually where it started (0.00%) and the last time we saw this was on the 12th December 2010. Given the tone from the last meeting the minutes were always
going to be dovish but expectations of hints of further QE were clearly higher than that. Overall the minutes showed that further QE is not yet a consensus view amongst FOMC members and would only likely be triggered if the economic recovery were to lose momentum. So last week’s slightly disappointment payrolls number isn’t probably enough evidence yet. Ironically the market probably has a better chance of performing near-term if the data gets worse from here rather than flat lines.
Staying on the US theme, the trade deficit number came in largely in line with market expectations (-$48.7bn v -$48.6bn). That said, the softer trade data as well as recent indication of weaker inventory stocking have led our US economists to lower Q2 real GDP growth by one full percentage point to +1.4%. This has the effect of lowering their Q4 over Q4 forecast a couple of tenths to +2.2% from
+2.4% previously. The impact on the annual average is the same as well, +2.1% current versus +2.3% previously.
At the micro level corporate news offered further evidence of the challenging macro outlook. European equities were down after luxury retailer Burberry reported a Q1 sales growth that missed market consensus. Burberry share price hit a new low for the year after a -7.4% decline. Clothing company Levi yesterday said that Europe continues to be a challenge and that business in Asia has
declined. Marriott’s earnings were broadly in line with the market but said that demand growth is slowing in Middle East and Asia particularly for higher-end hotels. These are probably themes that will repeat themselves throughout the upcoming reporting season.
Back to the market whilst the US session finished unchanged the sector split was mixed. Industrials (-0.70%), IT (-0.61%) and Consumer Discretionary (-0.54%) were the main decliners while Energy (+1.39%) and Financials (+0.82%) were the main gainers that helped offset those losses. In credit its worth highlighting that despite all the intraday market volatility the bid for corporate bonds were fairly strong. Credit has certainly been out-performing of late. Anheuser-Busch InBev printed a $7.5bn deal yesterday with books said to be around $29bn across the 3/5/10/30yr tenors. The deal performed well on the break helped unsurprising given the over subscription.
Moving on to Asia the risk tone remains weak overnight. The Bank of Korea’s unexpectedly rate cut was the main development cutting its key rate down 25bp to 3%. It was also the first BOK cut since February 2009 as they expect some tougher times ahead for the economy. The KOSPI (-0.9%) is still down on the day but Korea’s front end rates have declined by around 15-18bps.
Elsewhere in Asia the Nikkei is down -1.1% and the Hang Seng is down -1.6% with the latter still concerned about the slowdown in China. China’s data dump tomorrow, especially the GDP print, will clearly be very closely watched. Asian CDS indices are outperforming though despite the weakness in equities overnight. The Asia and Australia iTraxx indices are both around 2bp tighter on the day with the former significantly outperforming peers in year to date terms.
Turning to Europe the major development yesterday came from Spain as the government announced its fourth austerity package in 7 months. These measures, totalling some EUR65bn includes cuts in unemployment benefits, reduction in pensions and hikes in sales
taxes. Spanish bonds had another decent day yesterday with the 10-year yield down by 24bp to 6.577%. Away from Spain, Finland is in discussions to get shares in Spanish banks as collateral in exchange for its contribution to the bailout, according to Bloomberg. Elsewhere, Mr. Schaeuble yesterday reiterated his stance on shared liability, saying that “as long as we don’t have a common fiscal policy, we can’t mutualise liability”. Greece sold EU1.625bn in 6-month T-bills yesterday with yields down slightly versus a previous June auction.
Looking at today, initial jobless claims will be a key data to watch as ever as markets are expecting a moderate -4k decline from last week’s. We also have the monthly budget statement from the US today. CPI releases from France and Ireland as well as the Greek
unemployment rate are the notable releases in Europe today. Auction wise, Italy plans to raise as much as EU7.5bn via 12-month bills but tomorrow’s Italian bond auction is the more relevant event.
Readers from yesterday will be pleased to know I’m off on another trip just after I press send on this but have remembered my Ipad this time. The trouble is I’m now a quarter of the way through the emergency paper book I bought! The dilemma!
Colin Tan, CFA
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