Sentiment Shaped By Chinese Stimulus Stinginess vs Japanese Generosity
It is not often that early sentiment is defined by developments out of Asia but this is precisely what has happened overnight.
The Alcoa "hope rally", which saw the company close red on the day of its earnings, but which sent the markets higher on the CEO's announcement that things in China may be improving, seem to be ending following last night's news out of China which saw December CPI jump to 2.5%, substantially more than expected, following a spike in food costs in part from the coldest weather in 28 years, implying any good news may have already been priced in. This renewed fears that speculation of PBOC easing was largely unjustified (it is) leading to the biggest drop in the Shanghai Composite in 2013, pushing it lower by 1.78%.
The offset came out of Japan, where the government approved a JPY10.3 trillion ($116 billion) fiscal stimulus package. This together with expectations of a BOJ 2% inflation rate targeting, are the reasons why the Dollar Yen soared to a fresh multi-year high of over 89.30, which has since regained some of the move. At this point virtually all the Japanese hope has been bought, and the actual BOJ announcement coming later this month will launch the "sell the news" mean reversion.
Shitfing to Europe we find more bad news, as Germany's economy minister announced that the country's economy "may have shrunk" in Q4 setting the first leg of an official recession (remember two consecutive negative quarters are needed for a formal recession announcement). Not helping was the UK, whose industrial production missed expectations of a 0.8% rise, printing at 0.3%, and Spain, whose November Industrial Output plunged 7.2% on expectations of a modest 4.0% drop from -3.1% in October.
In other news, Moody’s cut Cyprus’s credit rating three steps to Caa3 on government’s increased debt load to recapitalize banking system. Italy sold €5 billion of debt, with 2015 notes drawing 1.85%, down from 2.5% paid Dec. 13 and lowest since March 2010.
In the US, trade data is the only relevant macro point, while the financial earnings season is kicked off by Wells Fargo.
More from DB:
Draghi yesterday disappointed those hoping for a rate cut in the next few months. Although the ECB’s view on the macro was little different to last month, there’s little doubt that there was more confidence in Draghi’s performance and in the press release. As our economists pointed out ‘Improved fragmentation/segmentation’ was mentioned three times in the prepared press statement. Last month it was mentioned once and used as a negative, not a positive. Draghi was also in bullish mood in the Q&A, discussing declining yields and CDS spreads, rising capital inflows, rising deposit bases at periphery banks and the declining usage of the ECB balance sheet and Target2. Draghi summarised this as “positive contagion”. Although they highlighted that risks remain this was hardly the performance of a governing council minded to cut rates soon. Indeed our Euro economists have now removed their March 25bp cut expectations and now expect the ECB to remain on hold for the foreseeable future. As they quote from the conference, last month a rate cut had been “widely discussed”. This month, no one “asked for it” and the Council was unanimous in leaving rates unchanged.
So although this increased confidence should be good news the European market reaction provided us with some clues as to how addicted markets are to liquidity. European markets peaked just before the press conference with the DAX +0.6% and at the day’s high before closing -0.16%. However the US did go through a similar initial reaction to last week’s Fed minutes and has now climbed to higher levels. Indeed after the lows near the European close the S&P 500 rallied 0.7% to end 0.75% higher and at 5-year highs. The reality is that it would be very bad for markets if central banks started to withdraw liquidity. However we’re not there yet but Europe has to be careful they don’t relax as there’s a very long way to go. Often in this crisis when the ECB has relaxed, problems have resurfaced a few months later.
So with a rate cut seemingly off the table for now, EURUSD rallied 1.3% following Draghi’s press conference to close 1.6% higher in its best one-day performance since August 3rd 2012. Incidentally that day came after the ECB’s August meeting where Draghi disappointed a market that was expecting an ECB bond purchase to be finalised (the OMT was eventually unveiled a month later).
Elsewhere, it was a strong day for peripheral bond yields. The 10yr Spanish bond yield (-23bp) closed below 5% (4.904%) for the first time since March 9th 2012. Italy’s 10yr yield (-11bp) is also at its lowest level in more than 2 years. A good Spanish bond auction was a main driver. Spain raised EUR5.8bn (vs EUR5bn targeted) and our economists noted that most of the supply was in the shorter-maturity that would be covered by OMT purchases if Spain asked for aid. Nevertheless, market momentum is strong enough that our economists no longer believe that Spain or Italy will need to trigger OMT in Q1 of 2013.
Elsewhere in what was welcome and slightly surprising news for investors in the UK index-linked gilt market, the Office for National Statistics decided to leave the calculation of the retail price index unchanged. The national statistician did say that she accepts that the RPI formula “has an upward bias” of nearly 1% per year though.
Across the Atlantic, American Express surprised the market with an earlier than expected profit release. The post-market result was broadly in line with both earnings (EPS $1.09 vs $1.06 expected) and revenue ($8.1bn vs $8.11bn) close to consensus. AMEX’s stock rose by about 1% in extended hours trading probably buoyed by the unveiling of restructuring plans for the company’s travel business. Over to Asia, it has been a busy 24 hours in Japan after overnight comments from PM Abe that the BoJ should follow the Fed’s lead and target employment as one of its monetary policy targets. The comments are driving the Nikkei (+1.45%) to its 23-month highs overnight while the USDJPY is 0.35% higher. Mr Abe added that he wants the central bank “to have responsibility for the real economy too”. According to the same newspaper, a joint statement between the government and the BoJ specifying a 2% inflation target is in the process of being drafted. If that wasn’t enough, Abe announced that a JPY10 trillion fiscal stimulus package has been approved by cabinet on Friday which the government expects will boost growth by 2% and create 600,000 jobs. Including local government and private sector spending, the stimulus package is expected to be worth around JPY20 trillion and will focus on infrastructure building (Bloomberg). Japanese data also added more Yen weakness with current account surplus shrinking to a seasonally-adjusted JPY225.9bn in November (vs October’s JPY414.1bn surplus).
The Nikkei is the clear outperformer overnight on the back of the new stimulus as major equity bourses across the region are generally lower. The Shanghai Composite and KOSPI are both down by about half a percent as we type. Stronger-than-expected inflation data (2.5% vs 2.3% yoy) is driving Chinese equities lower as hopes of additional stimulus fade.
The Bank of Korea’s decision to hold rates unchanged also had a similar impact on local equities. The tone in Asian credit is also weaker as we saw more selling of HY bonds in secondary although the primary pipeline still remains robust. S&P 500 Futures are broadly unchanged while the 10-year UST yield is up by 1bps to 1.906% overnight.
Moving on to the day ahead we will get Industrial Production from the UK and Spain today. There is also an Italian bond auction. US trade data will probably be the most interesting data point of note on the other side of the pond. The Fed’s Plosser will speak about the economic outlook at a forum today which may generate some sound bites. Otherwise Wells Fargo’s Q4 results today will also officially kick off the earnings season for US banks.
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