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(Ir)Rational Overnight Exuberance On Summers Withdrawal Sends Futures To All Time Highs

Tyler Durden's picture





 

While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks."

And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?

So with those largely irrelevant factual news out of the way, we go back to the only story largely meaningless story that matters: the market's reaction to who may or may not be the new printer supervisor and do Wall Street's bidding.

Market Re-Cap from RanSquawk

Stock and credit markets gained ground overnight in Asia and Europe this morning as market participants reacted to press reports that Lawrence Summers called US President Obama and withdrew his name for the Fed chairman job. Given that this will now likely spur speculation that the more dovish Yellen will end up succeeding Bernanke resulted in an aggressive short squeeze which in turn saw USTs gain over 1 point and Bunds to open up over 50 ticks relative to Friday’s closing level. While basic materials led the move higher, oil & gas related stocks underperformed amid lower energy prices which were not only weighed down by reports of an agreement between the US and Russia over Syria handing over its chemical weapons, but also after French President's office reported that Britain and the US agreed to press for strong UN resolution on Syria with detailed and binding dates.

In terms of EU related commentary, ahead of next week’s general election German Chancellor Merkel and her allies have scored a resounding win in the German state of Bavaria, securing an absolute majority of 101 of 180 parliamentary seats in Bavarian state elections. Elsewhere, economists at Deutsche Bank revised up Eurozone GDP growth from -0.7 to -0.4 (2013E) and from 0.8% to 1.1% (2014E) given the broad-based improvement in leading indicators, pointing to a sustainable recovery. Going forward, market participants will get to digest the release of the latest Empire Manufacturing report, as well as Industrial and Manufacturing production reports for the month of August.

Overnight news bulletin from Ran and Bloomberg:

  • Treasuries surge, led by 5Y and 7Y notes,  10Y yield approaches month’s low as Lawrence Summers withdraws candidacy to replace Bernanke after liberal and moderate Democrats began signaling concerns to White House.
  • Summers exit is “huge” for risk-on trades, Pimco’s Bill Gross tweeted yesterday
  • Former Treasury Secretary Geithner remains firm that he will not be considered for Fed chairmanship, WSJ reported in post on Twitter feed
  • WTI and Brent crude prices under pressure following reports that France, Britain and US agree to press for strong UN resolution on Syria with detailed and binding dates, according to French President's office
  • According to television exit polls, German Chancellor Merkel and her allies have scored a resounding win in the German state of Bavaria, ahead of next week’s general election
  • Fed meeting begins tomorrow with decision, updated eco projections and Bernanke press conference Wednesday; many expect $10b-$15b tapering of asset purchases
  • Republicans accused the Obama administration of ceding its leverage in Syria by backing off a threat of military action; House Intelligence Committee Chairman Mike Rogers said the U.S.-Russia deal will offer openings for American enemies in the region to increase their influence
  • EU lawyers gave the U.K. victories in fights over financial regulation that will boost the country’s standing in a power struggle over the future of banks and securities trading in the 28-nation bloc
  • EU attempts to centralize control of failing banks stumbled under a German-led attack that may imperil efforts to restore confidence in the euro zone’s financial system
  • Sovereign yields slide. EU peripheral spreads widen. Asian and European stocks, U.S.  equity-index futures gain. WTI crude and gold fall, copper gains

Asian Headlines

Japanese markets were closed due to Respect for the Aged Day.

PBOC governor Zhou said China's economic situation is stable and that China is to encourage financial innovation. Zhou added that China is to improve financial controls, deepen financial reform, promote deposit insurance and is to support setting up of banks.

EU & UK Headlines

According to television exit polls, German Chancellor Merkel and her allies have scored a resounding win in the German state of Bavaria, ahead of next week’s general election.

ECB’s Praet said as long as inflation expectations are well anchored, the ECB has room to maneuver and there was a discussion of a rate cut at the last meeting. If tensions are increasing, we can always change the gap between our different interest rates. Praet added that the ECB has leeway to deal with Fed withdrawal.

