There was some hilarious news overnight: such that supposedly Spain's GDP rose 0.1% in Q3 thus ending a 2+ year recession. There is no point to even comment on this "recovery" - we will merely remind that starving your economy of imports for the sake of generating a GDP-boosting trade surplus, while consumption declines, solves nothing and point readers to charts of Spanish non-performing loans, housing prices, and unemployment, oh and the massive Bad Bank of course, and leave it at that. In terms of real news, futures are lower following a drubbing in Asia over the previously discussed concerns over tighter Chinese monetary policy. Amusingly, as Reuters notes, this has hit global shares still high on hopes of extended U.S. stimulus on Wednesday, when the dollar tentatively steadied at an eight-month low after its latest slide. The immediate casualty is the USDJPY, which continues to slide and is approaching the 200SMA. In short: fears that China may have resumed tapering have offset yesterday's hope that "horrible" job numbers mean no Fed tapering until mid-2014.... New Normal fundamentals.
More from Reuters: European shares saw their biggest falls in two weeks as markets opened when fears of tighter policy in China were amplified by reports that some of its big banks were tripling write-offs on bad loans. Asian markets saw widespread weakness as a variety of factors ranging from a strengthening yen in Japan and fading rate cut hopes in Australia added to the negativity. "What has happened this morning is that we have the Chinese rate surge on the policy tightening fears," said Alvin Tan, a strategist at Societe Generale in London. "That has basically generated a broad correction in risk assets and in Europe that is continuing." Short-term Chinese money rates underscored investors' concerns that regulators there are poised to tighten liquidity to quell growing inflationary pressures.
The benchmark seven-day repo contract, which had been steadily sliding since October 9, spiked in the morning session, a day after a policy adviser to the People's Bank of China (PBOC) told Reuters it was weighing tightening measures. In Europe, A string of earning misses from some of the region's biggest corporate names including chip maker STMicroelectronics (STM.PA) and brewer Heineken (HEIN.AS) added to the pressure on shares.
Market Re-Cap from RanSquawk
Touted profit taking following yesterday’s gains, together with reports of problems in China’s banking system which in turn resulted in the 1 week SHIBOR rising to a three-week high overnight meant that safe haven assets outperformed in Europe this morning. As a result, heading into the North American open, stocks are lower across the board, with financials and telecommunications sectors underperforming. Despite the marginal credit spread widening, money market rates held relatively steady, that’s even as it was confirmed that the ECB will use 8% capital benchmark to assess the health of the banking system.
There was little in terms of EU related macroeconomic commentary, but the release of the most recent BoE MPC meeting minutes revealed that the MPC voted unanimously to keep interest rates on hold. The minutes also noted that the MPC view as probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report. Going forward, market participants will get to digest another round of earnings releases, with around 40 S&P 500 constituents due to report today.
According to reports, China's largest banks tripled the amount of bad loans written off in the first half of 2013. The five largest banks in China (including the state-backed lenders) wrote off USD 3.65bln of debt that could not be collected. The fears lifted the SHIBOR inter-bank borrowing rate to 3.78% from 3.05%.
EU & UK Headlines
BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%.
- Unusually hard to gauge slack in labour market, MPC has range of views on productivity, too early to draw conclusions.
- Indicators point to further house price rises, this will boost households' collateral and help growth.
- Probable that unemployment will be lower and output growth faster in H2 2013 than forecast in August.
- No MPC member thought policy tightening was needed. and that inflation expectations remain well anchored.
- GBP rise would dampen export growth in medium term.
ECB confirmed that bank assessment will use capital benchmark of 8%. Bank assessment to begin in November 2013 and assessment to take 12 months.
German government still sees 0.5% growth this year and raises 2014 growth forecast to 1.7% vs. Prior of 1.6%.
Germany sold EUR 1.665bln in 2.5% 2044 Buxl, b/c 1.4 (Prev. 1.6) and avg. yield 2.640% (Prev. 2.470%), retention 16.75% (Prev. 18.65%)
Barclays month-end extension: Euro Agg +0.08y
Barclays month-end extension: Sterling Agg +0.02y
Japan Post President says has no plan to reduce US Treasury holdings.
Barclays month-end extension: Treasury +0.06y
Major European equity indices traded lower this morning, with financials and telecommunications sectors under performing, as market participants booked profits following yesterday's gains and also fretted over reports that banks in China tripled the amount of bad loans written off in the H1 2013.
Italian and Spanish banks bore the brunt of the selling pressure, after the ECB confirmed that it is to use capital benchmark of 8% to assess the health of the banking system. The assessment to begin November 2013 and to take 12 months.
