"Failed" Bund Auction At Record Low Yield And All Other Key Overnight Events

Tyler Durden's picture

While there has been no global economic outlook cut today, or no further pre-revision hints of "decoupling" by the apartchiks at the US Bureau of Economic Analysis,  both European and US equities are pointing at a higher open, because - you guessed it - there were more "suggestions" of "imminent" QE by a central bank, in this case it was again ECB's Constancio dropping further hints over a potential ECB QE programme, something the ECB has become the undisputed world champion in.

To wit: ECB will "consider buying other assets, including sovereign bonds in the secondary market," if the pace of evolution of its balance-sheet expansion judged not in line with expectations, Vice President Vitor Constancio says in text of speech in London. "In particular, during the first quarter of next year we will be able to gauge better” the impact of current stimulus. Further asset purchases “would be a pure monetary policy decision, buying accordingly to our capital key, within our mandate and our legal competence." Sovereign QE transmission channels include “signaling and influencing inflation expectations, exploring spill-overs resulting from investors using the cash received to buy other assets, including foreign assets with influence on the exchange rate,” and “increasing credit to the real economy.”

What Constancio did not say is that while private QE, the type the ECB has been engaging in until now, is perfectly legal by the European framework, public QE has been repeatedly frowned upon by Germany and various constitutional courts, not to mention Article 123. But for now every ECB bluff succeeds in pushing both stocks higher and bond yields lower.

In fact, the constant ECB jawboning, and relentless central bank interventions over the past 6 years, led to this:

  • GERMANY SELLS 10-YEAR BUNDS AT RECORD-LOW YIELD OF 0.74%

The punchline: this was another technically "failed" auction as it was uncovered, the 10th of the year, as there was not enough investor demand at this low yield, and so the Buba had to retain a whopping 18.8% - the most since May - with just €3.250Bn of the €4Bn target sold, after receiving €3.67Bn in bids.

But while the central bank domination of all capital markets is well-known, the week's biggest event, the OPEC meeting, got a second glass of cold water after Russia yesterday failed to agree on a production cut, when Saudi Arabian Oil Minister Ali Al-Naimi tells reporters in Vienna, before tomorrow's OPEC meeting that "No one should cut and mkt will stabilize itself." What's worse, the Saudi turned the tables on the US itself: “Why Saudi Arabia should cut? The U.S. is a big producer too now. Should they cut?" Well, it isn't an OPEC member. But it's good to see that Kerry's "secret" agreement with the Saudis to crush Russia has backfired so spectacularly.

European equities trade mostly in the green in what has been a relatively choppy session so far. European stocks were provided some reprieve in the early stages of trade after EU's Juncker said the EUR 315bln value for the EU’s investment programme is not an upper level and they could go beyond that level if investment fund works. However, this upside was relatively short-lived with a lack of further notable newsflow and participants seemingly shrugging off the latest ECB rhetoric with ECB’s Constancio saying the central bank may consider sovereign bond buying in Q1 of 2015. On a sector specific basis, utilities lead the way, with RWE (+3.8%) the notable outperformer amid expectations the Co. will maintain its dividend, while energy names drag stocks lower as hopes of a potential OPEC cut continue to abate. Elsewhere, despite coming off their best levels, T-notes edged higher throughout European trade supported by positive month end flows and solid US auctions this week ahead of the final 7yr offering.

Asian markets are somewhat mixed this morning although Chinese equities continue to extend their gains into year end, this is despite a fairly subdued consumer sentiment print in the region this morning (second lowest reading since September 2011, the lowest being last month). Indeed the Shanghai and Shenzhen Composite are up +0.6% and +0.2% overnight which puts them at around +22% and +32% this year on a local currency basis. Relative to other key regional bourses, the China rally has also placed it well ahead of most of the region YTD. Elsewhere in 2014 we have the Hang Seng (+2.4%), Nikkei (+6.8%), KOSPI (-1.4%), ASX 200 (+0.6%) and the Jakarta Composite (+19.6%). The winner so far though is India’s Sensex (+33.9%). Credit markets are a tad softer this morning with IG spreads generically 1-2bp wider in Asia as there’s little sign that supply is easing into December.