Economists at Deutsche Bank revised up Eurozone GDP growth from -0.7 to -0.4 (2013E) and from 0.8% to 1.1% (2014E) given the broad-based improvement in leading indicators, pointing to a sustainable recovery.

S&P’s chief sovereign ratings officer Kraemer said France has yet to demonstrate it can consolidate spending, after the country revised its public deficit forecasts last week.

US Headlines

Lawrence Summers called US President Obama on Sunday and withdrew his name for the Fed chairman job, citing a possible acrimonious confirmation process. Summers had been seen as one of the front-runners for the position, and had been seen by many as leaning against extended quantitative easing.

PIMCO's Bill Gross said Summers's exit makes Monday huge for risk on trade and that stocks should do very well. Gross added that Monday is also a huge day for yield curve trades.

Equities

Stock and credit markets gained ground overnight in Asia and Europe this morning as market participants reacted to press reports that Lawrence Summers called US President Obama and withdrew his name for the Fed chairman job. While basic materials led the move higher, oil & gas related stocks underperformed amid lower energy prices which were not only weighed down by reports of an agreement between the US and Russia over Syria handing over its chemical weapons, but also after French President's office reported that Britain and the US agreed to press for strong UN resolution on Syria with detailed and binding dates.

FX

EUR/USD and GBP/USD advanced overnight, with GBP/USD touching on highest level since mid-January, amid prospects of a more dovish candidate (Yellen) potentially taking over the helm at the Fed. At the same time, interest rate differential flows (USTs bid) had an adverse impact on USD/JPY, which not only fell below the 100DMA, but also the 50DMA line in the process as market participants were forced to square longs.

Even though the rally by gold and silver was short lived following reports that Summers called US President Obama on Sunday and withdrew his name for the Fed chairman job, the bid tone by commodity related currencies remained intact.

In turn, AUD/USD advanced to its highest level since late June and briefly traded above the technically important 100DMA line at 0.9377.

Commodities

UBS said Summers's withdrawal is short-term positive for Gold and that Fed chairman wont change longterm view on gold.

- Hedge funds and money managers slashed bullish bets in futures and options of the U.S. gold markets for the first time in 5 weeks. Net longs in gold were cut by 16,466 lots, or 16%, to 84,929, its biggest weekly percentage loss since early August.

Speculators also trimmed bullish bets in the silver and copper futures and options markets, according to the CFTC.

US and Russia reach Syria weapons agreement. The US and Russia have managed to come to an agreement regarding Syrian President Bashar al-Assad to hand over chemical weapon stockpiles to the international community with a deadline of mid-2014 for their removal or destruction. (FT-More)

- On the topic, Assad has said that agreeing to give up chemical weapons is a great victory for his country and Russia.

“Syria as a state genuinely seeks to avert another war of lunacy on itself and countries in the region, contrary to the efforts of warmongers in the US who seek to inflame a regional war,”.

- However the White House has insisted that US military strikes remained an option despite its deal with Russia to secure chemical weapon stockpiles through a United Nations resolution. CME has lowered Henry Hub natural gas index future initial margins for specs by 20.7% to USD 633.00 per contract from USD 798.00 .

* * *

DB's Jim Reid recaps the full weekend narrative:

Well a highly anticipated week has started with a bang as late last night Summers pulled out of the race to be the next Fed Governor after what was becoming an increasingly difficult political battle for him to win. In a week where the FOMC will likely start to taper QE (more below), the market will at the margin see his withdrawal as one which prolongs unorthodox policy for longer - partly because it moves the more dovish Yellen up the favourites list for the new job.

