Another Overnight Levitation Ramp
The BTFD mantra is alive and well in a market, where futures overnight briefly dipped to a low of -0.5% only to be set to open at record high, following the biggest one day drubbing in China in months, where the Shanghai Composite closed -2.82% after new rules were issued by the Chinese banking regulator to limit the expansion and improve the transparency of so-called “wealth management products”. The products, which are marketed as higher yielding alternatives to bank deposits, are often used to fund risky projects including property developments, short-term corporate lines of credit or for speculative purchases of commodities and have been identified as contributing to the rise of shadow-banking in China’s financial system. As Deutsche reports, Fitch estimates the total amount of outstanding wealth-management products was around 13 trillion yuan at the end of last year—equal to about 15% of total banking-system deposits. Japanese equities were also weaker overnight (Nikkei –1.3%) and the yen is 0.3% firmer against the dollar after BoJ Governor Kuroda told parliament that he has no intention of buying foreign bonds because doing so could be seen as currency intervention. Finally, South Korea informally entered the currency wars after it slashed its GDP forecast from 3% to mid-2%, announcing it would use "interest rates" to boost growth, which naturally means use of monetary means and directly challenging the BOJ.
Curiously, it was Europe that was the source of optimism, following a report of German retail sales rising 0.4% on expectations of a -0.6% drop, down from 3.0% in the prior month, even as unemployment unexpectedly rose in March by 13K, vs an expected decline of -2K. But it was the Cyprus bank reopening that everyone had been focused on, and having seen no riots or stampedes, the EURUSD soared by 50 pips in the matter of an hour, sending equity futures to overnight and record highs. It is somewhat odd living in a world in which the lack of rioting is seen as a "good enough" signal to push the stock market to fresh all time highs. All this, even as private sector loans in February fell 0.9% Y/Y, confirming that the actual underlying economy continues to contract at a disturbing pace.
And while the Cyprus developments were not surprising to anyone but the slowest GETCO algos, as the capital controls in place make any violent behavior moot, the bigger catalyst today will be out of Italy where Bersani is supposed to announce a government, however where he will most likely return the mandate to the president empty-handed, ushering in the process of new elections, and further economic uncertainty in a continent in which deposit confiscations now may or may not be the template.
Some more on today's key events from SocGen:
Lukewarm demand for Italian government debt yesterday and further political wrangling have cast their shadow over the eurozone as we head into the Easter weekend. However, it is the latest Reuters poll that nails home how the Cyprus crisis and the way it has been handled have landed the EUR in turbulent waters. A staggering 36 out of 48 economists now believe that Cyprus is unlikely to be the last eurozone country to seek an international bailout, with Spain and Slovenia topping the list of most likely candidates. If the ECB managed to successfully remove euro tail risk last summer, European finance ministers narrowly averted creating their own black swan over the last two weeks. Banks in Cyprus are scheduled to re-open today, but this will not be of great relief to local account holders who were told yesterday of pretty draconian capital controls including limits on money transfers and the amount of cash citizens can travel with outside the country (capped at EUR3,000). Risk appetite is still trading poorly into quarter end with negative contagion dragging down broader equity market indices and pushing credit indices and swap spreads wider by considerable margins. EU 2y swaps spreads nearly reached 52bp yesterday, the highest since 6 September when the ECB put the OMT in place. The ECB will announce the latest 3y LTRO repayment amounts today. If the events of this week are any guide, redemptions should slow to a trickle as banks hold on to their cash. As our SG colleague Hank Calenti discusses in a special note, the credit lessons from Cyprus, silent capital flight from weak European banks headquartered in fiscally weak countries is more likely when distress occurs.
