In an overnight session that had little in terms of macro and news flow, the most notable event was that the Dollar-Renminbi finally crossed above 6.20 which as a reminder is the suggested "max vega" point beyond which even more max pain lies for levered accounts long the Yuan.
However, in a world in which nothing is discounted and in which no news matters, the "market" broadly ignored this significant development (which as we explained further yesterday means an accelerated unwind of Chinese Commodity Funding Deals, and a potential drop in global commodity prices), and eagerly awaited today's non-event of an FOMC conference, where nothing new will be announced save for the novelty of it being Yellen's first appearance before the press as the head of the Fed. And of course the Fed will almost certainly scrap the 6.5% employment threshold, as the FOMC scrambles to make the economy appear worse than it is reported to be, in a stark reminder that the biggest optically manipulated tool meant to boost confidence in the recovery was nothing but a number meant to serve political purposes.
Cautious sentiment dominated the price action again in Europe this morning, with stocks trading lower as market participants await the upcoming FOMC decision due out later today. Much of the attention this morning was on UK macroeconomic publications, with the most recent BoE minutes indicating that there is lack of unity amongst the MPC, while the latest jobs report showed that number of people in employment highest since records began in 1971. As such, GBP has outperformed EUR this morning, with the shorter dated UK paper underperforming EU equivalent.
Going forward, market participants will look forward to UK Chancellor presenting Budget, the release of the latest weekly DoE data and then await the FOMC decision. Expect a new all time high in the S&P 500 just because.
Bulletin news summary from Bloomberg and RanSquawk
- BoE MPC voted 9-0 for unchanged QE and bank rate, range of views over inflation outlook.
- According to German Banking Association BDB, German economy to grow 1.8% in 2014, 2% in 2015, adding that interest rates much too low for Germany.
- Going forward, market participants will look forward to UK Chancellor presenting Budget, the release of the latest weekly DoE data and then await the FOMC decision.
- Treasuries steady before Fed rate and QE decision at 2pm ET, Yellen’s first press conference as Fed chair at 2:30pm; market looks for additional $10b taper, discussion of changes to forward guidance, unemployment rate threshold.
- Russia cemented its claim to Crimea as Putin showed no sign of backing down in the standoff over Ukraine’s breakaway Black Sea region, prompting Western leaders to vow further sanctions this week
- Britain’s jobless rate held at 7.2% in the three months through January, in line with median forecast in a Bloomberg survey
- Bank of England policy makers said the pound’s strength is putting downward pressure on inflation and there’s a risk of further increases as the economy recovers
- Chancellor of the Exchequer George Osborne to present his budget today
- China’s yuan slid below 6.20 per dollar for the first time since April as the central bank cut the currency’s fixing amid concern that rising financial risks will slow growth
- Investors are demanding the highest premium to hold Chinese dollar notes in almost seven months as the collapse of a developer and the first onshore bond default fuel speculation missed payments will spread
- Less than 12 months after saying the Fed’s stimulus and a plunge in defaults would support the market for junk-rated debt for another four years, Jeffrey Gundlach is trimming DoubleLine’s allocations to the asset class
- JPMorgan agreed to sell its physical commodities unit to Mercuria Energy Group Ltd., according to two people with knowledge of the matter
- Obama is a polarizing figure in some districts and states, especially those where Democrats are in closely competitive races. Even while raising money, the president runs the risk of hurting Democratic candidates in nearby districts
- Sovereign yields mixed. EU peripheral spreads narrow. Asian equities mixed, Nikkei +0.4%, Shanghai -0.2%. European equity markets lower, U.S. stock-index futures gain. WTI crude little changed, gold and copper lower
US Event Calendar
- 7:00am: MBA Mortgage Applications, March 14: -1.2%, prior -2.1%
- 8:30am: Current Account Balance, 4Q, est. -$88b (prior - $94.8b)
- 2:00pm: FOMC seen holding overnight bank lending rate in 0%-0.25% range; Fed QE3 Purchases, est. $55b (prior $65b)
- 2:30pm: Fed’s Yellen holds news conference
BoJ board member Kiuchi said side-effects of more easing could exceed benefits and that excessive easing could hurt long-term economic growth. (BBG)
Fitch said Zhejiang Xingrun default reflects China's housing dynamics and believes there will be further defaults in this industry. Fitch also added that China banks may favour larger developers after defaults. (BBG)
EU & UK Headlines
BoE MPC voted 9-0 for unchanged QE and bank rate, range of views over inflation outlook.
- Rise in Q4 unemployment and higher self-employment suggests greater labour market slack, but low youth productivity points other way.
- Official wage growth weak by historic standards and indications given by other surveys.
UK ILO Unemployment Rate (Jan) 3M/3M 7.2% vs. Exp. 7.2% (Prev. 7.2%)
- Jobless Claims Change (Feb) M/M -34.6k vs. Exp. -25.0k (Prev. -27.6k, Rev. -33.9k)
- Number of people in employment highest since records began in 1971.
