It took only a 60 USDJPY pip overnight ramp to send US equity futures 20 points off the overnight lows in the immediate aftermath of the Crimean referendum, which from a massive risk off event has somehow metamorphosed into a "priced in", even welcome catalyst to buy stocks. The supposed reasoning, and in a world in which Virtu algos determine the price action of the USDJPY from which all else flows based solely on momentum we use the word reasoning "loosely", is that there was little to indicate that the escalation between Russia and Ukraine was set to accelerate further. As we said: an annexation is now seen as risk off, something even Goldman appears unable to comprehend (more on that shortly). In macroeconomic news, European inflation - at least for the Keynesians - turned from bad to worse after the final February inflation print dropped from the flash, and expected, reading of 0.8% to just 0.7% Y/Y, a sequential increase of 0.3% and below the 0.4% expected, confirming that deflationary forces continue to ravage the continent. The only question is how soon until Europe comes up with some brilliant scheme that will help it join Japan in exporting its deflation.
So in summary, unwind of risk off positions dominated the price action this morning, with stocks in Europe trading higher as market participants breathed a sigh of relief that even though the referendum in Crimea showed an overwhelming support to join Russia, there is little to indicate that the stand-off between Ukraine/Russia will escalate further. As a result, Bunds quickly reversed the initial upside and heading into the North American open are seen lower, with USD/JPY and EUR/CHF also benefiting from flows into riskier assets.
Looking elsewhere, further reduction of the so-called war-premium relating to Ukraine/Russia crisis, saw energy complex come under broad based selling pressure. Going forward, market participants will get to digest the release of the latest US Empire Manufacturing report and NAHB Housing Market Index, while the BoE will conduct its latest APF as part of already announced reinvestment program.
Bulletin news summary from Bloomberg and RanSquawk
- Exit polls show that 95.5% of voters in Ukraine's Crimea voted to leave Ukraine to rejoin the Russian Federation, however multiple EU and US officials have deemed the vote illegitimate and will not recognise the outcome.
- USD/CNY climbed to its highest level in 10-months overnight, with 1-month implied vol advancing to its highest in over 2 years after the PBoC widened the daily trading band for USD/CNY to 2% from 1%.
- UK listed home builders are also among the best performing stocks following reports that the Help to Buy scheme is likely to be extended in this week’s UK budget.
- Treasuries decline as JPY pares overnight gains, yields 5Y and longer rise by 1bp-2.5bps before Fed meeting begins tomorrow; 96.8% of voters in Crimea backed leaving Ukraine to join Russia, paving way for annexation by Vladimir Putin.
- Putin’s approval rating in Russia reached a three-year high as he poured troops into Crimea amid the overthrow of the Kremlin- backed government in Kiev; EU foreign ministers met today to impose sanctions
- A closely held Chinese real estate developer with 3.5 billion yuan ($566.6 million) of debt has collapsed and its largest shareholder was detained, said government officials familiar with the matter
- The yuan sank to an 11-month low as the PBOC doubled the currency’s trading limits vs the dollar; yuan is allowed, from today, to trade as much as 2% on either side of a daily reference rate compared with a previous limit of 1%
- Euro-area inflation rose 0.7% in February, down from 0.8% in Jan.; the rate has held below 1% for five months, maintaining pressure on ECB to maintain loose monetary policy
- Asking prices for homes in London surged to a record this month, as the buoyant outlook spread to other parts of the country, according to Rightmove Plc
- Sovereign yields mostly higher. EU peripheral spreads narrow. Asian equities mixed, with Nikkei -0.4%, Shanghai +1%; European equity markets, U.S. stock-index futures gain. WTI crude and gold lower, copper gains
US Event Calendar
- 8:30am: Empire Manufacturing, March, est. 7.00 (prior 4.48)
- 9:00am: Net Long-term TIC Flows, Jan., est. $30.0b (prior - $45.9b); Total Net TIC Flows, Jan. (prior -$119.6b)
- 9:15am: Industrial Production m/m, Feb., est. 0.2% (prior -0.3%); Capacity Utilization, Feb., est. 78.6% (prior 78.5%); Manufacturing (SIC) Production, Feb., est. 0.3% (prior -0.8%)
- 11:00am: POMO Fed to purchase $2.25b-$2.75b in 2019-2021 sector
USD/CNY climbed to its highest level in 10-months overnight, with 1-month implied vol advancing to its highest in over 2 years after the PBoC widened the daily trading band for USD/CNY to 2% from 1% effective March 17. However analysts at Bank of American have said that a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow.
