Markets On Edge Following No Dead Japanese Cat Bounce, Eyeing ECB And Payrolls

Tyler Durden's picture

Another day, another sell off in Japan. The Nikkei index closed down 0.9%, just off its lows and less than 1% away from officially entering a bear market, but not before another vomit-inducing volatile session, which saw the high to low swing at nearly 400 points. Hopes that a USDJPY short-covering squeeze would push the Nikkei, and thus the S&P futures higher did not materialize. And while the weakness in Japan is well-known and tracked by all, what may come as a surprise is that the Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Elsewhere in macro land, the Aussie Dollar continues to get pounded on China derivative weakness, tumbling to multi-year lows of just above 94 as Druckenmiller, who called the AUDUSD short nearly a month ago at parity shows he still has it.

There was little news out of Europe except for another disappointing factory order print this time out of Germany (April -2.3%, Exp. -1.0%, March +2.3%), although the continent is focused squarely on the ECB meeting today, when nothing much is expected to happen. The US will be pretending to care about Initial claims as the last economic data point before tomorrow's NFP report, although trading will be be defined largely by Mrs Watanabe whose every Nikkei move translates into the S&P500.

Previewing Mario's monthly presentation, SocGen says that the ECB meeting today must not be downplayed given its relevance for policy signals and future intentions as the economic landscape in the eurozone changes; however, we suspect the bar for another move today is quite a bit higher following the May rate cut. With no visibility yet on the July updated inflation and growth forecasts, it is the ongoing state of flux in FX, bonds and stocks driven by developments across the pond and in Asia, not across the Channel, that will determine where we end up today. The signs are not good as risk assets continue to fret over a Fed exit, and the Nikkei has just lost another 0.9%. The BoJ's ‘super easing' effort is starting to backfire as the Nikkei sits only a handful of points above the 3 April close before the central bank announced its ambitious QQM programme.

"We do not wish to detract from the ECB's active discussion on the level of interest rates or negative deposit rates, but we were told by central bank sources this week that there is no agreement on further stimulus or narrowing of the rate corridor. Instead, we are looking for Draghi to elaborate a bit more during the Q&A on plans to revive credit growth, or the intention not to put the ECB balance at the heart of an effort to revive lending growth and narrow the borrowing gulf between the North and South. Overcoming German resistance to fresh stimulus has been the least of the ECB's worries as we have found but with the election a mere three months away, the cards may soon be stacked differently than six months ago."

As to the palpable shift in the global mood in recent days, here are Jim Reid's (Deutsche) summary thoughts:

The prevailing mood in markets has definitely changed since Bernanke's congressional Q&A session on May 22nd. This was where the question around the potential for tapering by "Labor Day" was not dismissed. Prior to this point the ever increasing wedge between the technicals and fundamentals was being aided by a benign view on the Fed's 2013's actions. So for us the last two weeks are a reminder of just how important liquidity is to the health of markets around the globe. Yes markets can continue to go up but the odds of this lowers dramatically if central bankers start trying to withdraw support. My personal view is that the Fed is somewhat trapped into keeping high levels of QE going for longer than most expect and although they may indeed want to take more of a step back the risks are high if they do due to 1) the whole spectrum of global assets that will be impacted (as an example look at EM of late), and 2) the fact that other countries will likely continue to be regularly pumping on the liquidity gas. The Fed is not operating in a vacuum.


If I'm correct then the liquidity story isn't likely to go away but it now feels like we've moved into a new phase where the perception of unconditional  liquidity has been replaced by the belief that we might only be a few good data points away from the Fed taking a step back. It’s going to be tough to put the tapering genie back totally in the bottle for a while now. This probably calls for more volatility over the summer and data sensitivity being high. Indeed tomorrow's payrolls number kicks off a summer of high impact data. Before this, today brings what should be an interesting ECB meeting which will tell us a bit more about how dovish the ECB might be over the next few months.


For the record, DB’s Wall and Moec do not expect any policy announcements from the ECB today, but they expect the tone to remain dovish with the likelihood that they will keep their options open. They continue to expect another 25bp refi rate cut in either July or August. Nevertheless, Wall and Moec believe that negative deposit rates may be a closer call than the market thinks given that the debate has moved on from one focused on “the unintended consequences” to the ECB seeking to better understand the costs and benefits. So this discussion on negative deposit rates will probably be the most important thing to listen out for today.