And while trading desks may be empty on the east coast as a result of a mini Nor'easter slamming the seaboard with several inches of snow, and volumes will be beyond abysmal - something which assures a new all time high close - there is an Olympic amount of eco data on the US docket: the highlight will likely be the durable goods report for October which should provide an update on the current state of quarterly capital spending. Elsewhere we will also keep an eye on personal consumption data as well as the core PCE deflator which is expected to increase 0.1%. Finally we will round off with the jobless claims data (which are outside the survey period for next week’s payrolls), University of Michigan confidence and new home sales. So plenty to keep an eye on throughout the day.

Market Wrap

European shares stay higher though off intraday highs with the utilities and telco sectors outperforming and construction, travel & leisure underperforming. Saudi oil minister says no producer should cut output, oil will stabilize. The German and Dutch markets are the best- performing larger bourses, Swedish the worst.  The euro is weaker against the dollar. Japanese 10yr bond yields fall; Greek yields increase. Commodities gain, with nickel, silver underperforming and wheat outperforming. U.S. Chicago purchasing manager, jobless claims, mortgage applications, Michigan confidence, new home sales, durable goods orders, pending home sales, personal income, personal spending due later.

  • S&P 500 futures up 0.1% to 2069.4
  • Stoxx 600 up 0.2% to 346.9
  • US 10Yr yield up 0bps to 2.26%
  • German 10Yr yield little changed at 0.75%
  • MSCI Asia Pacific up 0.3% to 141.1
  • Gold spot down 0.4% to $1196.1/oz

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European stocks enter the North American open in the green in what has been a relatively mixed session, while ECB’s Constancio drops further hints over a potential ECB QE programme.
  • Energy prices ebb lower as the latest rhetoric from Saudi Arabia indicates that a supply cut tomorrow is increasingly unlikely.
  • Looking ahead, today’s session sees a raft of tier 1 US data points with durable good, weekly jobs, personal income, PCE deflator, Chicago PMI, Univ. of Michigan, pending & new home sales, DoE inventories, and the EIA natural gas storage chance all due for release
  • Treasuries steady before week’s auctions conclude with $29b 7Y notes; WI yield 1.980% vs 2.018% in October.
  • 10Y and 30Y yields yesterday broke out of ranges in place since late Oct. after strong demand for 5Y auction, including indirect award that was second-highest on record
  • U.S. bond markets closed for Thanksgiving tomorrow, followed by early close on Friday
  • ECB will consider buying sovereign debt proportional to the size of each euro member’s economy if current stimulus proves insufficient, ECB Vice President Vitor Constancio said
  • Germany’s borrowing costs fell to a record low at an auction of 10-year bunds; yields on euro zone bonds from Austria to Spain touched all-time lows yday
  • Even if the ECB clears all the hurdles to enact a government- bond buying program, there will be one final obstacle: finding motivated sellers, as banks would earn less from the cash proceeds than from keeping euro-area sovereign debt, according to HSBC
  • Democrats made a mistake by passing Obama’s health-care law in 2010 instead of first focusing more directly on helping the middle class, third-ranking U.S. Senate Democrat Charles Schumer said
  • Obama’s threatened veto of a $400b-plus tax-break bill exposed a widening fault line within the Democratic Party
  • The Justice Department is unlikely to be able to file federal charges in the shooting death of a black teenager in Missouri by a white police officer, according to former U.S. prosecutors, an outcome that is sure to frustrate civil- rights leaders and protesters
  • Saudi Arabia’s oil minister said crude prices will stabilize while the UAE said OPEC will do what it takes to balance the market; Angola predicted the 12-nation group will reach a consensus when it meets tomorrow
  • Sovereign yields mostly lower. Asian and European stocks mostly higher;  U.S. equity-index futures gain. Brent crude gains, gold and copper lower