The full recap of the past 24 hours from Deutsche's Jim Reid:
As we go into the Easter break, the US is continuing to exhibit a hard shell with Europe's soft centre continuing to be exposed. After hitting a low of -0.76% near the open, the S&P 500 closed at only -0.06% after a session that saw Europe trading fairly weakly. One distortion that's opened up since the fraught Cyprus bailout has been the significant widening of iTraxx Senior financials which widened another 10bps yesterday to leave the index 45bp wider since the Friday before the first bail-out proposal. The move in the cash market has not been as severe leaving the basis fairly wide at the moment. The ratio between Senior Financial and Crossover is also starting to approach record levels of compression again. The graph in today's EMR shows this relationship since 2005 on the left and on the right since the new trading range established itself since the start of 2011. Since then Crossover has traded between 2.2x and 3.6x Senior Financials using the on-the-run series. Last night we closed at 2.43x having been at the high end of that range in early 2013. To put these numbers in perspective it did peak at around 33x in 2006!! Clearly the rolls have some impact on this long-term chart but using Series 14 (which has been around for 2.5 years) the ratio was at its most compressed level ever last night. So we're at ratios similar to or more compressed than that seen at the worst point in the Greek, Irish, Portuguese, Spanish, and Italian sovereign crises even if markets elsewhere are much calmer. So the Cyprus story has arguably had as big a relative move on iTraxx Senior Financials as any of the previous sovereign events.
Back to broader markets, it was a poor day for European peripheral government bonds. Yesterday saw the 10-year yields of Italy, Spain, Portugal and Greece spike 21bp, 14bp, 18bp, and 71bp to 4.78%, 5.08%, 6.37% and 12.84%, respectively. The weakness in European equities (IBEX -1.13%, FTSEMIB -0.92%, Athens ASE - 3.99%) also boosted demand for core government paper. Incredibly all this has pushed the 2-year Bund yield back into sub-zero territory (-0.02%) for the first time this year after having declined 3bp on the day. A near 8bp decline yesterday also brought the 10-year Bund yield back to the lowest level since August last year. For the record, the 2yr and 10yr Bund yields are now 30bp and 16bp off their YTD highs. In the US, Treasuries have also rallied but to a lesser extent. The 10-year UST yield has edged lower every day this week and is now at 1.838% as we type, or 22bp off their YTD highs. A round of dovish Fed speeches from Rosengren, Evans and Kocherlakota was also supportive. The diverging performance between assets on both sides of the Atlantic remains one of the main market themes at the moment with European markets clearly having underperformed since the Cyprus-led volatility began two weeks ago.
On the topic of Cyprus, all eyes will be on the Cypriot banks today which will be opening for the first time in almost two weeks.
They are scheduled to open at around midday local time (or 10am London) and will stay open for around 6 hours but with a number of new capital controls. These controls include limiting withdrawals to EUR300 per day, banning cheques and curbing the use of Cypriot credit cards abroad. Yiangos Demetriou, head of internal audit at the Central Bank, said that the controls would allow unlimited use of credit cards within Cyprus, but set a limit of EUR5k abroad. He said the measures would last for around one week but could be reviewed. According to Greek newspaper Kathimerini, Cypriots would not be permitted to send money overseas without documentation showing they are paying for imports or for accommodation and tuition costs for Cypriots studying abroad. The capital controls apply to all accounts, payments and transfers, regardless of currency used.
Elsewhere, readers may recall our casual mention earlier this week of a potential spike in super king size mattresses sales on the back of the newfound Cyprus ‘solution’. Well we don’t have any stats to show this but in a rather timely fashion, Salamanca-based Descanso Santos Sueños launched a mattress three weeks ago that comes with a built-in safe! The WSJ noted that the mattresses is selling for EUR875 and at the foot of the bed is a flap which, when pulled back, reveals a 15×10 centimetre door with a keypad. The mattress is called the “Caja Micolchon” which apparently translates to “My Mattress Safe”. Actually the Easter Egg I bought yesterday is so valuable maybe I should be buying this!
Turning to the day ahead, the ECB’s money and credit aggregates report for the month of February will be a key focus for markets in Europe. The main data prints are German retail sales and employment reports; and the Chicago PMI and jobless claims in the US.