Global Market and Economic Update

Economy
The global sell-off in bond markets has resumed, as yields surge on 10-year notes in Italy, Spain, Portugal and Germany. With the full picture still far from clear, strategists and analysts have been hard pressed to pinpoint a specific reason for the shift over the past two weeks. Markets will now focus on rates today and several U.S. Treasury auctions this week to see if Monday’s high yields were just the starting point for a new trading range. 10-year Bund yields +9 bps to 0.68%; U.S. 10-year +12 bps to 2.27%

The Trans-Pacific Partnership faces its first test in the U.S. Senate today in a critical vote that may hold the key to President Obama’s diplomatic pivot to Asia. Senate Majority Leader Mitch McConnell will have to find 60 votes in the 100-member Senate to overcome procedural obstacles before work can formally begin on fast-track legislation. Trading partners have said they want to see that enacted before finalizing the agreement. TPP would create a free trade zone covering 40% of the world economy – making it the biggest trade deal since NAFTA.

At a panel discussion in Zurich this morning, NY Fed President William Dudley outlined that he does not know when interest rates will rise but repeated recent comments that the policy tightening will depend on the U.S. economy. “To be as direct as possible: I don’t know when this will occur,” declared Dudley. “I expect that this (a raise in rates) will have implications for global capital flows, foreign exchange valuation and financial asset prices even if it is mostly anticipated when it occurs.”

According to the latest report from the Energy Information Administration, oil production from seven major U.S. shale plays is expected to fall by 86K bbl/day in June. Oil output at the Eagle Ford shale play in South Texas is forecast to see the biggest decline, down 47K bbl/day, while production at the Bakken shale play, centered in North Dakota, is expected to drop by 31K bbl/day. Crude futures +1.9% to $60.39/bbl.

Another strong earthquake shook Nepal today, following April’s 7.8 magnitude quake that killed thousands. The U.S. Geological Survey said the quake had a magnitude of 7.1 and struck 68 km west of the town of Namche Bazar, close to Mount Everest. Shockwaves were felt across northern India and as far away as the capital New Delhi, where buildings swayed for more than a minute. BSE Sensex -2.3% to 26,877.

Stocks
“The magnitude of falsity…is enormous,” declared U.S. Judge Denise Cote, ruling that Nomura (NYSE:NMR) and RBS (NYSE:RBS) made false statements in selling MBSs to Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) before the financial crisis. The two banks have been the only ones out of 18 financial firms that took their case to trial, arguing that it was the housing crash, and not deceptive loan documents, that caused the bonds to collapse. The other firms – including Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) – settled, together paying nearly $18B in penalties.

Federal regulators are defending their heightened oversight of giant insurer MetLife (NYSE:MET), saying the company could pose a threat to the U.S. financial system because of its complex transactions and capital-markets activities. In January, MetLife became the first non-bank to challenge a decision by the Financial Stability Oversight Council that designated it as a SIFI, or systemically important financial institution.

Morgan Stanley has confirmed the sale of its Global Oil Merchanting business to Castleton Commodities; financial terms were not disclosed, but FT reports the purchase price is at least $1B. Morgan Stanley (NYSE:MS) previously agreed to sell the business to Russia’s Rosneft (OTC:RNFTF) but the deal fell apart amid tensions over the Ukraine conflict. The sale marks the end of Wall Street’s controversial involvement in physical oil trading.

Looking to push competitors out of the market, BHP Billiton (NYSE:BHP) is aiming to reduce iron ore unit costs at its Western Australia operations by 21% to $16 per tonne in the 2016 financial year, down from just below $20 per tonne in April. The mining company also expects to cut capital and exploration expenditure to $9B this year from $12.6B in 2015. BHP +0.8% premarket.

The prospects for a last-minute settlement with DuPont (NYSE:DD) are “dim”, Trian’s Nelson Peltz told CNBC on Monday. DuPont has refused to add Peltz to its board and has rejected his demand to split the company’s volatile materials business from its more stable units. Shareholders will vote on whether Peltz and several other Trian nominees should join the firm’s board on May 13.

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