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Overnight Equity Levitation Interrupted On Strong Dollar, Weak Treasurys

Tyler Durden's picture




 

Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.

In China, a few hours ago we saw the end of the "historic" Third Plenum session of the ruling party’s Central Committee which many anticipate will produce a blueprint for a wideranging set of Chinese economic reforms. Hardly, but there will be many promises. According to initial reports, the communist party has promised even more, greater reforms (like in Europe, promising reforms is easy, it is actually doing them that everyone fails, everywhere), and that the market will play a "decisive" instead of just "basic" role in China's reform path. Whether this means that the SHCOMP will become just as manipulated as the S&P remains to be seen.

Looking at today’s calendar, the data docket again looks relatively thin with German and UK inflation numbers in Europe. Across the Atlantic, there is the NFIB small business optimism survey for October and the Chicago Fed National Activity Index for September. The usually-hawkish Richard Fisher from the Dallas Fed will be speaking shortly after we go to print. The Fed’s Lockhart and Kocherlakota will be speaking on the economy and monetary policy at separate events in the second half of the US trading session. We may hear more from China’s third plenum meeting later today.

Today's US Data Docket

  • US: NFIB small business optimism, cons 93.5 (7:30)
  • US: Chicago Fed Nat activity index, cons 0.15 (8:30)
  • US: $1.25-$1.75bn POMO (11:00)
  • US: Fed speakers Kocherlakota (13:00), Lockhart (13:50)
  • US: $30 billion 3 Y note sale (13:00)

Overnight news bulletin from Bloomberg and RanSquawk

  • Treasuries extend last week’s post- payrolls decline, with 5Y yield at highest since Oct. 15, 7Y-10Y at highest since mid-Sept. as market participants recalibrate expectations for Fed tapering.
  • 3Y notes to be sold today yield 0.650% in WI trading; drew 0.710% at October auction and 0.913% in Sept., which was highest since May 2011
  • Fed’s Fisher, speaking in Melbourne, said monetary accomodation is getting riskier by the day, doesn’t see inflation risk right now
  • China’s leaders said markets will play a “decisive” role in the world’s second-largest economy after concluding a four-day policy summit designed to chart a course for sustaining long-term growth
  • U.K. inflation slowed more than economists forecast in October and is now the closest it’s been to the Bank of England’s 2 percent target since September 2012
  • The number of people enrolled in private insurance plans through Obamacare’s exchanges may total less than 100,000, a lower-than-projected tally that could threaten the program’s     viability
  • Talks on limiting Iran’s nuclear program, which broke up Nov. 9 without an initial agreement, have been criticized by Israeli Prime Minister Benjamin Netanyahu for considering steps to ease some economic sanctions without first ensuring a halt to Iran’s uranium enrichment
  • Russia is negotiating its biggest weapons deals with Egypt since the Cold War as it seeks to capitalize on Obama’s decision to cut defense aid to the military-backed government
  • Sovereign yields mostly higher, EU peripheral spreads widen. Nikkei +2.2%, Shanghai +0.8%. European stocks, U.S. equity-index futures decline. WTI crude, copper and gold lower

Market Re-Cap

Positive sentiment that was evident overnight in Asia failed to carry over into the European session and stocks traded lower, with basic materials underperforming its peers amid a firmer USD (+0.33%). However in spite of the cautious sentiment, as well as dovish comments by ECB's Asmussen and Nowotny, Bunds and USTs trended lower, underpinned by the looming supply from Eurozone, as well as the US, with the US Treasury auctioning off USD 30bln in 3y notes later today and Germany, as well as Italy coming to the market tomorrow. ECB's Asmussen said that the ECB has not yet reached limit on what it can do on interest rates depending on inflation developments, while ECB's Nowotny stated that stagnation and not inflation is real risk now. As a result, combination of favourable interest rate differential flows and a firmer USD ensured that USD/JPY remained on an upward trend, which also saw the pair advance to its highest level since mid-September. Looking elsewhere, Gilts outperformed its peers, with short-sterling curve reversing some of the bear steepening yesterday following the release of softer than expected UK CPI data, which also saw GBP/USD slip to its lowest level since early September. Going forward, market participants will get to digest the release of the latest NFIB small business optimism survey for October and the Chicago Fed National Activity Index for September. The Fed's Lockhart and Kocherlakota will be speaking on the economy and monetary policy at separate events in the second half of the US trading session.

Asian Headlines

China may cut growth target next year to 7% in a sign of the government's determination to push through structural reforms and steer the economy on to a more sustainable path, according to CICC.

According to Xinhua, China's Third Plenum has delivered a decision on "major issues concerning comprehensively deepening reforms".

As a guide, historically, such third plenary sessions of a newly installed Central Committee have acted as a springboard for key economic reforms and this one will also serve as a first test of the new leadership's commitment to reform.

