Has the market done it again? Two weeks ago, Putin's first speech of the Ukraine conflict was taken by the USDJPY algos - which seemingly need to take a remedial class in Real Politik - as a conciliatory step, and words like "blinking" at the West were used when describing Putin, leading to a market surge. Promptly thereafter Russia seized Crimea and is now on the verge of formally annexing it. Over the weekend, we had the exact same misreading of the situation, when the Crimean referendum, whose purpose is to give Russia the green light to enter the country, was actually misinterpreted as a risk on event, not realizing that all the Russian apparatus needed to get a green light for further incursions into Ukraine or other neighboring countries was just the market surge the algos orchestrated. Anyway, yesterday's risk on, zero volume euphoria has been tapered overnight, with the USDJPY sliding from nearly 102.00 to just above 101.30 dragging futures with it, in advance of Putin's speech to parliament, in which he is expected to provide clarity on the Russian response to US sanctions, as well as formulate the nation's further strategy vis-a-vis Crimea and the Ukraine.
In addition to Ukraine, concerns are finally starting to mount over the previously reported second Chinese default in under a month, only this time the bail out wild card may be used as usual. Bloomberg reports that officials from Ningbo branch of People’s Bank of China and China Banking Regulatory Commission have joined talks on collapsed real estate developer Zhejiang Xingrun Real Estate Co., according to officials familiar with the matter. Possible resolutions include local government bailing out co., which has 3.5b yuan in debt, according to the officials.
Away from the developments in EM, today sees the start of a 2-day FOMC gathering, and the first chaired by Yellen. This will be followed by the release of the Fed’s latest economic projections as well as a press conference given by Yellen. Whilst the huge weight of Fed speak so far this year suggests another $10bn taper there is debate as to what the Fed will do with its forward guidance, specifically the 6.5% unemployment rate threshold that seems fast headed to irrelevance given the unemployment rate is hovering at 6.7%. The challenge the Fed faces is altering its guidance without leading the market to bring forward expectation of future rate hikes. Given the Fed’s seeming commitment to shrinking its asset purchases this is important as holding down interest rate expectations will increasingly become the Fed’s key expansionary tool.
Profit taking, together with touted positioning ahead of the upcoming risk events buoyed demand for safe haven assets this morning, which in turn resulted in stocks trading lower since the get-go. At the same time, the release of weaker than expected ZEW survey further reinforced the cautious sentiment, resulting in broad based selling pressure on EUR. Apart from digesting the release of the latest ZEW survey, there was little for market participants to seek direction from. However it is worth noting that it was announced that Ben Broadbent, an external member of the Bank of England's Monetary Policy Committee, will replace Charlie Bean as deputy governor for monetary policy. Going forward, market participants will await the release of the latest US CPI, Housing Start and Building Permits data, as well as the weekly API report after the closing bell on Wall Street.
On the macro front, moments ago Germany reported a collapse - the third in a row - in the ZEW Survey, where expectations crashed from 55.7 to 46.6, on expectations of a 52.0 number. That soaring EUR is starting to really hurt Europe, but feel free to take your complaints to the PBOC which has been gobbling up EURs with panache in recent weeks, as well as the department of magic at the ECB. Aside from this we will also get US CPI (markets expecting this to be unchanged at +0.1% MoM), housing starts (consensus +3.4% MoM) and building permits (consensus +1.6% Mom)
Bulletin news summary from Bloomberg and RanSquawk:
- Cautious sentiment dominated the price action after German investor confidence fell to the lowest since August.
- German constitutional court confirms legality of Eurozone's ESM rescue fund and upholding preliminary ruling from 2012.
- Market participants will now await the release of the latest US CPI, Housing Start and Building Permits data, as well as the weekly API report after the closing bell on Wall Street.
- Treasuries gain, 7Y and 10Y notes lead, as Fed’s two-day meeting begins today amid expectations for additional $10b cut in QE and possible changes to forward guidance and 6.5% unemployment rate threshold.
