US Futures Rebound Sharply From Friday’s Coup Fears, Focus Shifts To M&A

Having panciked briefly on Friday night on news of a Turkish coup, which has since not only failed but been cast away as speculation rises that it was staged and designed to give Erdogan even more authoritarian power, markets have moved on and are now focusing on the main overnight event which was the surprising $32 billion bid by Japan’s SoftBank for U.K.’s semiconductor giant ARM Holdings Plc which has soared 45%, crushing the recently rising short base, sending comparable semis higher in European trading and pushing the Stoxx Europe 600 Index up by 0.6%, after surging 3.2% last week. Safe haven assets, including the yen, gold and U.S. Treasuries fell as geopolitical concerns faded away.

That said, there are still some aftershocks in Turkey as markets digest the fallout from the failed coup and the inevitable concentration of even more power in Erdogan’s hands who has unleashed a historic purge to eliminate his key enemies.

 

Turkish officials over the weekend sought to limit the impact on financial markets by promising unlimited liquidity to lenders and measures to support the currency. Turkey’s lira recovered more than half of its loss from Friday, while the Borsa Istanbul 100 Index sank 2.7% after a 6.2% jump last week that marked its best performance since October. Turkish Airlines tumbled as much as 6.5% . President Recep Tayyip Erdogan ordered reprisals after the attempted takeover by the military led to the deaths of more than 190 civilians and so far more than 6,000 people, including members of the judiciary, have been detained.

The failed putsch in Turkey came less than a week after global equities had recovered from the selloff that followed the U.K.’s June 23 vote to leave the European Union, an event that wiped almost $4 trillion off the value of the securities over two trading days, and which has since seen US stocks surge to all time highs.  As Bloomberg notes, Hermes Asset Management is among investors seeing potential for a relief rally in Turkish assets even amid longer-term concern about the country’s political and economic situation. Rabobank and CrossBorder are predicting outflows from Turkey. Turkey’s deputy prime minister posted on Twitter that there’s “no need to worry.”

“Geopolitical risk has reared its head again,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which manages more than $110 billion. “But it’s at least the fourth coup in Turkey since 1960 and I suspect no lasting impact on global markets.”

Elsewhere, the MSCI Asia Pacific excluding Japan Index rose 0.4%, after surging 4.5 percent last week. Benchmarks gained in Australia, Hong Kong and India, while the Shanghai Composite Index declined after data showed new home-price gains moderated last month in China. Markets were shut in Japan and Thailand for holidays. Malaysia Airports Holdings Bhd., owner of Istanbul’s second-biggest airport, tumbled more than 5 percent on concern fewer people will visit Turkey following the attempted coup. Lenovo Group Ltd., the world’s biggest personal-computer maker, rallied to a two-month high in Hong Kong after a filing last week showed its chief executive boosted his stake. Futures on the S&P 500 index rose 0.5 percent ahead of earnings from companies including Bank of America Corp., Charles Schwab Corp. and International Business Machines Corp.

Turkey’s 10-year bonds tumbled 2.5 percent, pushing their yield up by
41 basis points to this month’s high of 9.30 percent. The rate on
German notes due in a decade declined by two basis points to minus 0.01
percent. The yield on similar-maturity U.S. Treasuries rose three basis points to 1.58 percent. “There seems to be a reasonable resolution to the events” in Turkey, said Bill Bovingdon, the chief investment officer at Altius Asset Management in Sydney.

