The big driver of market declines Friday was led by the Non-Farm Payrolls report. The jobs data was a dreadful miss which leads to the major “disconnect” we’ve been seeing between stock prices and overall economic data which we posted just last week. This is the nagging and confounding reality of the QE and ZIRP grand experiment for many investors.
A review of the implications of the new deal struck on Cyprus. We think three of the worst pitfalls have ultimately been avoided--small depositors protected, orthodox seniority of claims respected, and extensive capital controls averted. The political will to preserve EMU has once again triumphed over ideological purity. We review the economic calendar for the week ahead.
With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing:
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.
This follows a statement by the US Treasury's Lael Branaird yesterday in which she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Lastly, the SNB's Jordan also confirmed that the Swiss National Bank will continue to do everything to crush its own currency, and will the 1.20 EURCHF floor, stating that Japan is merely doing the right thing to stimulate growth (i.e., doing what "we" are doing). In other words, let the FX wars continue and may the biggest balance sheet win, all the while everyone pretends nothing is happening.
The underlying trends seen this year have continued, but after strong follow through in Asia, a more subdued tone has been seen in Europe. The US dollar is generally softer, except against the yen and sterling. Japanese markets were closed for holiday, but the MSCI Asia-Pacific Index rose almost 0.3%, lifted by more than a 3% rally in China on speculation that there may be a sharp increase in the cap on foreign investors' ability to invest in Chinese equities. In Europe, the Dow Jones Stoxx 600 is hp about 0.4%, led by a rise in financials. Spanish stock market is at its highest level in almost a year (Feb 2012) and Italy's market is at its best August 2011, though their bond markets are seeing some profit-taking today. With a light economic calendar in North America today, Bernanke's speech in Michigan after the markets close may be the highlight. We identify six key factors shaping the investment climate.
The slow data (and holiday) week will likely keep eyes focused on the 'fiscal cliff' supplying a stiff headwind to stocks as it only reminds investors of the peril which looms directly in front of them. One suggestion I could offer both sides of this debate to avoid any further damage is just to be quiet. Stop making stump speeches. We all know your views. We all know how stridently you will defend them, but your incessant reminders that you have dug in your heels does no good regardless of the negotiating tactic. Instead, hold a joint press conference and admit there are ideological differences, but announce that both parties will do their best to hammer out a deal palatable enough for everyone. Alas, this is wishful thinking. As a result, anytime they open of their mouths, most notably Mr. Obama’s, the words they spew will cause damage to share prices. Unfortunately, the President’s drawing a line in the sand on Friday has guaranteed that a countless number of E-Mini bandits will short the futures in front of his speaking which will erode the conviction among managers trying to put money to work. Ironically, it may take an equity market in free fall that ultimately forces compromise.
A weekend article from Der Spiegel has been the centre of must attention this morning amid a light economic calendar on both sides of the pond. The article reported that the ECB would set limits to the yields of periphery country debt and intervene should these limits be breached. This weighed on the German Bund from the Eurex open and saw the Spanish curve trade lower by 25bps to 35b ps, as well as buoying the EUR currency and riskier assets in early trade. Risk-on moves in EUR and DAX futures were retraced as the ECB denied these reports, saying that it was misleading to report on decisions not yet taken, though it will act within its mandate. A German finance ministry spokesman also denied all knowledge of the reports a short while before hand. Furthermore, the latest monthly bulletin from the Bundesbank that once again reiterated the disapproving German stance toward the ECB's controversial bond-buying programme also dampened the mood.
The initial boost given to European equities following weaker than expected overnight data from China, which renewed speculation of more stimulus measures, has faded throughout the morning. The major European bourses are now trading in negative territory at the North American crossover. The DAX is underperforming, weighed down by the likes of Commerzbank and Deutsche Telekom who both failed to impress markets with their earnings reports pre-market. However, thin summer volumes and another light economic calendar have once again been the theme for the morning, with only the UK Trade Balance for June gaining some market attention. Despite the larger than expected deficit, the ONS said that the figure is likely distorted by the extra public holidays.
European equities are trading in minor positive territory on light volume and a light economic calendar with the exception of the IBEX and the FTSE MIB which are down 0.3% and 0.4% respectively as US participants begin to come to their desks. Headline employment data from the UK was for the most part in-line with expectations, though the jobless claims change for June showed a 6.1K increase compared with the 5.0K expected, with downward revisions to May’s figures. The BoE minutes showed the July increase in APF was not unanimous at 7-2, and a GBP 75bln increase was also discussed, and that should the additional easing measures not work, a further rate cut would be examined. The final comment caused a spike to the upside in the short Sterling strip of 6 ticks, Gilt futures rose to make highs of 121.78, and GBP/USD to slide back below 1.5600, though the pair has since come off its lows and trades back above this level.
Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
With US markets already checked out ahead of the holiday day weekend, and Europe acting abnormally stupid (PIIGS bond spreads plunging, then soaring right back), there is little newsflow to report overnight, except for a key report that China loan growth is plunging in what is a major risk flag proudly ignored by all algos (but not the SHCOMP which dropped 0.7%). Futures have followed the now traditional inverse pattern of selling off early in the Asian session, then ramping following the European opening on nothing but vapors of hope. All that needs to happen today is a drop early in regular trading, following by a major squeeze on the third consecutive baseless rumor for the week to be complete, and for stocks to actually post an increase even as the EUR crashes and burns. Unless of course we get a rumor that Europe will be open on Monday even as the US is not there to bail out risk assets.
