Once again it was all about the China and the carry trade. First it was Chinese stocks that tumbled overnight, closing down 1.75% driven by real-estate stocks. The catalyst was new-home-price data released at the market open which showed average prices up 0.4% in January for a 9% gain from the year-earlier period. The housing bubble in the top-tier cities continued, if at a slightly slower pace.
So what drove China stocks lower? Shanghai Securities News noted that ICBC and some other banks have curbed loans to developers in sectors such as steel and cement. Slower gains in home property prices in China’s tier 1 cities are also not helping sentiment. Beijing and Shenzhen prices rose 0.4% in January, which looks to be the slowest monthly gain since October 2012 according to Bloomberg. Elsewhere there are reports that a property developer in Hangzhou (Tier 2 city in China) is reducing its unit prices by 19%. Our property analysts noted that given the strong gains seen in Tier-1 and some bigger Tier-2 cities in 2013, a slowdown or negative trends in price growth should not be a surprise. Nevertheless, it has been a very weak day for Chinese and HK markets with the Shanghai Composite and the Hang Seng indices down -2.0% and -1.2% lower as we type. Across the region, bourses in Japan and Korea are down -1.0% and -0.6%, respectively.
Among the losers, China Overseas Land is down 3.8%, China Resources Land is off 5.5%, and Agile Property is taking a punishing 8.3% sell-down.
The Chinese weakness in turn pushed the all important USDJPY pair lower, dropping as low as 102.20, which adversely impacted US futures and European stocks in early trade. In Europe we got confirmation once again that deflation rules, after the Eurozone CPI printed -1.1% in January, in line with expectations, and down from 0.3% previously, confirming the ECB's strategy of hoping something changes on its own, will simply not work. Subsequently, the USDJPY perfectly expeted ramp since then to 102.50 in the now widely anticipated pattern where the USDJPY is sold off during overnight trading and bought - and aggressively ramped - during US hours, means that futures are currently modestly green and will likely go for another try at an all time high later today.
The release of better than expected German IfO survey failed to reverse the cautious sentiment which saw stocks open lower in Europe amid renewed fears over potential credit freeze in China. In terms of the price action overnight in Asia, JGBs were supported by reports that some commercial banks in China tightened lending for property, which in turn translated into softer stocks and triggered squaring of long USD/JPY positions. As a result, heading into the North American open, equities in Europe are seen mixed with the FTSE-100 index underperforming, with Vodafone trading ex-div and at a new adjusted weighting in the benchmark index.
Despite the lacklustre price action by EU stocks, the headline IfO reading, which climbed to its highest level since July 2011, resulted in an immediate selling pressure on Bunds, which were also weighed on by positive sentiment stemming from an upgrade of Spain's sovereign credit rating prompting tightening of the SP/GE 10y spread since the get-go. Going forward, market participants will get to digest the release of the latest Chicago Fed and Dallas Fed Activity Index reports, as well as earnings by EOG Resources.
US event calendar
- Chicago Fed national activity index, cons n/a (8:30)
- Former Fed Chair Greenspan (8:45)
- US sells $50bn 3m and 6m bills (11:30)
- POMO: $2.50 - $3.00 billion in the 11/30/2019 - 02/15/2021 range
Japanese PM adviser Hamada says BoJ can wait for summer data releases, reflecting the tax hike effect to decide whether to ease further and PM Abe should put off the decision until H2 on a second sales tax hike if the Japanese job recovery stalls and deflationary gap persists. (RTRS)
EU & UK Headlines
German IFO Business Climate (Feb) M/M 111.3 vs. Exp. 110.5 (Prev. 110.6) - highest level since July 2011.
- Current Assessment (Feb) M/M 114.4 vs. Exp. 112.8 (Prev. 112.4)
- Expectations (Feb) M/M 108.3 vs. Exp. 108.1 (Prev. 108.9)
Eurozone CPI (Jan F) Y/Y 0.8% vs. Exp. 0.7% (Prev. 0.7%)
- Eurozone CPI (Jan) M/M -1.1% vs. Exp. -1.1% (Prev. 0.3%)
- Eurozone CPI Core (Jan F) Y/Y 0.8% vs. Exp. 0.8% (Prev. 0.8%)
The SP/GE 10y spread trades at the tightest level since early 2011 following Moody's upgrading Spain's sovereign rating to Baa2 from Baa3; outlook positive late on Friday.
