With the market basking in glow of good earnings results yesterday, mostly out of IBM, and to a lesser extent GOOG, which missed on the top line but beat on EPS squeezing some recent inbound shorts, S&P500 futures have yet to post a solid move to the upside. Perhaps a big reason for this is the recent recoupling of risk based on not one but two carry signals: the first is the well-known EURUSD pair, while the second is the recent entrant, the USDJPY, and it is the latter that continues to see a cover of the massive short interest accumulated over the recent 1000 pip move higher on what upon ongoing reflection has been a disappointing announcement out of the BOJ. Needless to say, the Nikkei whose recent surge higher was all due to currency weakness has tumbled overnight despite corporate fundamentals, if not economic data, which continues to post substantially subpar prints.
Europe continues to plough along in limbo with Ken Rogoff telling Bloomberg ealier that the ECB has not solved any of the continent's "fundamental problems." Sure enough, the Bank of Spain announced that Spanish GDP shrunk 1.7% in 2012.
It is a quiet day macroeconomically, with the biggest event today being Apple's results after the closing bell in the US after what, as Deutsche Bank describes, has been a fascinating few months for the company with the stock down 28% from its peak of $702.
Deutsche's Jim Reid recounts the balance of the overnight action:
With all the recent excitement about central banks and the brewing discussions about currency wars, the BoE governor made some interesting remarks last night. He indicated that it would be appropriate to review the BoE’s current inflation targeting regime but warned against abandoning its 2% inflation target in favour of pursuing growth targets - a move suggested by King’s successor, Mark Carney. Speaking in Ireland, King said that high inflation “can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable”. It looks like such debates are going to continue in 2013. In the near-term the ECB are likely to be the least interventionalist of the major central banks and as such the Euro looks set to edge higher. Indeed with some pre-payments of LTRO money, it could be said that the ECB is slowly exiting. Will this subtle tightening of policy cause problems for the Euro economy over the next few quarters? Our base case is that by the middle of the year it will.
Elsewhere, in Israel, voters delivered a third term to Benjamin Netanyahu overnight, but his Likud party returns with a weaker mandate than four years ago. Early exit polls indicate the combined Likud and Yisrael Beitenu parties captured just 33 seats in the 120-seat Knesset. This was down from pre-election polls projecting 37 seats, and is down from 42 in the outgoing parliament (Bloomberg). Likud remains the biggest party but the centrist Yesh Atuid party managed to secure around 18 seats, becoming the second largest political force. Mr Netanyahu is widely expected to be assigned the task of pulling together 61-seat coalition, potentially needing the support of centrist parties to form a majority. With geopolitical risk bubbling under the surface in the Middle East these are important events to watch.
Returning to markets the S&P500 closed with a gain of 0.44% yesterday, after rallying 0.8% from the morning lows seen after a weaker-than-expected existing home sales print.
Monday’s headline that Republican leaders will bring a House vote on extending the debt ceiling by 4 months helped risk assets retrace some of the early losses. The White House responded that it would not block the bill should it manage to pass Congress although Obama remains in favour of seeking a longer-term debt ceiling solution. Overnight, House Speak John Boehner was quoted as saying that it was time for the House to “come to a plan that will in fact balance the budget over the next 10 years”. The late rally drove S&P futures to new five year highs, helped by a number of positive earnings reports from the likes of AMD, IBM and Google.
Turning to overnight markets and Japanese assets continue to trade heavily following yesterday’s BoJ meeting. The Nikkei is down 1.3% as we type, underperforming other Asian equities which are down about two-tenths to half a percent. The concerns are focusing on the fact that the new BoJ measures don't come into effect until January 2014 and that there is no set date to attain the 2% inflation target. The yen is up 0.4% against the dollar overnight (88.35), adding to gains of 1% yesterday. In light of the recent moves, Japan’s economy minister said that investors “don’t fully appreciate the significance of Tuesday’s monetary policy decision”. Outside of Japan, the Thai finance minister asked the central bank to “take care” of the Baht’s recent strength. He joins a growing chorus of other Asian officials including the Korean finance minister, who have expressed concern over local currency appreciation. Elsewhere, the AUD is 0.3% weaker against the USD following a lower than expected inflation print for November (+0.2% vs +0.4% expected).
In more credit specific issues, I've been away for a couple of days but I wanted to highlight our latest weekly where we looked at the basis between the single-name CDS and cash market. Over the course of the last 12 months or so, and specifically since the middle of last year we have seen a notable swing in the average level of the CDS-cash basis. In fact the majority of EUR corporate bonds from European issuers are now trading with a positive basis.
Looking at the day’s calendar, David Cameron’s speech at 8am (London time) on the future of Britain’s relationship with the EU will be closely watched. Overnight headlines suggest that the PM will propose a referendum sometime after the next election that will give voters a “very simple in or out choice” (BBC). In the US, the House of Reps will meet at 9am (2pm London) to consider the Republican debt ceiling bill that has been rather subtlety named the “No Budget, No Pay Act of 2013”.
In terms of data, French business confidence, Eurozone consumer confidence and BoE minutes are the key data points during the European timezone. Weekly mortgage applications and the FHFA house price reading for November are scheduled in the US. The IMF releases its World Economic Outlook update today and the Bank of Canada’s rate announcement is also scheduled for today.