Overnight Sentiment: Driftless
The driftless overnight sessions are back. After the Nikkei soared by 3% following several days of declines, and the Shanghai Composite continued its downward ways despite Non-Manufacturing PMI prints for March which rose both per official and HSBC MarkIt data, Europe was unsure which way to go, especially with the EURUSD once more probing the 1.28 support level. The USDJPY was no help, and even with the BOJ meeting at which new governor Kuroda is finally expected to do something instead of only talking about it, imminent, has hardly seen the Yen budge and provide the expected carry-funding boost to global risk. In terms of newsflow there was little of it: European CPI in March printed at 1.7%, above expectations of 1.6%, but below February's 1.8% rise in inflation. UK continued telegraphing the inevitability of Mark Carney's imminent QE, with construction PMI the latest indicator missing, at 47.2, below expectations of 48.0 (above 46.8 last).
In Cyprus news, the International Monetary Fund said it will contribute 1 billion euros over three years to the €10 billion bailout for Cyprus. Lagarde said she expected the IMF board to approve the funds in early May. "A staff team of the International Monetary Fund has reached staff level agreement with the Cypriot authorities on an economic program that will be supported by the IMF jointly with the European Union and the European Central Bank," Lagarde said. "A combined financing package of 10 billion euros is designed to help Cyprus cover its financing needs, including to service debt obligations, while it implements the policies needed to restore the health of the economy and regain access to capital market financing," she said.
Concurrently, Cyprus's central bank unfroze 10% of deposits over €100,000 at Bank of Cyprus PCL to allow business and individuals access to some of their savings, moving to gradually ease controls put in place to stem capital flight during the island's banking crisis. It is unclear how much of this money depositors actually have access to in light of the ongoing capital controls and cash withdrawal limitations.
Elsewhere, Spanish Prime Minister Mariano Rajoy on Wednesday called for Europe to implement growth policies to balance its austerity drive and for countries with room for fiscal manoeuvre to increase public spending. "Europe is the only region in the world in recession. To overcome this situation we need three things: every country needs to do its homework, we need more (European) integration and we need growth policies," Rajoy said in a televised speech to leaders of his People's Party. "That's why countries which can afford it should spend more." Rajoy also said the Spanish economy would clearly grow in 2014 while 2013 would remain tough.
Surely Europe will get right on it.
SocGen lists the main macro events to be on the lookout for today:
The apathy towards the gyrations in periphery spreads over bunds, 2y bono spreads tightened 20bp yesterday, is a testament to investors' lack of conviction and desire not to be exposed long or short before policy makers announce their decision and the next set of US employment data are released. A weaker non-manufacturing services ISM from the US is a risk today but a comparison of historical trends between manufacturing and non-manufacturing indices shows no striking co-movement at least where negative surprises are concerned. With the exception perhaps of June 2012, declines in the manufacturing ISM of 3.5pts and 5.9pts respectively in July and May 2011 did not translate into major setbacks for the services ISM equivalent. This does not tell us how the market will set up for Thursday, but we guess that investors will not be inclined to nail their colours to the ISM or ADP mast until the suspense of the Kuroda and Draghi press conferences are behind us. Providing a hint of what the BoJ might announce, Kuroda said recently that he will consider combining monthly asset purchases and an asset purchase fund, as well as buying debt with longer maturities. Break-even inflation in Japan rose some 60bp on a 6y horizon between December and March but has started to flat line since the middle of last month when Kuroda was appointed. Although the government has now raised the economic outlook for the last three months in succession, the latest quarterly Tankan survey showed lingering pessimism and planned cutbacks in investment, with USD/JPY averaging 85.0 through FY 2013. Can the BoJ lead companies to expect higher USD/JPY? What does the Kuroda BoJ put up against the $85bn per month of Fed purchases? The bank's current asset purchase target is ‘only' Y101trn by end-2013.