- Putin supported a request from Ukraine’s separatist region of Crimea to join Russia, defying U.S. and EU sanctions in the worst standoff between Russia and the West since the Cold War
- Germany’s ZEW Investor Confidence fell to 46.6 (est. 52) in March from 55.7 the prior month, the third straight month decline as political uncertainty in Ukraine threatens to weigh on a recovery in Europe’s largest economy
- China’s central bank and China Construction Bank held emergency talks today over whether or not to bail out Zhejiang Xingrun Real Estate, FT reports without saying where it got the information
- China’s benchmark money-market rate climbed to the highest level in almost two weeks as the central bank stepped up cash withdrawals
- Greece will probably sell bonds for the first time in four years before May as the nation seeks to rebuild its finances following an international bailout, Infrastructure Minister Michalis Chrisochoides said
- Australia’s central bank said it saw more signs record-low interest rates were boosting growth, and reiterated a period of steady borrowing costs was likely
- Ben Broadbent, an external member of the Bank of England’s Monetary Policy Committee, will replace Charlie Bean as deputy governor for monetary policy
- A snapshot of Obamacare enrollment in seven states suggests the law hasn’t significantly increased competition in health insurance markets, the Kaiser Family Foundation reported
- Sovereign yields steady. EU peripheral spreads little changed. Asian equities gain. European equity markets, U.S. stock-index futures decline. WTI crude gains, gold lower, copper little changed
US Event Calendar
- 8:30am: CPI m/m, Feb., est. 0.1% (prior 0.1%); CPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.1%)
- 8:30am: Housing Starts, Feb., est. 911k (prior 880k); Housing Starts m/m, Feb., est. 3.5% (prior -16%); Building Permits, Feb., est. 960k (prior 937k, revised 945k)
- Fed opens 2-day FOMC meeting
- 11:00am: POMO - Fed to purchase $1b-$1.25b in 2036-2044 sector
China Feb new home prices rose Y/Y in 69 cities vs. 69 cities in Jan, and rose M/M in 57 cities vs. 62 cities in Jan. (BBG)
- All China New Home Prices (Feb) Y/Y 8.7% (Prev. 9.6%)
- Beijing Feb new home prices rose 12.2% Y/Y (Prev. 14.7%)
- Shanghai Feb new home prices rose 15.7% Y/Y (Prev. 17.5%)
EU & UK Headlines
German ZEW Survey Expectations (Mar) M/M 46.6 vs. Exp. 52.0 (Prev. 55.7)
German ZEW Current Situation (Mar) M/M 51.3 vs. Exp. 52.0 (Prev. 50.0)
Eurozone ZEW Survey Expectations (Mar) M/M 61.5 (Prev. 68.5)
German constitutional court confirms legality of Eurozone's ESM rescue fund and upholding preliminary ruling from 2012. Reiterated Germany's liability to ESM must be limited to EUR 190bln, any more needs parliamentary approval.
Of note, it was reported this morning that BoE's Broadbent has been appointed as the Deputy Governor for monetary policy, replacing Bean. At the same time, Shafik will take MPC seat currently held by Paul Fisher. While Andy Haldane to be appointed as Chief Economist at BoE replacing Spencer Dale's MPC seat.
Following comments by Greek infrastructure minister that the country targets market return before Euro elections prompted speculation that the country may surprise markets with a bond auction in May.
Vice President Biden left yesterday evening for Warsaw, where he'll meet today with Polish Prime Minister Donald Tusk and President Bronislaw Komorowski. He'll meet separately with Estonian President Toomas Hendrik Ilves. (BBG/RTRS)
Consumer services and basic materials and sectors underperformed this morning, with Asos trading lower by over 10% among the notable movers. Lower metal prices amid growing fears of more problems in China surrounding credit markets.
At the same time, telecoms fared poorly, with Vodafone under pressure after Fitch Ratings placed Vodafone Group Plc's 'A-' Long-term Issuer Default Rating (IDR) on Rating Watch Negative (RWN).
USD/JPY benefited from safe haven related flows, which saw the pair move back towards the 101.20 and a break of this level which as noted by analysts at Morgan Stanley will open open up the door towards 97.00 level. Of note, USD/CNY advanced to its highest level since April (6.1950 level), prompting fears that a move above the key 6.20 level which may trigger further unwinds linked to TRF (Target Redemption Forward) may result in a renewed pressure of the fragile borrowing market in China.
