Post-Turkish "Shock And Awe", Pre-FOMC Market Summary
The Fed tightens by a little (sorry, tapering - flow - is and always will be tightening): markets soar; Turkey tightens by a lot: markets soar. If only it was that easy everyone would tighten. Only it never is. Which is why as we just reported, the initial euphoria in Turkey is long gone and the Turkish Lira is basically at pre-announcement levels, only now the government has a furious, and loan-challenged population to deal with, not to mention an economy which has just ground to a halt. Anyway, good luck - other EMs already faded, including the ZAR which many are speculating could be the next Turkey, and certainly the USDJPY which sent futures soaring last night, only to fade all gains as well and bring equities down with it.
Following the CBRT’s actions last night, the central bank focus turns to the Fed where the second day of the January FOMC and Bernanke’s final policy meeting, will be held today. The overwhelming consensus is that the Fed will deliver another $10bn taper at this month’s meeting, so any deviation from that view could bring substantial volatility to markets. The turbulence in EM financial markets is probably not seen as widespread or intense enough to warrant special recognition by the Committee. Given that the negative spillover to US financial markets has been relatively modest so far, and given that the dollar overall has actually declined a bit, consensus sees no reason for them to signal any potential change in US policy. Deutsche Bank adds that on the question of forward guidance, with the unemployment rate now sitting just above the 6.5% threshold for considering an increase in short-term rates, the question about reducing that threshold will arise again. There was not much sentiment in favor of such a reduction in December, and it seems unlikely there would be this time either. More likely they will be shifting their focus increasingly toward the low rate of core inflation as a reason to hold off raising rates for some time to come.
Recall that the voting rolls will change at the January meeting, with a shift moderately in a hawkish direction. Presidents Rosengren (dissenting dove), Evans (dove), Bullard (center left) and George (dissenting hawk), will be replaced by Presidents Plossser and Fisher (both potentially dissenting hawks), Pianalto (center right) and Kocherlakota (potentially dissenting dove).
Also of note: today the Treasury sells its first $15 billion in 2 Year Floating Rate Notes, and there is no POMO.
Quick Market from RanSquawk
Focus this morning was yet again on EM after the Turkish central bank hiked rates late yesterday in order to suppress fears of further capital flight from the country. However after opening up over 2%, the domestic Turkish stock index gradually moved into negative territory, while the spot TRY rate has reversed almost half of the aggressive move lower observed following the rate hike, as market participants questioned the implications that higher interest rates will have on future growth prospects.
Nevertheless, heading into the North American open, stocks in Europe have closed the opening gap higher but remain in positive territory, with basic materials outperforming following the release of better than expected earnings by Anglo American and Antofagasta. In terms of other notable equity movers, Fiat shares plunged after the company failed to meet trading profit expectations, while Sainsbury's shares in London fell over 6% after it was reported that CEO Justin King to step down.
In terms of macroeconomic release, the latest Eurozone M3 data showed that lending to the private sector declined by 2.3% in December, matching November, thus underpinning the view that the ECB will likely need to act in the near future. Going forward, focus will now turn to the FOMC decision at 1900GMT/1300CST, as well as earning by Facebook and Boeing.
US Event Calendar
- 7:00am: MBA Mortgage Applications, Jan. 24 (prior 4.7%) Central Banks
- 2:00pm: FOMC Rate Decision, Jan. 29, est. 0%-0.25% (prior 0%-0.25%); Fed pace of QE, est. $65b/mo. (prior $75b/mo.)
- 3:00pm: Reserve Bank of New Zealand cash rate seen remaining at 2.5%
- Today at 11:30 am, the Treasury sells its first $15b in 2Y FRN
Overnight headline bulletin from Bloomberg and Ran:
- Spot TRY rate reversed over a half of the spike post the rate decision and the Turkish stock market gradually moved into negative territory as questions are raised over growth prospects in EM.
- Bunds reversed the opening gap lower and edged into minor positive territory, supported by touted monthend buying and also the release of the latest Eurozone M3 data.
fall for a third day, led by 7Y and 10Y notes, as week’s auctions
continue with inaugural offering of 2Y FRNs and before Fed meeting
concludes; FOMC widely expected to reduce asset purchases by another
- Economists remain divided on how the central bank will
react to any future shocks that threaten financial stability as U.S.