Market Snapshot

  • S&P 500 futures up 0.1% to 2156
  • Stoxx 600 up 0.1% to 338
  • FTSE 100 up 0.% to 6697
  • DAX unch at 10059
  • German 10Yr yield up less than 1bp to -0.03%
  • Italian 10Yr yield down less than 1bp to 1.21%
  • Spanish 10Yr yield down less than 1bp to 1.16%
  • S&P GSCI Index down 0.5% to 360.3
  • MSCI Asia Pacific up 0.4% to 134
  • Nikkei 225 closed
  • Hang Seng up 0.6% to 21688
  • Shanghai Composite up less than 0.1% to 3054
  • S&P/ASX 200 up 0.3% to 5430
  • US 10-yr yield down less than 1bp to 1.54%
  • Dollar Index down 0.03% to 96.05
  • WTI Crude futures down 1.1% to $45.18
  • Brent Futures down 1.2% to $46.79
  • Gold spot down 0.2% to $1,332
  • Silver spot down 0.4% to $20.23

Global Headline News

  • SoftBank to Buy Britain’s ARM for $32b in Record Deal: SoftBank to secure leader in global mobile computing with offer that has 43% premium to Friday close
  • Turkey Moves to Calm Investors After Coup Attempt Quashed: Central bank pledges unlimited liquidity to commercial lenders
  • NextEra’s $2.6b Hawaii Deal in Doubt as Regulator Says No: State Public Utilities Commission votes 2-0 against purchase
  • Clinton Maintains Lead of 46% to 41% Over Trump: WSJ/NBC Poll
  • Trump Formally Introduces Mike Pence as VP Nominee
  • Privacy Suit Against Apple, App-Makers Proceeds as Class Action
  • ‘Secret Life of Pets’ Fends Off ‘Ghostbusters’ to Stay No. 1
  • Three Police Officers Killed, Three Wounded in Baton Rouge: NYT

Looking at regional markets, we start in Asia which kick-started the week mostly higher, following the weak lead from the U.S., as upcoming key-risk events kept participants cautious. ASX 200 (+0.5%) traded with modest gains, with the energy sector outperfoming as the rally in natural gas extended overnight, while significant JPY weakness coincided with the initial outperformance in US futures. Elsewhere, Chinese markets traded in a subdued manner with the Hang Seng (+0.7%) narrowly in positive territory, while continued lacklustre liquidity injections from the PBoC saw sentiment in the Shanghai Comp (-0.3%). As a reminder, Nikkei 225 was closed for Ocean Day. Japanese Chief Cabinet Security Suga stated the BoJ has options for additional easing and has no intentions to issue deficit bonds.

Top Asian News

  • Temasek Said to Weigh Buyout of Singapore Rail Operator SMRT: State investment firm currently owns 54% of subway company
  • China Funds Running From Company Defaults Bet Big on Bank Debt: Certificates of deposit issuance triples to $928b
  • Abe’s Enforcer Rules Out Deficit Bonds to Fund Stimulus Package: BOJ still has easing options, Suga says in interview
  • China Home Price Gains Cool as Smaller Cities Impose Curbs: New-home prices gained in 55 cities in June versus 60 in May
  • Singapore Exchange Echoes NYSE in Spinning Off Policing Role: Regulatory unit will not add to IPO process, bourse says
  • Exxon’s $2.5b Bid for PNG’s InterOil Tops Oil Search: InterOil determines Exxon’s offer superior to Oil Search bid

European equities kicked of the session in positive territory, before paring much of the gains by the North American crossover to trade relatively mixed (Euro Stoxx: -0.40%). On a sector specific breakdown, chip names significantly outperform today, benefitting from Softbank’s takeover of ARM holdings (+42%). Financials also trade higher today, with Italian banks benefitting from reports that the Italian government is working on plans to set up a EUR 50bIn bad bank which would aim to clean up the banks, while the latest BoE comments from Weale strike a less dovish tone then some of the other MPC members of late, in particular Vlieghe who noted over the weekend that a rate cut should be accommodated with additional stimulus. Fixed income markets have remained elevated this morning on light newsflow, up around 40 ticks this morning, while looking ahead the most notable highlight from an auction perspective would be the UER 2.8-3.5bIn Belgian auction.