ECB's Draghi (Dove) signalled the central bank's March policy meeting could be critical in determining whether the ECB will provide more stimulus to the Eurozone economy. Draghi said "by then we'll have the full set of information needed for us to decide whether to act or not". (DJN) Draghi added “I wouldn’t say I am comfortable with the inflation rate”. March's ECB meeting will be the first with 2016 inflation forecasts for the policy-setting board. BoE’s Carney said the MPC will not take risks with the UK recovery, and guidance now requires more complex judgement. (BBG)
Meanwhile, Broadbent reiterated the recent cautious theme from the BoE, stating he expects interest rate hikes to be "gradual and limited" when the BoE decides to tighten policy. (Sunday Times)
Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.07y)
Barclays preliminary Sterling month-end extensions:(+0.05y) (12m avg. +0.06y)
The G20 have agreed to target reforms aimed at adding more than USD 2trl to the global economy over five years, marking a shift in emphasis at G20 level from championing austerity to promoting growth as the financial crisis recedes. Ministers also reiterated their commitment for monetary policy among G20 members to be “carefully calibrated and clearly communicated”. (FT)
Barclays preliminary US Tsys month-end extensions:(+0.12y) (12m avg. +0.07y)
In terms of notable equity movers, London listed HSBC shares came under selling pressure in early trade after the bank reported lower than expected FY pretax, adding that it anticipates greater volatility in 2014 choppy markets. Elsewhere, Scania shares surged at the open (+35%) after Volkswagen offered to buy the rest of Scania for EUR 6.7bln to intensify cooperation with its other commercial-vehicles units.
US investor George Soros said he believes in the EUR adding that he is looking into investments in Greece as its economy improves. He added at Euro-area is at risk of Japan-style economic stagnation. (Spiegel)
Despite the risk averse sentiment as evidenced in lower stocks, USD/JPY managed to recover off lowest levels, while EUR/CHF also traded higher. At the same time, concerns over credit markets in China failed to weigh on AUD, which traded higher, benefiting from a weaker USD and higher precious metal prices. Looking elsewhere, comments by Carney and Broadbent had little impact on the price action of GBP/USD, which heading into the North American cross over is seen higher and remained a by-product of option related flow, with a number of large strikes expiring on Tuesday at 1.6650 level.
Libyan oil production has fallen to 230,000bpd after the closure of the El Sharara oilfield due to industrial action and strikes in the area, according to the NOC. (RTRS)
China has issued new rules for the opening of oil and gas pipe network markets, saying operators should open pipelines to third-party companies if there's surplus capacity. (BBG)
A 65-mile stretch of the lower Mississippi, including the Port of New Orleans, has been closed following a oil spill due to a barge being hit by another vessel, with no information as to when the river will be re-opened. (RTRS)
Gold speculators, managed money, have increased their net long positions in gold by 21,652 contracts to a net long position of 90,942 contracts, the most bullish since the beginning of November, with the group adding 10,830 bullish bets in sliver to a net long of 18,504 lots. (CFTC)
We conclude with the traditional overnight recap by DB's Jim Reid:
With a US holiday last Monday and half-term for many, last week struggled for momentum. This wasn’t helped by US data still being in limbo due to the cold weather. We should get more trading activity this week but the data is unlikely to be clean enough yet for investors to make firm conclusions on the current economic run-rate. It seems ridiculous to say this given the weather on both sides of the Atlantic but my chronic early year hay fever struck yet again this past weekend after a week of bubbling under the surface. I was debilitated yesterday evening by a non-stop sneezing fit and itchy eyes. When I mentioned this last year I was stunned by how many readers also suffer early season. Any cures/remedies gratefully received as long as it doesn’t include giving up golf.
