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Markets Commentary

The main risk over the weekend was that markets, which have now dropped for three consecutive weeks the longest negative streak since January, would focus their attention on the latest batch of negative Chinese economic news released over the weekend, which missed expectations across the board:

  • most prominently in Retail Sales (10.1% vs. Exp. 10.6%, down from 10.5%) and
  • Industrial Production (6.0% vs. Exp. 6.5% down from 6.8%), and
  • following Friday’s disappointing new credit loan data, would sell off as the Chinese slowdown once again becomes a dominant concern.

However, after some initial weakness, the risks were all but gone when first the USDJPY jumped on another round of deflationary Japanese economic data (PPI Services -4.2%, Exp. -3.7%) which led to renewed hopes of more BOJ easing and a jump in the USDJPY and thus US futures.

Shortly thereafter a bearish report on oil by Goldman was misreported as bullish on oil prices (Goldman explicitly stated that the global rebalancing is taking longer than expected, but recent supply disruptions have taken off more oil from the market than expected, as a result of which Goldman cut its 2017 forecast prices while pushing up near-term expectations, a move that will also assure that 2017 prices are lower as more near-term production comes online.

Traders and analysts quickly focused on oil as the driver of risk on strength: “The firmer oil price is helping emerging-market equities today despite the weaker China data over the weekend,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP.

“Oil is being driven by what’s happening in Nigeria at the moment – that’s changed sentiment towards Brent and has brought an expected recovery forward,” said John Meyer, an analyst at broker SP Angel Corporate Finance LLP in London. “Rising oil prices tend to support the commodities complex.”

As a result of the confusion, Brent rose to a six-month high, leading a rebound in commodities and boosting the ruble and mining companies, as supply disruptions in Nigeria added to production woes, while WTI was trading above $47 for the first time since November.

And so, after last week’s US market losses and renewed recession concerns, the selloff was halted courtesy of the pickup in raw-materials prices which, as Bloomberg wrote, provides support for global equities after about $1.8 trillion was wiped off the value of the securities in the first two weeks of May amid weaker economic data and disappointing earnings reports.

“Concerns over the strength of the global economy are back on investors’ minds,” said Jasper Lawler, a London-based analyst at CMC Markets Plc. “The resources and oil sectors have been outperforming since the February low and both of them are performing OK today. But they need to continue to outperform for us to have a sustained rally.”

Low trading volumes due to the Whit Monday holiday,the Stoxx Europe 600 Index declined 0.4 percent, falling for a third time in four days. German and Swiss markets were among those shut, and volume of shares changing hands was about 45 percent lower than the 30-day average. Almost all industry groups in the Stoxx Europe 600 Index dropped after Chinese reports on new lending, retail sales, industrial production and fixed-asset investment missed economists’ estimates. The volume of Stoxx 600 shares changing hands was 44 percent lower than the 30-day average as German and Swiss markets were among those shut for a holiday.

Futures on the S&P 500 Index expiring next month added 0.1% after the gauge completed a third weekly decline, its longest streak since January.  Announced stock buybacks dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show. Is the buyback spree officially coming to an end?

Global Market Snapshot

  • S&P 500 futures up less than 0.1% to 2045
  • Stoxx 600 down 0.4% to 333
  • FTSE 100 down 0.3% to 6121
  • S&P GSCI Index up 0.9% to 364.9
  • MSCI Asia Pacific up 0.4% to 126
  • Nikkei 225 up 0.3% to 16466
  • Hang Seng up 0.8% to 19884
  • Shanghai Composite up 0.8% to 2851
  • S&P/ASX 200 up 0.6% to 5359
  • US 10-yr yield up 1bp to 1.71%
  • German 10Yr yield down less than 1bp to 0.12%
  • Italian 10Yr yield up less than 1bp to 1.48%
  • Spanish 10Yr yieldunchanged at 1.6%
  • Dollar Index up 0.02% to 94.63
  • WTI Crude futures up 2% to $47.13
  • Brent Futures up 1.9% to $48.74
  • Gold spot up 0.7% to $1,282
  • Silver spot up 1.2% to $17.32

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