After two consecutive down days in the market, it was time to get real, and like clockwork the dollar and yen devastation started right out of the gate in overnight trading, when first the USDJPY exploded higher, followed promptly by the EURUSD, both of which hit new period highs, of over 92, and just why of 1.37 respectively. And with not one funding currency around to push risk higher, but two, futures have ramped enough to undo all of yesterday's losses and then some. Bad news was either promptly ignored, such as China's official PMI coming in at 50.4, below expectations of the 50.6 print, or offset by conflicting data, with the HSBC China PMI print moments after at 52.3, higher than the 52.0 expected, taking us back to early 2012 when the Chinese PMI was contracting and expending at the same time.
Speaking of PMIs, it was Europe's turn to release its final PMIs, which came in line with expectations, with Spain and Italy posting yet another modest increase, Germany rising from 48.8 to 49.8, and above the expectations of an unchanged number, and the consolidated Eurozone Manufacturing PMI printing at 47.9, up from the previous and expected 47.5: an 11 month high. Then again all these gains took place under a weak Euro regime - it now remains to be seen how European manufacturing operates when the EURUSD is on its way to 1.40, and when both Germany and France are now warning about the inevitable hit to their exports. Concluding the economic picture in Europe was the unemployment print which remained flat at 11.7%, the same as the revised prior number.
And then, under an hour ago, we had the star event of the day, the second 3 Year LTRO repayment announcement, which was a dud. With expectations soaring, and some expecting as much as €200 billion to be repaid following last week's €137 billion repayment, the ECB shocked the market when it reported that just €3.484 billion would be repaid by 27 banks on February 6, which in turn means a far less than expected contraction in the ECB balance sheet, and a dip in the EURUSD from overnight highs. This has immediately prompted questions of just how healthy are the European banks if they are now repaying less on a total blended basis than had been expected previously.
On the other hand, how one can talk about ECB balance sheet "contraction" when Draghi has pledged unlimited balance sheet support should Europe need it, still boggles the mind, and is precisely that it is unquantifiable that the algos tracking the relative sizes of the European and US balance sheets are unable to parse this in terms of the EURUSD pair. Of course, sooner or later even the ECB will have to enter the global currency war and grow its own balance sheet. At that point the unlimited off-balance sheet support will have to shit to very limited on-balance sheet, and the cycle will repeat anew as the two biggest currency pairs resume their dance, only this time with the USD getting stronger for an indefinite amount of time.
Finally, in the "not all is great news" category, and confirming the LTRO perspective that European banks are far from out of the woods, Dutch bank SNS Reaal NV was nationalized overnight, the country’s second banking nationalization since 2008, as real-estate losses brought the bank to the brink of collapse.
“I scrutinized all alternative solutions involving market parties,” Finance Minister Jeroen Dijsselbloem said. “Yesterday night I found myself compelled to conclude no acceptable total solution was offered. I therefore had to use the instrument of last resort, which is nationalization.”
The lender, which acquired ABN Amro Holding NV’s property- finance unit in 2006, has been hurt by losses on real estate loans that have left it struggling to repay a government bailout before next year’s deadline and bolster capital buffers. The nationalization includes all issued shares, core tier 1 capital securities and subordinated bonds, the ministry said.
SNS shares were suspended in Amsterdam. They last traded yesterday at 84 cents, valuing the company at 242 million euros, and have declined 57 percent in the past year.
And with Europe largely out of the way, it is now the US' turn, where all eyes turn to the non-farm payrolls number to be released at 8:30 am, which will be great if it is bad, as it means much more unlimited QE, and greater if it is good, as it means the "recovery" is sustainable, and the manufacturing ISM just after.
Some more on the overnight action from DB
The first payrolls report of 2012 is expected to deliver a modestly better headline number than the one in December. Indeed the market consensus is for a headline of +165k versus +155k previously. Private payrolls and the unemployment rate are expected to remain broadly steady at +168k and 7.8% though. One interesting theme to watch in 2013 is if the seasonals again dominate the data and indeed payrolls. Joe LaVorgna pointed out that in each of the last two years, employment started the year on a strong note only to weaken noticeably by the third quarter.
There has been talk of the financial crisis distorting seasonal adjustments. Payroll reports are obviously now going to be watched even more closely in 2013 given the current Fed’s policy in linking QE to labour market conditions. This does leave the rates market vulnerable to strong prints. Volatility on payrolls Friday could be significant this year.
Employment data aside the US ISM manufacturing is expected (Bloomberg) to remain largely steady in January versus last month (50.6 v 50.7) but the stronger than-expected Chicago PMI yesterday (55.6 v 50.5) might raise some hopes. In Europe, Italy’s PMI manufacturing is expected (Bloomberg) to rise modestly to 47.4 from 46.7 last month while Spain’s is expected to also improve a smidgen to 45.5 from 45.3. Steady improvements in these two countries is needed. The problems will arise if we start to plateau before we get close to 50.
In terms of markets, the highest Chicago PMI print since April with solid improvement in the underlying details did little to enthuse month end trading. The S&P 500 traded down to close -0.26% lower on the day. A fairly downbeat outlook from UPS and a higher-than-expected initial jobless claims data (368k v 350k) probably didn’t help although it was a mixed day for data watchers. Personal income rose more than expected (+2.6% v +0.8%) in December largely driven by dividend income ahead of scheduled tax increases although Personal Spending stats were a little below expectations (+0.2% v +0.3%). UPS’s shares fell 2.4% on the day despite announcing a larger share buyback programme this year which was viewed as a credit negative by the rating agencies. In other markets the CDX IG pulled back from its recent wides to outperform equities for the first time in many days. The index closed 1.5bp tighter while HY credit also saw some support yesterday.
Asian equities are mixed overnight. Gains are being led by the Shanghai Composite (+0.5%) and the ASX200 (+0.87%), while the Hang Seng (-0.3%) and KOSPI (-0.2%) lag. The official Chinese manufacturing PMI for January fell short of market consensus (50.4 v 51.0) and also down from the 50.6 print seen in both December and November. Meanwhile, the final HSBC version (52.3 v 52.0
expected) came in stronger...
The Nikkei (+0.3%) is also outperforming helped by further JPY weakness (92.2). The US Treasury 10-year yield added 2bp and is currently trading a shade over 2.00%.So all eyes will be on Payrolls and the ISM/PMI numbers and crucially the reaction in the rates market.