RBA March minutes repeated that most prudent course likely period of steady rates and that the cash rate could remain at its current level for some time. The minutes also stated stated that the drop in AUD is to assist in achieving balanced growth,but noted that AUD remained high by historical standards. (BBG/RTRS)
Nomura recommended long USD/JPY as the FOMC are to alter forward guidance. (BBG)
India raised import tariff value on gold from USD 422 per 10 grams to USD 445 per 10 grams. The finance minister had previously eased jewelers by saying that gold import tariffs would be reviewed by the end of this month as the current account deficit is put under control. (Resource Investor)
Talks started today between Iran and six world powers, the US, UK, France, Germany, China and Russia, in Vienna, over the future of Iran's nuclear program. (RTRS)
Shell and Phillips 66 walked away with around 3.3mln bbl of the 5mln released from the Strategic Petroleum Reserve recently. (BBG)
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The full overnight recap via DB
China and Ukraine have been the dominant themes over the last few trading sessions but now we have a 2-day FOMC meeting to help distract us, the first chaired by Mrs Yellen. This week has so far started off a lot better than last week ended, with the S&P 500 (+0.96%) managing to retrace about half of last week’s losses yesterday. The positive momentum has carried through to overnight markets where we are seeing a constructive market tone for the second day running.
Taking a quick look at Asian markets, the gradual move higher in USDCNH (+0.2%) and USDCNY (+0.2%) continues today. The PBOC’s renminbi fixing came in at 6.1341 today, which is 20pips weaker than the 6.1321 set yesterday. Today’s move brings the cumulative devaluation of the CNY and CNH to around 2.5% since January. This is relatively small in a global context, but fairly notable relative to the recent history of the renminbi. DB’s FX strategist Bilal Hafeez writes that the CNY has been too strong compared to other EM surplus currencies - most of which reached a high against the US dollar in early 2012. The extraordinarily high carry was no doubt a key factor that allowed CNY to march higher against the dollar. With that support gone, CNY should weaken with levels such as 6.30 or more possible over the course of this year. Asian equities are enjoying a solid session led by a bounce back in the Nikkei (+1.4%) and solid gains in the KOSPI (+0.8%) and the Hang Seng (+0.5%). Chinese equities are lagging the broader rally somewhat (Shanghai Comp +0.2%) with some concern over the reported collapse of a local property developer owing more than US$500m in bank loans (Zhejiang Xingrun Real Estate). The story was run by a number of newswires yesterday, but it’s safe to say that the quality of Chinese bank loans made to real estate developers is not a new concern for markets. China’s National Bureau of Statistics published its latest new home prices in China's 70 major cities which showed that prices rose 8.7% yoy in February, versus 9.6% a month earlier. Elsewhere the RBA minutes contained no major surprises, and AUDUSD is largely unchanged this morning.
In terms of the latest on Ukraine and Russia, shortly after EU and US sanctions were declared against Russian/Crimean individuals, the Kremlin announced that Putin signed a decree officially recognizing Crimea as a “sovereign and independent state” called the Republic of Crimea. This came after Russia made its first offer of a diplomatic solution to the Ukraine crisis by suggesting that a international support group be used to help mediate between Western governments and Russia whilst guaranteeing “territorial integrity and neutral military-political status” for Ukraine. The negotiation offer was swiftly dismissed because one of the conditions was recognition of the Crimean referendum. In terms of the sanctions themselves, they were not deemed at this stage to materially threaten economic trade flows or the supply of energy into the EU, and do not apply to Putin. This was a relief to many yesterday. So what next for Ukraine and Russia? Firstly in terms of sanctions against Russia, both the EU and US have left the door open for the broadening of injunctions. An EU heads of government meeting in Brussels on Thursday may lay out a tougher range of economic sanctions to be imposed if there is fresh Russian intervention. Similarly, President Obama added that going forward the US can calibrate its response based on whether Russia chooses to escalate or de-escalate the situation. In terms of Russia’s next move, a reportedly defiant Putin will address a joint session of Russia's parliament today to speak about Crimea – scheduled for 3pm local time or 11am London time. Some expect Putin to endorse a request from Crimea’s parliament to annex it in keeping with the results of Sunday’s referendum (NY Times).
DB’s EM strategists think that Russian military intervention in eastern Ukraine is a tail risk at this stage though further agitation in some eastern cities would not be a surprise (EM Daily 18th March). That aside, there are already a number of processes in place to fast track the integration of Crimea into the Russian Federation. Russian lawmakers said they would accelerate bills to give out Russian passports to local Crimean residents (AFP). Crimean lawmakers have approved legislation to make the Russian ruble the official currency alongside the Ukrainian hryvnia. The hryvnia remains an official currency until January 1, 2016. Lawmakers also adopted a resolution stating that on March 30, Crimea will move to Moscow Standard Time. A big unknown at the moment is how Crimea will deal with its energy and water requirements. According to CNN, 90% of Crimea’s water, 80% of its electricity and roughly 65% of its gas comes from Ukraine. In addition to that, about 70% of Crimea's $1.2bn budget comes directly from Kiev.
