Sentiment Hobbled By Hawkish China Sending Futures Lower To Start The Week

Tyler Durden's picture

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear.

In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.

A full recap of overnight events from Deutsche Bank:

US payrolls and central banks take centre-stage this week and alongside the latest developments in Italy this will probably dictate whether we continue the upward march towards the recents highs or whether we pullback to the levels seen during last month’s wobble. We'll take a closer look at what’s in store for the week ahead later, but firstly we’ll review the overnight session in Asia and Friday’s risk- turnaround in the US.

Firstly, overnight trading in Asian markets has been marked by a risk-off tone as investors take note of new measures from the Chinese government to control real estate speculation. DB’s Jun Ma writes that the State Council issued a circular on Friday which included two key measures 1) raising the downpayment ratio and mortgage rates for second homes in localities with excessive property speculation and 2) a 20% profit tax on price differentials between selling price and purchase prices on homes. On the profits tax, Jun Ma’s view is that the strictness of implementation is the key unknown at this stage and will likely weigh on the real estate sector in the short term. On the back of the news, the Shanghai Composite (--2.8%) and Hang Seng (-1.5%) are underperforming with real estate developers, construction companies and resources stocks bearing the brunt of overnight declines. The Australian dollar is 0.75% lower to start the week, its seventh decline in the last nine sessions. The Nikkei (+0.6%) is the region’s outperformer this morning on comments from BoJ governor nominee Haruhiko Kuroda during his lower house hearing today. Kuroda was quoted as saying that "If I were appointed as the governor ... I would do everything possible to get out of deflation,". He added that "(the BOJ) is not doing enough in terms of the size of its asset purchases or the range of assets being bought”. 10yr JGB yields have hit a new low of 0.62% (-4bp on the day) while USDJPY is slightly lower at 93.45.

Returning to last Friday’s session, better than expected US manufacturing ISM (54.2 vs 52.5 expected) and consumer confidence (77.6 vs 76.3) data set the tone for a stronger US session, offsetting concerns over the impact of the sequestration and a mixed set of final PMIs in Europe. The S&P500 (+0.23%) closed near the day's highs rallying more than 1% from the morning lows, and taking the index to about 3% shy of its record 2007 closing high. Industry-wise, mining (-1.3%) and resources (-2.9%) were the main underperformers, weighed by weaker than expected official and HSBC manufacturing PMIs in China. The Dow Jones closed 0.25% higher and is now less than 1% from its 2007 peak.

Returning to Europe, in their latest Focus Europe piece, our economists have made an interim revision to their euro area GDP forecast following the downside surprise from Q4 GDP numbers, the weaker signal from the PMIs in Q1 and a provisional reaction to the increased political uncertainty in Italy. The result is a cut in euro area 2013 GDP growth from -0.3% to -0.8% for 2013

In terms of Italian elections, President Napolitano wants to bring forward the country’s first post-election parliamentary meeting to March 12th from March 15th, according to Bloomberg who cite Italian newspaper Corriere della Sera. Meanwhile Bersani hopes to persuade Italy's president that he could govern without a majority in the Senate. He has drawn up a seven or eight-point plan to present to Napolitano next Wednesday.

Bersani ruled out a deal with Silvio Berlusconi, saying a grand coalition with the centre-right was not an option (The Guardian).

As regards to Beppe Grillo, the UK Telegraph quoted that he has said that "if conditions do not change" Italy "will want" to leave the euro and return to its former national currency" citing an interview with a German magazine published on Saturday. So fairly inflammatory remarks.

Over to the US, in one of the first ramifications since the start of the budget sequester on Friday, The Hill is reporting that the Pentagon will cancel a carrier group’s deployment to the Middle East which will save roughly $300 million, helping the military curb its spending as it faces across-the-board cuts under sequestration.

In other weekend news, the PBoC deputy Governor Yi Gang said in Beijing that China is “fully prepared” for a currency war. Yi added that a currency war can be avoided if policy makers observe the consensus reached at the G20 meeting that monetary policies should be aimed at domestic economies (Xinhua).

Turning to today’s calendar, the Eurogroup/ECOFIN meeting kicks off today with developments in Italy, Ireland and Cyprus likely on the agenda. Spain’s February unemployment report is also due today while there will be no major data releases in the US.

