Overnight Sentiment: Yen Slaughter Takes A Breather
We started off the overnight session with various pseudo-pundits doing the count-up to a 100 in the USDJPY. It was only logical then that moments before the 4 year old threshold was breached, the Yen resumed strengthening following comments from various Japanese politicians who made it appear that the recent weakening in the currency may suffice for now. This culminated moments ago when Koichi Hamada, a former Yale professor and adviser to Japanese Prime Minister Shinzo Abe, told Reuters that level of 100 yen to dollar is suitable level from the perspective of competitiveness. The result has been a nearly 100 pip move lower in the USDJPY which puts into question the sustainability of the recent equity rally now that the primary carry funding pair has resumed its downward trajectory. Another result is that the rally in the Nikkei225 was finally halted, closing trading unchanged, and bringing cumulative gains since the morning before the BoJ’s announcement last Thursday to 8.9%. Over that the same time period, the TOPIX Real Estate Index is up an incredible 24%, no doubt reflecting the prospect of renewed buying of REIT stocks from the BoJ’s asset purchasing program.
European data was relatively muted, following the release of a mixed set of headlines. In Germany, the February trade surplus increased to €16.8 bn more than the Est €15.0 billion; while the February trade deficit widened in France to €-6 bn from an expected €-5.4 billion, and up from €-5.7 billion last. In the UK, manufacturing output surprised on the upside, printing at 0.8% mom. Finally, the Bank of France business survey fell slightly from 96 to 93 in March, just ahead of Wednesday's French industrial production release.
As SocGen reports, in Germany, structurally strong net exports, which remains a major contributor of German growth, do not show any signs of adjustment via stronger imports. In fact, seasonally adjusted exports contracted at -1.5% mom while imports contracted at -3.8% mom. Looking at the three months average of the yearly rate, this translates into a -0.2% yoy contraction on the import and a 1.2% yoy expansion on the export side. Looking ahead, the scenario remains for stronger import demand in the coming years, as wage growth should support household spending. Therefore, German growth should benefit from an increasing support from domestic demand and the net trade surplus should gradually decrease. All of this of course assumes the EUR remains the currency of choice of the very aptly misnamed European Union (where, however, one must never underestimate the amount of political capital invested, etc...).
Today, US economic data continues the be scarce with the B-importance grade NFIB small business optimism index, wholesale inventories and the BLS JOLTS survey on deck. This means that with few economic "misses" available to drive the market higher, it will be up to corporate earnings misses to push the P/E multiple expansion that has been the sole driver of all upside in the past 6 months.
Finally, if the past two weeks are any inidcation, based on the Down, Up, Down, Up seesaw algo, today we are due for a down day. Of course, if only it were that easy.... Which is perhaps precisely the case.
More on the overnight session recap from DB's Jim Reid
Onto markets and US earnings season kicked off in a somewhat mixed fashion with Alcoa’s Q1 earnings. The company’s EPS came in ahead of Bloomberg estimates (11c vs 8c) on the back of “strong demand” for alumina and other upstream products, although the top line lagged consensus estimates ($5.83bn vs $5.88bn). Alcoa shares traded 1.4% lower in after hours. Looking forward to the rest of reporting season, earnings growth is expected to be fairly modest at 1.5% according to data compiled by Thomson Reuters. A little more concerning however is the fact that over 100 companies on the S&P 500 have provided negative earnings guidance for Q1 so far, compared to 23 positive pre-announcements. A glass half-full view of this may say that it has reduced the chance of negative surprises during the earnings season itself but for firms with global exposure we also start to wonder how the continued weakness in Europe and the USD strength is going to impact on their final numbers. It will be an interesting few weeks.
Back to yesterday’s session, the S&P 500 (+0.63%) finished the day back above the levels seen before last Friday’s non-farm payrolls miss. Post-payrolls, the index has now added 1.5% from the lows. Looking more broadly at the performance of some other asset classes following payrolls reveals that the market has generally now taken last week’s disappointing jobs data in its stride.
