Daily Agenda: China and Euro Zone Macro Fears Weigh on Markets

Amid marginally positive signals from the industrial sector in China and Europe, macroeconomic jitters continue to weigh on financial markets, with ten-year euro zone peripheral spreads reaching year-to-date highs overnight as concerns about a looming Grexit mount. For U.S. markets, today’s personal consumption expenditure index levels for April, released by the Bureau of Economic Analysis, revealed that consumer spending remains anemic. After a lackluster first quarter, U.S. shoppers will need to shake off concerns and start spending for a rebound in growth promoted by Federal Reserve policymakers in recent speeches to hold true.

Chinese manufacturing unlikely to alter PBOC course. The official purchasing manager index for May, issued today by the National Bureau of Statistics, edged up slightly from the earlier flash estimate to 50.2, a marginal expansion in line with consensus estimates. The improvement in output and overall new orders was offset by confirmation of declining export demand, prompting analysts to reiterate expectations for more liquidity efforts by the People’s Bank of China in coming weeks.

Wealth management slows at RBC.Royal Bank of Canada reported a 14 percent increase in net income for its fiscal second quarter. One dark cloud for investors in the figures, released over the weekend, was a single-digit contraction in wealth management revenue, a critical franchise for the banking giant.

Gaming bailout of CFD trading company makes for strange bedfellows. Playtech, an Israeli online gaming company, is acquiring troubled London-listed firm Plus500 in a transaction valued at more than $700 million. Shares of Plus500, which makes markets in one-day futures contracts on events that bridge the gap between financial derivatives and gambling, plunged by two thirds in mid-May after freezing client accounts in the wake of a U.K. regulatory investigations.

IMF cuts growth estimates for Ukraine. The International Monetary Fund lowered its 2015 GDP forecast for Ukraine on Sunday, predicting a contraction of 9 percent. The projection reflects larger-than-expected damage to the local economy from the Russia-backed uprising by separatist rebels in eastern Ukraine. The Fund said Kiev remained committed to its economic reform program and was on track to meet all the benchmarks in its IMF assistance program.

Citi to shutter Banamex unit. Over the weekend The Wall Street Journal, citing undisclosed sources, reported that Citigroup was preparing to shut down its Banamex USA unit following discussions with state and federal regulators over money-laundering violations. The division is an arm of Mexico’s second-largest bank, which Citi acquired in 2001.

Improving manufacturing environment for Europe’s South. In good news for the recovering southern economies of the European Union, Markit manufacturing PMI data for May released today included positive readings for Spain and Italy, with both nation’s headline indexes reaching multiyear highs. Offsetting the positive signals, figures for France and Germany remained subdued, with the German index marking a sequential contraction from flash estimates.

Portfolio Perspective: A Busy Week for Bond Markets — Karl Haeling, Landesbank Baden-Württemberg

As is normally the case, Friday’s U.S. GDP and Chicago PMI data generated a wide range of interpretations by economists. As usual, most of these were in line with each economist’s prevailing view of the business outlook. So most analysts took positive views of the data in total. We see the reports consistent with an improvement in the economy over the rest of the year, but only moderately so, thus maintaining underlying trend growth of 2 to 2.5 percent. And if there is a surprise, we see it likely to be a negative, not positive, one. A breakdown in the Dow Jones Transportation Index certainly adds some weight to our skepticism surrounding forecasts for an economic upsurge any time soon.

The coming week will see the release of a variety of data, including the Federal Reserve’s beige book on Wednesday, while Friday will see the always important monthly employment report. Consensus forecasts are for data very similar to that seen in recent months: 220,000-plus in nonfarm payrolls, no change in the 5.4 percent unemployment rate and a 0.2 percent rise in average hourly earnings.

Expectations are for $25 billion to $35 billion of corporate and financial investment-grade debt issuance in the coming week, with $80 billion to $100 billion for the month of June. As issuance is expected to slow both immediately ahead of the June 16-17 meeting of the Federal Open Market Committee and toward the end of the month because of quarter-end liquidity concerns, much of the issuance is expected to hit the market during the first three weeks of the month. This could add some bearish pressure to Treasuries in the near term. On the other hand, chart-related factors are generally short-term bullish and uncertainty surrounding Greece’s debt negotiations should limit selling until a breakthrough emerges.

Karl Haeling is a vice president of capital markets at Landesbank Baden-Württemberg’s New York office.