The market reaction has been unsurprisingly positive. On the equities side, S&P500 futures jumped as high as 1711 (+22pts) early in the Asian trading session but has since settled back at around 1707 (or +1.1%). The Hang Seng is (+1.1%) is up by a similar amount. The USD index is 0.5% lower this morning driven by moves in the AUDUSD (+1%), EURUSD (+0.5%) USDJPY (-0.5%). On the fixed income side, UST trading is closed in Japan today due to holidays, but treasury futures have traded up around 30 ticks (+0.8%). Given their underperformance in August, the EM space is probably where we will see outsized moves today. Indeed, the Asia ex-Japan IG index is quoted 10bp tighter this morning. Asian EM sovereign 5yr CDS is also quoted tighter across the board led by Indonesia, Thailand and Malaysia which are all 9-10bp lower. Indonesian USD bonds are 15bp better at the open while the IDR bonds are more than 25bp firmer this morning. EM currencies such as the ZAR and MXN are both trading stronger against the USD.

So with Summers withdrawing from the Fed race, the two other top contenders mentioned by President Barack Obama for the Fed job are Janet Yellen and Donald Kohn, the Fed's current vice and previous Fed vice chairpersons respectively. A number of media reports suggest that it’s still possible that Obama could turn to other “dark horse” candidates such as former Treasury Secretary Timothy Geithner or former Fed Vice Chairman Roger Ferguson. Geithner though was quoted this morning reaffirming his disinterest in leading the Fed (WSJ).

The Summers news has kicked off a hotly anticipated week. The unequivocal highlight is the two-day FOMC concluding on Wednesday. DB’s economists expect that the Fed will trim its mortgage purchases by $5 billion and its Treasury purchases by $10 billion, thereby reducing monthly buying to $35 billion apiece for a total of $70 billion. This seems broadly in line with market expectations. Indeed, a Reuters poll showed the consensus call is for asset purchases to be cut by $10 billion, which is less than earlier estimates after a disappointing August payrolls and last Friday’s weaker-than-expected retail sales (0.2% vs 0.5% expected) and consumer confidence survey (76.8 vs 82.0).

Outside of the taper debate, we will also be looking out for Bernanke’s postmeeting comments particularly with respect to the Fed forward guidance given that the Fed will also be providing updated economic forecasts extending through to 2016.

Outside of the Fed, there have been other market-positive stories over the weekend. The first of these was that the Syrian government will commit to a US-Russian agreement to eradicate its chemical weapons by the middle of 2014. The agreement, which was cautiously welcomed by the Obama administration, probably lessens the threat of a US military strike in Syria in the near term. However, the agreement does require the Assad government to provide a “comprehensive listing” of weapons within a week and if not complied with, Secretary of State John Kerry warned that “there’s no diminution of options” available to the United States. Nonetheless, the diplomatic breakthrough has seen crude oil trade 0.8% weaker this morning and is probably contributing the broad risk-on overnight.

The other story of note is in Germany where Angela Merkel’s allies secured an absolute majority of 101 of 180 parliamentary seats in Bavarian state elections yesterday. The strong showing for the conservatives bodes well for Merkel heading into this weekend’s federal elections and provides some hope for investors that are looking for political continuity. However, the junior member of Merkel’s coalition, the pro-business Free Democrats won only 3% of the vote in Bavaria, leaving them short of the 5% threshold needed to enter parliament, which could have a bearing if repeated in this week’s national vote.

Looking out over the rest of the week ahead, we have a full data docket in the US which will be give us a number of timely updates on the state of US housing and manufacturing. The data flow starts with today’s industrial production and Empire Fed manufacturing reports. This will be followed by Tuesday’s CPI and NAHB homebuilders index, Wednesday’s housing starts and permits and Thursday’s existing home sales and Philly Fed. In Europe, politics remains the focus in the last week of campaigning before German federal elections on Sunday 22nd. The important data releases are August's inflation and July's trade reports over the next two days. Germany’s ZEW survey is out on Tuesday and flash consumer confidence readings are released on Friday. In terms of the central banks, Draghi will be speaking at a SME conference in Berlin this morning and the Bank of England’s meeting minutes will be released on Wednesday.

A quieter week is in store for Asia. Tokyo is closed today while Chinese markets are closed on Thursday and Friday due to the mid-Autumn festival (the Hong Kong Stock Exchange is shut on Friday only). In terms of data, Japan’s August trade data will be published on Thursday.

 


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