The European Stoxx 600 has added 0.6% to trade back at pre-NFP levels. US 10yr yields have added 6bp and the VIX is down 16% and is at its lowest level in a week. In the credit markets, the European Crossover and iTraxx indices have tightened by 10bp and 3bp respectively. European senior and subordinated financials have tightened by an impressive 12bp and 14bp respectively, while the CDX IG index is around 3bps firmer.
Turning briefly to Asia and the rally in the Nikkei was finally halted closing unchanged, bringing cumulative gains since the morning before the BoJ’s announcement last Thursday to 8.9%. Over that the same time period, The TOPIX Real Estate Index is up an incredible 24%, no doubt reflecting the prospect of renewed buying of REIT stocks from the BoJ’s asset purchasing program. Currency moves remain a key indicator to watch with the USDJPY creeping towards 100, and is trading at 98.90 as we type. DB strategists now see USDJPY hitting 120-140 under the BoJ's current mandate. JGB yields are broadly unchanged although the 30yr yield is 11bps higher overnight.
With the BoJ aggressively on the front foot there are considerable discussions on what a weaker JPY means for various economies. In Asia, Jun Ma and his team has looked at the potential impact on China. Given new assumptions on Japan's GDP growth and inflation they think the aggressive monetary easing by the BoJ will lift Chinese export growth by 1ppt and China's GDP growth by 0.1ppt. The impact on RMB/USD will likely be minimal and Japanese QE may slightly boost net capital inflows to China via carry trades. The aggressive easing is also spurring a flurry of activity in domestic JPY credit markets. The Nikkei is reporting that a number of Japanese companies are “rushing to issue JPY bonds” to take advantage of the recent compression in credit spreads and the low bond yields in the wake of the BoJ’s announcement last week. This mirrors a similar pattern to that seen in the US. Indeed yesterday that US bellwether FedEx priced a 10yr USD bond with a 2.7% coupon, tieing Dr Pepper Snapple for the second-lowest BBB/Baa1 rated 10yr bond coupon and only beaten by Fedex’s own 10yr bond issue (with 2.625% coupon) in mid-2012 (Reuters).
Elsewhere in overnight markets, the firmer tone is being helped by the latest Chinese inflation numbers for March which came in below market consensus (2.1% vs 2.5%). Whilst most Asian bourses are higher on the day the KOSPI (-0.1%) continues to underperform. Tensions on the Korean peninsula took another turn for the worse yesterday after the North announced the indefinite suspension of the joint industrial Gaesong complex along the border. The industrial park, located about an hours drive away from Seoul, is seen as a symbol of North-South Korean co-operation and is also an important source of foreign currency income for the North. According to the WSJ, South Korea provides $90m in annual wages paid directly to Pyongyang through labours employed within the industrial zone. North Koreans employed in the complex reportedly did not turn up for work this morning. The South Korean government said the North may be ready to conduct a nuclear test or missile launch as early as this week. The escalating confrontation between both sides is also raising alerts elsewhere. In his prepared remarks overnight, the Head of US Pacific Command said that the North Korea's poses a direct threat" to the US and its allies and the hostile rhetoric from Kim Jong Un "creates an environment marked by the potential for miscalculation and military escalation". North Korea clearly remains the wild card here and the 10th and 15th of April remain key dates to watch as we mentioned yesterday. They have said that they cannot guarantee the diplomatic missions in Pyongyang from the 10th onwards and the late Kim Il-Sung's birthday (North Korea's founder and grandfather of the current leader) is on the 15th. Korean credit spreads are broadly steady to a touch tighter this morning on the back of a positive tone in global credit.
In other headlines, Bernanke spoke overnight at a conference sponsored by the Atlanta Fed. Although his speech steered away from commenting on the outlook for the economy and monetary policy, he did say that conditions remain “clearly still far from where we would all like them to be”. He added that the global monetary easing amongst major industrial economies was “mutually constructive”.
Turning to the day ahead, we have a relatively busier day for data with German, French and UK trade numbers in Europe. The UK will also print industrial numbers for February. In the US the NFIB small business optimism index, wholesale inventories and the BLS JOLTS survey are the data highlights.
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