Some more overnight highlights in bulletin format via Bloomberg:

  • Treasuries gain before BoE and ECB rate decisions, Draghi press coference, with USD/JPY holding below 100 and EUR/USD retreating from session highs after German factory orders miss forecasts.
  • ECB will probably keep rates on hold today as economic data haven’t been bad enough to trigger fresh action; likely discussion of possible deposit rate cut may benefit short-end rates, economists and strategists say
  • German factory orders fell 2.3% in April vs expectations for 1% drop
  • BoJ divided over whether to authorize a measure designed to quell bond-market volatility, with some officials concerned it would return the BOJ to a pattern of incremental steps that failed in the past, according to people familiar with the discussions
  • The EU is considering whether to hand oversight of scandal-ridden Libor to the European Securities and Markets Authority
  • Levels of investor concern in equities, commodities, bonds and currencies as measured by Bank of America Corp.’s Market Risk index of cross-asset volatility are below readings from about 75% of days since 2000, according to data compiled by Bloomberg
  • Supporters of Turkey’s government attacked a group of protesters in Prime Minister Erdogan’s hometown of Rize on  the Black Sea, and in Ankara clashes between demonstrators and police extended into the night
  • Sovereign yields mostly lower. Nikkei -0.85%, leading Asia equity markets lower; Shanghai Composite fell for sixth day, longest losing streak this year.  European stock markets, U.S. equity index futures gain. WTI crude gains, copper and gold fall

Recapping the rest of the overnight action with DB:

Back to markets yesterday was a very poor day for risk assets. The S&P 500 (- 1.38%) fell to a one-month low whilst the Dow (-1.43%) closed below 15,000 for the first time in a month. We continue to get somewhat mixed signals about the US recovery which perhaps added more uncertainty to all the Fed taper chat. Indeed the latest ADP employment headline disappointed on the downside (135k v 165k) but the Fed’s Beige Book sounded a little bit more positive on the manufacturing and the retail sectors. The ISM non-manufacturing (53.7 v 53.5) came in broadly in line with consensus but we do note that the employment component fell to the lowest level since July 2012. On the back of this and a riskoff mode in equities we saw the 10yr UST rally 6bp on the day to 2.089%. The 10yr is now about 14bp off the recent highs. The rates story was quite different in EM though which continues to come under selling pressure. The 10yr USD yields of Mexico and Venezuela rose 31bp and 45bp respectively.

Moving on to the overnight session the risk sell-off is extending into Asian trading with equities lower across the region. The Nikkei (-1.0%) is down for  he second straight day and is trading below the 13,000 mark for the first time in about 2 months. The index has fallen about 17% from its recent peak and all eyes continue to see if we break into bear market territory on Japan anytime soon. Elsewhere in Asia, the Hang Seng and Shanghai Composite are down -1.1% and -0.6% respectively. Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Similarly Asian credit continues to come pressure with the Asia iTraxx 6bp wider on the day as the technical picture on EM hard currency debt flows continue to worsen. In Asian FX, the Indian Rupee is now at a one year low against the Dollar while the JPY continues to strengthen and has now appreciated about 4% against the Greenback from its recent lows.

In other headlines, the FT is reporting that a number of quant hedge funds have been hit by the recent selloff in US bond yields during the month of May. Shares in Man Group closed 17% lower yesterday after it was reported that one of its flagship funds lost more than 10% of its NAV in the last two weeks (FT). Returning to Europe, the ESM is likely to set a cap on the amount of funds it can use for direct bank recap at between EUR50-70bn, a relatively small percentage of its EUR500bn lending capacity, according to a Reuters article. The cap is designed to “preserve the ESM’s high creditworthiness and its lending capacity for other instruments”. We’ll likely get further details on this when the Eurogroup meets later this month.

In terms of today, German factory orders and US jobless claims are the main data highlights. All eyes will be on the ECB and Draghi though. The ECB’s policy announcement is expected at 12.45pm today London time with Draghi’s press conference to be followed 45 minutes later. The Bank of England’s policy statement is also due at noon but the market is expecting no changes in Governor King’s final rate meeting. Elsewhere we will hear from Philly Fed’s Plosser (a nonvoter) later today but the key event for markets will likely be the payrolls report tomorrow.