Top European News

  • Draghi Seen Taking Carney Cue by Deferring ECB Action for Now: Economists see little chance of new ECB stimulus on Thursday
  • Opera Plunges as $1b Buyout Scrapped on State Rebuff: Chinese consortium paying $600m to get browsers
  • EU Said to Study Nuclear Option to Force May’s Hand Over Brexit: Britain could in theory see EU voting rights suspended
  • Police Make Further Arrests as They Seek Truck Killer’s Motives: Govt defends security measures; 85 still hospitalized

In FX, the lira jumped 2.9 percent versus the dollar, after sliding 4.6 percent on Friday. The South African rand climbed 1.9 percent, having dropped 2.4 percent in the last session as news of Turkey’s coup attempt hit emerging-market assets. Mexico’s peso rose 0.8 percent. The yen fell 0.9 percent to 105.78 per dollar. It tumbled 4.1 percent last week as Prime Minister Shinzo Abe outlined plans for a “bold” stimulus package in the wake of an election victory. The Bloomberg Dollar Spot Index gained 0.1 percent. It climbed 0.4 percent in the last session as U.S. reports showed retail sales rose in June by more than economists predicted and manufacturing expanded by the most since January. The odds of the Federal Reserve increasing interest rates by December more than doubled last week to 44 percent in the futures market. China’s yuan fell as much as 0.17 percent to its weakest level since 2010, having lost ground in all but one of the last 11 weeks. “We’re seeing Asian currencies weaker because of the dollar,” said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “I’m not sure whether the Turkey situation has really stabilized and, if there’s any concern, it should be good for the dollar.”

In commodities, crude oil was little changed at $45.94 a barrel in New York. It gained 0.6 percent in the last session as news broke of the coup attempt in Turkey, a vital conduit for oil passing from Russia and Iraq to the Mediterranean Sea. Gold declined 0.9 percent to about $1,326 an ounce, trimming this year’s advance to 25 percent. The metal is in a major bull market and may surge to more than $1,500 as low interest rates buoy demand and the U.S. presidential election looms, according to DBS Group Holdings Ltd. Copper fell 0.8 percent in London, extending Friday’s retreat from the highest level since April. Tin dropped 1.4 percent, slipping from a four-month high. Nickel rallied 0.7 percent amid a clampdown on polluting mines in the Philippines, the world’s largest producer of nickel ore. Corn climbed as much as 1.4 percent in Chicago, where it’s posted declines in each of the last four weeks. Heat in the U.S. Midwest intensified over the weekend and this may damage crops, said Michael Pitts, commodity sales director at National Australia Bank Ltd. in Sydney.

It’s a particularly quiet start to the week today with no data due out in Europe and just the July NAHB housing market index due in the US this afternoon. In the US 112 companies are set to report, or 26% of the S&P 500 market cap. This will include the remaining banks in BofA, Morgan Stanley and Goldman Sachs, as well as the big tech names Microsoft, Amazon, Intel and IBM. In Europe we’ll also get quarterly reports from 73 Stoxx 600 companies including Roche, SAP and Daimler.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities are relatively mixed, while chipmakers outperform after Softbank’s USD 31 bIn purchase of ARM Holdings
  • GBP saw a brief bout of strength after BoE’s Weale highlighted that there is no rush to cut interest rates
  • Looking ahead, highlights include ECB’s Villeroy, as well as earnings from IBM & Bank of America
  • Treasuries lower overnight along with European equities and gold as military coup in Turkey failed; today will see NAHB housing market index along with $69b in bill sales.
  • Friday’s failed plot to topple President Recep Tayyip Erdogan risks shattering what’s left of Turkey’s image as a stable country that can attract enough investment to finance one of the highest current-account deficits among G-20 economies; Turkey’s lira rebounded from its biggest retreat in eight years and bonds tumbled as the cost of insuring the country’s debt soared, while shares in Turkish Airlines and banks led a slump in stocks
  • Economists in a Bloomberg survey predict the ECB will keep policy unchanged on Thursday but announce fresh measures before the end of the year
  • Bank of England policy maker Martin Weale said he needs to see firmer evidence of the impact of the U.K.’s vote to leave the European Union before supporting additional stimulus at the central bank’s August meeting
  • No other country is feeling the fallout from the U.K.’s vote to leave the European Union more than Ireland, with its prime minister under pressure, economists slashing growth forecasts and companies warning of Brexit’s dire consequences
  • London’s seven-year housing boom may be about to end and its residential properties could experience a severe downturn, according to Societe Generale analysts
  • Japan’s top government spokesman ruled out the issuance of deficit bonds to fund an economic stimulus package planned for the autumn, hinting at the use of construction bonds for longer-term investments
  • This year’s Republican National Convention will be defined by Donald Trump, who responded to the killing of three police officers in Baton Rouge, Louisiana with a dire warning about the direction the nation was headed. “It will only get worse!” he tweeted

