Friday, June 29, 2018

Capital Markets: "Stocks Jump into Quarter-End, Euro Bounces on Immigration Deal"

From Marc to Market:
Global equities are posting impressive gains to close out the quarter. The Shanghai Composite rose nearly 2.2%, its strongest gain in a couple of years on signals from the PBOC that focus may shift to growth stabilization, which could facilitate easing of credit conditions. The onshore yuan snapped a six-day slide, while the offshore yuan rose for the first time in 12 sessions.

More broadly, the MSCI Asia Pacific Index ended a four-day slide to finish 0.9% higher, recouping a third of this week's losses. Nearly all markets in the region rose but Australia (-0.3%) and Thailand (-0.5%). Indonesian stocks rallied 2.3% even after the central bank surprised investors by a 50 bp rate hike. Many had expected a quarter-point move. The MSCI Asia Pacific Index rose one week in May and one week in June. It fell 3.8% over Q2, after slipping 0.6% in Q1. The benchmark rose in all four quarters last year.

European stocks are moving higher as well. Coming into today, the Dow Jones Stoxx 600 was up about 1.6% for the quarter and is tacking on another 1.2% today. All the major industry groups are advancing, led by information technology and financials. It is still off 1% on the week, and its the fifth week of the past six that the benchmark has moved lower.

There are two main developments in Europe today. First, a deal appears to have been struck on immigration. It is very much along the lines that Italy's new government advocated, and one that will likely be sufficient to ease the tension within Merkel's CDU/CSU alliance. Essentially, the agreement calls for increased border security, holding centers for asylum seekers, an expedited process to determine eligibility for asylum and overhaul the distribution of migrants when the gateway states, like Italy, Malta, and Greece, are overwhelmed. Illegal immigrants will be expelled.

The second development was the flash June CPI report. It was in line with expectations. The headline rate rose to 2.0% from 1.9%, while the core rate slipped to 1.0% from 1.1%. The rise in the headline rate likely stems from the increase in energy prices.

The euro, which had returned its recent lows yesterday (near $1.1525) is moving higher today. It took out yesterday's high in Asia to reach $1.1665. Although the high was reapproached after the CPI report, it stalled. The midweek high was a little above $1.1670, and the high for the week was near $1.1720. There was a large option struck at $1.15 (3 bln euros) which seems irrelevant now, and another nearly 900 mln euros struck at $1.1550 is not in play. However, the 2 bln euro option at $1.1600 could still impact activity in the North American morning.

Sterling eased to a new 2018 low yesterday near $1.3050, effectively meeting the objective of the double top pattern from the spring. It bounced off smartly, alongside the euro, in Asia. It reached almost $1.3185 in early Europe but turned down after the batch of data, which included a tick up in Q1 GDP estimate to 0.2% from 0.1%. Today's data for Q2 suggest the economy has done a bit better. The market appears to be pricing in about a 70% chance of a BOE rate hike in August. This is around twice the probability that was discounted at the end of May.

European bonds are mixed. Italy's 10-year yield is off eight basis points to bring this week's decline to 12 bp. Spain and Portugal's 10-year benchmark yields are three basis points lower, while the core yields are slightly firmer. The US and UK 10-year yields are 1-2 basis points higher but are still 2-3 lower on the week.

An unexpected decline in Japanese unemployment and a smaller than forecast decline in industrial output failed to stir investors. May's unemployment fell to 2.2%, but the mild wage pressure (~0.9% year-over-year) blunts the significance for many investors. Industrial production was expected to have fallen by at least 1% in May but instead slipped a mild 0.2%, which allowed the year-over-year pace improve to 4.2% from 3.4% in April.

The dollar is consolidating this week's small gains. Impressively consistent, the greenback has risen every week here in Q2 except two, for an overall gain of near 4.1%. Today there is a $466 mln option stuck at JPY110.50 expiring. Another $372 mln JPY110 option also will be cut....