A dispassionate discussion of the major forces impacting the investment climate in the week ahead.
It has been a relatively quiet overnight session, aside from the already noted news surrounding China's halt on virtual credit card payments sending Chinese online commerce stocks sliding, where despite an ongoing decline in the USDJPY which has sent the Nikkei plunging by 3.3% (and which is starting to impact Abe whose approval rating dropped in March by a whopping 5.6 points to 48.1% according to a Jiji poll), US equity futures have managed to stay surprisingly strong following yesterday's market tumble. We can only assume this has to do with short covering of positions, because we fail to see how anyone can be so foolhardy to enter risk on ahead of a weekend where the worst case scenario can be an overture to World War III following a Crimean referendum which is assured to result in the formal annexation of the peninsula by Russia.
Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.
Stocks in Europe failed to hold onto early gains and gradually moved into negative territory, albeit minor, as concerns over money markets in China gathered attention yet again after benchmark rates fell to lowest since May 2012. Nevertheless, basic materials outperformed on the sector breakdown, as energy and metal prices rebounded following yesterday’s weaker than expected Chinese data inspired sell off. At the same time, Bunds remained supported by the cautious sentiment, while EUR/USD came under pressure following comments by ECB's Constancio who said that financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. Going forward, market participants will get to digest the release of the weekly API report after the closing bell on Wall Street and the US Treasury will kick off this week’s issuance with a sale of USD 30bln in 3y notes.
This week brings a slew of central bank meetings: At the forefront will be the BOJ meeting on Tuesday where no changes to monetary policy are expected. However, we will be watching the commentary closely for hints to further monetary easing in the coming months. Goldman, and others, still expect the BOJ to provide additional stimulus in the second quarter of this year as the impact of the consumption tax hike on the economy becomes visible - it is that expectation that sent the USDJPY above 100 in late 2013 and any disappointment by the BOJ will certainly have an adverse impact on the all important Yen carry pair. In terms of the key data to watch this week, the themes of recent weeks remain the same: US activity data, with retail sales and the U. Michigan Consumer sentiment survey the main releases, European inflation trends (French and German HCPI data on Thursday and Friday, respectively), and finally external balances in EM. Within that group, the latest data points for trade and current account balances in India, Turkey and South Africa will receive the most attention.
Just when it seemed that the ever deteriorating situation in the Crimean, the unexpected plunge in Chinese exports which has sent the Yuan reeling again, the Copper slam which is down some 10% in two days, and the outright collapse in Japan's capital flows, not to mention the worst GDP print under Abe, may not be quite "priced in" by a market that is now expecting well beyond perfection in perpetuity, further shown by Goldman over the weekend which reprorted that revenue multiples have never been greater, and futures may finally dip, here came - right on schedule - the USDJPY levitation liftathon, which boosted futures from down 10 to barely unchanged, and which should be green by the second USDJPY ramp some time just after 8 am.
Plenty of excuses out there for this evening's collosal miss in Chinese exports (-18.1% YoY vs an expectation of a 7.5% rise) mainly based on timing issues over the Lunar New Year (but didn't the 45 economists who forecast this data know the dates before they forecast?) This is a 6-sigma miss and plunges China's trade balance to its biggest miss on record and 2nd largest deficit on record. Combining Jan and Feb data (i.e. smoothing over the holiday), exports are still down 1.6% YoY - not good for the much-heralded global recovery. Exports to the rest of the BRICs were all down over 20% but no there is no contagion from an emerging market crisis.
- Putin rebuffs Obama as Ukraine crisis escalates (Reuters)
- Behind the $100 Billion Commodity Empire That Few Know (BBG)
- Initial Public Offerings Hit Pace Not Seen in Years (WSJ)
- Russian Parliament Will Back Crimea Split From Ukraine (WSJ)
- Nakamoto Named as Bitcoin Father Denies Involvement, Flees Press (BBG)
- Chaori Can’t Make Payment in China’s First Onshore Default (BBG)
- Zombies Spreading Shows Chaori Default Just Start (BBG)
- Pimco's Gross declares El-Erian is 'trying to undermine me' (Reuters)
- U.S. Fighters Circle Baltics as Putin Fans Fear of Russia (BBG)
Today's nonfarm payroll number is set to be a virtual non-event: with consensus expecting an abysmal print, it is almost assured that the real seasonally adjusted number (and keep in mind that the average February seasonal adjustment to the actual number is 1.5 million "jobs" higher) will be a major beat to expectations, which will crash the "harsh weather" narrative but who cares. Alternatively, if the number is truly horrendous, no problem there either: just blame it on the cold February... because after all what are seasonal adjustments for? Either way, whatever the number, the algos will send stocks higher - that much is given in a blow off top bubble market in which any news is an excuse to buy more. So while everyone is focused on the NFP placeholder, the real key event that nobody is paying attention to took place in China, where overnight China’s Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), as had been reported here extensively previously. This marked the first domestic corporate bond default in the country's history - indicating a further shift toward responsibility and focus on moral hazard in China.
