Markets: Directionless?

You can’t get there from here. Whether you remember REM or Bert&I routines, the result is the same – sometimes you see what you want but you just can’t figure out the way to get it. The markets across the globe look directionless. The USD rally fizzles, but so too does any EUR bounce.

Equities bounce but in the big picture remain stuck in consolidation. We are caught with data that suggest trade wars matter but growth remains good enough for now. China unveiled a package of targeted policies -- from a tax cut aimed at fostering research to special bonds for infrastructure investment -- to boost domestic demand as the trade dispute with the U.S. threatens to slow growth – so stocks there rallied and the CNY trades weaker and that begs the risk correlations we learned from the last 6 weeks. In Europe, better German Manufacturing flash PMI reports not sufficient to offset weaker Services elsewhere. Italy is still a focus with the Washington Post interview with FinMin Tria saying “the reforms for welfare spending will be made within the limits of the planned deficit.”

So BTPs are lower.Markets are bid up for bonds and stocks today in a relief rally that the world is stuck not falling further down the currency and trade war abyss.The role of mood in driving policy will be tested from Turkey to Hungary then later to the ECB with the next big hurdle for those that want to get bullish the US/EU trade meetings with Juncker and Trump. This puts the focus today on the sharp bounce back in metals and oil. It also puts the pressure back on US rates with supply today important.The equation of higher USD, lower EM, more fear changed a bit yesterday.Higher US rates remain in play and may still be the sore point for an otherwise directionless market.

Question for the Day: Is the market set up for trouble? The USD bets for a rally are in place with US rates remaining a key driver and US growth expectations the backdrop. The GDP release for 2Q later this week may be more important than many expect. The problem with leveraged bets on the USD higher is Trump. The pushback from the 95.65 highs last week holds and the momentum for a bigger upswing is resting on ECB and risk- moods now with 10Y 3.05% US rates looking important to the puzzle. The positions from leveraged players is likely not yet washed out from last week so that maybe the key to trading the risk-on game today.

What Happened?

• Japan July flash Nikkei Manufacturing PMI 51.6 from 53.0 – much weaker than 52.7 expected – 20-month lows. The input and output inflation both rose to mult-year highs and business confidence fell substantially. New business growth slowed with export demand lagging despite a weaker JPY. Input delivery times lengthened to over 7-year highs and supply chain concerns lifted input inflation to Mar 2011 highs. 
• ECB 2Q Lending Survey: Sees easing credit standards and increasing demand across all loan sectors. The net easing (-3%) of credit standards – i.e. banks’ internal guidelines or loan approval criteria – follows on from an easing of credit standards (-8%) for loans to enterprises in the previous quarter and was in line with banks’ expectations in the previous survey round. In addition, credit standards for loans to households for house purchase eased (net percentage of reporting banks at -8%, after -11%), and credit standards for consumer credit and another lending to households also eased (-3%, unchanged from previous period). Across the three segments, competitive pressure and risk perceptions had an easing impact on credit standards, while banks’ cost of funds and balance sheet constraints and their risk tolerance were broadly neutral. For the third quarter of 2018, banks expect a net easing of credit standards in all three segments.

Eurozone July flash Manufacturing PMI 55.1 from 54.9 – better than 54.7 expected. The flash Services PMI 54.4 from 55.2 – weaker than 55.0 expected. The flash Composite PMI 54.3 from 54.9 – weaker than 54.8 expected. The report suggests the Eurozone economy lost momentum at the start of 3Q. Manufacturing output was flat at 54.2 – holding at 19-month lows. New orders slowed with factor orders near 2-year lows and services second-lowest in 1 ½ years. Export orders weakest since Aug 2016. 

• German July flash Manufacturing PMI 57.3 from 55.9 – better than 55.5 expected – 3-month highs - with Services 54.4 from 54.5 –slightly better than 54.3 expected – 2-month lows – leave the flash Composite 55.2 from 54.8 – better than 54.8 expected – 5-month highs. The bounce from May’s 20-month lows extends in 3Q start with pricing at 5M highs and service prices 2nd highest ever. The only downside see was in business confidence, which remained "subdued.” "The Future Output Index was at its second-lowest level in 20 months, remaining well below the highs seen in 2017", IHS Markit noted. 
• France July flash Manufacturing PMI 53.1 from 52.5 – better than 52.4 expected. The flash Services PMI 55.3 from 55.9 – weaker than 55.7 expected – bringing the flash Composite PMI to 54.5 from 55 – weaker than 54.8 expected. While new orders rose, ExportManufacturing fell for the first time since Sep 2016, nevertheless, French companies were still optimistic along with job creation. 

• France July Manufacturing sentiment 108 from 109 – weaker than 109 expected. Services 104 flat and overall economic sentiment 106 flat. Compared to June, the business climate is stable in building construction and in services. It has gained one point in retail trade and has lost one in manufacturing industry. Compared to May, it has lost three points in wholesale trade. It remains well above its long-term mean in all the sectors.
• UK July CBI industrial trends orders 11% from 13% - slightly better than 10% expected. The volume output 3M forward 14.% form 18% while past volume 27% from 29%. Average prices next 3M flat at 13%. The 3Q optimism fell to -3% from -4% and less than+5% expected with export prospects flat at -2%. 

Market Recap: 

Equities: US S&P500 futures are up 0.37%after a 0.18% gain yesterday – after hours Alphabet beating earnings supported US shares. The Stoxx Europe 600 rose 0.4% at the open and now up 0.8% with UBS earnings helping along with Peugeot. The MSCI Asia Pacific rose 0.6% with China leading on easing/stimulus measures.