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maxmad's picture

Ah yes.... Black Friday coming... Again!!

GetZeeGold's picture



.....and yet it's only Thursday. It's all about pacing yourself.

Bearwagon's picture

Right! Having paced myself from participating in any market for more than fifteen years, I can assure you that it's saturday over here, everyday. ;-)

Urban Redneck's picture

Shit- I thought today was Wednesday...

Monedas's picture

It's Brown Thursday .... market sitting on the edge .... thinking about taking .... a dead cow dump !

maxmad's picture

Fukishima just accelerated things.... FU Abe!

Hannibal's picture

Hezbollah don't take no mess

"The "Friends of Syria" are appalled. Their much vaunted "rebel held" stronghold of Qusayr is gone. This BBC headline sums it all up: "Syria conflict: US condemns siege of Qusayr."

For White House spokesman Jay Carney, "pro-government forces", to win, needed help from by their "partners in tyranny" - Hezbollah and Iran. Right: so the "rebels" weaponized by Saudi Arabia, Qatar and the CIA, not to mention jihadis of the Jabhat al-Nusra kind, are partners in what, "freedom and democracy"?

Spin out, facts in. This is a monster strategic defeat for the NATO-Gulf Cooperation Council-Israel axis. [1] The supply lines from Lebanon to Homs of the Not Exactly Free Syrian Army (FSA) gangs and the odd jihadi are gone."


Monedas's picture

Muslims doing open heart surgery in the street .... how do we spin this .... in Israel's flavor ?  The "Arab Spring" is a "Fall Scirocco Windfall Profit" .... for my little Jooish cousins .... just pick up all the dead Muslim bodies .... and turn 'em into soap !

Sudden Debt's picture

the rumors about a Euro devaluation are beginning to sound pretty loud these last few weeks.

Talk is about a 13% devaluation.

I wonder when that will hit frontpage.


Bearwagon's picture

Possibly anytime past the 21. ....

El Hosel's picture

    Makes sense maybe explains why US markets and dollar going down at the same time lately. Just when it looks like US is winning the global currency debase... a 13% bitch slap devaluation from across the pond? WOW, the Horror.

How much money would Bernanke have to print to compete with a -13% Euro fix?

achmachat's picture

would you like to elaborate? Inquiring minds want to know.

SmallerGovNow2's picture

Exactly, what i see as of late is the euro is up and dollar falling...

Urban Redneck's picture

Which means the SNB has to print how much?  If they took physical delivery of all the worthless fiat already on their balance sheet, they'd have cut down the Black Forest, with open Euro devaluation and they'd have cut down the Amazon.

Monedas's picture

Taper QE so economy doesn't slam shut !  

El Hosel's picture

A cherry might look nice on the tip of that taper.

colin's picture

dead cats dont bounce with u stuff them with QE

fonzannoon's picture

and look at crude just continue to laugh at everyone. 

Bearwagon's picture

Now, that you mention it: I still haven't found the deflation, but will keep searching. ;-)

El Hosel's picture

Crude no doing so well considering the dollar has been down pretty hard the last as several days. Watch out for the federal inflation fighters.

rsnoble's picture

Boy these markets have one excuse after another.  During the rip upwards when they all knew QE was gona keep coming the headlines were "The EU doesn't matter, nothing does. Only US stock prices matter". LMAO what a fucking joke.  What has changed in the last few years?  Everything still sucks ass and is getting worse in some cases therefore the markets should keep going up. LMAO. 

Gigantor's picture

This is fantastic.

Futures are up because the ECB is looking like it won't raise benchmark rates? 

Everything is still the same, i.e. BAD, so stocks look to go higher. 


Also, what the hell would a rate cut do for a recessionary European-bloc economy? Answer:  Nothing but give banks access to further cheap money.


It's all right there for all to see. 


P.T. Barnum was a smart man.



chubbyjjfong's picture

Looks like EUR/USD dropping.  All the voodoo money was on a pop and fade.. Its just a poop and fart instead