Yen Carry Lifts Risk Around The Globe In Quiet Overnight Trade
In a carry-trade driven world in which news and fundamentals no longer matter, the only relevant "variable" is whether the JPY is down (check) and the EUR is up (check) which always results in green equities around the globe and green futures in the US, with yesterday's sudden and sharp selloff on no liquidity and no news long forgotten.
The conventional wisdom "reason" for the overnight JPY underperformance against all major FX is once again due to central bank rhetoric, when overnight BOJ's Kiuchi sees high uncertainty whether 2% CPI will be reached in 2 years, Shirai says bank should ease further if growth, CPI diverge from main scenario. Also the BOJ once again hinted at more QE, and since this has proven sufficient to keep the JPY selling momentum, for now, why not continue doing it until like in May it stops working. As a result EURJPY rose above the 4 year high resistance of 138.00, while USDJPY is bordering on 102.00. On the other hand, the EUR gained after German parties strike coalition accord, pushing the EURUSD over 1.36 and further making the ECB's life, now that it has to talk the currency down not up, impossible. This is especially true following reports in the German press that the ECB is looking at introducing an LTRO in order to help promote bank lending. Since that rumor made zero dent on the EUR, expect the ongoing daily litany of ECB rumors that the bank is "technically ready" for negative rates and even QE, although as has been shown in recent months this now has a half-life measured in minutes as the market largely is ignoring whatever "tools" Draghi and company believe they have left.
As for everything else that is "going on" in the market, DB's Jim Reid summarizes it perfectly: "There have certainly been more interesting weeks than this one has been so far and yesterday proved to be another fairly dull affair for markets. The lack of any key market moving developments and the Thanksgiving-shortened week is certainly not helping." Complacency all around.
Previewing today’s main events we’ll get a deluge of US data given tomorrow's holiday. Initial jobless claims, UofM Consumer Sentiment, mortgage applications are some of the notable ones but we suspect focus will firmly be on durable goods orders for October and the Chicago PMI for November. Expectations for these two are reasonably low with the market expecting durable goods headline to fall 2% in October from the 3.8% increase we saw in September. Chicago PMI will be an important read ahead of next week’s ISM and the market is expecting November’s print (60.0) to be nearly 6pts lower than last month. Data aside we have a 7yr Treasury auction today following a fairly decent 5yr auction yesterday.
US event calendar
- US: Initial jobless claims, cons 330k (8:30)
- US: Durable goods orders m/m, cons -2.0% (8:30)
- US: Chicago PMI, cons 60.0 (9:45)
- US: Univ. of Michigan confidence (F), cons 73.1 (9:55)
- US: sells US$29bn 7y notes (11:30)
Overnight news bulletin from Bloomberg and Ransquawk:
- Treasuries little changed before week’s auctions conclude with $29b 7Y notes, yield 2.065% in WI trading; noncompetitive and competitive closing times at 11:00 a.m. and 11:30 a.m. ET, respectively.
- U.S. fixed-income markets closed for Thanksgiving Day tomorrow, close at 2pm on Friday
- Reports that the ECB is looking at introducing an LTRO in order to help promote bank lending has failed to weigh on EUR. However, Favourable seasonal flow, together with touted real money buying EUR saw EUR/ JPY advance to its highest level since 2009 this morning.
