The market was largely in consolidation mode yesterday with equities and credit finishing flat to moderately better ahead of EU finance minister’s conference call on Spain today. Officials are expected to approve the EU100bn Spanish bank rescue plan however the exact size of the loan will probably only be determined in September pending the result of a bank-by-bank stress test (Reuters). This will then pave way for restructuring plans for the sector in October which is broadly consistent with the timeline set out in the leaked draft MoU. At the previous meeting finance ministers agreed to first disburse EU30bn to Spain by the end of July so we will watch out for further confirmation of this today. We may also get the terms of the loan today. The conference call is expected to start at 10am GMT and will probably be today’s main event along with General Electric’s Q2 result.
Back to the market, US equities were off the day’s highs yesterday but the S&P 500 still managed to close +0.27%. Better earnings momentum helped offset the disappointing US data even though revenue performance continues to lag. Of the 35 S&P 500 firms that reported results yesterday, about 74% of those came ahead of market consensus but only 57% of those topped sales forecasts. Morgan Stanley missed on both fronts as its FICC business materially underperformed against peers in the second quarter. MS also had to post $2.9bn in collateral as a result of the recent rating downgrade in June. MS shares were down more than 5% yesterday but that didn’t deter the demand for its new $2bn 30-year bonds, which broke 5-6bp tighter on the break. After market results were mixed. Microsoft earnings were better but sales missed while Google was the other way round. Briefly recapping yesterday’s data, initial claims (386k v 365k) were higher than expected; Philly Fed survey (-12.9 v -8.0) and existing home sales (-5.4% mom v +1.5%) were both below market estimates.
Away from the equity market it was another constructive day for cash credit. CDS indices were little changed on the day but the bid for cash remains strong with new issuance generally breaking tighter. MS’ 30-year deal aside, eBay’s new $3bn four- part offering also narrowed 3-10bp tighter on the break. In core rates, the 10- year Treasury was around 2bp higher yesterday and continues to trade around the 1.50% range. Indeed we haven’t seen a +/-5bp daily move in the 10-year for two weeks now. Given the ongoing inflows, market technicals remain supportive for corporate bonds as investors continue to chase spread products in a low volatility and low yield environment.
Turning to other markets it was again a strong day for commodities and rising food prices seem to be gaining further attention. Corn and Soybeans hit a record high (at least since 1960s) as they extend their recent rally. A Bloomberg survey indicated that corn and soybean traders are bullish for a 13th consecutive week on the worst US drought in half a century and that yields will continue to decline. Soft commodities aside, the rally in crude has also taken prices back to mid-May levels. Brent and WTI were up +2.5% and +3.1% yesterday to $107.8/bbl and $92.6/bbl respectively on rising Middle East tension. Both are slightly weaker overnight on
concerns that global growth will curb demand but are still about 19-20% above the lows in June.
Moving on to the overnight session Asian equities are taking a breather following the strong performance yesterday. The Nikkei and Shanghai Composite are down around -0.2% as we type although we are seeing some modest gains in Hong Kong (+0.1% and Korea (+0.3%). In credit markets Asian CDS spreads are largely unchanged while HY bonds have opened about 1/4pt higher.
Back to Europe, Spain yesterday sold EU2.98bn in bonds, slightly below the maximum EU3bn targeted. The 5-year auction printed at a new high in yields (6.459%) which was 40bp higher than a month ago. Spain’s 10-year bond yield rose 5bps to close at 7.01%. In
Germany, the Bundestag approved by the Spanish bank rescue package by 473-97 although Finance Minister Schaeuble apparently told the parliament that there will be no possibility to sidestep the liability issue in the process of transferring Spain’s bank rescue aid. Bloomberg news reported that Spain’s plan to offer cash-strapped regional administrations emergency loans leaves the Treasury with EU12bn of additional funding needs but the government said it won’t affect borrowing plans.
In terms of today there isn’t really much going on as far as economic data is concerned. German PPI and UK public finances are the main releases in Europe. With no US data expected today focus will be on earnings. We have about 10 S&P 500 firms lined up for
today and bell-weather General Electric is the name to watch.
Colin Tan, CFA
Research Analyst
Jim Reid
Strategist
Deutsche Bank
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