We are back to that phase in market euphoria where no news is good news, good news is better, and bad news is best. While there was little news over the weekend, and overnight, what news there was uniformly negative: northern China drowning in smog, the Apple fad bubble bursting, European Industrial production printing below expectations (-0.3%, exp.-0.2%, down from revised -1.0%), and ever louder rumors that the debt ceiling debate may metastasize into an actual government shutdown for at least a few days, which means the first technical default in US history. Yet nothing seems able to faze the risk on mood, still driven by a relentless surge in the EURUSD which touched on 1.34 overnight before retracing, and the EURCHF, which too has soared by over a 100 pips in recent trading action, which according to some is a result of Swatch buying the Harry Winston watch and jewelry brand for $1 billion, and an aggressively selling of CHF into USD by the company. Eventwise, today will be a quiet day in the US, although the action will pick up tomorrow as more companies report earnings as well as the all important retail sales report will put to rest all debate over just how good or bad this holiday shopping season (pre and post seasonal adjustments) truly was.
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No news plus lots of liquidity is undoubtedly a recipe for higher markets. February will see this tested with the Italian elections and the US debt ceiling debate, and as we move into Q2 we'll see whether we get a repeat of last year in Europe, i.e. disappointing growth numbers overpowering the LTRO impact. When we see the current European rally it is worth remembering how increasingly optimistic markets were about Europe as Q1 2012 progressed and how quickly this changed in Q2. Sentiment can swing very quickly if the facts change.
Moving on to this week, it will be a busy few days of “Fedspeak” beginning with Chairman Bernanke’s appearance tonight at the University of Michigan’s Gerald Ford School of Public Policy (9pm London, 4pm USET). The event is titled “A Conversation with Federal Reserve Chairman Ben Bernanke” and as the name suggests, members of the public will be given the chance to ask questions directly to the Chairman through either the audience or via Twitter on the topics of monetary policy, economic recovery and long-term challenges facing the US economy. So for those who are keen to ask a question about the path of the Fed’s monetary policy and would like to join the conversation, the event’s hashtag is #fordschoolbernanke.
We’ll preview more of the week ahead below, but first we’ll briefly recap the weekend’s headlines. Starting in Japan, PM Abe said in an interview on Sunday that he is seeking "a person who can carry out bold monetary steps" as the next governor of the Bank of Japan after the current Governor’s term ends in April (Nikkei). Mr. Abe also said that his government will set a medium-term 2% inflation target with the Bank of Japan in a joint statement expected later this month. Abe was quoted as saying the inflation target needs to be achieved under a medium-term timeframe, rather than a long-term one, or financial markets "will not react”. Japanese markets are shut today, though the USDJPY is trading at 31- month highs as we type after adding 0.4% in overnight trading. In a wide ranging interview, Mr Abe also added that he would also like to visit the US in February, where he hoped to tell Obama that the government will accelerate discussions toward revising its pacifist Constitution to enable Japan to exercise the right to collective self-defense (Japan Times).
Moving to the US debt ceiling debate, a letter signed by Senate Majority Leader Harry Reid and other Senate Democratic leaders encouraged President Obama to be ready to take unilateral action to raise the debt limit.
The letter urged Obama to “take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis - without Congressional approval, if necessary”. One option some congressional Democrats have advocated would involve Obama invoking the 14th Amendment to the U.S. Constitution to declare congressional action unnecessary for raising the limit, although the White House has played down this option to date (Washington Post).
Shifting the focus to Europe, Italy’s Democratic Party said that the centre-left and Monti’s centrist parties should co-operate and work together “with respect to the main division line that divides the populists from the Europe-ists” (Financial Times). According to the FT, the European Commission is considering a two-page proposal that would force countries that could afford it to inject their own funds into failing banks or guarantee the ESM for losses before the bailout fund would use its own funds to recapitalise banks. The proposal seemingly backtracks somewhat from the EU’s decision to allow direct recapitalisation of banks agreed mid last year.
Briefly recapping Friday’s markets, the S&P500 finished the day virtually unchanged after trading 0.3% lower shortly after the open. Wells Fargo’s Q4 results were marginally ahead of estimates on both the top and bottom line, but the bank’s equities underperformed (-0.85%) with investors focusing on shrinking net interest margins (down 10bp on the quarter to 3.56%) and decrease in mortgage applications. The result weighed on banking stocks (- 0.80%) which underperformed on Friday. The US market open was also weighed by trade data which surprised with the November trade balance widening to -$48.7B (vs. -$42.1B previous month and $41.3B expected). The widening was driven by a 3.8% increase in imports (vs. -2.1% previously), which significantly outpaced the 1.0% increase in exports (vs. -3.5% previously). The Euro added 0.53% on Friday and is up a further 0.35% overnight, bringing total gains against the USD since last week’s ECB meeting to 2.5%.
Turning to overnight markets and Asian equities are trading with a broad risk-on tone. Chinese equities are outperforming with the Shanghai Composite up 2.6% helped by comments from the Chairman of the Chinese securities regulator that it had awarded $16bn in quotas for foreign investors to invest in onshore securities in 2012, equivalent to the total quota granted during the previous six years (Reuters). In addition, the CSRC said that it can increase up to 10 times the current level of investment quotas. The outperformance of Chinese stocks is helping risk sentiment more broadly with the Hang Seng, KOSPI and ASX200 up +0.6%, +0.31% and +0.22% respectively. In the credit space, the Asian IG index is unchanged overnight with the focus remaining on the mixed performance of new issues.
On a more negative note, a number of Apple suppliers' equities are underperforming this morning in Asian trading following a report in the Nikkei that Apple has cut its orders for iPhone 5 components due to weaker-than-expected demand. Orders have been cut by roughly half of what the company had previously planned for the January-March quarter, the report said (Bloomberg).
Looking at the week’s calendar, we’re set for an event-filled week of earnings and data. Starting with US earnings, 40 S&P500 companies are scheduled to report this week equivalent to 12% of the index by market cap. Major US financials including JPM, GS, BoNY will be amongst the first to report on Wednesday and will be setting the tone for BofA, Citi (Thurs) and Morgan Stanley (Friday) who report later in the week. Corporate bellwethers Intel (Thurs) and GE (Fri) will also be reporting this week. Aside from Bernanke’s Q&A session tonight, six regional Fed presidents will be speaking publicly this week on Monday, Tuesday and Thursday. In terms of economic releases, it will be a data-packed week in the US with the highlights being Tuesday's retail sales, Wednesday's industrial production and CPI and Thursday's building permits and housing starts. A number of confidence and activity readings are scheduled including the empire manufacturing (Tues), Philly Fed (Thurs) and the UofM confidence (Fri).
Turning to Europe, the week's highlights are Eurozone industrial production (Monday), German Q4 GDP (Tuesday), Eurozone inflation (Wed) and UK retail sales (Friday). There will be a German 10yr bond auction on Wednesday followed by a Spanish auction on Thursday. In Asia, the highlight will be China's monthly macro download on Friday - including Q4 GDP, December retail sales, industrial production, fixed asset investment and house prices.
Consensus is for GDP growth of 7.8% in Q4 from 7.4% in Q3. In Japan the key releases are consumer confidence and machine orders on Wednesday and industrial production on Friday.