• Japan Nikkei up 0.51% to 22,510.48
• Korea Kospi up 0.48% to 2,280.20
• Hong Kong Hang Seng up 1.44% to 28,662.57
• China Shanghai Composite up 1.62% to 2,095.94
• Australia ASX up 0.56% to 6,355.20
• India NSE50 up 0.45% to 11,134.30
• UK FTSE so far up 0.95% o 7,767
• German DAX so far up 1.35% to 12,717
• French CAC40 so far up 0.9% to 5,425
• Italian FTSE so far up 0.85% to 21,787

Fixed Income: Bonds were bid overnight with some pullback in the US yields leading despite a robust equity rally. The headlines from Italy hurt periphery and that spread along with weaker Composite flash PMI driving as well – Core EU bid – with UK 10-year Gilt yields off 1bps to 1.26%, German Bunds off 1bps to 0.395%, French OATs off 1bps to 0.7% while Italy up 5.5bps to 2.69%, Spain up 1bps to 1.385% and Portugal up 2.2bps to 1.78%. The horrible wildfires near Athens notable tragedy there – Greek 10Y bonds up 1bps to 3.82%.

• The UK DMO sold GBP2.75bn of 6Y 1.0% July 20204 Gilts at 1.092% with 2.13 cover and 0.1bps tail. 
• The ESM syndicates at E4bn 5Y note at MS19 with book over E9bn
• US Bonds rally back with bull flattening but focus on supply and more economic data– 2Y off 0.8bps to 2.621%, 5Y off 0.7bps to 2.811%, 10Y off 0.9bps to 2.945% and 30Y off 0.9bps to 3.082%. 
• Japan JGBs see curve steep despite good 40-year sale – 2Y off 1.5bps to -0.125% while 40Y up 3bps to 0.94%.  10Y flat at 0.075%. The MOF sold Y399.5bn of 40-year JGBs at 0.88% with 3.302 cover – previously 0.865% with 3.923 cover. The result was better than feared. 
• Australian bonds track US moves – with CPI next, China stimulus – 10Y up 5bps to 2.72%. 
• China PBOC skips open market operations, net drains CNY70bn on the day. Money market rates mixed with 7-day up 1bps to 2.627% and O/N off 1bps to 2.34%. 10Y bond yields rose 4bps to 3.56%.  

Foreign Exchange: The US dollar index off 0.1% to 94.53 still watching 55-day at 93.71 for support against 95.52 resistance still. In Asia EM FX USD bid: TWD off 0.2% to 30.72, KRW off 0.35% to 1135 – tests 1137 9-month lows, INR off 0.1% to 68.908 with 69.085 $ highs.  In EMEA, USD offered: RUB up 0.45% to 62.756, ZAR up 0.9% to 13.34, TRY the exception with CB focus off 3.5% to 4.8975.

• EUR: 1.1705 up 0.15%. Range1.1655-1.1708 with German PMI flash helping a bit but 1.1650-1.1740 still key consolidation into ECB
• JPY: 111.05 off 0.2%. Range 111.06-111.51 with EUR/JPY130.05 off 0.1% - stuck with BOJ policy watch still key vs. US rates/risk mood. 
• GBP: 1.3135 up 0.25%. Range1.3072-1.3137 with EUR/GBP .8915 off 0.1% - focus is on BOE and growth with CBI reporting helping. 
• AUD: .7405 up 0.25%. Range .7360-.7406 with focus on metals and China still – CPI next driver. NZD .6800 up 0.2%, tracking A$ and JPY again. 
• CAD: 1.3145 off 0.3%. Range 1.3143-1.3191 – watching oil and US rates with 1.3050-1.33 still consolidation. 
• CHF: .9930 up 0.1%. Range .9918-.9954 with EUR/CHF 1.1625 up 0.2% - despite Italy BTPs – CHF weaker – watching 1.00 again. 
• CNY: 6.7891 fixed 0.44% weaker from 6.7593 – lowest in a year – trades 6.7969-6.8290 now back down to 6.80 with focus on intervention risks. CNH 6.8050 flat after testing 6.8446. 

Commodities: Oil up, Gold up, Copper up 1% to $2.7920.

• Oil: $68.25 up 0.5%. Range $67.56-$68.45. WTI watching 100-day m.a. at $66.30 with $67.50 minor support against $68.30 and $69.70 20-day resistance. Brent  $73.16 up 0.15%, watching $72.78 yesterday lows then $72.35 for support against $73.50 and $74.20 resistance. Still a game of Iran/US vs. US inventories and China trade slowdown fears.
• Gold: $1227 up 0.2%. Range $1222-$1228. Still watching $1216 and $1204.8 base against 200-week m.a. at $1234 then $1238 and $1245.7 resistance. Silver up 0.75% to $15.498, Platinum up 1.1% to $841.45 and Palladium up 1% to $924. 

Conclusions: Supply matters. The 0.6% drop in US June existing home sales – the third fall in a row – matters pushing sales – 2.2% y/y but with prices higher and sales 5.38mn down from 5.41mn in May. The driving forces behind the weaker US housing market – too much demand for supply, higher mortgage rates and lower affordability. New supply is hampered by higher inflation from labor, materials and land. There are signals thereof where the US economic cycle is and many will be watching to see if new home sales differ. FHA Housing prices are next up today and too fast a rise matters as a signal of demand again outstripping supply.

Economic Calendar:

• 0900 am US May FHA housing prices (m/m) 0.1%p 0.3%e
• 0945 am US July flash Manufacturing PMI 55.4p 55.3e / Services 56.5p 56.4e / Composite 56.2p 56.0e
• 1000 am US July Richmond Fed Manufacturing Index 20p 18e
• 1130 am US 4-week bill sales
• 0100 pm US $36bn 2Y note sale
• 0400 pm US weekly API crude oil inventory +0.629mb p -2.9mb e