Following yesterday’s turbulent bond trading session, where the volatility after the worst Bid to Cover in a Japanese bond auction since 2009 spread to Europe and sent Bund yields soaring again, in the process “turmoiling” equities, today’s session has been a peaceful slumber barely interrupted by a “better than expected” Italian and German Bund auction, both of which concluded without a hitch, and without the now traditional “technical” failure when selling German paper. Perhaps that was to be expected considering the surge in the closing yield from 0.13% to 0.65%. Not hurting the bid for 10Y US Treasury was yesterday’s report that Japan had bought a whopping $23 billion in US Treasurys in March, the most in 4 years so to all those shorting Tsys – you are now once again fighting the Bank of Japan.
On the economic front we got some poor news out of China, where both industrial production and retail sales mixed (this is bullish because it means more easing may be coming), while in Europe Q1 GDP came in line as expected at 0.4% (up from 0.3%), which is also bullish because it means easing is working. Let’s just ignore the arther substantial drop in Eurozone industrial production in March, which slid 0.3% on expectations of an unchanged print and down from last month’s 1.1%. Just chalk it up to spring weather or something.
The overnight session started with Asian equity markets trading mixed following a tepid Wall Street close, with energy outperforming on the back of gains in crude prices. ASX 200 (+0.4%) after Australia lowered taxes for small businesses in the budget which sparked hopes of a spending spree. Nikkei 225 fluctuated between gains and losses with telecoms underperforming, following a miss on earnings from index heavyweight KDDI (-3%). Chinese markets saw subdued trade with market participants tentative ahead of the release of Chinese industrial production and retail sales data which fell short of expectations (see below).
European equities (Eurostoxx50 +0.9%) recovered from yesterday’s losses to reside in positive territory, with the energy sector outperforming following the drawdown in the API crude inventory (-2.1mln vs. Prev. -1.5mln) release yesterday, which subsequently supported oil prices. Meanwhile, Bunds (+76 ticks) have been buoyed by German GDP SA (Q/Q 0.3% vs Exp. 0.5%) which came in short of expectations, combined with profit taking in German paper following yesterday’s sharp declines. The upside seen in Bunds is also a continuation from gains seen in UST’s (+8 ticks) due to short covering from dealers and real money demand, coupled with the strong 3Y treasury auction.
BoE QIR said CPI is in line with returning to the 2% target in 2 years however cut CPI forecast for 2016 to 1.6%, cut 2015 and 2016 GDP forecast and sees downside risk to near term inflation which prompted GBP/USD to fall from fresh YTD highs to reverse all of its earlier gains from positive jobs data (UK Jobless Claims Change (Apr) M/M -12.6k vs Exp. -20.0k) (UK Average Weekly Earnings 3M/Y (Mar) 1.9% vs. Exp. 1.7%) which also showed a pick-up in wages. The report from the BoE was largely less hawkish than the market has previously expected. Meanwhile, EUR/USD is slightly lower after lacklustre Eurozone Industrial Production data (M/M -0.3% vs Exp. 0.0%), while Eurozone GDP came in-line with expectations 0.4%.
WTI (USD +0.57) and Brent (USD +0.48%) crude futures have been supported after API crude inventories showed a drawdown of 2.1mln vs. Prev. -1.5mln, while today’s DoE crude inventories are expected at -250K. The monthly IEA report showed that the IEA says OPEC April oil production rose by 160,000bpd to 31.2mln bpd in April, the highest since September 2012 and left their forecast for global demand unchanged. Elsewhere spot gold (unch) has traded within a tight range sitting USD 5.00 shy of the USD 1,200 despite the softer greenback.
In summary: European shares remain higher though off intraday highs, with the real estate and media sectors outperforming and financial services, health care underperforming. Euro-area 1Q GDP growth in line with ests., German 1Q growth below estimates, Italian, French growth ahead. BOE cuts U.K. growth forecasts through 2017, sees inflation at goal in 2 years. China April industrial output, retail sales below estimates. The French and Italian markets are the best-performing larger bourses, Swiss the worst. The euro is stronger against the dollar. French 10yr bond yields fall; German yields decline. Commodities gain, with nickel, corn underperforming and WTI crude outperforming. U.S. mortgage applications, retail sales, import price index, business inventories, due later.