US Event Calendar

  • 8am: NAHB Housing Market Index, July, est. 60 (prior 60)
  • 4pm: Total Net TIC Flows, May (prior $80.4b)

DB’s Jim reid concludes the overnight wrap

Markets over the last 36 working hours have been diverted by the tragic events in Nice and Turkey. Whilst both disturbing, events in Turkey had the most potential to be a major macro event but the quick resolution of the attempted coup on Friday night will probably limit its impact. In very late trading on Friday as the story broke, the Turkish Lira was down as much as -6% against the USD, before finishing -4.78% weaker by the close – the biggest decline since 2008. This morning it’s back to only -2.09% lower since just before the coup emerged, with the crackdown on those involved and responsible well underway. Our EM strategists noted that local media outlets have reported that followers of Fethullah Gulen, a preacher in self-exile in the US, were behind the plot. At least 6000 people have been detained in relation to the failed coup including President Erdogan’s top military aide Col Ali Yazici. Meanwhile the AKP government has embarked on a massive purge in the army and judiciary following the attempt. Accordingly, the Turkish Supreme Board of Judges and Prosecutors (HSYK) ordered the detention of nearly 2750 judges. Arrest warrants have been issued for 140 Supreme Court members and 48 members of the Council of State on the basis of being part of the Gulen movement. Our colleagues also note that the Turkish Parliament is still the legislative power in the country and held an extraordinary session on Saturday displaying a united stance against the failed coup.

As we refresh our screens this morning, the Hang Seng (+0.05%) and ASX (+0.53%) are currently up, while the Shanghai Comp (-0.39%) and Kospi (-0.02%) have retreated. Credit markets in Asia and Australia are little changed and so all things considered there’s not really been too much of a reaction. It’s worth noting that markets in Japan are shut today for a public holiday, so this could be keeping things quiet also. Meanwhile, Oil markets are a touch higher (Brent +0.46%) and Gold (-0.61%) has eased off slightly. Government bond markets are a touch weaker also.

Sticking with bond markets, it’s worth quickly recapping the impressive move higher for yields across most government bond markets last week, which coincided with a pretty strong five day gain for risk assets. Indeed 10y Bunds in particular stood out after closing in positive territory on Friday (at 0.006%) for the first time in the post-Brexit era (they last closed in positive territory on June 23rd). Bund yields rose 19.5bps last week or a more eye opening +103%, with that absolute weekly move higher in yield the most since December last year. 10y government bonds in France were 12.8bps higher last week which was also the biggest move up this year, while similar maturity bonds in Spain and Italy were 8.0bps and 6.1bps higher respectively. 10y Treasuries were also an impressive 19.3bps higher and back to the highest since June 24th.

Although last week saw yields rise, the past week did see the first non-financial corporate (albeit a 100% state owned one) issue a EUR bond with a negative yield as Deutsche Bahn priced a 5 year zero coupon bond at a yield of -0.006%. We highlighted in a Credit Bites on Friday how much of the Euro corporate bond universe now trades with a negative yield after the push lower in rates since the UK referendum. We find it’s actually been as much due to spreads tightening as falling yields though.

