Overnight Sentiment: Keep Ignoring Fundamentals, Keep Buying
Futures green? Check. Overnight ramp in either the EURUSD or USDJPY carry funding pair? Check? Lack of good economic news and plethora of economic misses? Check. In short, all the ingredients for continued New Normal record highs, driven only by the central bank liquidity tsunami are here. The weakness started with Australia's stunning unemployment jump overnight which saw a 36,100 drop in jobs on just 7,500 expected. A miss in Chinese auto sales was next, with 1.59MM cars sole in March, below the 1.596 expected, and even despite the surge in M2 and loan data, the Shanghai Composite closed down once again, dropping 0.29% to 2219.6. Nikkei continued its deranged liquidity-fueled ways, rising 1.96% even as Kuroda is starting to become quite concerned about the rapid move in the Yen, saying he "may adjust policy before the 2% target is reached if the economy and other indicators are growing rapidly." They aren't, and won't be, but if the Nikkei225 is confused for the economy, he just may push on the breaks which would send the only reason for the latest rally, the USDJPY tumbling. Finally, looking at Europe, Italy sold well less than the maximum €6 billion targeted in 2016, 2017 and 2028 bonds, which dented some of the enthusiasm for Italian paper although with Japanese money desperate to be parked somewhere, it will continue going into European and all other fixed income, distorting market signals for a long time.
In short, expect the central-bank risk levitation to continue as all the deteriorating fundamentals and reality are ignored once more, and hopium and P/E multiple expansion are the only story in town.
SocGen summarizes the key events to watch out for
The NZD, AUD and SEK have been in a league of their own this week, logging average gains of 3.4% vs the JPY as investors pile into the JPY funded carry trade, but EUR/JPY is not following too far behind with a gain of 2.86%. The extent of grab for eurozone yield has been evident since last week, and flows have also been diverted into EM currencies. As we have pointed out there is a seasonal impact which could support the trend through Q2 bearing in mind historical trends. For some the price action is obfuscating and of course it is a step too far to conclude that the flows into, say EM or stocks, is a testimony of a broader return of risk appetite just as we are seeing a soft patch in the US. To underscore this point pay attention for a second to the German 2y auction yesterday. Total bids of a staggering E9.140bn, the highest since May 2011, and the accepted yield averaged 0.02% vs 0.06% previously. In other words, this flight into the German short-end is telling a story where ‘safety first' takes precedence. The point is that non-euro portfolio investments may well be supporting EUR/USD short-term, but the disconnect with German 2y yields is not ideal for gains to be sustained over a longer time horizon. A proposed extension of the maturities of the EU bailout loans to Ireland and Portugal to 7y (pending the approval by EU finmins) will help to reduce the burden for those countries but will they become self-financing to roll over around E20bn a year between 2016-2020 (Ireland) and between 2015-2021 (Portugal). The strong interest in German 2y paper illustrates there are quite a few who believe that the EU way of ‘kicking the can' cannot go on forever.
And the full overnight summary from Deutsche
The S&P500 (+1.22%) finished the session with its best one-day gain in more than a month and closed at a record high of 1587.73. Similarly, the Dow closed at a record high and the NASDAQ closed at its highest level since 2000. Across the Atlantic, equities paused for a short breather following the FOMC minutes, but soon resumed their upward march. The Stoxx600 (+1.8%) posted a solid gain, led by a 4% jump in banking stocks and a strong performance in Italy (+3.2%) and Spain (+3.4%), despite disappointing industrial production data in both countries. Given the increased talk of QE tapering, it was unsurprising to see gold (-1.7%) and US treasuries (10yr yields +5bp) weaker. A report that Cyprus will be forced to sell most of its gold reserves to raise around EUR400m to finance its portion of its bailout did not help sentiment in the precious metal.
According to Reuters, this will be the first major gold disposal by a euro area central bank since France sold 17.4 tonnes in the first half of 2009. Since October, the precious metal has lost 13%.
In terms of the FOMC minutes themselves, the key message appeared to be that Committee members are inching closer to deciding when to slow asset purchases, but that timing remained contingent on continued improvement in the data. The following line from the minutes probably summed it up: “Many participants…..expressed the view that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings, while a few participants suggested that economic conditions would likely justify continuing the program at its current pace at least until late in the year”. Our US economics team concludes that while the majority of policymakers favored a taper in H2, they are not agreed on the necessary preconditions. They may try to reach a consensus at the April/May meeting. But the recent soft patch in the March economic data may cast greater doubt and ease the pressure for action.
In Asia overnight, the market has been surprised by the BoK’s decision to hold the seven day repo-rate unchanged at 2.75% despite the apparent political pressure to loosen policy as geopolitical concerns undermine confidence. The USDKRW (-0.5%) moved several points lower and the KOSPI weakened 0.2% following the BoK’s announcement. In Japan, the Nikkei (+0.3%) doesn’t seem to have been affected by governor Kuroda’s comments yesterday that the BoJ had taken all “necessary” and “possible” measures for now to achieve its 2% inflation goal. Elsewhere, the Hang Seng (+0.9%) is seeing solid gains, driven by financials, after China released monetary and credit data overnight which beat expectations by a fair margin. M2 money supply of 15.7% year-on-year beat estimates of 14.6%, while new loans of RMB1.06trn were comfortably ahead of consensus of RMB860bn. The Australian dollar is 0.3% weaker against the greenback following a disappointing employment print which saw unemployment edge up to 5.6% (vs 5.4% previously).
In terms of other headlines, a few interesting news stories have caught our eye. Starting with Greece, the Bank of Greece Governor George Provopoulos said that the country saw deposit inflows of more than EUR1.5bn in March despite fears the Cypriot banking crisis would cause outflows. Provopoulos said the Greek banking sector averted contagion from the Cypriot crisis by getting Greek lender Piraeus to buy Cypriot bank branches operating in Greece before they reopened after the extended bank holiday.
In Italy, Reuters noted the seemingly increasing signs of division within the centre-left party after weeks of stalled efforts by Democratic Party leader Bersani to form a government. Matteo Renzi, who challenged Bersani unsuccessfully in a party primary last year, called on the centre-left to either drop objections to dealing with Berlusconi’s centre-right bloc or accept the need for new elections. Renzi appears to be boosted by opinion polls which which suggest the Democratic Party could win 32.5%with him at its head compared with 28.2% under Bersani. The impasse doesn’t appear to have affected Italian funding costs thus far, with bond yields still well below those seen after the election in late February.
Also worth mentioning as we begin Q1 reporting season, Taiwan’s Hon Hai, the world’s largest contract manufacturer of electronics, posted its biggest revenue decline in at least 13 years yesterday. First quarter revenues fell 19% year-on-year, missing expectations by 9%, with some analysts saying that the results do not bode well for the sale of iPhones, iPads and other personal electronic devices. Maybe something worth keeping an eye on for the reporting season.
In the US, President Obama released his 2014 budget plans yesterday that will see a $744 billion budget deficit next year, $3.77 trillion in total spending and would add $8.2 trillion to the federal debt over 10 years. It would also eliminate sequester-related spending cuts and raise more than $1 trillion in new taxes.
The budget includes changes in spending on programs such as Social Security by $130 billion over 10 years by using a different inflation measure for calculating annual cost-of-living increases, and making $370 billion in changes to Medicare through cuts to providers. A number of Republican leaders were quick to dismiss the plan though.
Turning to the day ahead, US weekly jobless claims will gather a lot of attention in light of the past weeks’ pattern of rising claims and with last week’s payrolls disappointment. For the record, the market is looking for a print of +360k, down from last week’s five-month-high of +385k. It will be an otherwise quiet day for data.