Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.
Stocks in Europe traded higher since the get-go, with the German DAX index outperforming following consensus beating earnings by Daimler pre-market. On the sector breakdown, telecommunications sector outperformed, supported by earnings by Vodafone, with health care lagging following pre-market earnings by AstraZeneca. Looking elsewhere, Bunds remained under pressure even after supply from Spain (19k Mar-Bund contracts) and France (85k Mar-Bund contracts) was successfully observed, with Spain selling just above the targeted range. At the same time, given the absence of any tier 1 macroeconomic releases this morning, EUR/USD and GBP/USD traded steady, as market participants refrained from making directional commitments ahead of monetary policy announcements by the BoE and the ECB.
Headline bulletin summary from RanSquawk and Bloomberg
- European equities trade in the green ahead of today's key risk events with the DAX leading the way after positive earnings from Daimler.
- SP/GE 10y spread continues to tighten (-5bps), with Spanish paper outperforming peripheral counterparts, which comes after the Spanish Treasury sold above targeted amount of EUR 5.5bln in today's auctions.
- Apart from digesting comments from ECB's Draghi, the latter half of the session will also see the release of the latest US Trade Balance data and the weekly jobs report.
- Treasuries steady, 10Y yield rising further from Monday’s YTD low 2.568% as market prepares for January payrolls report tomorrow, est. +183k, unemployment rate holding at 6.7%.
- ECB is likely to keep policy on hold at today’s meeting, with strong risk of easing in coming months as inflation slows, analysts say. Danske Bank and BNP Paribas joined Deutsche Bank, RBS and Barclays this week in expecting ECB to cut rates today
- Decision due at 7:45am ET, with Draghi presser at 8:30am
- German factory orders unexpectedly declined in Dec. on weaker domestic demand, falling 0.5% M/m vs est. of 0.2% gain, +2.4% (revised) in Nov.
- Bank of England also meets today, economists expect no change in policy, as Carney and colleagues debate how they can reflect the strength of the U.K. economy in their forecasts without suggesting that interest rates are about to go up; decision due at 7am
- Bank of Japan Deputy Governor Kikuo Iwata says he’s emphasizing the bank’s commitment to ease until inflation is stable at 2%, saying that this may “not have been so clear to the public”
- Japan’s Abe is considering the biggest change to Japan’s military engagement rules since World War II; would allow the nation to come to the aid of its allies
- Germany’s SPD wants counterespionage against the U.S.; interior policy expert Michael Hartmann says that “who spies on us must expect to become a target as well,” in interview with Rheinische Post newspaper
- Sovereign yields higher. EU peripheral spreads tighten. Asian stock mixed, European stocks higher, U.S. stock-index futures gain. WTI crude, gold and copper higher
The Nikkei 225 pared early gains to close with a minor loss of 0.2%, whilst the rest of the Asian equity markets were higher as they continued to stabilise following the heavy sell-off seen at the beginning of the week.
EU & UK Headlines
German Factory Orders (Dec) M/M -0.5% vs Exp. 0.2% (Prev. 2.1%, Rev. 2.4%)
- German Factory Orders WDA (Dec) Y/Y 6.0% vs Exp. 6.3% (Prev. 6.8%. Rev. 7.2%)
UK Halifax House Prices (Jan) M/M 1.1% vs Exp. 1.0% (Prev. -0.6%)
- UK Halifax House Prices 3Mths/Y (Jan) 3M/Y 7.3% vs Exp. 7.2% (Prev. 7.5%)
Markets remain relatively subdued ahead of today's key risk events. Analysts remain split on today's ECB rate decision, with the latest source comments suggesting the board is divided on further action from the central bank, as the ECB face constrained liquidity, disinflationary pressures and a strong domestic currency. Full rate decision due at 1245GMT/0645CST, with the following press conference at 1330GMT/0730CST. (RANsquawk)
Newsflow remains light from the US as participants look ahead to tomorrow's Nonfarm Payrolls release, with various banks cutting their forecasts for the figure after yesterday's softer than expected ADP reading.
Credit Suisse shares are trading marginally lower (-1%), underpinned by somewhat less than impressive earnings pre-market. As a result, the SMI index has underperformed its peers and is seen little changed.