With equity markets under pressure overnight as money market rates rose in China, USD/JPY also traded lower, breaking below the 200DMA line to the downside in the process. Nevertheless, despite lower spot rate, 1m implied vols are bid and 25-delta R/R also softer (lowest level since 14th October). EUR/GBP advanced above the key 100DMA line and to its highest levels since early September, buoyed by touted demand from a UK clearer.
Analysts at Commerzbank forecast copper price of USD 7,500 by end of 2013 and nickel at USD 14,600. Gold premiums in India climbed to a record as jewellers rushed to secure supplies to meet soaring demand during festivals and weddings amid government curbs on imports.
US API Crude Oil Inventories (Oct 18) W/W 3000K vs. Prev. 5900K
- Cushing Crude Inventory (Oct 18) W/W 423K vs. Prev. 291K
- Gasoline Inventories (Oct 18) W/W -510K vs. Prev. -2200K
- Distillate Inventory (Oct 18) W/W 815K vs. Prev. -1300K
Iran are said to be contacting former oil purchasers and have said that they will be willing to cut prices if the sanctions imposed upon the country are eased.
Libyan crude exports have reached 450,000bpd according to a board member of the National Oil Corporation.
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DB's Jim Reid recaps the various other overnight odds and ends
While the September payrolls print was fairly tepid, October’s payrolls is also likely to fall short of the Fed’s hurdle rate. The White House yesterday warned that the government shutdown has led to 120,000 fewer jobs being created both directly and indirectly across the government and private sector. The White House data took into account information only through Oct. 12, though the government shutdown lasted until October 17, meaning that the ultimate effect on payrolls may be even larger. It will clearly be very difficult to get a clear message from the next payroll number.
The market reaction to the disappointing payroll number saw risk-on and carry trades in favour. The S&P500 (+0.57%) hit another new high driven by strong gains in the 'yieldy' sectors including REITs (+2.25%) and utilities (+1.3%). There were also strong gains in the latter half of European trading that took many indices to YTD gains close to 25% in USD terms. Gold added 1.8% which spurred strong gains in gold mining stocks while the dollar index hit near 9- month lows.
In Asia this morning, early gains from have been erased as risk assets take a breather in the second half of the Asian session. There are intensifying concerns about policy risk in China following yesterday’s strong Chinese home price data. Indeed, 1 week SHIBOR hit a three-week high overnight, adding more than 40bp, as did the onshore 7-day repo rate, on chatter that the Chinese government is mulling a crackdown on property related lending. There is market talk that domestic Chinese banks have already hit their 2013 full year loan targets following excessive real estate lending in the last couple of months. Indeed, Bloomberg is reporting that domestic loans to property developers jumped 50% in September from a year earlier, citing a Shanghaibased advisory firm which used government data. Indeed, the Hang Seng and Shanghai Composite are 0.1% and 1.2% lower overnight. Elsewhere in Asia, the Nikkei (+-1.2%) has failed to hold onto early gains, weighed by a falling USDJPY, as the USD trades weaker against major currencies.
The Australian dollar has retreated from multi-month highs despite a higher than expected inflation reading, reversing some of the solid post-payrolls gains. In Europe today, the ECB is set to release the names of the 130 or so systemically important Eurozone banks that it will begin supervising in 2014. Though the composition of that list shouldn’t generate too many surprises, there will be some attention paid to the details of the ECB’s upcoming Asset Quality Review. The AQR is expected to focus on bank loans made to the real estate, SME, shipping and structured finance areas. The ECB is also expected to outline a series of stress tests in conjunction with the European Banking Authority, which markets are expecting will be more stringent than the central’s banks prior two stress tests. Details of the bank system health checks are expected to be released at 9am Frankfurt time today. Ahead of the AQR, there were reports in both Reuters and Bloomberg yesterday that the ECB will require the largest banks that it will supervise to hold an 8% tier one ratio, comprising a 7ppt capital buffer and a supplemental 1ppt for large systemically important institutions. The article says that the 8% threshold shouldn’t be an issue for the vast majority of banks, but this ultimately depends on the outcome of the AQR’s findings. Looking at the rest of the day ahead, business confidence readings are due in France. A 30yr German bund auction will also be held this morning. There is not much on the data docket in the US except for weekly mortgage applications and the House Price index for August. It’s another big day on the earnings calendar with close to 40 S&P 500 companies reporting today. Companies include macro-bellwethers Boeing and Caterpillar.