Tue, 14 Aug 2018 04:32 IST
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Deutsche Bank Early Morning Reid – August 7, 2018

In fairly quiet markets the ECB’s conditional backstop for the euro last Thursday continued to dictate the market sentiment yesterday. Further helping this was the latest commentary from Germany yesterday which indicated that Merkel’s government is supportive of the ECB’s action and was in no doubt that the central bank is acting within its mandate. It was a quiet session for data watchers but the
latest Fed senior loan officer survey was somewhat encouraging. On balance, domestic US banks have continued to ease their lending standards across most loan categories in the past 3 months even though lending standards at branches of foreign banks are tightening.

Turning to Asia, markets are extending their trend higher overnight with the Nikkei and Heng Seng up +0.6% and +0.3% respectively. The Shanghai Composite is flat overnight, underperforming the region on profit concerns. Chinese equities have been the main global laggards this year. In overnight stories we thought WSJ Hilsenrath’s latest interview with Fed’s Eric Rosengren was interesting. Mr.
Rosengren said the Fed should buy more mortgage-backed securities and possibly U.S. Treasury securities in an open-ended program, and state that it will continue to buy bonds “until we start seeing some pretty significant improvements in growth and income.” Speaking of the current jobs data he argued for a more substantive action than what has been taken to date. Rosengren is a well known
dove amongst Fed officials. Whilst currently a non-voting member his comments may re-ignite the QE 3 debate ahead of the Jackson Hole symposium on the very last day of the month.

Recapping yesterday’s markets, the S&P 500 (+0.23%) drifted higher after having attempted to test the 1400 mark yesterday. The market didn’t get there but nonetheless still closed at a 3-month high. Across the Atlantic, the IBEX and FTSE MIB gained +4.41% and +1.54% respectively with the former closing above 7000 for the first time in over four weeks. Spanish bond yields continued to make their way lower with yet again another spectacular performance led by the front end. The 2yr yield has declined 315bp in 9 trading sessions after having fallen 46bp yesterday to close at 3.495%. It is the sharpest euro-era rally we’ve seen in Spanish 2yr after having roughly halved the highs two Wednesdays ago. Spanish 2-year yield is now back to levels last seen in early May of this year.

Indeed Spanish 2-year bonds aside certain equity and credit benchmarks are also back to their early May levels. Having reversed nearly all of the ‘May-day’ selloff the S&P 500 is now less than 2% away from revisiting its year-to-date highs of 1419. In credit, the iTraxx Main and Financial Senior indices are back to their early May spreads of 148bp and 244bp respectively. The Fin Sub index also closed below 400bp for the first time since early May after having reached the wides of 515bp in mid-May. Some indices have outperformed on a relative basis though with Xover closing below 600bp for the first time since late March of this year. Likewise the Stoxx600 is also back to its late March levels.

In other European stories, the European Commission plans to detail proposals for a euro-zone banking supervisor by 11 September (WSJ). A common banking supervisor was a pre-requisite before the ESM can recapitalise banks directly – a decision that was taken at the 29 June summit. The new body would be an agency of the ECB and the European Banking Authority will effectively lose control. The new agency could delegate oversight to the EBA for some activities in some euro-zone banks though, said the article.

In Greece, the government aims to speed up privatization of state-owned assets and wants binding bids for its natural gas company and gas grid operator by the end of September. The sale of betting firm OPAP and the old Athens airport and buildings in Athens and on the
islands of Corfu and Rhodes are said to be priorities.

Moving on to today we expect another quiet one as far as data is concerned with Italian Q2 GDP being the main focus. The market is expecting a -0.8%qoq/-2.5%yoy print for Q2, versus -0.8%qoq/-1.4%yoy previously. Elsewhere we have UK industrial production and
German factory orders in Europe. Greece will also sell EU625m in 6-month bills later. Consumer credit stats will be the only notable release from the US today.

Colin Tan, CFA
Research Analyst

Jim Reid
Strategist