 

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Nov. 21 (prior 4.9%)
  • 8:30am: Durable Goods Orders, Oct., est. -0.6% (prior -1.3%, revised -1.1%)
    • Durables Ex Transportation, Oct., est. 0.5% (prior -0.2%, revised -0.1%)
    • Cap Goods Orders Nondef Ex Air, Oct., est. 1.0% (prior -1.7%, revised -1.6%)
    • Cap Goods Ship Nondef Ex Air, Oct., est. 0.5% (prior -0.2%, revised 0.3%)
  • 8:30am: Initial Jobless Claims, Nov. 22, est. 288k (prior 291k)
    • Continuing Claims, Nov. 15, est. 2.348m (prior 2.330m)
  • 8:30am: Personal Income, Oct., est. 0.4% (prior 0.2%)
    • Personal Spending, Oct., est. 0.3% (prior -0.2%); PCE Deflator m/m, Oct., est. 0.0% (prior 0.1%)
    • PCE Core m/m, Oct., est. 0.2% (prior 0.1%)
  • 9:45am: Chicago MNI, Nov., est. 63 (prior 66.2)
  • 9:45am: Bloomberg Consumer Comfort, Nov. 23 (prior 38.5)
  • 9:55am: UofMich Confidence, Nov. final, est. 90 (prior 89.4)
  • 10:00am: Pending Home Sales m/m, Oct., est. 0.5% (prior 0.3%); Pending Home Sales NSA y/y, Oct., est. 2.5% (prior 1%)
  • 10:00am: New Home Sales, Oct., est. 471k (prior 467k); New Home Sales m/m, Oct., est. 0.8% (prior 0.2%)

FX

Overnight was relatively subdued with USD/JPY running into resistance at the 118.00 handle, with Japanese exporters also said to be on the offer. Furthermore, AUD staged a modest rebound off its 4yr lows overnight, however, these modest gains were erased during the European session after AUD/NZD moved below its 200DMA and the 1.0900 handle after triggering stops. This subsequently strengthened EUR/AUD alongside the comments from Juncker which provided EUR/USD with a modest boost. Elsewhere, GBP was relatively unphased by the second reading of Q3 UK GDP which came in-line. Furthermore, despite UK net trade contribution cutting 0.5pts off Q3 GDP, the services came in at its highest level since March.

COMMODITIES

In the commodity complex, WTI and Brent crude futures have ebbed lower as a supply cut announcement by OPEC tomorrow appears to be increasingly unlikely, with the more likely outcome to be that Saudi will urge member nations to stick more rigidly to the existing ceiling. This sentiment was further enhanced by comments from the Saudi oil minister who said Saudi, the US and others should not cut output. In metals markets, price action has been relatively tentative despite a data print error which showed a USD 250 rise in spot gold, with participants now looking ahead to key risk events.

* * *

DB's Jim Reid concludes the overnight recap

Ahead of thanksgiving it almost feels like we'll get a whole month of data today as Thanksgiving squeezes all the remainder of the week's US data into today. We'll go through it at the end but the US growth bulls got a boost yesterday from the latest Q3 GDP numbers, with the print being revised up to +3.9% from +3.5% previously. With regards to the details, our US colleagues noted that the mix in the revisions was very supportive of current quarter growth, which they continue to peg at 4.2%. Both consumption (revised up 40bps) and nonresidential fixed investment (revised up 160bps) were notable takeaways and elsewhere improving demand, as evidenced by final sales to private domestic purchasers which grew 3% last quarter and is up 3% over the last year – means that production has to rise meaningfully further. There will be a final revision to the print next month which they continue to see the possibility of it being revised up to over 4%.

