The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.
In other news, courtesy of the cash debt bubble which has now surpassed 2007 levels (if not so much in synthetic and securitized products yet, but their time will come), Portugal had no problem selling €3 billion in 10 Year Benchmark February 2024 notes for which it had about €4 billion in orders, which priced at midswaps +400, yielding around 5.66%. All of this, of course, on the back of the global carry trade where the short end originates in various "stable" credit bubble nations such as Japan (which has to buy the EUR to get involved, thus offsetting Draghi's plans).
All of this followed yet another easing move by a major bank, this time the RBA, which in an unsurprising move cut the Australian benchmark rate to a new record low of 2.75% to "counter slowing down in the country's mining sector." from BBC:
Australia's central bank cut interest rates to a record low on Tuesday and signalled there was room to ease yet further, highlighting the relentless pressure a stubbornly high currency is putting on the resource-dependent economy.
Indeed, the local dollar gave ground only grudgingly after the Reserve Bank of Australia (RBA) surprised some by easing a quarter point to 2.75 percent, taking rates even below the nadir touched in the global financial crisis.
With the currency still not far from 28-year peaks when measured against a basket of its counterparts, analysts suspected the new normal might be lower rates for longer.
"The RBA appears to have simply grown weary of a high Aussie, while becoming more comfortable about the high pace of domestic inflation," said Scott Haslem, chief economist at UBS.
"This suggests even with our outlook for better growth, the cash rate in Australia is likely to remain low for longer than has been normally the case."
Even after Tuesday's easing, Australian rates remain among the highest in the developed world. The European Central Bank cut its main rate to 0.5 percent last week, while the Federal Reserve and Bank of Japan are effectively at zero.
As those major central banks pursue ever more radical easing policies, it puts downward pressure on their currencies while helping keep the Australian dollar painfully high.
That could be one reason RBA Governor Glenn Stevens implicitly left the door open to further easing when announcing the policy decision on Tuesday.
"The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand," " RBA Governor Glenn Stevens said. "At today's meeting the Board decided to use some of that scope."
Stevens noted inflation had been lower than expected recently and well in line with the RBA's long term target of 2 to 3 percent. The latest reading of underlying inflation put it at 2.4 percent in the year to March.
Finally, in order to "explain" the most recent overnight weakness in gold, the China gold association says China Q1 gold consumption 320.54 tons, which was up 25.6% from the same period last year. So why does gold continue to sell, and why are GLD holdings down to multi year lows? Bloomberg has the answer: Paulson gold fund lost 27% last month after the precious metal and
related securities plummeted, according to two people familiar with the
matter. Can anyone spell ongoing forced liquidations?
The Bloomberg bulletin blast has all the pithy event soundbites:
- Treasuries lower, tracking bunds; 10Y yield above 200-DMA; Treasury sells $32b in 3yr notes today in first of 3 refunding auctions; WI yield at 0.345%
- The Reserve Bank of Australia cut its benchmark interest rate by 25bps to 2.75%, a record low, driving down a currency that has damaged manufacturing and boosted unemployment; says AUD record strength “is unusual given the decline in export prices and interest rates”
- German March manufacturing orders +2.2% from Feb., prior +2.2%; est. -0.5%
- HSBC Holdings Plc, Europe’s largest bank, said 1Q profit almost doubled, beating analyst estimates, as bad debts declined and it cut costs; French banks Societe Generale SA and Credit Agricole SA reported 1Q results that beat estimates
- E.U. Commissioner Rehn says it’s too early to say whether Slovenia requires a bailout, E.U. may consider extending target deadline; Slovenian Prime Minister Bratusek says his government is considering tax increases as part of fiscal consolidation plan
- Greek yields below 10% signal increasing confidence that the country is stemming the financial turmoil that triggered the euro area’s debt crisis
- Goldman Sachs Group Inc., Citigroup Inc. and 10 other banks have restrained market competition for credit default swaps in violation of U.S. antitrust law, a union pension plan claimed in a federal court complaint
- U.S. regulators face renewed pressure from congressional lawmakers to ease Dodd-Frank Act derivatives requirements amid mounting criticism from Wall Street and overseas officials that the rules overreach
- China is tightening approvals of bond sales by local government finance vehicles with higher levels of debt, three people with knowledge of the matter said
- Paulson gold fund lost 27% last month after the precious metal and related securities plummeted, according to two people familiar with the matter
- BofAML Corporate Master Index OAS narrows to 144bps from 147bps, tying YTD tights last seen March 14; $2.575b priced Monday. Markit IG is unchanged at 71bps YTD low. High Yield Master II OAS widens to 430bps from 433bps as $1.45b priced
- Monday. CDX High Yield closed at 107.27, +0.04.
- Sovereign yields higher, led by the U.K. and Australia.
- Asian stocks rise, European shares advanced to highest level in almost five years as earnings beat estimates. U.S. stock-index futures gain; WTI crude falls for first time in four days; gold declines, copper gains
* * *
For more key macro events and outlook we go to SocGen
Financial markets are likely to come back to life today, with the return of UK investors after the bank holiday weekend.
