Was that it for the "reflation" aka Bund-rout trade? One look at German bonds this morning and the sharp, panic selloffs seen in recent days are completely gone making one wonder if the CTAs who were riding the momentum train have all been squeezed out of their long positions and now the trend back to -0.20% can resume only to be followed by another abrupt 6-sigma move as the ECB once again sells inventory to buy itself more monetization runway. As a reminder, the ECB has to buy debt until September 2016 and it won't be able to if the 30-Year Bund is at -0.20% in a few months (or weeks).

Not helping the "reflation" trade is that that other momentum trade, higher oil, may have reached a peak as sanity and rational though once again prevail as the market notices that US production is once again rising crushing Saudi's stated claim that it won the war on shale. Don't be surprised if today's Baker Hugher oil rig report shows the first rebound in 2015. Some of the smartest money is already betting on the next oil downturn, one which would promptly send global Treasury yields sliding back to recent tights.

In the meantime, while mutual fund and ETF flows continue to exit equity fund, stocks maintain their lower volume levitation, with S&P futures printing at new record highs this morning, as Europe rises on another newsless, volumeless overnight session. We already documented that the worse the US economy is, the higher stocks rise...

... which makes us wonder (as we have all along since 2009), if a US depression, coupled with everyone pulling their money out of the markets, will push the S&P to all time central-bank and stock buyback forced highs? The answer: sure, why not. Under central planning nothing at all makes sense.

Asian equities trade mixed with the Nikkei 225 (+0.8%) and ASX 200 (+0.7%) taking the impetus from a strong Wall Street
close. This was after the S&P 500 finishing at an all-time closing high following poor US PPI data adding to calls for a
delay in Fed rate lift off, with weak JPY also supporting Japanese stocks. Shanghai Comp (-1.6%) underperformed amid
liquidity concerns ahead of a CNY 3trl lock up of shares with 20 IPOs due to begin issuance next week. Meanwhile the Hang
Seng (+2%) rallied into the close after rumours began to emerge that the date for the Shenzhen link may be pushed
forward. KOSPI (-0.5%) declined after the BoK disappointed outside calls for a rate cut.

Today’s session has provided relatively subdued trade, as European equities trade higher after taking the lead from record closes the in the US amid heightened calls for a delay in a Fed rate hike. Elsewhere in Asia, the Hang Seng rallied into the close to finish the session higher by 2% after unconfirmed reports suggested that the date of the Shenzhen link will be  brought forward, however, the Hong Kong Exchange refused to comment on the rumours.

Bunds (+82 ticks) have edged higher after the moves seen yesterday in UST's following the lacklustre US PPI data, as investors continue to focus on today’s upcoming US data in the form of US Empire Manufacturing, Industrial Production and Univ. of Michigan sentiment to gauge whether the US can break the recent stream of weak data.

The USD-index (+0.3%) is on track to halt its fourth consecutive daily fall this week as it recovers after printing a 3 month low yesterday. Meanwhile, major pairs trade marginally lower against the USD with little fundamental news driving price action as EUR/USD retreats from 3 month highs and drifts towards yesterday’s lows 1.1344. Elsewhere, NZD/USD remains near its session lows after Fonterra lowered its whole milk powder offer forecast and as such, AUD/USD followed in sympathy to come off 4 month highs. Elsewhere, USD/JPY moved higher after reports that the BoJ are said to assess the cutting of their Reserve rate as a possible option, however such a move will be met with scepticism as some officials believe that this would hinder the central banks efforts to increase their monetary base.

All that matters for FX is that while last week a stronger dollar was good for stocks and yesterday a weaker dollar was also good for stocks, today the important thing will be that a strong dollar is again good for stocks.

WTI and Brent crude remain relatively unchanged alongside the broad market trend, while spot gold eases off highs not seen since the middle February, albeit above its 200DMA at 1217.62. Meanwhile, copper prices were mildly lower as the lack of demand from China’s property sector weighs on the red metal, while Dalian iron ore futures were also weaker despite port inventories and declined to a 19 month low as sentiment in the market remains weak.

