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Asia has been in a positive mood and our European equity market calls have also responded, helped by the nice late session melt up in the S&P 500 and the fact that US futures have followed Asian bourses higher today. It’s interesting to see the DAX performing well, and while we have seen subdued buying of EURs, clients have been better buyers out-of-hours of the German index over other markets.
Weekend newsflow was minimal, with some focus on a raft of comments from various Fed officials. The comments from San Francisco president John Williams - that developments in the labor market have given the central bank flexibility to start the process of normalisation earlier - have widely been discussed today by the macro community.
Consensus is currently calling for a rise in the fed funds rate in Q2 or Q3, so Mr Williams’ comments suggest that we could see a move in Q1. Janet Yellen and the core will need to see wage pressures emerging. It has also become clear over the last couple of years that asset markets have become the Fed’s third mandate, so volatility in the S&P 500 will also be a concern.
As Glenn Stevens detailed on the weekend he sees the ‘likelihood of some disruptions in markets’ when the Fed raise rates. These comments won’t startle many, who would be expecting these ‘disruptions’ prior to the ‘lift off’ in US rates. My best guess is we still see clearer signs around a rise in the funds rate in the September FOMC meeting.
A triple whammy of event risk
This week global markets will face US earnings, central bank rhetoric and growth, with the US Beige Book and Chinese Q2 GDP firmly in play. It’s therefore interesting to see US 2014 real growth targets being sliced again last week to 1.7%. This is the fourth time since March, when the market was expecting 2.9%.
The S&P 500 continues to be the major focal point of markets, although the US ten-year treasury at 2.50% is also a major talking point. Talk today has been around the late arrival of retail investor to the bull market, which has pushed a few strategists to suggest we are now in the ‘euphoria’ stage in the cycle. It’s also worth highlighting that the consensus target on the S&P 500 is 1978 and while there are a couple of strategists calling for moves above 2000, the upside from here seems tougher going.
We need to see a strong earnings season, with investors having their chance to mark-to-market current levels and getting a much needed reality check. That starts today with Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America reporting in the financial space and it’s interesting to note the financials are expected to perform fairly poorly this earnings season, so good numbers could really get the market going.
European banks are also worth watching as well, with the Stoxx 600 banking sector down 12.6% in the recent sell-off and down 5.2% last week. Along with the size of the ECB’s balance sheet (relative to that of the Fed’s) and moves in the peripheral bond markets, flows towards European banks are a potentially major driver of the EUR from here. A move through the July 7 low of 1.3576 would suggest a deeper move targeting the post ECB meeting on June 6 at 1.3503.
A weekly trend break in the Spanish IBEX
Staying on the European market thematic and it’s interesting to see strong buying coming into the German equity market on moves to the 9600 level. This looks like the line in the sand for now and the bulls seem keen to defend the 9600 area. Perhaps the weakest index is the Spanish IBEX, which closed last week below the uptrend drawn from the June 2013 low. On the daily chart the years downtrend has been broken and the bears will be keen to see a move to the May 16 low of 10,280. There was clear indecision on Friday and it seems that we are at a real inflection point here.
Looking forward; data over the coming European and US session is thin, so it seems the key focus will be on Mario Draghi’s testimony to the European Committee in Strasbourg in the latter stages of US trade.
Citigroup are expected to earn $1.06, on revenue of $18.81 billion, with a fairly sizeable decline in trading revenue likely to be seen. Citi seem to be finding good buyers in the mid $46 area, however the real support seems to be coming in closer to $46.