EU & UK Headlines
Eurozone CPI (Feb F) Y/Y 0.7% vs. Exp. 0.8% (Prev. 0.8%)
- CPI (Feb) M/M 0.3% vs. Exp. 0.4% (Prev. -1.1%)
- CPI Core (Feb F) Y/Y 1.0% vs. Exp. 1.0% (Prev. 1.0%)
The Office for Budget Responsibility will upgrade their UK economic growth forecast to 2.7% from 2.4%, according to the EY ITEM Club. (Daily Mail)
The Senate’s first order of business when lawmakers return to Washington on March 24 will be legislation to impose sanctions against Russia and provide aid to Ukraine, said Sen. John Hoeven (R., N.D.), who was part of a bipartisan group of eight senators to visit Ukraine. (WSJ)
Stocks traded higher this morning, with tech names leading the move higher, while oil & gas sector underperformed as WTI and Brent crude futures came under selling pressure amid alleviation of fears surrounding a military intervention by Russia in Crimea. Of note, UK listed home builders are also among the best performing stocks following reports that the Help to Buy scheme is likely to be extended in this week’s UK budget.
Moody's said ECB plan to require marked to market loan collateral to reveal Italian bank exposures and require more capital.
The unwind of risk off trades which benefited USD/JPY overnight failed to have a meaningful impact on EUR/USD and GBP/USD this morning, with both majors trading sideways for much of the session. However it is worth noting that EUR/USD edged off the best levels of the session following the release of lower than expected Eurozone CPI data. Analysts at Morgan Stanley have revised their EUR/USD forecasts and for Q1 now expect the pair to trade at 1.4000 vs. Prev. forecast of 1.3400, also raised Q4 forecast to 1.3300 from 1.2400. At the same time, analysts lowered Q1 forecast for USD/JPY to 99.00 from 103.00 and Q4 forecast was lowered to 108.00 from 109.00.
Deutsche Bank and Barclays are advising calm over Chinese copper financing worries. Suggesting that the recent CNY drop and sell off of copper will not lead to a mass unwinding of copper backed financing. Codelco and Collahuasi mines reported to be running normally after north Chile is hit by a level 7 earth quake. (BBG) Chinese crude oil imports set to rise 5% to 6% annually by 2015. (Xinhua/DJN)
Iran's Foreign Minister Mohammad Javad Zarif said does not expect March 18 nuclear talks in Vienna to end with agreement. (IRNA)
Libya rebels who have seized three oil export ports said they were ready to negotiate with the government over an end to their blocked if it abandoned plans for a military offensive line. (RTRS)
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In conclusion, here is Jim Reid's overnight recap:
Outside of the obvious problems with Ukraine and Crimea which we'll discuss below, a major issue for markets at the moment is that the Fed, the PBoC and the ECB all seem to be less market friendly than they could be given how Q1 is going. We could even add the BoJ to that list as the sales tax rise looms. Over weekend the PBoC's decision to widen the CNY band suggests to us and our Chinese economists that perhaps they are putting attempts at reforms ahead of growth. More on this below but this week also sees a FOMC meeting where the Fed are set to continue the taper despite mixed data and a more fragile global environment than they would have expected at this point. However the Fed rhetoric this year has suggested that there's a high hurdle for them to stop the current meeting by meeting taper. Meanwhile the ECB seems stuck until there's a more pressing need to act. Our start of the year view was for a decent 2014 after a choppy H1 but only due to what we thought would be central banks that continued to err on the side of more liquidity.