EU & UK Headlines

ECB's Draghi is said to be concerned about deflation in the Eurozone, but would dispute that statement publicly, according to sources.

ECB's Asmussen says ECB has not yet reached limit on what it can do on interest rates depending on inflation developments according to a the New Osnabruck Newspaper.

He added that he would be very careful about moving to negative deposit rate, but would not rule it out. Might be possible in future to drop minimum ECB reserve requirement for banks, this would boost liquidity.

ECB's Nowotny says sees very low inflation rates in Eurozone for a time to come and that stagnation, not inflation is real risk now.

The EU is expected to open an in-depth review of the German economy, according to sources. The sources added that the EU sees the German current account and trade surplus as a potential excessive imbalance.

UK CPI (Oct) Y/Y 2.2% vs. Exp. 2.5% (Prev. 2.7%) - Lowest since 2012.

UK CPI Core (Oct) Y/Y 1.7% vs. Exp. 2.0% (Prev. 2.2%) - Lowest since Sep 2009. ONS says fall in CPI rate driven by motor fuels, air fares, second-hand cars and university tuition.

UK RPI (Oct) Y/Y 2.6% vs. Exp. 2.9% (Prev. 3.2%)

German CPI (Oct F) Y/Y 1.2% vs Exp. 1.2% (Prev. 1.2%)

German Wholesale Price Index (Oct) M/M -1.0% (Prev. 0.7%)

Bank of France Business Sentiment (Oct) Y/Y 99 vs Exp. 97 (Prev. 97)

US Headlines

House Republicans hope to keep the White House on the defensive over ObamaCare this week with a vote on legislation allowing people to keep their existing health plans. The GOP has scheduled five healthcare-related hearings over the next three days, each of which is designed to keep the administration on its back foot.

Equities

Positive sentiment that was evident overnight in Asia failed to carry over into the European session and stocks traded lower, with basic materials underperforming its peers amid a firmer USD (+0.33%). At the same time telecommunications related stocks led the move higher, as market participants used yesterday's selling pressure as a buying opportunity. of note, despite missing services revenue growth estimates which consequently resulted in a lower open, Vodafone shares reversed and moved into positive territory as focus turned on the proposed USD 9.6bln plan to upgrade its networks around the world.

FX

USD/JPY trended higher this morning, underpinned by a firmer USD and favourable interest rate differential flows as market participants positioned for supply from the US Treasury this week. Elsewhere, softer than expected UK CPI data resulted in broad based GBP weakness, which also saw the major pair fall to its lowest level since early September.

Japanese finance minister Aso and US Treasury Secretary Lew reaffirmed the G7 and G-20 commitment on FX according to a Japanese Ministry of Finance official. Separately, US Treasury Secretary Lew says China needs to move faster toward market-set FX rate and Japan needs to respect G-20 pledge against targeting FX.

Commodities

The IEA have boosted their 2020 world gas demand forecast by 0.8% to 3,975bcm. Finally, the IEA has said that the US is to surpass Saudi Arabia as the top oil producer by 2016.

OPEC output stable in October at 29.89mln BPD, near two-year low

According to the NCB, Saudi crude production is set to fall this month and heading into next year due to falling demand in OPEC oil.

Credit Suisse sees current oil prices close to floor for Q4.

According to the chairman of All India Gem and Jewellery Trade Federation, India's efforts to curb gold imports are expected to bring down inflow of gold from overseas in Q4 2013 by 71.23% vis-a-vis last year. Q4 is the time of the year when gold demand increases in India.

Chilean copper concentrate export agreements rose 6.3% in September this year, compared with agreements in August, according to a report by the Chilean Copper Commission (Cochilco).

Chinese Oct crude oil output is close to its 3 year high at 4.27mln bpd according to data released by The National Bureau of Statistics.

SocGen's key FX macro themes:

In the eurozone, reports yesterday claimed that a six-man “revolt” on the ECB led the opposition against the 25bp rate cut last week. We will hear today from Messrs Nowotny, Asmussen and Weidmann (probable dissenters) of what they make of the very low inflation data and what benefit there was in their view of waiting until the December forecasts are completed. The EUR perked up on the report of dissent but bids should prove short-lived if the three members clarify that the cut was only a matter of timing and does not scupper the possibility of the ECB conducting another LTRO in the New Year. Given the renewed strength of US incoming data, risks are skewed towards further EUR weakness, not renewed strength. Keep an eye on support in the 1.3350 area as US trading resumes.

UK CPI data is due today and will kick off a busy three-day period for sterling. Brian Hilliard, our UK economist, forecasts a fall in annual CPI to 2.3% from 2.7%, 2ppts below the consensus of 2.5%. M&A flows (Shire purchase of Viropharma) helped to deflate GBP/USD yesterday below 1.60 and softer inflation data could see further profit taking and a test of the early November low (1.5904). However, conviction is unlikely to keep bidding EUR/GBP higher ahead of a more hawkish Inflation Report anticipated tomorrow. The pullback in GBP/CHF too below 1.4700 should prove short-lived. For our latest GBP slide pack (“GBP: Echoes of 1997”), please click here.