In summary: European shares rise, close to intraday highs, with the financial services and health care sectors outperforming and oil & gas, telcos underperforming. The Swiss and Dutch markets are the best-performing larger bourses, Spanish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities little changed, with zinc, silver underperforming and nickel outperforming. U.S. Empire manufacturing, net TIC flows, industrial production, capacity utilization, Michigan confidence, due later.

Market Wrap

• S&P 500 futures up 0.2% to 2122
• Stoxx 600 up 0.6% to 400.2
• US 10Yr yield down 4bps to 2.19%
• German 10Yr yield down 6bps to 0.64%
• MSCI Asia Pacific up 0.6% to 153.1
• Gold spot down 0.2% to $1219.1/oz
• 77.8% of Stoxx 600 members gain, 19.5% decline
• Eurostoxx 50 +0.4%, FTSE 100 +0.3%, CAC 40 +0.4%, DAX +0.4%, IBEX +0%, FTSEMIB +0.5%, SMI +1.3%
• Asian stocks rise with the Hang Seng outperforming and the Shanghai Composite underperforming.
• MSCI Asia Pacific up 0.6% to 153.1; Nikkei 225 up 0.8%, Hang Seng up 2%, Kospi down 0.7%, Shanghai Composite down 1.6%, ASX up 0.7%, Sensex up 0.6%
• Euro down 0.43% to $1.1361
• Dollar Index up 0.26% to 93.7
• Italian 10Yr yield down 6bps to 1.79%
• Spanish 10Yr yield down 8bps to 1.76%
• French 10Yr yield down 6bps to 0.91%
• S&P GSCI Index down 0.1% to 451.5
• Brent Futures up 0% to $66.7/bbl, WTI Futures down 0.3% to $59.7/bbl
• LME 3m Copper up 0% to $6403/MT
• LME 3m Nickel up 0.9% to $13900/MT
• Wheat futures up 0.4% to 516.3 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities (Eurostoxx50 +0.5%) benefit from the record close in the S&P in a session that has provided a lack of pertinent newsflow
• Bunds (+82 ticks) taking the lead from yesterday’s lacklustre PPI, as expectations of a Fed rate hike suffered another blow
• Looking ahead sees the release of the US Empire Manufacturing, Industrial Production and Univ. of Michigan
• Treasuries gain overnight with EGBs, 7Y-30Y maturities pare fourth consecutive weekly loss; next week’s eco calendar light before long holiday weekend.
• Greek PM Tsipras plans to press fellow EU leaders to help resolve the deadlock in talks with creditors, inserting his country’s  crisis into an EU summit intended to discuss eastern Europe.
• IMF European Dept. Director Poul Thomsen told IMF’s board Thursday that he didn’t press euro-area finance ministers during a meeting in Riga last month to restructure Greece’s debt, Kathimerini reports, without citing anyone
• Expansion of BOJ easing isn’t needed now, Governor Kuroda said; BOJ to continue QQE to reach 2% inflation target as soon as possible
• Barclays Plc will probably be fined for violating a three- year-old settlement over Libor rigging, but U.S. prosecutors will stop short of seeking a guilty plea, which they are demanding from UBS AG, people familiar with the matter said
• At least $1t of global reserves will switch into Chinese assets if the IMF endorses the yuan as a reserve currency this year, according to Standard Chartered Plc and AXA Investment Managers
• Obama promised Persian Gulf nations that the U.S. will come to their defense against any external attack and that any final deal signed with Iran will cut off the Islamic Republic’s path to a nuclear weapon
• While he got no endorsement of the framework, Obama said all  agreed that a comprehensive, verifiable deal that blocks Iran from developing nuclear arms is in the best interest of the region
• Proposed U.S. military “freedom of navigation” operations in the South China Sea may prod China to more clearly explain what it considers to be its territory -- and why
• Sovereign bond yields lower.  Asian stocks mostly higher, European stocks, U.S. equity-index futures gain. Crude oil, gold and copper lower