Although markets were initially buoyed by the reading, a raft of data releases later in the day dampened sentiment somewhat and saw the S&P 500 pare back those initial gains to close -0.12% at the end of play. Energy stocks (-1.60%) were the notable laggard yesterday driven by another weak day in Oil. Brent and WTI both fell around 1.7% to close at $78.3/bbl and $74.1/bbl, respectively ahead of what is building up to be a key OPEC meeting tomorrow. Officials from Venezuela, Saudi Arabia, Mexico and Russia met during a pre-OPEC meeting yesterday but failed to reach consensus around supply amid weakening demand. The head of Rosneft was even quoted to have said that the current level of prices was not ‘critical’ (FT). Venezuelan Foreign Minister Rafael Ramirez told reporters after the talks that while all sides agreed current prices were "not good" for producing countries, no coordinated output cuts were reached yesterday. For the record Energy is the only S&P 500 sector that is in negative territory for the year (-3.2%). Health Care (+23.5%), IT (+18.7%) and Utilities (+18.5%) are the darlings this year.

Before we move on, DB’s Michael Lewis commented in his piece yesterday that although uncertainty exists around coordinated agreement and timing, an examination of oil market fundamentals suggests that a coordinated cut in OPEC production is inevitable based on supply and demand dynamics. Michael comments that the supply overhang which has emerged this year will not be reversed any time soon and that the current OPEC production implies the current surplus of 0.6mm/d expanding to 1.0mmb/d in 2015. He notes that a quota reduction of 1.0 mmb/d would be necessary to restore confidence to the market and help stabilise prices. He also mentions that over the past 20 years, an initial quota reduction by OPEC has averaged 1.1mmb/d and that outside of recessionary environments, OPEC actions have been successful in that prices have typically rallied by 8.5% over the subsequent three month period (implying a move back towards $87/bbl by Feb 2015 if history repeats).

Whilst Oil was a key driver yesterday the market also seemed particularly disappointed by a softer consumer conference reading, which fell to 88.7 from 94.1 in October and also below consensus of 96. In other releases, the Case-Shiller house price index recorded the first increase in 5 months in September (+0.34% v +0.30% expected). Elsewhere, the Richmond Fed manufacturing index fell short of consensus in November (4 v 16) which also marks its lowest reading since June. Treasuries had a strong day with the 10yr benchmark rallying some 5bps lower to close at 2.257%. A strong outcome at the US$35bn 5yr auction yesterday likely helped matters which saw the strongest foreign demand for the notes since December 2004.

Staying on core rates it is also worth noting that 10yr Bund yields went through the October 15th's flight to quality all time closing lows of 0.756%. Indeed the 10yr Bund yield fell by 3bp to 0.748% yesterday. Its an impressive achievement as when we were at these levels in the stress of 6 weeks ago, Crossover closed at 401bp (now 334bp) and Stoxx 600 at 311 (now 346) so European Government bonds and even Bunds just keep on performing even with risk-on back in vogue. Obviously the prospect of ECB buying is increasingly being priced in. One thing that makes us slightly nervous of this trade continuing is that the experience of the US was that Treasuries tended to rally most between bouts of QE and not during. So will it be a case of "buy the rumour sell the fact" if and when QE happens? However Japan's mega QE and still ultra low yields is a cautionary tale that the US experience isn't necessarily a fool proof template but maybe the BoJ are buying far more of the JGB market than their peers thus really completely distorting the price. So there are a number of things to consider but it’s not a slam dunk that bunds will continue to be strong after QE.

In fact in the new 'Koncept' magazine from DB research yesterday there was an interesting article about how Germany might actually overheat going forward with the danger being that loose monetary policy becomes entrenched in order to help weaker Eurozone members. If they are right is 0.75% really the correct level for 10 year bunds?

Just wrapping up markets in Europe yesterday, Q3 GDP in Germany came in line with expectations of +0.1% for the quarter whilst we also noted a modest pickup in manufacturing (99 vs. 97 previously) and business (94 vs. 91 previously) confidence. Finally, there was further ECB chatter yesterday. This time coming from board member Noyer, who in contrast to comments from other members yesterday, was quoted on Bloomberg as saying that the ECB’s statement on balance sheet ‘should certainly be seen as a clear indication that further policy action, if necessary, will not be inhibited by any overall quantitative restraint or limit’.

