One day after the SNB stunner roiled markets, overnight global markets have seen - as expected - substanial downward pressure, with the Swiss market slide resuming post open, while European stocks have seen some pressure despite what is now an assured ECB QE announcement next week. However, the one trade that can not be mistaken is the global rush into the safety of government paper, with every single treasury yielding less today than yesterday (the Swiss 10Y was trading below 0% at last check), except for Greek 10Y which are wider on deposit run fears. That said, with capital market liquidity absolutely non-existent even the smallest trade has a disproportionate effect on futures, and expect to see much more rangebound trading until the damage report from the SNB action is fully digested, something which will take place over the weekend.
The possibility of the ECB announcing sovereign asset purchases on 22 January already led Switzerland’s SNB to move pre-emptively last month and introduce negative interest rates. As SocGen's FX Research group notes, as disinflationary pressures spill over from the eurozone to trading partners in the north and east of Europe, we parse over the central banks that stand ready to act should the ECB announce QE.
Anyone who was hoping the market would rebound on last-minute news that the US government has gotten funding for another 9 months, will be disappointed this morning, when futures are finally starting to notice the relentless decline in crude, and with Brent down another 1% as of this writing following yet another cut in the forecast of Global oil demand by the IEA (the 4th in the last 5 months) and with Chinese industrial production also missing estimates (recall that the Chinese slow-motion hard landing has been said by many to be the primary catalyst for the crude collapse) which however pushed Chinese stocks higher on hopes of even more stimulus, the S&P is trading lower by some 14 points, the 10 Year is in the red zone at 2.12%, and the USDJPY is close to session lows. In short: Kevin Henry's "ETF" desk at the NY Fed will have its work cut out to generate one of the now traditional pre-weekend feel good, boost confidence stock market ramps.
New oil projects are being scrapped in Norway amid falling production and low oil prices. The governor of Norway’s central bank says western Europe’s biggest oil producer is facing a major economic slowdown as crude prices continue to plunge. As Bloomberg reports, Oeystein Olsen said today after unexpectedly cutting rates and shocking markets to a new 5 year low in NOKEUR, "our job now is that we need to prevent a severe downturn in the economy... that is presently the major concern of the board."
Not quite as many fireworks overnight, in another session dominated by central banks. First it was revealed that China had injected CNY400 billion into the banking system to add liquidity as the economy slows, which is ironic because on the other hand China is also seemingly doing everything in its power to crash its nascent stock market bubble mania, following the latest news that China’s CSRC approved 12 IPOs ahead of schedule which is seen as a pre-emptive step to tighten interbank liquidity amid the recent rise in margin trading. Another central bank that was busy overnight was Russia's, which proceeded with its 5th rate hike of the year, pushing the central rate up by 100 bps to 10.50% as expected. Elsewhere, the Bank of England wants to move to a Fed-style decision schedule and start releasing immediate minutes as Governor Mark Carney overhauls the framework set up more than 17 years ago. The Swiss National Bank predicted consumer prices will drop next year and said the risk of deflation has increased as it vowed to defend its cap on the franc. Finally Norway’s central bank cut its main interest rate for the first time in more than two years and signaled it may ease again next year as plunging oil prices threaten growth in western Europe’s biggest crude exporter.
The Federal Reserve Bank of New York (FRBNY) has built a new crystal ball (technically a DSGE model) as part of its efforts to forecast the U.S. economy. In part 1 of a week-long series - to provide some background on the model, its use for policy analysis and forecasting, as well as its forecasting performance - they briefly discuss what DSGE models are and explain their usefulness as a forecasting tool.
US Industrial Production and the NY Fed Empire State Manufacturing survey are the two main releases for the US. In Europe, the euro area trade balance will be the notable print. Beyond today, US PPI, German ZEW and UK CPI are the main economic reports tomorrow. Wednesday will see the release of BOE’s meeting minutes, the US CPI, and the Euro area inflation report. On Thursday, President Obama will host Poroshenko and on the data front we have Philly Fed, initial claims, and building permits to watch out for, but the biggest market moving event will surely be the Scottish independence referendum. German PPI will be the key release on what will otherwise be a relatively quiet Friday.
For those just catching up on the main news event of the weekend, namely the sudden surge in Scotland "Yes" vote polling surpassing 50% for the first time, here is a complete round up of the background, updates and expert reactions from RanSquawk, Bloomberg and AFP.
Simple overview of the week ahead.
Straightforward dispassionate overview of the investment climate
- Qatar Bank: Deutsche Bank to raise $11 bln with help from Qatar (Reuters)
- AstraZeneca rejects Pfizer's take-it-or-leave-it offer (Reuters)
- China Home-Price Growth Slowdown Spreads as Sellers Discount (BBG)
- The new face of NSA: Mike Rogers (Reuters)
- Putin orders troops near Ukraine to return home (AP)
- Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to High (Nasdaq)
- Bank of England's Mark Carney highlights housing market's risk to UK economy (Guardian)
- Greek Selloff Shows Rush for Exit Recalling Crisis (BBG)
- Anti-austerity Greek radicals ahead in Athens local election (AFP)
This week, markets are likely to focus on US ISM Nonmanufacturing, services and composite PMIs in the Euro area (expect increases), ECB’s Monetary Policy Decision (expect no change in policy until further ahead), and Congressional testimony by Fed’s Yellen.
Previewing the rest of this week’s events, we have a bumper week of US data over the next five days, in part making up for two days of blackout last week for Thanksgiving. Aside from Friday’s nonfarm payroll report, the key releases to look for are manufacturing ISM and construction spending (today), unit motor vehicle sales (tomorrow), non-manufacturing ISM (Wednesday), preliminary Q3 real GDP and initial jobless claims (Thursday), as well as personal income/consumption and consumer sentiment (Friday). Wednesday’s ADP employment report will, as usual, provide a preamble for Friday’s payrolls.
With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."
In addition to the already noted repeat spike in Chinese overnight repo rates as the PBOC refuses to inject liquidity for nearly a week offsetting the "news" of a better than expected HSBC PMI, the other kay datapoints to hit in the overnight session were various European PMIs which were broadly lower across the board. Of note being the French, which missed both the Manufacturing Index (49.4 vs 50.1 expected, down from 49.8) and the Services (50.2 vs 51.0 expected, down from 51.0) and Germany, which missed in Services (52.3 vs 53.7 expected, same as September), while modestly beating Manufacturing at 51.5 vs 51.4 expected, up from 51.1 last. On a blended basis, the Composite Flash PMI fell from 52.2 to 51.5, against the consensus expectation of a modest rise (Cons: 52.4). Today's correction brings to a halt a series of six consecutive monthly rises in the Euro area composite PMI.