- German Chancellor Merkel and SPD reached grand coalition agreement, according to CDU's Grosse-Broemer. There were also earlier reports that the new German Cabinet will not be named until mid-December according to the DPA.Ifo institute’s index of Germany’s business climate rose to 109.3 in Nov., highest since April 2012 and above all estimates in a Bloomberg survey
- Obama’s agreement with Iran is part of a high-stakes set of diplomatic initiatives that is unnerving Middle East allies concerned that his goal is to reduce U.S. commitments in the region
- Two unarmed American B-52 bombers flew through disputed areas of the East China Sea covered by China’s new air defense zone, a show of support for Japan as Abe seeks to expand his nation’s military
- The Supreme Court will take up a challenge to part of Obamacare by companies claiming a religious exemption to the requirement that they provide birth- control coverage for employees
- Sovereign yields mostly higher; EU peripheral spreads narrow as bund yields rise. Asian stocks mixed, European stocks, U.S. equity-index futures gain. WTI crude falls; copper and gold higher
Market Re-Cap from Ransquawk
Reports that the ECB is looking at introducing an LTRO in order to help promote bank lending has failed to weigh on EUR, which instead benefited from broad based JPY weakness which drove EUR/JPY above 138.00 level (highest since 2009) and also touted real money buying of EUR. Nevertheless, stocks traded broadly higher, with peripheral EU based financials among the best performing as credit spreads tightened further amid reports of a new LTRO which is said to be with a 9-12 month term. Looking elsewhere, despite the supply from Buba, Bunds traded steady, with peripheral bond yield spreads trading marginally tighter. On that note, analysts at Goldman Sachs noted that they believe that Spanish and Italian 2y spreads vs. Germany could halve in 2014, citing what they believe is market's incorrect pricing of a potential negative ECB deposit rate, or extension of full-allotment term funding. Going forward, market participants will get to digest the release of the latest weekly jobs report, Chicago PMI and also the weekly DoE data.
BoJ board member Shirai commented that they should stick to 2% price target now, instead of setting target in a range and that targeting an inflation range is an option once CPI tops 1%. Shirai was more cautious on GDP and CPI outlook than BoJ's median forecast, but stated that current conditions don't warrant additional easing.
EU & UK Headlines
German Chancellor Merkel and SPD reached grand coalition agreement, according to CDU's Grosse-Broemer. There were also earlier reports that the new German Cabinet will not be named until mid-December according to the DPA. The agreement says individual EU states will be responsible for winding down their own banks if the common resolution fund is insufficient. Funds used by EU member states to rescue banks should be excluded from 3%/GDP deficit rule, but states may apply to the ESM should national funds be insufficient.
ECB weighing new
The IMF are discussing plans to impose upfront losses on bondholders the next time a country in the euro area requests a bailout according to unsourced reports.
Italian Prime Minister Enrico Letta's government won a confidence vote on the 2014 budget in the Italian senate with a vote of 171 to 135
German GfK Consumer Confidence (Dec) M/M 7.4 vs Exp. 7.1 (Prev. 7.0, Rev. 7.1)
Goldman Sachs sees Spanish and Italian 2y spreads vs. Germany possibly to halve in 2014
UK GDP (Q3 P) Q/Q 0.8% vs Exp. 0.8% (Prev. 0.8%) - Strongest Q/Q since Q2 2010
UK GDP (Q3 P) Y/Y 1.5% vs Exp. 1.5% (Prev. 1.5%)
Barclays month-end extensions: Euro Aggr (+0.04y)
Barclays month-end extensions: Sterling Aggr (+0.06y)
After setting a deadline to fix the HealthCare.gov website, Obama administration officials have offered largely inexact measures of success. That has prompted Republicans to accuse the White House of moving the goal posts.
Barclays month-end extensions: Treasuries (+0.10y)
Equities are seen up across the board this morning with the outperformer this being Colruyt following their premarket earnings. Furthermore Banco Popolare are up just over 3% following reports that the Co. are said to be holding extraordinary board meeting to discuss possible reorganisation including Credito Bergamasco Unit. Vivendi are also seeing some upside following reports that the Co. may distribute SFR shares to Co. shareholders after the Co.'s board validates demerger plan. Co. says to submit demerger plan to works councils. In terms of laggards, Accor are down around 4.50% following reports of a shake up to the Co.'s board. Solvay are also seeing some downside following reports that the Co. have cut 2016 adj. EBITDA goal to EUR 2.3-2.5bln vs. Est. 2.35bln.
Favourable seasonal flow, together with touted real money buying EUR saw EUR/JPY advance to its highest level since 2009 this morning. The cross also benefited from grind higher by USD/JPY, which remains vulnerable to downside demand given the erasure of RKO barriers. Elsewhere, USD weakness also supported GBP/USD in the first half of the trading session, which advanced to its highest level in 11-months and broke above touted barrier level at 1.6300.