Before we run over today’s calendar, Asian markets are somewhat mixed this morning although Chinese equities continue to extend their gains into year end, this is despite a fairly subdued consumer sentiment print in the region this morning (second lowest reading since September 2011, the lowest being last month). Indeed the Shanghai and Shenzhen Composite are up +0.6% and +0.2% overnight which puts them at around +22% and +32% this year on a local currency basis. Relative to other key regional bourses, the China rally has also placed it well ahead of most of the region YTD. Elsewhere in 2014 we have the Hang Seng (+2.4%), Nikkei (+6.8%), KOSPI (-1.4%), ASX 200 (+0.6%) and the Jakarta Composite (+19.6%). The winner so far though is India’s Sensex (+33.9%). Credit markets are a tad softer this morning with IG spreads generically 1-2bp wider in Asia as there’s little sign that supply is easing into December.

Looking at the day ahead, we kick off this morning in the UK with the second reading of Q3 GDP (expected at +0.7% qoq) and CBI reported sales for November. Before this in Europe, we will get consumer confidence readings out of both France and Italy as well as import price index data out of Germany. As well as this, the ECB’s Constancio will be speaking today. In the US the highlight will likely be the durable goods report for October which should provide an update on the current state of quarterly capital spending. Elsewhere we will also keep an eye on personal consumption data as well as the core PCE deflator which is expected to increase 0.1%. Finally we will round off with the jobless claims data (which are outside the survey period for next week’s payrolls), University of Michigan confidence and new home sales. So plenty to keep an eye on throughout the day.

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GetZeeGold's picture

 

 

 

So plenty to keep an eye on throughout the day.

 

Uh huh....

Haus-Targaryen's picture

As things get worse, I am becoming more apathetic.  

 

I keep buying physical, and at this point its a waiting game.  

Arius's picture

Germany is a failed state ... famous only because of nazis ...people fail to remember this place called "germany" is only one or two hunderds years old ... much younger even than the newbies of United States ...

Haus-Targaryen's picture

Germany is not a failed state -- it is not sovereign though.  

 

Germans have been around for going on 700 years, as a culture with similar cultural identities.  Just because the German state (a political entity) as we know it today has only existed in form since the 1870s doesn't mean it doesn't have a super old history.  

That is like saying France, as a country is only a couple hundred years old, see French Revolution. 

 

Arius's picture

yes, correct France has been around for a couple of hunderds years more ... dont take it personally amigo ... they just built up and destroy states ... look at ISIS become a new state soon, currency backed by pm when others will go up in flames, in 30-40 years is going to be a power to reckon with in the middle east ... so what .. it is still a new state

Ghordius's picture

this is perhaps only because you define sovereign in a different, non-continental manner

don't get me wrong, I agree with the rest of your statements. but the very concept of sovereignty is different, here, for historical reasons

example: some Baltic nations were vassals of Sweden for a while, in the same manner as the Netherlands were to Spain, etc. etc.

vassallage, military subserviency or alliances, all kind of treaties etc. are the norm in continental european history. but for our understanding, a nation does not stop being sovereign by that

to make a comparison, to our ears it sounds like you are saying that marriage takes away your free will as a man. it is not so, it binds you (temporarily) it gives you duties, but it does not take away your options. sovereignty is about options, in our understanding. you can divorce. you have to want it and do it, and accept the consequences. that is sovereignty

in the same way, hegemony binds a sovereign too, doesn't it?

walküre's picture

good points and now put this into the Ukrainian context

what is a "Ukrainian"?

HowdyDoody's picture

It's like a Brazillian but a lot more messy and painful.

