The Honey Badger Market Grinds Higher
The honey badger ramp continues, once more driven entirely by the USD carry as both the EURUSD and USDJPY hit new highs (14 month and 3 year, respectively). The EUR took another major leg higher following today's second ECB refinancing operation in two days, a 3 month LTRO, in which just €3.71 billion was allotted to some 46 bidders, far less than the €10 billion expected particularly in the context of the €6 billion the matured, leading to further Euribor curve steepening, more non-expansion of the ECB balance sheet, and a surge in the EURUSD to new post-2011 highs of 1.3560. But if it wasn't this it would be something else. Elsewhere we got the final official Spanish GDP number, which as previously reported once again came worse than expected at -0.7%, compared to expectations of -0.6%, and -1.8% Y/Y vs Exp. -1.7%. But once again we are told to ignore current reality and look with optimism to the future as various European confidence indices posted higher than expected prints. This seems logical: when the ugly fundamentals don't matter, one must at least pretend there is hope they will improve in the future to serve as a buying catalyst. Finally, and what the surging EUR and crushed exports are all about, Italy sold some €6.5 billion in 5 and 10 year BTPs at yields of 2.94% and 4.17%, both respectively lower than the prior auctions of 3.26% and 4.48%.
And while it would be easy to assume that the relentless rise in the EUR and plunge in the JPY are free lunches, there is no such thing. In fact even Goldman is now warning that the relentless march higher in the EURUSD will soon attract the attention of the ECB. In a note overnight by Goldman's Dirk Schumacher, he said that "one risk factor for the economic outlook is the exchange rate. The trade-weighted Euro has appreciated by 2.5% since the beginning of this year and by almost 5% since the announcement of the OMT in September.... a further strengthening at a similar same pace to what we have observed in recent months would eventually weigh more meaningfully on the economy, and this in turn would lead to a change in the “medium-term outlook for price stability”. The ECB, we think, would react in this case by cutting rates, in an attempt to slow the upward momentum of the exchange rate."
This was reinforced moments ago by the French industry minister who said that the EUR exchange rate is too strong. Well, then, just complain the Monte Paschi supervisor extraordinaire Mario Draghi and ask him to stop his backdoor bailout of the PIIGS: watch the EURUSD regain its "export-boosting" fair value then. Oh, wait, redenomination risk...
As for the plunge in the Yen, well the one nation that shut down all of its nukes, and now has to import its energy with a collapsing currency already has felt the 3% inflation in gas prices in 2 months as reported previously. Once this number hits 10% in a few more weeks, we doubt there will be much enthusiasm left for Abe's masterplan.
Today's two key events are the first US Q4 GDP report and the FOMC statement. If Bernanke even so much as hints at pulling the punchbowl, as he kinda, sorta did last time, watch out below.
The full overnight symmary is from DB's Jim Reid
The equity market continues to be in better health than me with the S&P 500 (+0.51%) up for the 9th day in 10 with only Monday’s (-0.18% spoiling the perfect 10). Interestingly over the same 10-day period US CDX IG has only tightened from 89bp to 86bp with Crossover, Main and Senior Financials actually +8bp, +5bp and +9bp wider over the same period. In cash credit while iBoxx $ Corporate BBB spreads are virtually unchanged, iBoxx € Corporates have widened by +15bp. So equities are starting to outperform credit. Credit has been a relative underperformer partly due to the emergence of event risks with the TMT being impacted by LBO chatter on both sides of the Atlantic. There is also some indigestion on new supply but there is also a valuation argument out there that spreads (especially on low beta names) are too tight and offer little cushion against rate rises. So it’s worth keeping an eye on credit as it’s not fully joining the risk-on party at the moment.
Looking ahead, today will be a pretty busy day. We have the first cut of the Q4 US GDP number with the market expecting a sharp drop to 1.1% from 3.1% previously. Much of the impact is likely to be driven by a slowdown in inventory building which is partly due to Hurricane Sandy. We also have the ADP employment report today ahead of Friday’s payrolls report. The FOMC statement is due at 7.15pm London time today. While no significant policy changes are expected Peter Hooper thinks the meeting itself offers an opportunity to have an important discussion about what signals might be given on the likely longevity of the current QE policy. The results of this discussion will likely appear in the minutes in three weeks time and/or in a variety of upcoming Fedspeak. There is no press conference today which lessons the immediate information flow.
In Europe we also have the first reading of Spain’s Q4 GDP and a handful of confidence surveys from the Eurozone. The market is expecting further shrinkage in the Spanish economy (-0.6% QoQ v -0.3% previously) but the confidence surveys are expected to be largely flat to a tad better in January. The ECB’s Weidmann will speak in Berlin today after the European market close while PM Monti will also give a speech in Brussels after Europe goes home.
Back to markets, the risk-positive session yesterday also led to a further rise in Treasury yields with the 10-year closing at 1.99% on the day. The mood was largely lifted by what was again another positive day of earnings which helped offset a mediocre set of US data. Indeed 18 out of the 25 companies that reported yesterday came ahead relative to EPS consensus. Revenue performance was also impressive with just 4 of those falling short of estimates. Notably Amazon’s shares traded nearly 12% higher in extended hours trading as the market welcomed the operating margin expansion in its North American business.
On the data front the Case-Shiller home price index (5.52% yoy v 5.55% yoy expected) was a little softer than expected whilst the Conference Board Consumer Confidence survey (58.6 v 64.0 expected) fell to the lowest level since November 2011.
Moving on to the overnight session Asian equity markets are largely on the front foot with the Nikkei, Hang Seng and the KOSPI +1.8%, +0.7% and +0.4% higher, respectively. The Nikkei is trading at its highest since April 2010 with the strength overnight fuelled by further weakness in the Yen. In Asian credit, new issues remain the focus although the Australian iTraxx is 2bp wider at 117.5bp as we go to print. In commodities, Copper is up for the third consecutive day while Gold is up for the second straight session at $1667/oz. The UST 10-year yield has edged a tad higher again overnight and is currently at 2.01%.
Updating some European news flow before we wrap up, EU’s Olli Rehn told a press conference yesterday that EU officials will make a decision on the best pace for Spain’s budget consolidation when they deliver a scheduled assessment of the program next month. Rehn said that if there has been a serious deterioration in the economy, we can propose an extension of a country’s adjustment path. Staying in Europe, S&P has kept Belgium’s AA rating on negative outlook reflecting downside risks to the rating if the country’s economic or budgetary performance disappoints sharply relative to the agency’s forecasts.