US Event Calendar

• 8:30am: Empire Manufacturing, May, est. 5.00 (prior -1.2%)
• 9:15am: Industrial Production, April, est 0.0% (prior -0.6%)
  • Capacity Utilization, April, est. 78.3% (prior 78.4%)
  • Manufacturing (SIC) Production, April, est. 0.2% (prior 0.1%)
• 10:00am: U. of Mich. Sentiment, May preliminary, est. 95.9 (prior 95.9)
  • Current Conditions, May (prior 107)
  • Expectations, May (prior 88.8)
  • 1 Yr Inflation, May (prior 2.6%)
  • 5-10 Yr Inflation, May (prior 2.6%)
• 4:00pm: Net Long-term TIC Flows, March (prior $9.8b); Total Net TIC Flows, March (prior $4.1b)

DB's Jim Reid completes the overnight recap

There was no real clarity on market direction outside of a general view that rates are likely to structurally stay low and that this is not the start of a long back-up in yields. Most clients I met thought the Fed would raise in September purely because they've flagged it so hard that they might look foolish not doing so. I still think it would be a mistake with Nominal GDP so low but it’s clear that the Fed are getting impatient and want to give themselves some ammo for when it might be needed. The problem with this argument is that re-stocking the ammo might actually help accelerate the start of the next battle (a recession). So that's a dangerous game. Most clients agreed that the Fed have a tough few months ahead. The credit investors I met were still broadly long. Supply, liquidity and rates were stopping them being longer but most saw little alternative other than to be invested in spread product.

While I was away this week, my team have been busy which is always good to know. Nick and Seb have published two notes over the last few days. One looking at the fact that credit has been remarkably resilient in the 4-week global rates sell-off. The other looking at credit and rates performance before and after European QE started and comparing this to a similar point in the US's QE experience. The links to both reports are at the end today.

Turning to markets, it was a better day in US equities yesterday as the S&P 500 (+1.08%) wiped out the previous 3-days of declines this week to close at a fresh record high. The Dollar appeared to lend a helping hand as the DXY closed -0.17% lower to mark a -1.64% decline now over the past 3 sessions and taking the index to its lowest level since January 21st. It was a better day for Treasuries too as 10y yields closed 6.3bps tighter at 2.231% while 30y yields dropped 3.7bps off their recent highs to finish at 3.051%. The move also followed an ok 30y auction with the bid-to-cover ratio of 2.20x above the 2.18x seen in April’s auction with investor’s appearing to put the recent bond market volatility to one side.

Yesterday’s PPI data in the US appeared to temper inflation expectations somewhat, in turn helping to drag down the Dollar and Treasury yields. April’s headline (-0.4% mom vs. +0.1%) and core (-0.2% mom vs. +0.1% expected) prints came in well below expectations, dragging the annualized rates down to -1.3% yoy and +0.8% yoy respectively (from -0.8% and +0.9% respectively). The print comes on the back of the weaker import price index data that we saw on Wednesday. Elsewhere yesterday’s jobless claims data continued to paint a somewhat rosier picture for this month’s payrolls with the 264k reading below market expectations of 275k and helping to bring the four-week average of 272k down to a 15-year low. Fed funds expectations have been declining of late and yesterday the Dec15 contract fell another basis point to 0.305% and a new low. The Dec16 and Dec17 contracts both closed 6.5bps lower in yield meanwhile.

Moving on, the ECB’s Draghi, speaking in Washington yesterday late afternoon, reaffirmed his commitment to the QE program in full while acknowledging that a period of low interest rates will ‘inevitably result in some local misallocation of resources’ but that ‘it does not follow that it has to threaten overall financial stability’. Draghi said that although the effect of asset purchases has already resulted in a substantial effect on asset prices and economic confidence, what ultimately matters is that there is an equivalent effect on investment, consumption and inflation. To that effect and playing down any concerns over a possibly slowing in pace of asset purchases, Draghi said that ‘we will implement in full our purchase program as announced and, in any case, until we see a sustained adjustment in the path of inflation’.