Away from the developments in EM, today sees the start of a 2-day FOMC gathering, and the first chaired by Yellen. This will be followed by the release of the Fed’s latest economic projections as well as a press conference given by Yellen. Whilst the huge weight of Fed speak so far this year suggests another $10bn taper there is debate as to what the Fed will do with its forward guidance, specifically the 6.5% unemployment rate threshold that seems fast headed to irrelevance given the unemployment rate is hovering at 6.7%. The challenge the Fed faces is altering its guidance without leading the market to bring forward expectation of future rate hikes. Given the Fed’s seeming commitment to shrinking its asset purchases this is important as holding down interest rate expectations will increasingly become the Fed’s key expansionary tool. As DB’s Peter Hooper sees it, the Fed has a number of options. It could do nothing in the hope that not changing the message even as it becomes irrelevant will mean no change in market expectations. It could drop the specific mention of the 6.5% threshold whilst leaving in place its current reference to other labour market and inflation indicators, or it could drop mention of the 6.5% threshold and strengthen its current references to other labour market indicators – for example highlighting their commitment to substantial further progress in reducing unemployment and raising inflation up to target, so long as inflation expectations remain stable. Peter expects the Fed will opt for this final option possibly adding some indication that most members of the Committee currently expect economic conditions to allow them to begin to raise rates sometime after mid-2015. The press conference and the release of the economic projections certainly give the Fed a range of communication options which they aren’t scheduled to have again until the June meeting so it is fair to say that something is expected from the Fed tomorrow.
In terms of yesterday’s US data, there were two key manufacturing data points worth highlighting. The first of these was the February industrial production report which impressed on the headline (0.6% MoM vs 0.2% consensus). The gain was driven by manufacturing production which rose 0.8% versus expectations of a 0.3% gain. DB’s Joe Lavorgna interprets the February data as suggesting that the drags from weather are abating and thereby clearing the way for a late-quarter or early Q2 snapback in hiring, production and consumption. The second datapoint to highlight was the NY Empire Fed survey which disappointed relative to expectations (5.61 vs 6.5 exp). On a more positive note it did improve 1.1pts versus February’s 4.5 reading and new orders (+3.1 vs. -0.2), shipments (+4.0 vs. +2.1) and inventories (+7.1 vs. -5.0) improved modestly in the month – perhaps suggesting that manufacturing is picking up following the inclement weather earlier in the year. Across the Atlantic, Euroarea CPI again disappointed expectations by falling to +0.7% yoy (vs 0.8% previous and expected) which is a 4.5yr low. The EURUSD was little changed on the data however.
Reviewing some of the other headlines over the last 24 hours, Moody’s downgraded Argentina’s sovereign bond rating by one notch to Caa1 late yesterday. The rating agency cited the country’s significant fall in official reserves which have dropped to $27.5bn from a high of $52.7bn in 2011. The Argentine Peso was quoted around 0.3% weaker at 7.925 in late Monday trading. In China, there was an interesting article in the FT suggesting that all the negative attention on China’s corporate defaults has caused a flight to the relatively safety of bonds issued by local government financing vehicles (LGFVs). LGFVs have created headlines over the last few years with many blaming these financing platforms for the build up in leverage at the local government level – however they were described in the article as a relative “safe haven”. In Europe, Italian PM Renzi said after meeting with Angela Merkel that Italy “is not asking to exceed treaty limits” with regards to the budget. Renzi has said recently that his goal is to bring in tax cuts and boost growth in Italy, which will hopefully reduce Italy’s debt as a percentage of output (Reuters).
Turning to the day ahead, the latest ZEW survey will be key data release in Europe which will be followed by US CPI (markets expecting this to be unchanged at +0.1% MoM), housing starts (consensus +3.4% MoM) and building permits (consensus +1.6% Mom). Putin’s speech to the Russian lower parliament may provide clues as to Russia’s next move in Ukraine. The speech is scheduled for 11am London