Goldman Sachs 3rd Top Ten 2014 Trade is long USD/CAD; targeting 1.14
Credit Suisse now sees USD/JPY at 110.00 in 3 months and at 120.00 in 12 months
Heading into the North American open, WTI crude futures are trading in negative territory following a large build in API crude oil inventories of 6.9mln, whilst Brent crude futures trade with gains for the session in a continuation of recent trade given troubles in Libya and caused a widening of the WTI-Brent spread.
Furthermore, WTI has been trading in a tight range for the past month around the USD 93 level, below this there is little in the way of support for prices until just above the USD 90 level which was seen in June, therefore today's DoE release could act as a catalyst to break out of this range.
SocGen revised Brent outlook down by USD 2 to USD 108/bbl in 2014, revised WTI outlook down by USD 4 to USD 99/bbl and forecast an average 2014 NYMEX natural gas price of USD 3.65/MCF. Sees gold averaging USD 1135/Oz in 2014, silver at USD 19/Oz, platinum at USD 1550/ Oz, palladium at USD 790/Oz and sees 2014 aluminium price at 1,900/T and 2015 at 1,950/T.
Iran's Oil Minster Zanganeh has held meetings with European Co.'s in an attempt to get them back to Iran following the nuclear deal struck over the weekend.
Morgan Stanley said that Brent is unlikely to average below USD 95-100 per barrel, adding that downside risk is concentrated in 2014, 2015 and that Brent is likely range-bound over the medium term.
Jim Reid from DB concludes the overnight event roundup
Away from the equity markets, primary market activities in credit slowed down sharply ahead of Thanksgiving. Supply was on the quiet side as investors were
largely focused on month-end rebalancing given the upcoming holiday. Investors were still net buyers of bonds though, to the tune of US$383m in the US, according to FINRA TRACE data which noted that US$12.7bn of bonds were swapping hands yesterday. As we mentioned yesterday US credit spreads have had a pretty good ride since their wides in early October and we suspect the search for yield mentality will continue to prevail into year-end absence any surprises from the Fed.
Recapping the main data events of yesterday, the US risk sentiment was actually well supported early on by some positive housing data. Building permits (974k v 935k) was better than expected while the Case-Shiller home price index also rose more than consensus (+1.03% v +0.90%) in September. The Richmond Fed manufacturing survey bucked the recent trend in similar surveys with a better-than-expected headline (13 v 4) but all eyes will be on the Chicago PMI today. The consumer was the main softness in yesterday’s data flow with the confidence reading down to 70.4 v 72.6 expected. The decline
was largely driven by a drop in consumer expectations (69.3 v 72.2) although labour market related sub-indicators showed some monthly improvement.
Turning to the overnight session the Asian equities session is mixed with Chinese (+0.7%) and Hong Kong (+0.6%) markets outperforming the rest. The rally in Chinese stocks overnight also marks the first gain in five days largely driven by railway makers, brokers and defence companies. The latter was likely driven by the escalating military tension between China and the US that seems to be getting increasing press focus overnight. According to Bloomberg news two unarmed US B-52 bombers yesterday flew into a disputed air-defence zone claimed by China. The area is said to include a chain of islands in the East China Sea controlled by Japan. Pentagon said that the flights were a longplanned training mission and insisted that the US would continue to operate in what it considers to be international air space. FT said that the Chinese were not informed of the flights. Per the Japanese government’s instructions, ANA and Japan Airlines have also stopped providing flight information to China which they did overnight as they flew through a new Chinese air-defense zone without notice.
In other overnight news, Chancellor Merkel’s CDU has reached a coalition agreement with the Social Democrats after a lengthy discussion overnight. According to the BBC the breakthrough came after 17 hours of talks with both parties reaching agreement on issues including minimum wage, a lower retirement age and changes to dual citizenship rules. Away from politics and on a less cheerful note, S&P said that the biggest US banks may have to spend another US$104bn to resolve mortgage related issues with investors and counterparties. The top end of this estimate would eliminate about two thirds of the $154.9bn litigation costs already provided for by the banks but would not erode into their regulatory capital (FT).
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