Despite continued volatility and more substantial intraday ranges, 10y Bunds (-2.2bps) actually closed tighter yesterday for just the third time in the last 18 sessions. Having opened at 0.724%, yields hit an intraday high of 0.771% (and just shy of the intraday high we saw 7 days ago of 0.775%), only to then rally and hit a low of 0.676% before then closing at 0.700% - still a 9.5bps range on the day. There were similar moves in other core European bond markets while the peripherals generally outperformed as Italy (-3.6bps), Spain (-4.6bps) and Portugal (-4.3bps) all closed tighter. With little in the way of data in Europe yesterday, Euro bonds appeared to be following the Treasury market moves more than anything else. Equities also appeared to follow suit, as markets reversed some early weakness to close higher. The Stoxx 600 (+0.64%), DAX (+1.84%) and CAC (+1.36%) in particular firming.

On the back of the fresh record high for the S&P 500 yesterday, markets in Asia are generally mixed this morning. The Nikkei (+0.48%) and Hang Seng (+0.49%) are both trading firmer although the Kospi (-0.46%) and bourses in China (Shanghai Comp -1.44%, CSI 300 -1.49%) are softer. The latter in particular perhaps reflecting better data out of the region tempering further easing hopes after the April foreign direct investment print (+10.5% yoy vs. +2.0% expected) came in well above consensus. Bond markets are generally firmer, led by a further tightening for 10y Treasuries (-1.9bps) this morning.

Staying on China, yesterday the Ministry of Finance released data on fiscal revenue and expenditure in April. The findings showed that revenue remained weak but expenditure growth picked up significantly. Total government income growth was -4.7% yoy which compares to -6.1% in Q1 and +7.1% in 2014. On the expenditure side, national expenditure growth accelerated to +22% yoy from -0.2% in Q1 and +6.4% in 2014. In particular, transport (+57.8% yoy), environmental protection (+30.5% yoy) and social housing (+21.2% yoy) saw sharp increases in spending. Our China Chief Economist Zhiwei Zhang believes that the uptick in expenditure growth is the first sign of fiscal policy stance turning from contraction to expansion. Having been concerned about the lack of fiscal policy easing, April’s data makes Zhiwei more comfortable that growth may rebound in H2. Zhiwei expects fiscal spending growth to remain high and the fiscal deficit to expand to 3.7% of GDP this year. He continues to expect growth to slow to 6.8% in Q2 before then rebounding to 7.1% in H2.

Over in Greece progress continues to be slow as technical teams from Greece and its creditors resumed talks yesterday. Headlines are continuing to build with Greek press Ekathimerini suggesting that Greece’s creditors want to be presented with a list of proposed reforms from Athens by Sunday. In the meantime, European officials including Italian Finance Minister Padoan and EU Parliament Chief Schulz reiterated the risks of Greece leaving the Euro area. One move which will likely have helped ease talks is the apparent news that Greece is pushing ahead with the sale of its biggest shipping port Piraeus, according to Reuters. The article suggests that Greece has asked three firms to submit bids for a majority stake. This comes after previous worries that Athens would be seeking to block any potential asset sales. Ultimately however the bigger picture remains the same with both Greece and its creditors still seemingly not seeing eye-to-eye on taxations, pensions and the labour market. Time is not on their side with the gap still seemingly large.

Looking at today’s calendar now, it continues be quiet in the European timezone with just the March construction output print in the UK due. It’s a busier end to the week in the US however. We kick off with the May empire manufacturing print, followed by industrial and manufacturing production. April’s capacity utilization is also scheduled and we close out the day with the provisional University of Michigan consumer sentiment print for May.