DB's Jim Reid concludes the overnight recap

A key test for US rates and the dollar comes on Thursday when Yellen testifies before the Senate Banking Committee. Yellen has not discussed monetary policy publicly since April and Thursday will mark her first public appearance on Capitol Hill as Obama’s official Fed chair nominee. As we wrote yesterday, we think it may be a politicised hearing and one where Yellen may have to be more balanced than her natural dovish tendencies to broaden her appeal to the members. On the political point, the WSJ’s Hilsenrath highlights that Republicans are increasingly frustrated at one of the Fed’s open issues at the moment, and one that will be raised again on Thursday, which is the current vacancy for the Fed vice chair of supervision. It is up to President Barack Obama to nominate a candidate for the job, a new role within the seven-member Fed board created by the Dodd-Frank law more than three years ago. But it’s a seat that has remained vacant ever since (WSJ).

Coming back to markets, the Veteran’s Day holiday meant that volumes and volatility were low across a number of markets. Indeed the S&P 500 (+0.07%) traded in just a 2.5pt band for almost the whole day, matching the Stoxx 600 (+0.45%) which traded in a 1.5pt range. However a number of cyclical sectors including oil & gas, tech and financials were able to outperform yesterday. A report by CNN suggested that this year’s US holiday sales are shaping up to be the weakest since 2008 as weak consumer confidence weighs on the consumer wallet. We note that the UofMichigan consumer sentiment survey has dropped 13points since reaching a cyclical high in July but we will get a better picture of US consumer spending with the Thanksgiving and Cyber Monday sales at the end of this month. In contrast to this, there were reports of record high online retail sales during China’s “November 11” retail day yesterday which is the equivalent of the US’ Cyber Monday sales. Elsewhere, gold lost 0.44% yesterday and is now on track for its 10th daily loss of the last eleven. This streak included a couple of big drops last week off the back of the bumper US Q3 GDP and payrolls data prints. EM equities are on a similarly weak run of late which has spurred the MSCI EM equity index (-0.23%) to record its 8th consecutive fall yesterday. European government bond markets managed to erase some of last week’s losses, led by a 14bp rally in Portuguese yields attributed to Moody’s positive outlook change.

In China, today marks the end of the Third Plenum session of the ruling party’s Central Committee which many anticipate will produce a blueprint for a wideranging set of Chinese economic reforms. Officials have been tight-lipped so far as they meet in Beijing, but a number of snippets have been picked up domestic Chinese media. Indeed, the China Daily ran a story yesterday suggesting that private investors could soon buy direct minority stakes in state-owned enterprises but this was denied by the state-owned holding company SASAC. Our economists have written extensively on what they expect from this meeting. DB’s Michael Spencer thinks an emphasis on rapid financial sector liberalization is likely to be one of the most significant elements of the reforms. This offers the prospect of a redirection of credit away from inefficient SOEs towards hitherto capital-constrained but much more efficient private enterprises.

Looking at today’s calendar, the data docket again looks relatively thin with German and UK inflation numbers in Europe. Across the Atlantic, there is the NFIB small business optimism survey for October and the Chicago Fed National Activity Index for September. The usually-hawkish Richard Fisher from the Dallas Fed will be speaking shortly after we go to print. The Fed’s Lockhart and Kocherlakota will be speaking on the economy and monetary policy at separate events in the second half of the US trading session. We may hear more from China’s third plenum meeting later today.

 

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Tue, 11/12/2013 - 08:17 | 4145397 depression
depression's picture

Yellen best get to pumpin' and quick !

 

US: $1.25-$1.75bn POMO (11:00) clearly ain't cutting it, come on Yellen crank it up already

Tue, 11/12/2013 - 08:19 | 4145402 negative rates
negative rates's picture

Treasuries are going up, but the strong dollar is delusional for sure. Any better excuses than that?

Tue, 11/12/2013 - 10:52 | 4145794 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

HAH. strong dollar. the least limp dick at the alzheimers intensive care home. a couple more QEagra doses and we should be good to go.

Tue, 11/12/2013 - 08:19 | 4145404 new game
new game's picture

i was dreamin that the 10 year was lock limit up at 3.5 percent and choas was happening in the markets and paulson was called by o to head up a plunge protect team...yellen but not hearin.

Tue, 11/12/2013 - 08:20 | 4145408 firstdivision
firstdivision's picture

2014 is going to be the year to end all years.  With ISDA's recent announcement, seems to be the final nail in the coffin that tapering will be coming next year and they expect massive fallout.

Tue, 11/12/2013 - 08:58 | 4145471 negative rates
negative rates's picture

Book it in the calendar, someone's goin down.

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