There was some hope that today's European summit would provide some more clarity for something else than just the local caterer's 2012 tax payment. It wont. Per Reuters: "Germany does not believe that jointly issued euro zone bonds offer a solution to the bloc's debt crisis and will not change its stance despite calls from France and other countries to consider such a step, a senior German official said on Tuesday. "That's a firm conviction which will not change in June," the official said at a German government briefing before an informal summit of EU leaders on Wednesday. A second summit will be held at the end of June. The official, requesting anonymity, also said he saw no need for leaders to discuss a loosening of deficit goals for struggling euro zone countries like Greece or Spain, nor to explore new ways for recapitalise vulnerable banks at Wednesday's meeting." In other words absolutely the same as in August 2011 when Europe came, saw, and did nothing. Yes, yes, deja vu. Bottom line: just as Citi predicted, until the bottom falls out of the market, nothing will change. They were right. As for the summit, just recycle the Einhorn chart from below. Elsewhere, the OECD slashed world growth forecasts and now officially sees Europe contracting, something everyone else has known for months. "In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November... The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013." Concluding the overnight news was a meaningless auction of €2.5 billion in 3 and 6 month bills (recall, Bill issuance in LTRO Europe is completely meaningless) in which borrowing rates rose, and a very meaningful downgrade of Japan to A+ from AA, outlook negative, by Fitch which lowered Japan's long-term foreign currency rating to A plus from AA, the local currency rating to A plus from AA minus, and to the country ceiling rating to AA+ from AAA. Yes, Kyle Bass is right. Just a matter of time. Just like with subprime.
Here is what happened in Europe overnight, and why the market sentiment is already negative in advance of an NFP number which many are watching closely as a miss of expectations will cement the thesis that the US economy has now rolled over and will likely need more nominally dilutive aid from central planners to regain its upward slope:
- Spain Services PMI for April 42.1 – lower than expected. Consensus 45.4. Previous 46.3.
- Italian Services PMI for April 42.3 – lower than expected. Consensus 43.7. Previous 44.3.
- France Services PMI for April 45.2 – lower than expected. Consensus 46.4. Previous 46.4.
- Germany Service PMI for April 52.2 – lower than expected. Consensus 52.6. Previous 52.6.
- Euro-area Service PMI for April 46.9 – lower than expected. Consensus 47.9. Previous 47.9.
And while the data was bad enough to send European stocks and US stock futures lower, the latest meme spreading as the first US traders walk in, is one of reNEWed QE expectations already, if a very weak one for now.
Looking at your screens and seeing nothing but black? Don't worry, your internet feed did not get cut - it is just that virtually everyone else in the world is taking today off (although judging by recent volumes one could be forgiven to assume that it is "just another day"). Which is not to say that nothing is happening, with a surprising bigger than expected rate cut (50 bps to 3.75%) by the RBA crushing AUD longs overnight, and a Manufacturing ISM on deck which is far shakier now than it was before yesterday's major PMI miss. Compounding the concerns was a UK PMI print just barely above contraction territory at 50.5, below expectations of 51.5, down from 52.1. Finally, expect another record bout of GM channel stuffing which continues to be the only "shining" aspect of the now inflecting US recovery. To summarize with DB's Jim Reid: "Ahead of an important day, it has been a fairly quiet session for markets overnight. Most Asian markets (include Hong Kong, Singapore, Shanghai, and South Korea) are closed for Labour Day. Indeed much of Europe will be closed today. In terms of what's open overnight, the Nikkei is -1.2% but the ASX 200 is up +0.9%. China’s official PMI manufacturing inched a little higher in April to 53.3 from 53.1 in March but slightly below market consensus (53.6). For such a huge economy the Chinese official PMI series does seem to have been remarkably smooth of late as the reading has been gradually on the rise since hitting a recent low of 49.0 in November (50.3 in Dec, 50.5 in Jan, 51.0 in Feb, 53.1 in Mar, 53.3 in April). As we go to print the Reserve Bank of Australia has unexpectedly cut its key benchmark rate by 50bps to 3.75%. Indeed only 2 out of 29 economists polled by Bloomberg saw this coming. The market reacted aggressively post the announcement taking the front end bills 15-18bp lower in yields."
Another day of ugly news out of Europe, with both macroeconomic and monetary data coming in to confirm that downward slope of the European forward trajectory (not to mention funny: below is a chart of Greek retail sales. Hardly any commentary is necessary). Yet despite some recently gravity in the EURUSD, for the time being the futures are trending flat to slightly down, perfectly ambivalent as to how will ease first as long as someone eases. Will this sustain, or will a disappointing Chicago PMI at 9:45 am once again send stocks first plunging then soaring on hope of imminent NEW QE? We will find out shortly. In the meantime, here is a recap of the overnight market action.
After rising in the overnight session following the overbought momentum chasing yesterday's hawkish tone by the Fed (don't ask), futures, European stocks, and sovereign spreads took a turn for the worse following the big miss in European confidence and sentiment, all of which posted material declines, and slid to two and a half year lows. And while the traditional upward stock levitation will resume once the European market close is in sight, only one thing can spoil the party and derail the most recent pseudo-hawkish statement out of the Fed: initial claims, which are expected to decline to 375-380,000 from 386,000 last week. Instead what will most likely happen is a print in the mid to upper 380,000s, while last week's number will be revised to a 390K+ print, allowing the media to once again declare that the number was an improvement week over week. In other words, SSDD.