Rajoy Summarizes Overnight (And Recurring) Sentiment: "There Are No Green Shoots, There Is No Spring"
In the aftermath of yesterday's surge in German hopium measured by the ZEW Economic Survey which took out all expectations to the upside, it was inevitable that the other double-dipping country, France, telegraphed some optimism despite a contracting economy and would follow suit with a big confidence beat, and sure enough the French INSEE reported that February business sentiment rose from 87 to 90, on expectations of an unchanged number. And the subsequent prompt smash of investor expectations in Switzerland, where the ZEW soared from -6.9 to +10.0 tells us that something is very wrong in the Alpine country if it too is trying so hard to distract from the here and now. And while one can manipulate future optimism metrics to infinity, it is reality that is proving far more troublesome for Europe, as could be seen by the Italian Industrial Orders print which crashed -15.3% Y/Y on expectations of a smooth -9.5% drop, down from -6.7% previously. Since industrial orders are a proxy for future demand, a critical issue as Italy enters 2013 after six consecutive quarters of economic contraction and with no relief on the horizon, it is only fitting that Italy should shock the world with an off the chart confidence beat next.
In bond news, Spain said it would impose a yield ceiling on new bond sales by region, even as it prepared to launch new 5 year benchmark USD denominated bonds: there was a time when Europe was the US' dumb money. How quickly things have flipped. And while Spain was being bid, Germany was not, and following today's 10 Year Bund auction the 10 year yield rose another 5 bps to 1.67%.
Finally, in a rare moment of reality, Spanish PM Rajoy said at the State of the Nation debate. “It is not enough, there are no green shoots, there is no spring,” adding that Spain’s
economic situation is "terribly hard." It was confusing that this being corruption scandal-ridden Rajoy, he did not add that "except for all that things that are terrible, things are doing great." The US does it day after day.
Some more overnight highlights via BBG:
- New Zealand’s central bank governor said he’s ready to intervene in foreign-exchange markets, the latest in a string of countries from South Korea to Brazil warning their currencies are too strong
- Japan’s Abe will be accompanied by his top currency official when he visits the U.S. to meet with Obama, as Japan tries to limit international friction over a weakening yen
- Spain is imposing yield limits on debt sales by its 17 semi-autonomous regions that would shut most of them out of markets in an effort to curb the country’s borrowing, two people familiar with the matter said
- Bank of England officials considered options including a rate cut and expanding the range of assets purchased at their February meeting
- FOMC minutes to be released today won’t suggest Fed is ready to slow $85b/month pace of Treasury and MBS purchases, DB said yesterday
- U.K. jobless claims fell more than twice as much as forecast in January as job creation surged
- BofAML Corporate Master Index OAS holds at 147bps as $10.05b priced yesterday. Markit IG at 85bps, matching YTD low. High Yield Master II OAS narrows 3bps to 492bps; $1b priced Tuesday. CDX High Yield gains to 102.86
- Nikkei rises 0.8%%. Germany’s DAX lower, FTSE higher. U.S. equity-index futures rise. Italian and Spanish bonds gain, bunds and gilts fall. Energy, previous metals mostly lower
A recap of European markets:
- Spanish 10Y yield down 4bps to 5.16%
- Italian 10Y yield down 2bps to 4.38%
- U.K. 10Y yield up 2bps to 2.2%
- German 10Y yield up 4bps to 1.67%
- Bund future down 0.32% to 142.36
- BTP future up 0.2% to 112.37
- EUR/USD up 0.06% to $1.3396
- Dollar Index up 0.06% to 80.51
- Sterling spot down 0.76% to $1.5308
- 1Y euro cross currency basis swap up 1bp to -19bps
- Stoxx 600 down 0.15% to 289.58
A more detailed recap from DB
The market yesterday caught the mood of the London weather as Europe had one of its best days this year. The DAX and CAC added +1.62% and +1.88% respectively, only second to the +2.19% and +2.55% rally on the first day of 2013. In the US we saw the S&P 500 (+0.73%) hit fresh 5 year highs whilst the Dow Jones also reached a new cyclical high at 14035. The VIX index fell further to 12.31 reaching the lowest close since April 2007. Treasuries had a softer session with the 10-year yield creeping back above 2% helped by some chatter that the FOMC minutes later today will shed some light on the timing of stimulus withdrawal.
The stronger-than-expected German ZEW Economic Sentiment survey (48.2 v 35.0) was cited as the main catalyst of yesterday’s moves, which helped cushion a mildly disappointing NAHB housing market headline in the US (46 v 48). The main event at the end of the week, namely the Italian elections, are hardly being discussed. We thought that the prospect of them and the associated uncertainty would encourage some risk reversal in February before a March rebound after a pro-reform coalition was formed. However although many risk assets have been treading water in February it’s still net net been a better month than we expected. Tomorrow's flash PMIs in Europe (and elsewhere) are the next main hurdle. A continued steady improvement will support risk further.
Back to markets, Asian equities are trading with a firm tone, helped by the positive US lead. Overnight gains are being led by the ASX200 +0.33%), Hang Seng (+0.15%) and KOSPI (+1.76%). The Nikkei is up 0.72% and the yen is marginally stronger (+0.3%) against the dollar in overnight trading on relatively limited news flow. The Yen showed some weakness initially after Japan’s January trade deficit came in at a record JPY1.63trn, driven by higher than expected imports (+7.3%yoy vs 2.1% expected) – no doubt driven to some extent by the yen’s recent depreciation. The 'J-curve' analysis from A-Level Economics is flooding back into memory. Asian credit spreads are tighter as technicals are now better following a large bond redemption with supply generally being more subdued than expected.
Briefly returning to US markets, investors have been mulling the return of M&A activity. Indeed $158bn in deals have been announced in the year-to-date, which is more than double the activity in the same period last year according to Reuters data. Office Depot and OfficeMax are the latest companies in the M&A spotlight with reports suggesting that two companies are in discussions to merge (Bloomberg).
With the US spending sequesters scheduled to come into effect in a matter of days, Obama held a press conference yesterday to turn up the pressure on the GOP to accept his alternative deficit-reduction plan that includes both spending cuts and new revenues through closing tax loopholes. Obama will reportedly hit the road again next week for campaign-style events to build support for his plan. Also yesterday, Democrat Erskine Bowles and Republican Alan Simpson released a “version 2” of their deficit reduction plan calling for a reduction in government spending of $2.4trn over 10 years. Deficit reductions would come from lower payments to Medicare and Medicaid providers and higher Medicare premiums for top earners. Additional savings would come from using a “chained-CPI” gauge in Social Security cost-of-living payments. On the revenue side, a series of tax exemptions and deductions will be removed with part of the savings used for deficit reduction and the rest to reduce income tax rates (Bloomberg). Simpson and Bowles remained pessimistic about the chances of avoiding the sequester however, reflecting the general mood in both the Democrat and Republican camps.
Turning to the day ahead, the Bank of England will be releasing minutes from their last meeting. The UK’s latest labour report is also scheduled today. In the US, the focus will be on the FOMC minutes which will be closely examined in light of the recent discussions on the appropriate timing to reduce asset purchases. In terms of US data, January housing starts, building permits and PPI are the main highlights.
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