Moving on, as we noted earlier, last week was another relatively strong one for risk assets despite markets running out of steam slightly on Friday. Indeed despite a backdrop of relatively solid data and better than expected results out of Citi – which like JP Morgan benefited from decent fixed income trading revenues – the S&P 500 (-0.09%) edged slightly lower to pare its five day gain to +1.49%. The Dow (+0.05%) did however manage to eke out a small gain to take its weekly performance to +2.04%. Prior to this there was a similar level of week-end fatigue across European equities with the Stoxx 600 (-0.17%) also dipping a touch lower, although still finishing with a strong +3.23% gain for the week. The FTSE MIB (-0.29% on Friday) and European Banks (-0.22% on Friday) closed up +4.25% and +8.38% over the five days respectively.

Much of the focus on Friday and certainly prior to the Turkey headlines was the bumper set of data released out of the US. Retail sales arguably stole the show after coming in much stronger than expected. Indeed the headline printed at +0.6% mom in June (vs. +0.1% expected), although we did see the May reading revised down three-tenths to +0.2% mom. Both the ex auto and ex auto and gas readings came in at +0.7% mom (both also exceeding expectations) while the control group component (+0.5% mom vs. +0.3% expected) also beat the consensus forecast. That means the annualized quarterly reading for the control group component is +7.4% and the best showing since a similar increase in Q2 2014. Also coming in better than expected on Friday was the June industrial production print (+0.6% mom vs. +0.3% expected), while manufacturing production (+0.4% mom vs. +0.3% expected) was also a smidgen ahead. The Empire manufacturing reading for July did however decline 5.5pts to +0.55 (vs. 5.00 expected).
On the inflation front June CPI (+0.2% mom vs. +0.3% expected) actually rose a little less than expected, keeping the YoY rate unchanged at +1.0%. The core did however rise to +2.3% yoy following a +0.2% mom monthly increase. The more disappointing data on Friday came in the form of the initial July flash reading for the University of Michigan consumer sentiment survey. The headline sentiment reading tumbled 4pts from June to 89.5 after the expectation was for no change, with both the current conditions (-2.1pts to 108.1) and expectations (-5.3pts to 77.1) components falling. The text in the accompanying statement highlighted the Brexit vote as playing a large part in the dip lower and so it’ll be interesting to see just how much of a hit the global July PMI’s take when they get released on Friday. Meanwhile and just back on the Michigan survey, 1y inflation expectations actually nudged up two-tenths to 2.8%, while 5-10y expectations stayed put at 2.6%.

The end result of all that data was for the Atlanta Fed to revise up its Q2 GDP forecast by one-tenth to 2.4%. The NY Fed also pushed their forecast up to 2.2% from 2.1%.

Away from the data there was some focus over at the BoE where Chief Economist Andy Haldane said that ‘a package of mutually-comprehensive monetary policy measures is likely to be necessary’ next month when the ‘precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round’. Meanwhile over at the Fed, St Louis Fed President Bullard highlighted that there are ‘upside’ risks to his view for just one rate hike this year and none next year.

Taking a look at the week ahead now. It’s a particularly quiet start to the week today with no data due out in Europe and just the July NAHB housing market index due in the US this afternoon.

Away from the data it’s a quiet week for central bank speak with the BoE’s Weale the only notable speaker when he is set to speak this morning (9.15am BST) on the impact of Brexit on monetary policy. Earnings will be a focus however. In the US we’ve got 112 companies set to report, or 26% of the S&P 500 market cap. This will include the remaining banks in BofA, Morgan Stanley and Goldman Sachs, as well as the big tech names Microsoft, Amazon, Intel and IBM. In Europe we’ll also get quarterly reports from 73 Stoxx 600 companies including Roche, SAP and Daimler.

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