Finally, the full overnight recap comes as usual from Deutsche's Jim Reid:
Sometimes first and last days of a month and/or quarters can exhibit strange trading tendencies and yesterday felt like one of those days. Europe was particularly strong with the DAX, CAC, FTSE MIB and IBEX up 1.91%, 1.98%, 1.41% and 1.65% respectively. 10 year Italian and Spanish yields also fell 14bp and 12bp respectively. This was all in spite of worrying signs from the manufacturing PMIs for March where Italy (44.5 vs 45.3 expected) and Spain disappointed (44.2 vs 46.2). The UK (48.3 vs 48.7) also disappointed with the core Euro-zone numbers coming in broadly in line with expectation which had been pushed down due to the disappointing flash readings 10 or so days ago. France remained weak (44.0 vs 43.9) and Germany (49.0 vs 48.9) dipped back below 50 but is the only one of the four major Eurozone economies to be above the start of the year levels for this PMI series.
Back to yesterday and equity markets recorded solid gains on both sides of the Atlantic. The S&P 500 (+0.52%) closed at a new record high of 1570.25. US dataflow was decent with US factory orders (+3.0% v +2.9%) rising above expectations with the highest in print in five months. Orders for autos and aircraft boosted the February number which perhaps helped offset some concerns following Monday’s disappointing ISM manufacturing. Elsewhere the IBD/TIPP Economic Optimism index (46.2 v 45.5) also printed above market consensus. Besides economic data the Fedspeak yesterday was also dovish signaling further support for continuation of asset purchases. In particular, Atlanta Fed’s Dennis Lockhart noted that a slowing of Fed asset purchases potentially as late as early 2014 maybe needed to support the labour market.
On the micro front, reports that AT&T and Verizon may jointly bid for Vodafone Group Plc also helped lift equity market performance on both sides of the pond. Credit markets followed suit with spreads tighter across the board yesterday led by a sharp outperformance in European Financials. The European Financial Snr and Sub indices rallied 10bp and 15bp, respectively. As we showed last week, financials were trading at all times wides vs Crossover on a ratio basis just before Easter so any period of calm will likely favour them at the moment.
Elsewhere in credit we saw the European iTraxx Main, Xover and the CDX IG closing -5bp, -17bp and -2.5bp tighter on the day. FINRA Trace data showed that dealers were net sellers of cash bonds yesterday. Turning to Asia, the escalating tensions between North and South Korea continue to dominate market headlines overnight. The KRW dropped to a sixmonth low against the Greenback after the latest news that South Korean workers were refused access to an industrial park (Gaeseong zone) jointly run between the two countries for the first time since 2009. Demand for South Korean assets has taken a backseat ever since North Korea’s ‘state of declaration’ over the weekend and its decision to restart the Yongbyon nuclear site, which was shut down by the February 2007 disarmament accord. Korea’s 5-year sovereign CDS has come off its recent wides but still about 5bp wider on the week. Geopolitical tensions aside the latest non-manufacturing PMI data from China was better, coming at 55.6 in March from 54.5 in February.
Japanese equities are taking the lead as far as overnight markets are concerned with the Nikkei up strongly ahead of Bank of Japan meeting headlines.
Meanwhile its also worth mentioning that Gold had its largest drop in six weeks yesterday, down by 1.5% to test its February $1570/oz lows. Back to European news flow, according to Slovenian central bank head and ECB governing council member Marko Kranjec, savers have not been pulling out deposits from Slovenian banks. “The way the situation in Cyprus was being solved did not influence the confidence of our depositors" added Kranjec. According to Reuters Slovenian banks reportedly have around EUR7bn of bad loans, equivalent to 20% of GDP.
Looking forward we have an interesting ECB meeting coming up tomorrow and the market is starting to ponder what Draghi may say at his usual press conference. All eyes will be on his economic outlook but also more importantly on his thoughts on Cyprus and/or any mention of other unconventional policy options. Given how disappointing the data has been, markets are hoping for something from Draghi tomorrow.
Ahead of Payrolls Friday, the ADP employment report and the ISM manufacturing data in the US are today’s notable releases. In Europe we will get Eurozone CPI estimates for the month of March. In terms of the Fed Bullard and Williams will speak at some point later this evening.