Despite the Chinese and Crimean headlines, Asian equities have shaken off a weaker start to trade higher overnight boosted by the release of China’s 2014-
2020 urbanisation plan on Sunday. While short on detail, the plan calls for China’s urbanisation rate to reach 60% by 2020 from its current level of 53.7%. The plan also targets to help rural residents become urban citizens by increasing the number of those with a “city hukou” to 45% of the total population. The Hang Seng China Enterprises and Shanghai Composite indices are trading 0.20% and 0.45% higher respectively as we type, led by construction companies and cement stocks. The AUDUSD (+0.3%), USDJPY (+0.1%) and S&P500 futures (+0.05%) are all trading on a firmer footing this morning and the KOSPI (+0.3%) has shrugged off reports of multiple missile test launches from North Korea late on Sunday. As expected, USDCNH and USDCNY are trading slightly higher this morning following the PBOC news over the weekend, but the move higher has been anchored by a lower PBoC fixing. Today’s CNY midpoint has been fixed at 6.1321 or 25 pips lower than Friday’s 6.1346. In Japan, the Nikkei (-0.8%) received a small boost after PM Abe’s advisor Hamada said that the BoJ can double the pace of JGB accumulation as an easing option if there are signs that the pending sales tax hike is damaging the economy (Bloomberg). BoJ Governor Kuroda has also made some similarly dovish comments before the Japanese Diet this morning.
Looking at the Crimean situation in more detail, preliminary results from Sunday’s disputed referendum showed that more than 95% of voters supported leaving the Ukraine and joining Russia. The turnout was judged to be relatively high at more than 70%, exceeding the minimum 50% required for the referendum. Though the result will not come as a surprise to most, the overwhelming nature of the result does stand in contrast to the demographics within Crimea which suggest ethnic Russians account for under two-thirds of the population. Over the weekend and overnight, Ukraine’s allies have continued to dispute the legality of the referendum and the White House says that it will not recognise the vote. Either way, the focus is on Russia’s next move and the reaction from Ukraine’s Western allies.
In terms of military responses, already some are suggesting that Russia may move onto eastern Ukraine and certainly the weekend headlines seemed to suggest that this may already have happened to some extent (Reuters). The foreign ministry in Kiev denounced an “invasion” by Russia’s forces into its armored vehicles briefly seized a gas pumping station near the village of Strilkove, just north of Crimean territory – before retreating shortly afterwards. Russia said they had seized the pumping station out of fears it would be targeted by terrorists, according to a Ukrainian defense ministry official. Meanwhile, the Russian troop build up in Crimea continues to increase, with the last count at 22,000 according to the Ukrainian defense minister on Sunday, up from an estimate of 18,400 on Friday. In terms of military operations in Crimea, the Guardian reports that a truce has been agreed between Russian and Ukrainian forces in the Crimean region lasting until March 21st. What happens after March 21st is unclear at this stage. Aside from the military responses, there is also the question of political responses. At this stage our Russian economists’ base case scenario is that Russia will accept Crimea as a new subject of the Russian Federation, though there does remain a probability that Russia will seek concessions from the West in exchange for not going ahead with the formal incorporation of Crimea.
As we go to print, Reuters is reporting that Russia's lower house of parliament will soon pass legislation allowing Crimea to join Russia, quoting the deputy speaker. The Crimean PM was quoted overnight saying that the peninsula will join Russia as soon as possible (Interfax). In terms of sanctions, the EU and the US have unveiled earlier a coordinated set of sanctions, with the US imposing visa bans on unspecified number of Russian and Ukrainian individuals, while the EU moved to suspend visa and investment talks with Russia. Further sanctions are possible according to the US and EU officials in case the Crimean referendum is recognized officially by Russia. Indeed Reuters is reporting that the EU will imminently impose travel bans and asset freezes on a list of people in Crimea and Russia who “threaten the territorial integrity” of Ukraine. The initial list of 120 to 130 names, including senior figures in Russia's military and political establishment, will be whittled down to perhaps "tens or scores" of people before EU foreign ministers take the final decision in Brussels on Monday (Reuters). Germany’s foreign minister Frank-Walter Steinmeier said a level of sanctions against Russia will be decided on Monday, and he said he would argue for a regime of gradually tightening sanctions.
