It's Op-Ex Day, And The Buying Panic Is Late
After a solid day for risk yesterday, surging higher on a continuation of the rumor that Japan's economy will deteriorate so much the BOJ will have to print more money (even though overnight ex BOJ governor Sekido said Kuroda won't print more) we have a more cautious tone this morning heading into the Easter long weekend. A double earnings miss from Google and IBM following the US market close, comments from the Chinese Premier suggesting that the government will keep its policy settings unchanged, and a press conference from Russia’s President Putin in which the Russian president as expected, has refused to back down, has put a small dampener on sentiment today. Add the fact that due to Good Friday April equities Op-Ex will take place today and trading in the next 9 hours promises to be more unrigged than ever, especially if the NY Fed trading desk manages to slam the VIX into single-digit territory.
Some detail: Stocks in Europe (Eurostoxx50 -0.5%) failed to benefit from a positive close on Wall Street, as a combination of less than impressive earnings on both sides of the pond, together with position squaring ahead of the long weekend weighed on sentiment. Asian equities traded relatively flat with a lack of newsflow to guide price action.
GBP/USD has printed its highest reading in 5 years as markets continue to hold a bullish view on the time frame for a BoE rate hike.
Going forward, the key event is the start of a two-day, four-party summit with the foreign ministers from the US, EU, Russia and Ukraine begins today in Geneva to discuss the ongoing situation in Ukraine, and will help determine the likelihood of further sanctions against Russia in the short term – this might determine how markets open early next week. In terms of data, most of the focus will be on US jobless claims and the Philly Fed outlook survey. Consensus is expecting a small increase to 10.0 (from 9.0 previous) in the latter. There are plenty of US corporates due to announce earnings before the NY opening bell, including Morgan Stanley, Goldman Sachs and General Electric. It’s a 4 day weekend in much of continental Europe and the UK but equity and bond markets in the US will reopen on Monday.
Bulletin summary headlines from Bloomberg and RanSquawk
- Treasuries little changed in pre- holiday trading, with 30Y yields lower by ~3bps on the week, 2Y and 10Y little changed, 3Y-7Y yield higher by 3.6bps-6bps amid Ukraine violence, China growth concern, Yellen comments that Fed will remain accommodative.
- Ukrainian forces killed three pro-Russian militants after an attack on a national guard base in the country’s east as the U.S. and its European allies sat down with Ukraine and Russia to discuss the crisis
- Putin rejected claims from Ukraine that he’d deployed troops there and said he would fight to defend compatriots in other countries
- China’s slump in property sales and construction is spurring speculation that the government’s four-year-old campaign of real-estate controls will start to crack
- China’s interest-rate swaps fell by the most since June after the government said it will lower reserve-requirement ratios at some rural banks
- Malcolm Young, a founding member and guitarist of Scottish- Australian rock band AC/DC, will take a break from playing due to ill health, while the group has pledged to keep making music
- Sovereign yields mostly higher; EU peripherals rally. Asian stocks mixed; Nikkei little changed while Shanghai -0.3%. European equity markets, U.S. stock futures decline. WTI crude and copper higher, gold lower
US Event Calendar
- 8:30am: Initial Jobless Claims, April 12, est. 315k (prior 300k); Continuing Claims, April 5, est. 2.780m (prior 2.776m)
- 9:45am: Bloomberg Economic Expectations, April (prior -12)
- 9:45am: Bloomberg Consumer Comfort, April 13 (prior -31.9)
- 10:00am: Philadelphia Fed Business Outlook, April, est. 10 (prior 9)
- NO POMO today
EU & UK Headlines
The European session has seen a distinct lack of tier 1 macroeconomic data or significant economic commentary. Following the below 7% unemployment reading from the UK yesterday, Gilts have underperformed with the short-sterling curve steepening as participants continue to bring forward their expectations of a rate hike by the BoE. However, this price action in Gilts has failed to filter through into Bunds given the subdued nature of current markets.
IBM and Google shares traded lower in after-market hours, with IBM reporting a fall in sales and Google coming short of analysts expectations for paid clicks.
In terms of earnings, focus will be on Goldman Sachs and Philip Morris.
The tech sector led the move lower in Europe, with SAP down over 3% following earnings report pre-market. Utilities have also traded in the red throughout the session following a disappointing earnings update from Diageo. Of note, today also marks the expiration of various equity option contracts in both Europe and the US
In Asia-Pacific trade, GBP/USD rose through upside stops on its way through yesterday’s highs to print its highest level since 2009 at 1.6837, with the European session seeing an extension of these gains to the 1.6842 level.
In his annual Q&A with public, Russian President Putin said that he hopes he won't have to send troop into eastern Ukraine, adding that he will do everything possible to help east Ukraine population defend their rights.
