Overnight Sentiment: All About QE4EVA
Today is probably the first day in a while in which minute-by-minute rumors on the Fiscal Cliff will not be on the frontburner (with yet another late day rumor yesterday of an imminent deal turning out to be a dud, when it was reported that Obama's latest grand compromise was to lower his initial tax hike demand from $1.6 to $1.4 trillion, or still $600 billion more than last summer's negotiated number), with Ben Bernanke and QE4 taking center stage instead. By now it is a foregone conclusion that Ben will proceed with extending Twist as first predicted here, into an unsterilized bond buying operation, in effect confirming that there has been zero improvement in the economy, as another $1 trillion is about to be injected until the end of 2013, and more trillions after that. The good thing is that all pretense that the Fed cares about anything but the market is now gone. The bad thing is that the Fed will continue to take over the capital markets until it and the other central banks are the only traders remaining. The only question is whether the market, now well into massively overbought territory, will fizzle and snap back after Bernanke's news announcement, and will QE4EVA (as we believe QE3+1, aka QEternity-er, should be called) have been fully priced in by the time it was announced?
In terms of actual event and newsflow, instead of hope and optimism, we got the final shape of the Greek bond buyback, and learned that a total of EUR31.9 billion in GGB2 would be exchanged at a blended price of 33.8, meaning bondholders will now receive EUR 11.29 billion in EFSF bonds, as the world's most entertaining debt-for-debt cramdown continues (because sadly Greece does not have the case to give to the bondholders). Now all Greece has to do to "regain credibility" is ramp up its GDP by some EUR60 billion or roughly 30% in the next 10 years and all shall be well: in a fixed currency regime that allows no external devaluation this should be quite feasible... if Greece first cuts Greek salaries by some 50%.
In other fundamental news, and thus completely irrelevant to a market that only responds to central planners' best intentions, Industrial Production in the Eurozone dropped by 1.4%, missing expectations of an unchanged print. But this one too can be scrapped for the "hope" files. There was some good news ater the UK's Initial Claims declined by 3,000 on expectations of a 7,000 rise and down from 10,100. And that's about it for the good news.
Meanwhile, while everyone else is relishing in hope, the Swiss continue to be buffeted by reality, and after a resurgence in rumors that the SNB may hike the EURCHF peg from 1.20 to 1.25, UBS followed in Credit Suisse's footsteps from a week ago and it too imposed a fee for CHF deposits: just as we expected that the CS initiative will be followed by all banks. In other words, the money flows out of EUR and into a safe currency eagerly continue behind the scenes. But ignore all that for now: it doesn't work well with the year end hopium plan laid out by the central bankers.
But all of the above is promptly forgotten as the rabid, 1 millisecond attention span market watches Bernanke dangle another piece of blood meat later today and encourages everyone to take a bite: after all the last credit bubble which popped just over 5 years ago will never repeat - Bernanke has it all under control.
As usual, the less cynical version of the day's events comes from DB's Jim Reid
Welcome to 12/12/12. Unless the number of months in a year mysteriously change in the years ahead we won't have a similar day until the 01/01/01 some 88 years from now. Hopefully by then there will have been progress in the fiscal cliff talks and listening to Frank Kelly's call yesterday, he seems confident that what he calls the 'slow dance' is moving in the right direction for a deal. Indeed there have been signs that both sides are softening after Obama and Boehner held their first one-on-one meeting in over a year at the weekend and the rhetoric has grown milder. On top of this Frank sees the Boehner-directed House Republican Steering Committee’s decision last week to remove four outspoken conservatives from high-profile committees in the next Congress as a sign Boehner is getting the House Republicans in line and leaving him room to compromise. Time is running out though and in spite of Frank's increasing optimism, and the Dow closing back above election day levels, the late US session was full of comments that suggested that the deal is not imminent.
Indeed Senate Majority Leader Harry Reid said that to reach a deal before Christmas will be “extremely difficult”. Reid earlier said that Democrats aren’t going to make an offer on spending cuts thus putting the onus on Republicans. Reid’s comments came after Boehner accused the President of dragging his feet in the process (CNBC). Boehner said "We're still waiting for the White House to identify what spending cuts the President is willing to make as part of the balanced approach that he promised the American people. Where are the president's spending cuts?” Despite the public posturing Boehner and Obama spoke on the phone Tuesday evening after House Republican leaders sent a new offer on a deal (CNN).
Nevertheless the S&P 500 (+0.65%) rallied higher for the fifth consecutive day while investment grade credit finished 2bps tighter. Market sentiment was boosted by the WSJ story that we reported in the EMR yesterday that negotiations between Boehner and Obama have taken "a positive turn" even though this doesn’t seem to be consistent with the most recent comments we highlighted above. On the data front the better-than-expected ZEW economic sentiment survey (+6.9 v -11.5) also helped lift the mood yesterday.
Looking forward, the final FOMC meeting for the year will be the key focus today. DB’s Peter Hooper expects the Fed to announce a continuation of MBS purchases at a pace of $40bn per month and outright purchases of $45bn per month in longer-term Treasuries after Operation Twist expires at year-end. QE4 will most likely be open-ended, subject to at least a quarterly review, and expected to continue until the labour market has shown substantial improvement. No significant shift in their verbal guidance on rates is expected with the mid-2015 date still intact. The FOMC statement will be released at 5.30pm and Bernanke will start his press conference at 7.15pm (all London times).
As major central banks propel us deeper into a ZIRP environment its quite interesting to see that UBS will start charging institutional clients for cash balances held in Swiss francs. This comes on top of a “temporary excess balance fee” levy that has been imposed on cash clearing accounts since August 2011. In a notice to clients UBS said “we encourage our customers to keep their Swiss franc balances as low as possible”. There are currently 13 EMEA countries with 2-year government yields trading below 1% versus 9 of them a year ago. 6 of them (Switzerland, Denmark, Germany, Finland, Austria, and the Netherlands) actually trade at a negative nominal yield now while a year ago it was only Switzerland.
Moving to overnight markets Asian equities are higher across most countries with the Shanghai Composite (-0.1%) lagging for the second consecutive day. Elsewhere we are seeing bourses in Hong Kong, Japan and Korea up by +0.5%, +0.7% and +0.2%, respectively. The latter seemingly not affected by Bloomberg headlines that North Korea has launched a long-range rocket just a week before elections in South Korea. In other markets Credit is also trading better with IG spreads in the region around 2-3bps tighter overnight.
Looking ahead to today we will get inflation data from various parts of Europe as well as industrial production figures for the Eurozone. Labour market data will be the key release in the UK today. EU Finance Ministers will also meet again on establishing a single euro-area banking supervisor ahead of a year-end deadline. There is also a bills auction in Italy but all eyes will be on the Fed and Bernanke today.