Twitter shares initially moved higher in after-market trade following the release of the EPS and revenue figures but then reversed to trade down as much as 15% as monthly active users were lower than expected and EBITDA for Q1 was below forecasts.
Ahead of policy announcement by the BoE and the ECB, both EUR and GBP pairs trade little changed, with the USD index unchanged on the session. At the same time, AUD/USD continues to trade higher, albeit off the best levels posted overnight, following the release of the latest trade balance data, with supports seen at the 50DMA line at 0.8917
Credit Suisse have raised their 2014 nat gas price forecast, citing extreme weather in US and falling inventories. (RTRS) Iranian fuel oil exports may be reduced by 50% next month as maintenance work at the Abadan refinery is set to cut output.
The country may ship around 200,00 metric tonnes of fuel oil in March, compared with as much as 400,000 this month, and 350,000 in January. (BBG)
Indian gold jewellery imports have surged nearly 4-fold to 4-5 tonnes in January from 1-1.5 tonnes in November. (RTRS)
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DB's Jim Reid concludes the overnight recap
Today's main event is the ECB meeting where our economists expect the ECB to cut all policy rates by 5-10bps, which would imply a small negative deposit rate. Mark and Gilles believe that given the decline in excess reserves, a small negative deposit rate will have more signaling content than direct stimulus. It would also signal ECB’s willingness to adopt new non-standard policies as well as a signal that the central bank is happy to accept a weaker EUR. This is certainly not a consensus view with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today. Our thoughts are that the ECB will probably have to do QE (or something closely resembling it) later in the year but that any move today (or soon) is a necessary stepping stone as they exhaust alternative options.
Away from the ECB, markets are trading firmer overnight with major Asian bourses higher on the day. Sentiment overnight is perhaps also being helped by stronger-than-expected Australian trade data. The trade surplus in December came in at A$468mn against the market consensus of an A$200m deficit. Whilst our Australian economics team noted that the outsized gain was driven by a large rise in the value of 'cereal grains and cereal preparation' exports, markets seem to be taking the strong iron ore export gain (+2.4% mom) as a positive read-through for China. Chinese markets are still closed for Chinese New Year celebrations but the ASX 200 (+1.2%) is up for the first time this week whereas the KOSPI (+0.9%) is extending small gains for the second consecutive day. Asian cash and CDS spreads are mostly tighter across the board. Indonesian sovereigns are around 3/8pts higher across the Dollar curve whilst the bid tone for Korean credit also remains very firm. Treasuries are modestly weaker with the 10yr up 5bps to 2.68% over the last 24 hours or so.
EM sentiment was also supported by Moody's upgrade of Mexico's sovereign rating (to A3/Stable from Baa1) during US hours yesterday. Moody’s is the first rating agency to move Mexico into the single-A bucket saying that the decision was driven by the country's structural reforms which are expected to increase potential GDP growth and improve its fiscal fundamentals. Moody's upgrade triggered a round of protection selling in credit which moved Brazil and Mexico CDS 6bps and 4bps tighter, respectively. Mexico is rated BBB+/Stable by both S&P and Fitch.
The Asian market is perhaps also responding to the US market closing (-0.20%) off its intra-day lows. Overall the data flow yesterday was mixed. In Europe the final non-manufacturing PMI reading came in slightly below the flash estimate (51.6 v 51.9) with the January US ADP report also modestly below expectations (175k v 185k). The ISM services data for January also came in slightly above market (54.0 v 53.7) with the employment sub-reading also showing some signs of month-on-month improvement. Staying on jobs, with the ADP coming in 25k below DB’s economics forecast, Joe LaVorgna has similarly trimmed their forecast for this Friday’s NFP by 25k to 175k. Their unemployment rate forecast remains unchanged at 6.5% (vs 6.7% in December).
In terms of today, the data docket will feature December’s trade data and weekly jobless claims in the US. The Fed’s Tarullo will also testify on Financial Stability later today. European and German factory orders are due today and we also have BOE’s policy meeting today (no change expected by the market and DB). All eyes will clearly be on the ECB meeting though.