According to German Banking Association BDB, German economy to grow 1.8% in 2014, 2% in 2015, adding that interest rates much too low for Germany. (BBG)
Germany sells EUR 3.262bln 1.75% 2024 Bunds, bid/cover 1.6 (Prev. 1.1), yield 1.58% (Prev. 1.64%), retention 18.5% (Prev. 24.1%)
FOMC Decisions and Projections due at 1800GMT/1300CDT, followed by Press Conference from Chair Yellen at 1830GMT/1330CDT.
- Vast majority expect another taper of USD 10bln this month, taking monthly bond buys down to USD 55bln per month.
- Markets may look for indications of how the committee will adjust its forward guidance with regard to a hike of the federal funds rate.
German DAX index has outperformed its peers this morning, supported by banking stocks and also BMW, which advanced after the company said it targets significant profit gain. German banks benefited from the reports by Boersen-Zeitung citing sources that German federal and state finance ministers have agreed to allow banks to treat interest they pay on subordinated debt as an operating profit. At the same time, SAP shares traded lower this morning as market participants reacted to yesterday's weaker than expected earnings report by Oracle, which also saw shares fall 5% in after market trading hours.
Of note, USD/CNY advanced above the 6.20 level, which various analysts flagged up as a level which may begin to trigger further unwind linked to TRF (Target Redemption Fund) products and thus potentially lead to further pressure on the credit market in China. On that note, according to a Chinese government source, a weaker CNY and FX sales could prompt a cut to the Reserve Requirement Ratio, with 6.30 in USD/CNY seen as a medium-term limit. (MNI)
WTI crude futures have outperformed Brent this morning, while also recovering API inspired losses as overnight news of the earlier than expected Seaway pipeline's opening gave support to the reversal. A consequence of this positive news flow over the removal of bottlenecks at Cushing has been WTI and Brent crude spreads narrowing by 3%.
US API Crude Oil Inventories (Mar 14) W/W 5920k vs. Prev. 2600k
- Cushing Crude Inventories (Mar 14) W/W -1040k vs. Prev. -1300k
- Gasoline Inventories (Mar 14) W/W -1410k vs. Prev. -2150k
- Distillate Inventories (Mar 14) W/W -674k vs. Prev. -839k
Iranian crude exports to Asia rose sharply in February, with oil exported at levels higher than allowed under Western sanctions for a fourth straight month. (RTRS)
According to sources, JP Morgan has agreed to sell its commodities trading business to Switzerland-based energy-trading company Mercuria Energy Group. The terms of the deal aren't yet clear, but when the bank first opened its books to potential buyers in October it valued the assets at USD 3.3bln.
China Iron and Steel Association said that China steel average production was 2.1mln tons/day in first 10 days of March, which was the highest since mid-November. (BBG)
China plans to create 6-8 large scale mining groups over the next decade each with an output target of at least 30mln tonnes. (BBG)
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The full overnight summary by DB's Jim Reid
Attention turns to today’s FOMC and Yellen’s debut press conference as Fed chair, where the broad market consensus is that the Fed will taper by another $10bn while moving away from its current quantitative rate guidance. For the record, DB’s Peter Hooper thinks consensus appears to have been formed that it’s time to update the Committee’s forward guidance. However the center of the FOMC wants to achieve this change without giving the market reasons to raise interest rate expectations significantly above the path that the guidance has implied up to now. To achieve this, Peter thinks that the Fed is more likely to 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 also expects that either the new statement or the press conference will acknowledge the growing importance of the “dot chart” making more specific use of the Summary of the Committee's Economic Projections (SEP), for interest rates in particular, to guide market expectations. The SEP could show that most members of the Committee currently expect economic conditions that would allow them to begin to raise rates to be in place by sometime after mid-2015. This message could be bolstered by adding the observation (again inspired by the SEP) that most on the Committee also expect that various headwinds are likely to be in place that will warrant raising rates only slowly once the process has begun.
In terms of other tweaks to the FOMC statement, the WSJ’s Hilsenrath writes that the Fed will likely tone down their assessment of growth in activity, reflecting the recent soft bout of economic data and will probably reference the transitory effects of unseasonable weather. Meanwhile, the FT’s Hildebrand warns that the time for Fed tightening could be nigh given that some in the Fed think the fall in participation rates appear to be more structural than cyclical. Hildebrand notes that wage growth is at 2.5% versus a 10 year average before the financial crisis of 3.5%. For some perspective, following the last recession wage growth returned to that level by the end of 2004 – by which point the Fed funds rate had already been increased four times (FT).
Ahead of all this, risk is having a mixed overnight session, reflecting some caution going into the FOMC and renewed fears over a slowdown or deleveraging event in China. Shanghai copper futures are down 0.1% and eyes are again on USDCNH (+0.25%) and USDCNY (+0.05%) with the latter approaching a key 6.20 technical level (6.1994 as we type). The latest PBoC CNY fixing hasn’t helped matters much, coming in at 6.1351 or 10 pips above yesterday’s midpoint, and in the process notching up the weakest fixing since early December 2013. Onshore Chinese rates climbed by a not-insignificant amount today (7 day repo +80bp) despite the continued weakening in CNY.