Moving to the other developing story of the weekend which was the PBoC’s announcement that it will be widening the yuan’s daily trading band. The announcement means that the central bank will allow the exchange rate to fluctuate by 2% from the daily midpoint set each morning (widening from +/- 1% previously). The move was widely anticipated but our FX and fixed income strategists think the move reinforces the notion that authorities in China are putting a priority on reforms over growth. As such, into 2014, further reforms are likely to happen even if growth was to slow further. Though we are likely to see a higher USDCNH and USDCNY in the spot market in a short term reaction to this news, our FX strategists think the PBoC could print the USDCNY fixing below the market’s expectation for the next few days to (1) calm the market’s nerves in the near-term and (2) prevent the perception of outright significant depreciation. Over the slightly longer term, DB’s Chinese economist Lin Li believes that the widened trading may encourage investors to position for further yuan depreciation, extending the unwinding of short USD positions
which was valued at USD59bn in January. Li writes that clearly there is a risk that this process could be disorderly, although the USD3.8tn in foreign exchange reserves held by the PBOC would seem to be adequate defense against such a risk. Indeed, the PBOC emphasized in this weekend's press conference that the trading band widening won’t lead to sharp depreciation or appreciation in the short term. Indeed, it will be interesting if the CNH does move above 6.20 in the short term, as a number of technical factors start to come into play from offshore leveraged FX structures (e.g. target redemption forwards) which start to incur losses at the 6.20 level and above.
Amid the happenings in China and Ukraine, it’s easy to forget that we have the 2-day FOMC meeting this week (Tuesday to Wednesday). It’s the first meeting under the Janet Yellen who will also holding her first post-meeting press conference. While the Fed is expected to continue with the current pace of tapering, DB’s economists (and the broader market) expect the Fed to abandon its numerical unemployment and inflation thresholds, Instead it is expected that the Fed will adopt a more qualitative approach toward forward rate guidance. DB’s Joe Lavorgna notes that this would be consistent with recent public comments by monetary policymakers (e.g. Dudley and Plosser). In terms of what the qualitative guidance will look like, Yellen’s speech from last March discussed the broad array of indicators she was evaluating to determine whether a substantial improvement in the outlook for the labor market had occurred. These indicators include but are not limited to measures of gross job flows (job losses and hiring), quit rates, spending and economic growth. There has also been market talk that the Fed may split its current guidance in two parts - one that stays the same with unemployment above the current threshold of 6.5%, and another more qualitative form of guidance once unemployment falls below that level (Bloomberg).
Of the US data being released this week, of most interest will be Thursday’s jobless claims which cover the survey period for March payrolls. On the manufacturing side, the NY Empire State and Philly Fed manufacturing surveys, released on Monday and Friday, respectively, will get some attention, though the former has been fairly volatile of late. On the housing side, the NAHB homebuilding sentiment index for March (released on Monday) will be interesting given that it has been one of the most weather-impacted data points to date. Existing home sales for February will be released, though this may be subdued due to weather effects.
Elsewhere in the week ahead, the UK’s annual budget will be delivered on Wednesday which will be the penultimate budget before the 2015 general election. Markets are expecting an upgrade to the growth outlook which should feed through to the projected deficit. The UK prints Rightmove house prices today, the BoE publishes their latest MPC minutes on Wednesday and the latest UK employment report is due on the same day. In continental Europe, notable data releases include Eurozone CPI (Mon), the German ZEW survey (Tues) and consumer confidence (Fri). In the EM world, the developments between Russia and the Ukraine will dominate but there are also central bank policy meetings in Turkey (Tues), Colombia and Mexico (Fri). A busy week from all angles it seems!!