Over the weekend the dramatic turn of events in Ukraine was clearly the main story. The uprising in country saw toppled President Viktor Yanukovich flee the capital on Saturday and also the release of former Ukrainian PM Yulia Tymoshenko from prison hospital. Former speaker of the parliament, Oleksandr Turchynov, has been elected as the acting head of state until a new presidential election on the 25th May. Mrs Tymoshenko has ruled herself out of contention to be Ukraine’s new prime minister though. She is expected to run for president in the election in May. Mr. Turchynov has also urged parties to agree on a new coalition cabinet by tomorrow. Indeed there is little time to waste given the rising risk of a debt default. S&P last Friday downgraded its rating on Ukraine to CCC from CCC+ as the substantial deterioration in the political situation raises question marks around the financial support from Russia, which Ukraine is dependent on – in particular a US$15bn tranche which was scheduled to be fully disbursed before 2H 2014. S&P estimates that the government and related state-owned entities have about US$13bn in foreign currency debt service to make in 2014. Speaking at the G20 finance ministers summit in Sydney, leaders from the western world have agreed to offer financial support when a new cabinet is formed. IMF’s Largarde echoed this and said the fund will be ready to engage which will probably be accompanied by some form of debt restructuring. Ukraine’s benchmark 7.5% 2023 dollar bonds rallied 4 points on Friday to around $85 after having traded as low as $78.8 the day prior. Likewise Ukraine’s 5yr CDS also snapped 150bps tighter on Friday. In equities, the country’s market benchmark rebounded by a sharp 5.6% on Friday so today’s price action will certainly be interesting to watch.
Indeed outside of news from Ukraine, the G20 finance ministers and central bank meeting in Sydney was the other main weekend event. The final communiqué set a target to develop ‘ambitious but realistic’ policies with the aim of lifting the G20 collective GDP by more than 2% above the trajectory implied by current policies over the next 5 years although it was light on concrete details on how exactly this can be achieved.
Turning to markets, Asian equities are trading lower across the board on the back of some negative credit stories from China. Shanghai Securities News noted that ICBC and some other banks have curbed loans to developers in sectors such as steel and cement. Slower gains in home property prices in China’s tier 1 cities are also not helping sentiment. Beijing and Shenzhen prices rose 0.4% in January, which looks to be the slowest monthly gain since October 2012 according to Bloomberg. Elsewhere there are reports that a property developer in Hangzhou (Tier 2 city in China) is reducing its unit prices by 19%. Our property analysts noted that given the strong gains seen in Tier-1 and some bigger Tier-2 cities in 2013, a slowdown or negative trends in price growth should not be a surprise. Nevertheless, it has been a very weak day for Chinese and HK markets with the Shanghai Composite and the Hang Seng indices down -2.0% and -1.2% lower as we type. Across the region, bourses in Japan and Korea are down -1.0% and -0.6%, respectively.
Previewing the week ahead we do have a fairly eventful data calendar although the second half of Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee is probably the highlight in the US. Recall that her testimony was previously delayed by winter storm Pax but our house view is that it is unlikely that her prepared remarks will differ significantly from her statement before the House Financial Services Committee. Data has largely disappointed since her ‘first half’ appearance before the House so the Q&A session will be important as ever to watch for any changes in her tone/outlook regarding the economy. For the record Joe LaVorgna expects little change in her tone on that front. On that, while the market has been lowering their GDP outlook for Q1 Joe’s view of 3.1% remains unchanged. He believes money will just be spent on different things (eg utility bills and clean up works) rather than not spent at all. On the data front, notable US releases this week include the Conference Board Consumer Index (Tues), New Home Sales (Wed), Durable Goods Orders (Thurs), and the second reading of Q4 GDP, Pending Home Sales and the Chicago PMI (all on Friday). It is likely that we will see more weather-related distortions on the data flow this week though. On the other side of the pond, we have inflation readings across Eurozone (today), Germany (Thurs), and Spain (Fri).
We’ll also have the latest German IFO business confidence (today) and the final Q4 GDP print from Germany (Tue). It will be another busy week for earnings with 45 and 121 S&P 500 and Stoxx600 companies due to report. As US earnings season draws to a close, the focus will mostly be on Europe. HSBC, BASF, RBS and Telefonica are some of the major names scheduled to announce this week.
On the EM front, monetary policy meetings in Brazil (Wed) and Colombia (Fri) are the key events in Latam. A rate hike is likely in Brazil although market forecasters polled are rather divided between a 25bps and a 50bps increase. Data-wise we have GDP data in India, South Africa and Brazil throughout the week.