Libya’s Oil Minister said on Wednesday there was no clear timetable for the restart of a steady output flow. Libya’s Hariga oil port, 110kbpd capacity, started loading its first shipment of 1mbbls yesterday. (RTRS)
Senators are urging the Fed to ban US banks from owning commodity assets saying that their ownership threatens the global supply chains. (BBG)
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DB's Jim Reid concludes this overnight summary
In Asia, equities are trading with a mixed tone while overall volumes are on the low side. Premier Li’s comments late yesterday reiterating the government’s commitments to reforms hasn’t inspired Chinese equities (Shanghai Comp flat). However domestic swap rates have fallen after the Chinese State Cabinet said that it would loosen reserve requirements for qualifying rural banks aimed at stimulating growth. In Japan, there is again some focus on the Government Pension Investment Fund, after the head of the GPIF advisory panel advocated that the fund should sell down longer dated JGBs and increase its allocation to equities in the coming months. The comments haven’t had a large effect on Japanese bond yields. The Nikkei is down 0.1%, while dollar-yen is down 0.3% at just under 102. A firmer session for EM yesterday has spilled over into Asia where INR (+0.1%), IDR (+0.1%) and EM equities are trading stronger.
Yesterday’s Economic Club of NY speech by Janet Yellen contained little new information, but it perhaps provided reassurance in the Fed Chair’s dovish bias. Yellen’s speech was centred on three topics - namely the degree of slack in the labor market, the path of inflation, and downside risks to the economic recovery. On the first two topics, Yellen took on a dovish tone, saying that “the larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained”. On the third question about downside risks, she highlighted the period from 2010 to 2012 where the Fed’s economic forecasts were later disrupted by downside surprises. Yellen also further played down the six months time frame between QE end and rate rises saying in response to a question that the Fed will “respond to what we see happening, and not a fixed idea that we perhaps held at some earlier time about will come to pass”. The overall message was that at the end of the day policy will be data dependent and that this is the most important factor determining monetary policy.
After a couple of days of seemingly good corporate results announcements, yesterday’s earnings had a more negative tone highlighted by Google and IBM’s after-market earnings misses. Google’s stock fell more than 4% in aftermarket trading after the company missed earnings and revenue estimates. In addition to that there appeared to be some concern over Google’s rising cost base following recent acquisitions and a recent deceleration in mobile advertising revenues. Outside of the tech companies, BofA (-1.6%) also performed poorly after disclosing surprise losses due to legal costs from mortgage disputes. The bank also reported lower Q1 NIMs and FICC revenues (down 15%).
We’re still in the early stages of the Q1 earnings season with only 11% of the S&P 500’s constituents having reported results so far. However tallying up the results to date, we’re seeing around 65% of companies beating analyst estimates versus only 33% who have missed (2% in line). Of the companies that have beaten estimates, the average beat is fairly large at an average of 8.5% (median 5.0%). Interestingly, despite the recent selloff in tech stocks, it’s actually the technology sector which has the strongest beat:miss ratios at the moment. While just under two-thirds of companies are beating estimates, we should should note that according to DB’s equity strategist Q1 earnings estimates have been cut sharply in recent months. Over the last 3 years the average cut during the quarter was 3-4%, during 1Q it was 5.3%. The performance of companies on the revenue line is relatively weaker - just under half (49%) of companies have managed to beat expectations, versus 51% who have missed. So certainly some mixed messages coming out of the US reporting season so far. For more detail, our usual earnings tracker table is included in today’s PDF.
10yr US treasury yields remain at the bottom of recent trading ranges and they rallied a couple of basis points following Yellen’s speech yesterday. Before that however, yields reached a high of 2.66%, spurred by an above-consensus US March industrial production report (+0.7% versus consensus of 0.5%) which contained upward revisions to prior month’s data (up +0.6% to +1.2%). Housing data was a bit softer than expected but this was largely ignored. Housing starts in March rose 2.8% (vs 7.0% expected) to 946k in March after February was revised slightly higher to 920k versus 907k previously. Weather affected states in the mid-west and North-east rebounded strongly. Housing permits, which are less weather-distorted, were down 2.4% to 990k units. The Fed Beige book confirmed that economic growth in most US regions had increased with the improvement in the weather.
Turning to the day ahead, liquidity will again be patchy in some markets as we head into the long weekend. President Putin will hold an annual televised “direct line” Q&A with the media & public today at around 9am London time in which the main line of questioning is likely to be on the Ukrainian crisis. A twoday, four-party summit with the foreign ministers from the US, EU, Russia and Ukraine begins today in Geneva to discuss the ongoing situation in Ukraine, and will help determine the likelihood of further sanctions against Russia in the short term – this might determine how markets open early next week. In terms of data, most of the focus will be on US jobless claims and the Philly Fed outlook survey. Consensus is expecting a small increase to 10.0 (from 9.0 previous) in the latter. There are plenty of US corporates due to announce earnings before the NY opening bell, including Morgan Stanley, Goldman Sachs and General Electric. It’s a 4 day weekend in much of continental Europe and the UK but equity and bond markets in the US will reopen on Monday.
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