Economic news flow is unlikely to be inspiring, however: weak numbers have already been reported for French industrial production, with manufacturing output sliding 1.0% mom (-4.9% yoy ). New orders data from German industrials are also due and a soft set of numbers would keep downside pressure on the EUR and raise question of the scale of the recent move in 10y swaps. Bleak industry data would of course reinforce the pessimistic view of the economy set out by Mario Draghi last week and repeated in Rome yesterday where he stated that the ECB stands ready to act if needed.
As illustrated by a steepening of the euro yield last week, any gyration on the swap curve leads to curve steepening: yields in the long end can back up in the event of an improvement in risk sentiment, whereas short and medium-term maturities remain weighted down by economic prospects that are still showing no signs of improvement. The reversal lower in BTP and Bono yields brings some respite after the corrective push higher but Spanish 2016, 208 and 2026 supply on Thursday will be a consideration for investors and could keep 10y spreads over bunds struggling to tighten below 285bp.
Regarding EUR/USD, its resistance to selling never ceases to impress considering the negative news flow on the euro which the parity is shaking off with remarkable ease. Overnight follow through on Draghi's comments did not quite materialize and it is the decline in AUD/JPY on the RBA rate cut decision that is leading EUR/JPY lower. Yet, it is true that the dollar's effective exchange rate recovered somewhat since the release of the US employment report last Friday, even though EUR short positions have been trimmed back over the last week. We continue to believe that downward pressure on the euro will eventually gain the upper hand especially if incoming US data confirm the more positive message from the labour market for April and indicate the Q2 slowdown is temporary. US supply is also a factor this week and a solid 3y note sale today could support USD sentiment.
* * *
The full overnight recap from DB's Jim Reid
News that Bank of America had reached a $1.7bn agreement to settle a longstanding MBS dispute with MBIA gave the US Financial sector a boost. Share prices of BofA and MBIA rose +5.2% and +45.4%, respectively. The market also saw this as a big credit positive for the bond insurer which saw MBIA Insurance Corp’s 5-year CDS rally 30 upfront points tighter on the day. BofA’s 5-year CDS finished the day 7bp tighter.
It was a softer but quiet session in Europe. The Stoxx600 (-0.48%) closed modestly lower, not supported by declines in Italian (-0.35%) and Spanish (-0.48%) bourses. The final Eurozone PMI services data for April was revised up marginally (47.0 from 46.6) but still firmly below 50. The main headline yesterday came from ECB’s Draghi as he said “We will be looking at all data that arrives from the euroarea economy in the coming weeks and if necessary, we are ready to act again.” This is perhaps not a major surprise but clearly upcoming data performance still holds the key.
Moving on to the Asia, we have a mixed session overnight but Chinese (+0.1%) and Hong Kong (+0.1%) equities are turning positive after a weaker start to the day.
The Nikkei (+2.8%) continues to march higher despite a stronger JPY overnight. Malaysia’s main equity index is up half a percent overnight after a strong +3.4% gain yesterday. The weekend election outcome in Malaysia, which saw the ruling Barisan Nasional coalition retain power, was seen as a positive catalyst for markets. Likewise, Malaysia’s 5-year CDS is about 14bp off its recent highs after having outperformed regional peers yesterday. Focus in Asian credit remains firmly on new issues although technicals still remain supportive.
Elsewhere the latest Fed Loan Officer Survey was another notable release yesterday. The report noted that domestic banks, on balance, have eased their lending standards and having experienced stronger demand in several loan categories over the past three months.
In terms of today the RBA’s rate decision can be expected shortly. Whilst the market is generally expecting the central bank to keep its key rate unchanged at 3.0%, DB’s Adam Boyton is expecting a 25bps cut. Elsewhere today also sees the release of French IP and trade balance as well as factory orders from Germany. In the US, the IBD/TIPP Economic Optimism, JOLTS Jobs Opening and Consumer Credit are the main releases today. We also have a $32bn 3-year UST auction today. Data aside, President Obama will host South Korea’s President Park in the White House today. It would be Park’s inaugural visit to the White House and North Korea’s nuclear security issue will likely be high on the agenda.
Looking at the rest of the week, we can expect the usual post payrolls data lull in the US. The focus will be on a series of Fed speaks which begins tomorrow and ends with Bernanke’s keynote address on Friday. Initial jobless claims will also be a key data point this week given the current focus on labour market conditions. Today’s 3-year UST auction will be followed by a $24bn 10-year auction tomorrow and a $16bn 30-year sale on Thursday. In Europe, various industrial production releases will be the main focus this week. German, Spanish and Italian IPs are due on Wednesday, Thursday and Friday, respectively. We also have trade data from Germany on Friday. In the UK, the Bank of England’s rate decision will be a highlight and the central bank is expected to keep its interest rate and QE program unchanged. We also have UK IP data on Thursday and trade data on Friday.