Overnight Sentiment: The Printer Is Now In Draghi's Court
The two primary events of the overnight session have been the "agreement" on a single European bank supervisor (more on this in a subsequent article), and the just announced conclusion of the third Greek bailout, whereby the Eurogroup finally agreed to fund the much delayed bailout tranche to Greece. The Greek funding would consists of EUR34.3 billion available immediately, and EUR49.1 billion by the end of March, which funding would come from the European central bank CDO-squared equivalent, the EFSF, in other words sterilized through all member nations and any potential investors. Of course, none of these two developments were remotely surprising, yet together with news that Spain sold its first 2040 bonds, even if at a token EUR540 million, since 2009, the overnight tone should have been far more bullish, alas it has simply led to a sell off in the EURUSD, which was last seen trading at the lows of the day and to continued widening in peripheral bonds.
Why the lack of follow through? Because, according to preliminary desk talk, just as we predicted yesterday now that the Fed has reengaged the QEasing machine, the ECB will too have to intervene and ease on its own once again to push the EURUSD lower (as otherwise the internal devaluation for most European countries will be simply unbearable). Which means one thing: the time to drag the Spanish insolvency out of cryogenic sleep is coming, and if Rajoy still refuses to request a bailout, he will get some much needed assistance from Frankfurt to make up his mind, allowing the ECB to inject hundreds of billions into the market and in doing so to keep up with the Fed or else risk dropping too far behind in the global race to debase (with a footnote that in Europe, a drop in the currency always raises redenomination risk now and going forward).
In other news, the SNB came out with its much expected monetary policy assessment, and much to the disappointment of all those hoping the EURCHF peg would be raised to 1.25 based on a flurry of recent rumors, supposedly not started by Jim O'Neill whose one absolute certain trade from a year ago was to buy EURCHF on a raise in the peg. So much for that. Of course, now that Credit Suisse and UBS are doing the SNB's work for it, and have effectively dropped the deposit rate to negative, there is little if anything Herr Jordan can and will do in the coming months, even though the fund flow continues to be very aggressively out of the EUR and into the CHF.
And with all that out of the way, the real news of the day, at least as market critical kneejerk algos are concerned, will continue to be any and every news on the Fiscal Cliff, which now is impossible to get resolved by Christmas, and very much improbable by New Year's Day. That, and of course speculation on why yesterday was the first time in Fed history that the halflife of its announcement was a few hours tops, perhaps leading to the first more notable decline in the Shanghai Composite which dropped 1% to 2061, following the epic plunge in the Baltic Dry index.
More from DB's Jim Reid:
Be warned. Tonight is apparently the peak night for Xmas parties. Every year my own revelry takes another notch down as age catches up. This is no bad thing as after my first ever Xmas office party in the city nearly 20 years ago I nearly burnt my flat down after accidentally leaving a spitting grill on all night after arriving home at 4am eager for some sustenance. By contrast over this past week I've been in bed every night at about 830pm with a cup of hot honey trying to get rid of a bout of man flu. How times change.
Talking of Xmas parties, Bernanke seemed to place the proverbial punch-bowl right in the centre of the table last night with the surprise move to keep "this exceptionally low range for the federal funds rate" for "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” This surprise was alongside the very widely expected move to roll the expiring Operation Twist into outright purchases of longer-term Treasuries at a rate of $45bn per month and of similar average duration (about 9 years). The S&P 500 rallied as much as half a percent whilst the Dollar index fell as much as -0.3% immediately after the announcement.
However the S&P 500 closed +0.04% (0.7% off the post announcement highs) as Bernanke's press conference took the shine off things by suggesting the Fed cannot offset the full impact of the fiscal cliff and his tone indicated that he didn't have any insider knowledge as to its progress. The market may have also taken the view that his soft targets were pretty much in-line with what they might have expected them to be and therefore this didn't change too much.
So although the market gloss was taken off the new guidance, last night really indicated the difference that still exists between the Fed and the ECB. Although the ECB has changed significantly, we're a long, long way off a world where the ECB would say that they would buy Spanish Government bonds for as long as Spanish unemployment remained above a certain level. Whilst on the subject on central banks, it was interesting to read BoE governor-in-waiting Carney's comments from a couple of days ago. He was being quoted by the FT to have said that central banks should consider more radical measures such as commitments to keep rates on hold for an extended period of time and numerical targets for unemployment. To take this a step further Carney even said that should these fail to work central banks should consider scrapping their inflation targets. He also suggested that a nominal GDP target could in many respects be more powerful than flexible inflation targeting. So its possible that 2013 will start to see more central banks target actual economic variables when setting out the guidelines for their actions. Maybe the FOMC last night is the first step towards specific targets being formalised.
Turning to the Fiscal Cliff it is fair to say that another day has gone without any apparent signs of progress. House Speaker Boehner told the media that Republicans have “some serious differences” with Obama’s budget plan.
Referring to phone call he had with President Obama on Tuesday, Boehner said he and the president were frank about “how far apart we are”. Cliff uncertainty is also taking a toll on corporates’ capex plan. A survey conducted between 12-30 November found that 23% of US CEOs expect their firms to reduce capex during the next 6 months. This number was 19% in September.
In Italy Berlusconi told the press that he would now support Monti as PM if he agreed to run as the candidate for a center-right coalition. The Italian stock market (+1.15%) outperformed the rest yesterday along with a 8bp decline in the BTP 10-year yield. In other news President Bashar al-Assad’s forces have fired 6 Soviet-designed Scud missiles at rebel fighters inside Syria (NYT). Syria is a worry for 2013. We wrote a short section on geo-political risk in our outlook for those that want to know more about Syria and other potential hotspots.
Asian markets are mixed overnight. The Nikkei (+1.8%) and the KOSPI (+0.7%) are pacing gains as we type with the Shanghai Composite (-0.6%) being the major under-performer. JPY weakness is helping equities in Japan ahead of what is probably going to be a LDP victory (per polls) in the Japanese elections this weekend. As we go to print there are reports of Chinese planes entering into Japan’s air space over the disputed Diaoyu/Senkaku islands which has prompted the Japan Air Self-Defense Force to send F15s fighter jet to the area (Kyodo). Japan’s Chief Cabinet Secretary Fujimura calls the act as ‘regrettable’. UST 10-year yield is 1bp higher at 1.713% while credit markets are generally holding firm in the overnight session.
In other overnight news, the FT reported that after 12 hours of talks Eurozone finance ministers struck a deal for the ECB to begin direct supervision of big eurozone banks from early 2014. The ECB will have direct responsibility for banks with more than EU30bn in assets, or representing more than 20% of a states’ national output. This is said to cover almost all French banks but leaves most of Germany’s retail banking sector and the network of its savings banks effectively exempt. The ECB retains the power to intervene in any bank should it decide to do so. The package still requires approval from the EU parliament and the Bundestag a process that could take several months, said the FT.
In terms of the day ahead retail sales, jobless claims, PPI and business inventories will be the key data out of the US. In Europe we will get CPI data in Spain and Italy as well as the ECB’s monthly report for December. The main focus however will probably be the Eurozone finance ministers’ meeting on Greece’s next aid payment.