Overnight Futures Levitation Mode Engaged But Subdued

For all the talk of how stellar this earnings season has been so far (mostly for the financials if only relative to crushed expectations, and all in non-GAAP terms of course), some of the biggest bellwethers had nothing to write home about yesterday with Coca-cola (-2.85%), Travelers (-3.8%) and McDonalds (-1.3%) all falling after reporting mixed Q2 results with the latter saying that there was some “some trepidation” amongst franchisees about boosting staffing amid rising labor costs related to state minimum-wage increases and health care expenses. Adding to that, Apple, the largest company by market cap, fell 0.6% in afterhours trading after reporting Q2 EPS of $1.28 (vs 1.23 consensus), but missing top line estimates ($37.4bn vs $37.9 expected).

And if despite yesterday's lackluster earnings the most recent market levitation on low volume was largely due to what some considered a moderation in geopolitical tensions after Europe once again showed it is completely incapable of stopping Putin from dominating Europe with his energy trump card, and is so conflicted it is even unable to impose sanctions (despite the US prodding first France with BNP and now Germany with the latest DB revelations to get their act together), as well as it being, well, Tuesday, today's moderate run-up in equity futures can likely be best attributed to momentum algos, which are also rushing to recalibrate and follow the overnight surge in the AUDJPY while ignoring any drifting USDJPY signals.

Overnight markets have shaken off the mixed US earnings tape to trade higher across credit, FX and equities. The major mover during the Asian timezone is the AUD, which is about 0.4% firmer against the greenback following the Australian CPI print which rose to +3.0% YoY. The front end of the Australian bond curve has sold off by around 4-5bp. In EM Asia, Indonesia has seen a 1% richening in the IDR and 5-yr sovereign CDS has tightened 6bp following official news that the market-friendly Jokowi has indeed won the presidential election. However there has been profit-taking in Indonesian assets as we go to print, with headlines that the runner-up, Prabowo is planning to contest the vote in the Constitutional Court (Bloomberg).

Elswhere in Asia, global markets continue to watch the developments in the Chinese property market and today there were further signs that some Chinese cities are loosening home purchase restrictions to boost sales. Chinese construction material stocks are up 1.1% today and this is news has boosted the Shanghai Composite to a six-week high. We’ve also got one eye on what could be the second ever default in the Chinese onshore bond market by a company called Huatong Road & Bridge. The company failed to meet a principal repayment yesterday, but there are reports today that the local government may step in to help ensure the company meets bondholder obligations. How the Chinese authorities react to this case will be interesting.Asian stocks mostly rise with Hang Seng outperforming and Nikkei underperforming; MSCI Asia Pacific up 0.4% to 148.5; Nikkei 225 down 0.1%, Hang Seng up 0.8%, Kospi little changed, Shanghai Composite up 0.1%, ASX up 0.6%, Sensex up 0.4%; 8 out of 10 sectors rise with energy, materials outperforming and information technology, telecom services underperforming.

Heading into the North American open, stocks in Europe are seen broadly higher, with the German DAX outperforming following earnings by Daimler (+1.41%) pre-market. At the same time, Deutsche Bank (-0.98%) shares remained under pressure and headed for their largest fall in a month as market participants reacted to reports by the WSJ which indicated that bank overseers faulted some of the firm’s businesses in the US last year for “inaccurate and unreliable” financial reports. 17 out of 19 Stoxx 600 sectors rise; autos, basic resources outperform; utilities, banking underperform; 63.3% of Stoxx 600 members gain, 31.5% decline; Eurostoxx 50 +0.2%, FTSE 100 +0.1%, CAC 40 +0.2%, DAX +0.4%, IBEX -0.1%, FTSEMIB -0.5%, SMI +0%

Events in Ukraine have somewhat pushed Portugal’s banking troubles out of the headlines over the past few days even as the situation has continued to evolve. Banco’s parent ESI asked for protection from creditors at the end of last week and over the weekend BES promised to reimburse at maturity all the CP’s issued by its various parent holdco’s - a commitment worth around €820mn. Adding in Banco’s other exposures to the rest of the Espirito Santo Group it seems likely that BES at some point will have to raise further capital. On this note the Governor of the Bank of Portugal, Carlos Costa, was quoted on Friday in remarks to Parliament that, “preliminary contacts between BES and international investment banks, as well as interest shown by several entities, [namely] investment funds and European banks, show that a private solution to reinforce capital is possible" (Bloomberg). Yesterday it came out that Banco has postponed its Q2 earnings report, due on July 25th. In related news there were headlines after the market close last night that Compagnie Bancaire Helvetique had acquired a majority stake in Espirito Santo Private Bank although no further details beyond this announcement were given.

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