- Turkey’s central bank resisted government pressure and raised all of its main interest rates at an emergency late- night meeting in an effort to shore up the lira; the overnight lending rate went to 12% from 7.75%
- Investors in Asia overseeing more than $650b plan to shun the Treasury’s floater auction today, raising concern that demand may prove underwhelming
- U.K. house prices rose for a 13th month in January to their highest level in almost six years as the economy gained momentum, Nationwide Building Society said
- German consumer confidence index will rise to 8.2 in February, GfK says in report; sentiment to reach highest level since Aug. 2007
- China Credit Trust Co. has repaid the principal to some investors of its 3b yuan ($496m) high-yield product that faced default, according to investors who accepted the bailout offer
- India central bank Governor Raghuram Rajan signaled he’s preparing to follow through on proposals to make inflation the bank’s top priority even at the risk of friction with Prime Minister Manmohan Singh’s government
- Deutsche Bank AG cut total compensation for employees at its investment bank 23 percent in the fourth quarter as a slide in revenue contributed to a loss for the period
- Ukrainian President Viktor Yanukovych failed to quell nationwide street protests calling for his resignation after days of concessions culminated in the departure of his loyalist prime minister
- Obama’s State of the Union message centered on economic inequalities, a theme echoed by Democrats on Capitol Hill; political strategists say it may not be as potent as when Obama ran against multimillionaire Mitt Romney
- Edward Snowden was nominated for the Nobel Peace Prize by Norwegian politicians, including a former government minister, for contributing to transparency and global stability by exposing a U.S. surveillance program
- Sovereign yields mostly higher; EU peripheral spreads narrow. Asian and European equity markets, U.S. stock-index futures gain. WTI crude and gold lower, copper higher
Asian equity markets settled higher, with the Nikkei 225 gaining over 2%, with sentiment across the region lifted after the Turkish central bank aggressively hiked interest rates to stabilize the domestic currency amid the recent EM worries.
EU & UK Headlines
After gaping lower at the open, Bunds have edged into minor positive territory, supported by touted monthend buying and also the release of the latest Eurozone M3 data.
Eurozone M3 Money Supply (Dec) Y/Y 1.0% vs Exp. 1.7% (Prev. 1.5%)
- Eurozone M3 3-month average (Dec) 3M 1.3% vs Exp. 1.5% (Prev. 1.7%)
- Eurozone (Dec) annual growth loans to private sector at -2.3%, according to the ECB
Barclays preliminary pan-Euro agg month-end extensions: +0.13y (12m avg. +0.07y)
Barclays preliminary Sterling month-end extensions:+0.19y (12m avg. +0.06y)
US President Obama delivered the annual State of the Union Address and urged Congress to raise the national minimum wage to USD 10.10 per hour. Obama reiterated his veto threat on possible new Iranian sanctions if it threatens to derail talks. (BBG)
Barclays preliminary US Tsys month-end extensions:+0.06y (12m avg. +0.07y)
Stocks in Europe have failed to sustain upward price action observed at the open and have gradually closed the gap as market participants positioned for the release of the FOMC rate decision and also questioned the implications that higher rates will have on growth prospects in Turkey and other EM. Nevertheless, stocks in Europe have managed to hold onto marginal gains, supported by basic materials sector following consensus beating earnings by Anglo American and Antofagasta, while financials also gained on the back of consequent credit and bond yield spread tightening.
The Turkish Central Bank hiked the overnight lending rate by 425bps to 12.00% from 7.75%, raised the overnight borrowing rate by 450bps to 8.00% from 3.50%, and raised the benchmark repurchase rate by 550bps to 10.00% from 4.50%.
Safe haven currencies such as CHF and JPY were supported, as market participants questioned the implications that higher interest rates will have on future growth prospects.
Press conference by the South African central bank due at 1300GMT and the rate decision due shortly at approximately 1320GMT.