Looking out further into the week, on Thursday the ECB, BoE and BoJ will all announce their latest policy decisions with all three expected to stay put for the time being. Draghi’s post- ECB press conference will be closely watched in light of recent uncertainty following the Italian elections. From the Fed, Chairman Bernanke speaks on the topic “Low Long-Term Interest Rates" on Friday.

In the US, the focus will be on Friday’s payrolls report – the market is expecting a +160k change in the headline, +167k change in private payrolls and the unemployment rate to remain unchanged at 7.9%. Ahead of that, Tuesday’s services ISM, Wednesday’s ADP employment report and factory orders, and Thursday trade balance and consumer credit reports are also worth highlighting.

In Europe, final services PMIs and retail sales are due on Tuesday; Euro area Q4 GDP (preliminary) and an update on Spain’s budget balance for 2012 is on Wednesday; German factory orders are on Thursday followed by industrial production on Friday.

In China, the National People’s Congress is scheduled begins its annual session on Monday where Xi Jin Ping is set to be officially confirmed as the new President and Li Keqiang will officially succeed Wen Jiabao as Premier. The key data releases scheduled are the HSBC services PMI on Tuesday and the February trade report on Friday. On Saturday (9th March), China provides its monthly macro data update with CPI, PPI, industrial production, fixed asset investment and retail sales all scheduled

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Ghordius's picture

"As regards to Beppe Grillo, the UK Telegraph quoted that he has said that "if conditions do not change" Italy "will want" to leave the euro and return to its former national currency" citing an interview with a German magazine published on Saturday. So fairly inflammatory remarks."

the anti-EUR Telegraph forgets to mention that Grillo-as-citizen - not as leader of the movement - is in favour of a referendum on the EUR - after a deep and honest debate

which would have to include the middle part of the business plan: 1) exit the EUR. 2) ???. 3) Prosperity!!!!

fonzannoon's picture

Ghordius I'd rather have that business plan then just get beaten into submission than end up like Greece. If they take down a few big banks with them then good for them. At least they did it their way.

Ghordius's picture

fonzannoon, "ending like Greece" is at the moment not "ending like Argentina" - pls tell me what the little drachma would do in the midst of this currency war, including buying resources like oil, that is famously USD denominated

further, a GreXit would not take any of the megabanks with it - only the small ones

I understand your frustration, but when it comes to witnessing a foreign country having a monetary failure with all the entailed consequences and having this failure in your own country - well, let's say that the Greeks are still saying: "No, thanks"

if you had three buttons in front of you, one that destroys the USD monetary system, one that destroys the EUR monetary system and one that does it in Japan or in the UK (expand the buttons, if you want), what would you do with those buttons? (and remember that the EUR's is the only one that has no risk of hyperinflation at the moment)

remember that there is this belief around that any system going down reinforces the others, and keeps them longer alive

fonzannoon's picture

I hear you Ghordius. I don't think Italy is Greece. I think if Italy walked they could cause serious damage. But they will just end up debt slaves like Greece at this point unless something changes.

I think if Grillo were smart, he would truly walk Italy right to the edge. Make it clear he has no problem going back to the Lira. Scare the absolute shit out of everyone. My guess is Germany blinks first. Grillo wants their debts rengotiated. He is going to have to play serious hardball to get it done. If it comes to it maybe he will actually walk. Who knows.

Ghordius's picture

serious damage. to your creditors and business partners? to your peers? and do you really think that Italy would profit and prosper with the Lira? If yes, how long? And then? dollarzone?

please also don't forget how tightly interconnected the eurozone economies are, particularly the SMEs' flows of goods

sure, debt renegotiation would be a good thing

there is a dirty secret, btw. a lot of this debt looks like it's in French or German hands - but in reality it's in the hands of... Italians. you don't have to believe me in this, and it's actually irrelevant

it's a thin line you are proposing, politically, then at the moment he is scaring other Italians more than Germans

nevertheless please remember that Grillo is not his movement - they haven't even discussed properly any strategy on this

fonzannoon's picture

I believe you.

My old high school is a microcosm of this whole thing. It is being put up for a vote on whether to close it or not. The school district asked residents (again) to raise property taxes to make up their massive shortfall. This year everyone finally got pissed. I went to the meeting (I don't live there anymore) just out of curiousity. The first slide they showed illustrated that 81% of the budget goes out the window on Jan 1 to pay the pensions and health benefits of retired teachers/admin. They went on to argue for hours after that slide but I left 5 mins in.