There is some lingering concern over the state of Chinese property developers amid the reported collapse of Fenghua city developer Zhejiang Xingrun, which is leading to underperformance in Chinese USD bonds and the Shanghai Property equity index (-1.4%). The broader Shanghai Composite is down as well overnight (-0.9%). Adding to worries, late on Tuesday the PBOC denied that it was not involved in dealing with the collapse of Zhejiang Xingrun, and there is concern that a number of banks (as many as 20 domestic banks) may have exposure to the troubled developer. Though the systemic risks from this potential default are minimal given the single-city concentration of the developer and relatively small size of its bank obligations (around US$550m), it’s probably reflective of tough operating conditions for many smaller developers in China.
Outside of China, the Nikkei (+1.3%) has bounced back strongly from early losses though the exact catalyst for this unclear. The Feb Japanese trade report again disappointed (adjusted trade balance for February –JPY1.13trn vs –JPY907bn expected). Within the detail of the trade report, Japanese exports rose 9.8% YoY, which was lower than the 12.5% expected. Overall, the Japanese trade deficit has come in weaker than market consensus in 8 of the last 10 months. On a more positive note for PM Abe and the BoJ, land prices in Japan’s three largest cities rose for the time in six years in January. Adding to recent positive wage/hiring anecdotes, major Japanese retailer Fast Retailing said it was converting 16,000 part time contractors to full time workers (Kyodo News).
Coming back to yesterday, there was some relief in Putin’s statement that he does not plan to seize other regions of the Ukraine outside of Crimea, judging by the gains in the S&P500 (+0.72%) and Stoxx600 (+0.64%). After a solid Monday and Tuesday, the S&P500 is back within 6pts of all time highs. Our Russian economics team thinks that the key message in Putin’s address to the Federal assembly was that “Russia does not need division of Ukraine” which may render the escalation of tensions in the eastern part of Ukraine less likely. This in turn also lowers the probability of a significant escalation of sanctions vis-à-vis Russia. Overall, our Russian economists note that Putin’s direct appeal to the West does signal greater openness to negotiations, but regional risks do remain elevated due to the uncertainty over further developments in eastern Ukraine as well as the contours of the eventual accord between Russia and the West.
Nevertheless despite the assurances by Putin, there were reports that Russia was boosting its military presence on the eastern Ukraine border and that Russian forces were concentrated near major roads into Ukraine, according to Bloomberg who cited the Kharkiv city governor. Pro-Russian forces also reportedly stormed a Ukrainian military base in the Crimean capital Simferopol, resulting in one casualty (Bloomberg), an incident which was described by the Ukrainian PM as a “war crime” (BBC). Accounts of the incident are conflicting - a local Crimean news agency suggested that a local defense unit had come under fire, while Interfax-Ukraine reports that both local defense forces and Ukrainian servicemen came under fire at the same time. US Vice President Joe Biden said that the EU and US plan more sanctions aimed at Russia, and stressed to a number of eastern European NATO allies that the US was committed to defending their security.
In spite of all this Moscow’s MICEX closed with gains of 4%, and a number of Russian ADRs trading in the US such as Gazprom (+3.6%) and Sberbank (+5.0%) recorded strong gains. Putting Russia aside, EM had a buoyant session, allowing sovereigns such as Hungary to price US$3bn in bonds, but Russia was forced to cancel its sixth ruble bond auction this year due to “unfavourable market conditions”. The ruble gained 0.1% against the USD, and the Russian Central Bank said it had no plans to introduce capital controls to defend the RUB.
Back in DM, 10yr UST yields drifted lower (-2bp) after a somewhat lower than expected US February CPI reading (1.1% YoY vs 1.2% expected and 1.6% previously) and weaker than consensus February housing starts (-0.2% vs 3.4% expected). Housing starts were dragged lower by activity in the US northwest, suggesting some weather impact lingered during the month. US building permits were substantially above consensus at 7.7% MoM (1.6% expected). In Europe, markets lauded the first Greek bank to access the international bond market in five years (Financial Times) after Piraeus Bank priced a EUR500m 3yr notes at a yield of 5.125%. Piraeus joins banks from Portugal, Spain and Ireland in issuing their first post-crisis unsecured bonds.
Looking at the day ahead, all eyes will be on the FOMC with the statement due at 6pm London time. Yellen’s debut press conference follows 30 minutes afterwards. Ahead of that there isn’t too much data from Continental Europe but the UK will print its latest jobs report and the Bank of England releases its minutes from the March 5th/6th MPC meeting. The UK’s 2014 budget will be delivered to parliament today. DB’s George Buckley writes that he expects that the Budget will be fiscally neutral – either over the forecast horizon or across policy measures. Buckley also notes that this year’s budget may provide the government the best chance for “electioneering” ahead of the May 2015 general elections.