Libya's deputy oil minister has said crude exports are down by 60% due to the shutdown of major ports in the country. (MENA)
US API Crude Oil Inventories (Jan 24) W/W 4750k vs. Prev. 4860k
- Cushing Crude Inventories (Jan 24) W/W 221k vs. Prev. 772k
- Gasoline Inventories (Jan 24) W/W 363k vs. Prev. 1110k
- Distillate Inventories (Jan 24) W/W -1790k vs. Prev. -2290k
CME increased NYMEX natural gas margins 20% to USD 3,960 per contract. (BBG)
South African AMCU has said the 3 companies involved with the current strikes at platinum mines have made proposals to resolve the dispute, with talks set to continue today. (BBG)
* * *
Finally, here is Jim Reid's overnight recap of all the market news that's fit to highlight
EM investors hoping for the Central Bank of Turkey to deliver “shock and awe” policy were not disappointed after the CBRT delivered a dramatic tightening across all main interest rates at the stroke of midnight local time. At its emergency meeting last night, the CBRT hiked the benchmark one-week repo rate by 550bp from 4.50% to 10%, the overnight lending rate by 425bp from 7.75% to 12% and the overnight borrowing rate by 450bp from 3.5% to 8%. This was against expectations were that the central bank would hike the overnight lending rate by around 225bp, and last night’s announcement has effectively reversed years of policy easing in the CBRT’s bid to ensure price stability and support the lira. In addition to the rate hikes, the central bank also said that markets should treat the one-week repo as the main policy rate with liquidity to be provided via this benchmark, and that it will also seek to simplify the CBRT’s “operational framework”. The announcement saw USDTRY rally back below the 2.20 mark (2.16 as we type), now almost 7% lower since reaching record highs late last week. Meanwhile the Turkish 10yr bond gapped tighter by around 40bp in late European trading.
The CBRT’s policy move adds to the actions from a number of EM central banks over the past few days to shore up sentiment, including the Reserve Bank of India who delivered a surprise 25bp rate hike yesterday to address sticky inflation, the People’s Bank of China who has been active in injecting liquidity into the Chinese banking system over the past week, and the Central bank of Argentina who hiked rates earlier this week. The question remains whether the actions are sufficient enough to stabilize sentiment which has deteriorated sharply in recent weeks. Along the same vein, the South African Reserve Bank meets today, though it can be argued that the CBRT’s decision last night does take some pressure off the SARB to act today. Indeed, the South African rand has rallied 1.2% against the USD already this morning and consensus is that the SARB will hold fire on policy today.
Looking at Asian markets this morning, the CRBT’s decision has provided a timely boost to equity and credit markets across the region particularly for higher beta EMs. In terms of equities, there are sold gains being recorded in a number of EM indices including the HSCEI (+1.8%), Jakarta Composite (+1.8%) and KOSPI (+1.2%). The CBRT’s decision has provided a boost to USDJPY which is up more than 0.5% in the last 24 hours taking it firmly back above the 103 mark. This has buoyed the Nikkei (+2.2%) and the TOPIX (+2.3%) which are both leading the region’s gains. Asian EMFX are about a quarter of a percent firmer against the USD. On the credit side, EM sovereigns are having a strong day highlighted by Indonesia (5yr CDS 12bp tighter) and Philippines (5yr CDS -4bp) though both are off the tights. S&P500 futures gained around 8 points higher following the Turkish announcement and are trading 0.6% firmer as we type. Firmer risk sentiment has seen UST 10yr yields add 3bp to 2.78% in Asian trading.
Following the CBRT’s actions last night, the central bank focus turns to the Fed where the second day of the January FOMC and Bernanke’s final policy meeting, will be held today. The overwhelming consensus is that the Fed will deliver another $10bn taper at this month’s meeting, so any deviation from that view could bring substantial volatility to markets. For the record, our Chief Economist Peter Hooper thinks that the Fed will indeed deliver an uneventful meeting. The turbulence in EM financial markets is probably not seen as widespread or intense enough to warrant special recognition by the Committee. Given that the negative spillover to US financial markets has been relatively modest so far, and given that the dollar overall has actually declined a bit, Peter sees no reason for them to signal any potential change in US policy. And the US economic picture is improving enough to allow them to continue their current pace of tapering—another $10 bn cut in purchases at this meeting with no dissent. On the question of forward guidance, with the unemployment rate now sitting just above the 6.5% threshold for considering an increase in short-term rates, the question about reducing that threshold will arise again. There was not much sentiment in favor of such a reduction in December, and it seems unlikely there would be this time either. More likely they will be shifting their focus increasingly toward the low rate of core inflation as a reason to hold off raising rates for some time to come. Peter also highlights that the voting rolls will change at the January meeting, with a shift moderately in a hawkish direction. Presidents Rosengren (dissenting dove), Evans (dove), Bullard (center left) and George (dissenting hawk), will be replaced by Presidents Plossser and Fisher (both potentially dissenting hawks), Pianalto (center right) and Kocherlakota (potentially dissenting dove). Peter does not expect any dissents at the January meeting.