Following yesterday's abysmal employment and service data which led to an unchanged close it quite clear that the market has returned to a mode where it ignores all newsflow - at least the bad, which is due to the weather, the good news is due to the recovery - and instead is simply driven by such "fundamental drivers" as the momentum and position of the Yen carry trade. And overnight the USDJPY positively exploded following news that the Japan advisory committee has decided the nation's pension fund, the GPIF, does' t need a domestic bond focus. Implicitly this means that the GPIF will soon be able to purchase stocks like Facebook and Tesla, which is a guaranteed way of generated short-term gains and longer-term total losses for the Japanese pensioners. Of course, when the latter happens, nobody will have been able to foresee it and some scapegoat somewhere will be summarily fired. As for what this means for futures, the drift higher has made SPOOs rise once more and at last check was just below if not at new all time highs on an ongoing barrage of increasingly negative macro news.
After learning that it snowed in China this winter following the release of the abysmal February Flash HSBC PMI numbers, we found out that there had also been snow in Europe, following misses across virtually all key French, German and composite PMIs with the exception of the German Services PMI which was the sole "beater" out of 6. To wit:
- Eurozone PMI Manufacturing (Feb A) M/M 53.0 vs Exp. 54.0 (Prev. 54.0); Eurozone PMI Services (Feb A) M/M 51.7 vs Exp. 51.9 (Prev. 51.6)
- German Manufacturing PMI (Feb A) M/M 54.7 vs. Exp. 56.3 (Prev. 56.5); German PMI Services (Feb A) M/M 55.4 vs Exp. 53.4 (Prev. 53.1)
- French PMI Manufacturing (Feb P) M/M 48.5 vs. Exp. 49.6 (Prev. 49.3); French PMI Services (Feb P) M/M 46.9 vs. Exp. 49.4 (Prev. 48.9)
Of course, economic data is the last thing that matters in a manipulated market. Instead, all that does matter is what the USDJPY does overnight, and as we forecast yesterday, the USDJPY 102 tractor beam is alive and well and managed to pull equity futures from a -10 drop overnight to nearly unchanged, despite the now traditional pattern of USDJPY selling during the overnight session and buying during the US session.
Presenting a few of tonight's headlines...
- *OBAMA: 'THERE WILL BE CONSEQUENCES IF PEOPLE STEP OVER THE LINE' (like last time with Syria?)
- *FACEBOOK TO BUY WHATSAPP FOR ABOUT $16B CASH AND STOCK ($50 per user!)
- *U.S. COULDN'T REACH UKRAINIAN OFFICIALS IN FEW DAYS: OFFICIALS (can you hear me now?)
- JAPAN JAN. IMPORTS RISE 25.0% Y/Y (Abenomics is nailing it)
- *CNN LIES ABOUT VENEZUELA EVERY DAY: MADURO (no comment)
- Vietnam Bans Import of Used Electronic Devices
- *WILLIAMS: FED HAS REACHED `END OF THE LINE' ON JOBS THRESHOLD (that didn't last long)
- *SUGA: EXPECTS IMPROVEMENT IN TRADE BALANCE IN FUTURE (any day now)
- *MADURO SAYS `IT'S YOUR LAST CHANCE OR YOU'RE TOAST' (but you wanted peace?)
- *OBAMA SAYS WILL SEEK COOPERATION WITH PUTIN ON UKRAINE (worked last time?)
- And lots more...
Has the world gone mad?
With exports up 9% but imports up a massive 25% YoY, Japan's Trade balance pushed to itslargest deficit on record. This is the 2nd largest drop in the trade balance on record - beaten only by March/April 2011 (the Tsunami and Fuskushima). The miracle of the J-Curve (the hoped for recovery in exports that will come any minute now from the devaluation of the currency) is simply non-existent!! We love the smell of GDP downward revisions in the morning... Foreigners sold Japanese stocks for the 4th week in a row for the first time in 16 months.
Spoos Rise To Within Inches Of All Time High As Overnight Bad News Is Respun As Great News By Levitation AlgosSubmitted by Tyler Durden on 02/17/2014 07:26 -0500
After tumbling as low as the 101.30 level overnight on atrocious GDP data, it was the same atrocious GDP data that slowly became the spin needed to push the USDJPY higher as the market became convinced that like everywhere else, bad news is great news and a relapse in the Japanese economy simply means more QE is coming from the BOJ despite the numerous articles here, and elsewhere, explaining why this very well may not be the case. Furthermore, as we noted last night, comments by the chairman of the GPIF panel Takatoshi Ito that the largest Japanese bond pension fund should cut its bond holdings to 40% were used as further "support" to weaken the Yen, and what was completely ignored was the rebuttal by the very head of the GPIF who told the FT that demands were unfair on an institution that has been functionally independent from government since 2006. The FSA “should be doing what they are supposed to be doing, without asking too much from us,” he said, adding that the calls for trillions of yen of bond sales from panel chairman Takatoshi Ito showed he "lacks understanding of the practical issues of this portfolio.” What he understands, however, is that in the failing Japanese mega ponzi scheme, every lie to prop up support in its fading stock market is now critical as all it would take for the second reign of Abe to end is another 10% drop in the Nikkei 225.