They are screwed. Those contracts with the retirees have to be reset. Otherwise it's a death spiral. They have to be reset and those retirees will have to take a massive hit. Even after it they will still be better off than most of the rest of us. The next thing that has to happen is those union leaders and all their back deals with politicians have to go to prison. As Lawsofphysics says "prosecute the fraud".

Once those thing happen things can at least start to get better. But by me it's not happening. So old people are moving out. Young people can't afford to move in, and everyone in the middle is getting ripped to pieces. I presume it is somewhat a similar scenario there. Although I could be totally wrong.

Ghordius's picture

yes, there are similarities. btw, when it comes to sovereign debt the point of no return is about 20%-25% of the tax income paid for debt service. up to now Italy is not yet there, and as soon as it approaches it it's the very size of the debt that ensures a more sensible approach to it

the dirty secret of both debt and currency: size matters. the small can be thrown under the bus, the big can't

Panafrican Funktron Robot's picture

The thing potentially backing the lira would be Italy's fairly massive gold stash as compared to its total population.

A "golden lira" backed by this stash would be an instahit with people trading in real goods like oil.  Italy would be just fine with the lira.  

new game's picture

wish/think/realize - the ptb surely will not let this happen; are you forgetting they are still in CONTROL?


of course i wish as you do...

Ghordius's picture

may I also remind you that Italy was, together with France, instrumental in convincing Germany to merge the currency? And that was only possible by keeping Britain from calling an American intervention on German ReUnification? Which was btw another currency merger, too?

What you see is the EUR. What you don't see is how europe would have had an orgy of speculation and currency war during the crisis

Italians above thirty remember the lira very well - and they wanted a harder, more resilient currency that is more independent from the USD

they still want it - they are mainly bargaining about some rough spots around it (as the French with their 2013 budget)

you have to understand that europe is a concert - sometimes full of discordant notes, though

Shooting Shark's picture

That Council will leave fingerprints on the coming crash, but perhaps they honestly think they can generate a soft landing.  Either way, these particular commies have some brass.



new game's picture

maybe the "paperjob" isn't working out so well...

NoWayJose's picture

The reason Grillo's comments have no effect is that he already said that he will not join with anyone else to form a majority. While he did well in the election, it is almost certain that he will never get 51% by himself. Thus he is a non-factor. He would have more power if he took his top three ideas and joined to form a majority party. This would get those ideas into the forefront, and let his followers lead within the majority. As it looks now we will likely get another election.

Ghordius's picture

becoming an established party is something this movement wants to avoid, yes. they have an agenda of 120 points (that does not mention what the Telegraph hints to) and they want that agenda get through, nothing more, before

Curtis LeMay's picture

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation.

Chinese ghost cities/property bubble from 60 Minutes last night:!

q99x2's picture

I think it is time the central banks start giving me money directly and see how that works. It's worth a try.

Frozen IcQb's picture

Don't worry, the financial drones will pump it up every morning just as they have done like clockwork.

That will work until one day it doesn’t.

Buy physical, get off the playing field and watch the show from the sidelines. Enjoy!

thismarketisrigged's picture

so much about the lower futures.


these fucking pricks have brought the dow futures from -65 all the way down to -15 and s&p futures from -7.50 to - 1.00


also, im going to strangle warren buffet, he said on cnbc today that he has enormous respect for chairman bernanke and he has done a wonderful job

Frozen IcQb's picture

Of course the market is rigged!

Has been since they embarked on QE. Eventually the currencies will return to a modified form of Bretton-Woods where currencies are back-stopped by gold and other commodities.  This will happen whether the western countries like it or not.


The US, UK and a few others have killed themselves by shipping all their productive capacity off-shore.


Just stop feeding any addiction to trading and do something else productive while enjoying the theatricals on this board for entertainment purposes.


Law97's picture

And don't forget the BREAKING NEWS shocker headline:  "Fed's Yellen calls for continuation of Fed's easy money policies." 


"At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment," Yellen said in a speech to the National Association of Business Economics.


Wow.  Never saw that one coming.  Neither must have the market, cuz that was good for a nice bounce in the futures.

Frozen IcQb's picture

Yup, That will work until one day it doesn’t.

Could'nt give a flying falcon about it. I'm out and buying physical and good PM shares on the cheap held in direct registration mode outside the banking system. Don't care anymore.