Even before the Turkish central bank decision, there were signs that sentiment was improving which allowed the S&P500 (+0.61%) and the MSCI EM (+0.26%) indices to record their first gains in four sessions. Yesterday’s US equities performance had a cyclical element to it with financials (+1.4%), industrials (+0.85%) and construction (+1.3%) leading the way higher. We wrote yesterday that Apple’s post-market results on Monday had the potential the weigh on Tuesday’s US market open, but this proved short-lived, with equities soon reaching an intraday high of 1794. Nonetheless, Apple stock did lose 8% yesterday. A couple of solid earnings reports from the likes of Pfizer and Ford helped set a positive tone, and erased any Apple-inspired weakness at the open. Another positive earnings anecdote came from US home-builder D.R. Horton Inc which soared almost 10% after it announced that January home sales were fairly strong and that the Spring selling season had got off to a good start. This helped offset some concern that home sales were slowing following a weaker-than-expected new home sales report on Monday. There was further good housing news with the US Case-Shiller home price index rising 0.9% in November (vs 0.8% expected), which pushed the year-on-year rate of change to a post-recession high of +13.7%. Credit outperformed on both sides of the Atlantic (CDX IG and Eur iTraxx both - 4bp) and the feedback seemed to suggest that long credit positioning had cleared out substantially during the selloff over last week/early this week.
Stocks and treasuries seemed to get another boost following the disappointing durable goods orders print which prompted a 4bp rally in 10yr UST yields. December durable goods declined 4.3% on the headline (+1.8% expected) and the prior month was revised down -0.8% to +2.6%. Ex-transportation orders fell -1.6% (+0.5% exp) after a -1.1% downward revision last month to +0.1%. Additionally, core orders, which consist of non-defence capital goods exaircraft, dropped 1.3% (+0.3% exp) following a -1.9% downward revision to November to +2.6%. DB’s Joe LaVorgna thinks that while durable goods orders were disappointing, more forward looking indicators such as the ISM new orders index remain firmly in positive territory and suggest that business spending will not significantly deteriorate in the current quarter. In other US data, the US consumer confidence index rose to 80.7 (78.0 expected).
Wrapping up some of the headlines, President Obama’s State of the Union address last night focused heavily the economy and income inequality. To that end, the President proposed raising the minimum wage through Executive Order from $7.25 to $10.10 per hour for Federal contract workers by 2015, creating a new government-backed private retirement savings plan and speeding up the implementation of a previously announced program to connect schools to broadband wireless (Washington Post). Obama also reiterated his call for a comprehensive bill that includes a path to citizenship for the country’s 11 to 12 million undocumented immigrants. Elsewhere in Europe the UK Telegraph reported that a verdict from the German Constitutional Court’s decision on the ECB’s OMT program has been delayed until April due to the complexity of the case and "intense differences of opinion" among the eight judges, citing a report in Frankfurter Rundschau newspaper. The Frankfurter Rundschau said it would be a "spectacular" reversal of prior rulings if the court agreed to any arrangement that eroded ECB's independence, especially its seminal ruling on the Maastricht Treaty in the 1990s (UK Telegraph).
Aside from today’s FOMC, the other interesting macro events to look for today are the Euroarea money supply report and a speech from Mark Carney in Edinburgh. Today’s earnings calendar is highlighted by Dow Chemical and Boeing who report before the opening bell. The always-interesting Facebook earnings will be announced after the US market close. But all eyes will be on Bernanke’s final FOMC.
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