Wolferl's picture

You are wrong, Germans and their country Germany have been around since about 1200 years. And our anchesters, Germans tribes, Celts and Slaws even longer.

mpath's picture

Everything the central banks are doing is going to fail. The question at hand-when is the money flow to safety coming into the us stock market going to end? Exactly 1 year from now-3 years? Those questions are almost impossible to answer-so trade what is you know.

When euphoria is at extremes-expect a nice drop-go short or move to cash. When fear is at extremes-start buying. When it all ends-there will be no buying during the fear period and we continue lower. Sentiment will predict that time period-it isn't right now. 

http://www.sentimenttiming.com/times/

Arius's picture

Exactly 1 year from now-3 years?

 

Dont get too excited out there ... people have been sayin' it for a long time ... take your pick from 70s to much earlier on 20s and 30s ... we are still going strong ... strongest country in the world!

LawsofPhysics's picture

What part of ALL fiat goes to zero don't people understand?

GetZeeGold's picture

 

 

If you're a freshman taking ECON 101 you should probably ignore that statement....cause you WILL flunk your class.

 

But you should probably keep it tucked away in the back of your mind.

LostandFound's picture

One final push for a central bank hyper monetary pump globally, should retain there place in history, in something that is 100% guaranteed.

Tinky's picture

The "fiat" part – aren't they Italian cars?

Arius's picture

yes, you are correct ... that is one of the meanings of the word "fiat"

 

however, there are certain other meanings to the term and thats what it seems the author is referring to.

Notsobadwlad's picture

In a free market economy there should be no interest (ZERO) in buying bonds at this low rate. However, it appears to be the trade-off created between a fascist government and the criminal banks (who create money out of think air for this purpose). The government gets to fund its corruption, wars, slave-welfare and spying on people and the banks get to decide what laws they want passed, a free pass on crime, who gets elected and appointed to posts and who the government should target for persecution.

It is a match made in hell.

Burning small businesses and hurting each other will not correct this injustice. It only helps them keep us separated and them in power.

LostandFound's picture

Indeed Sir, i think the demise of the petro dollar is the end game (something they cannot control) and the counter party risk to this will bring the house of cards down.

LawsofPhysics's picture

So, same as it ever was then?  Fine.  Keep turning those paper promises into assets of real value.  Remember "laws" that cannot be enforced are irrelevant.

youngman's picture

Who were the 3.25 billion worth of bonds that were bought idiots.....who would buy that???? 

GetZeeGold's picture

 

 

Don't play dumb......you know who.

Wolferl's picture

Some market paticipants like insurers are actually "forced" to buy those bonds by law or by statute. It´s not their money in they end so why care?

WTFUD's picture

data pwint ewwow in spot gold!!!!! What dat mean?

falak pema's picture

I think that ZH has to admit that any notion of supply & demand determining key economic factors on the world scene is now receding fast under CB action.

We are, to all intents and purposes, in a COMMAND economy from China to USA, including BRICS and EU.

The only question now is : given that all major actors are in a command economy can they steer the financial and commodity plays of global Titanic from avoiding the Iceberg; or is it already too late, as liquidity does not command insolvency blues and the BEAST has to be bled off its poisonous debt fat to survive.

Thats what bail outs and tax inversion routs and moar Oligarchy taxation and confinement of casino plays will inevitably try to attain. (Not saying they will succeed).

We are still in dangerous waters as Oligarchy thieves falling out makes the COMMAND economy incoherent in currency and geo-political wars of ominous momentum, for an already careening Titanic having lost its engines. 

Is there a Captain on this ship ?

ZH should now convert itself from a financial blog flogging a dead horse to a political blog beating a populist drum. (I think we are already there!)

Funny how the Zeitgeist of the Internet world evolves, in what; "the twinkling of an eye!"

Tipping times and not just for Arab camels ! 

Irishcyclist's picture

The higher demand to buy bonds (bunds), the lower the yield.

Or am I missing something?

 

orangegeek's picture

the bigger the ECB buy, the more the guv can issue lower coupon rates

 

it's what yellen/bernanke/Fed have been doing for years, well, ECB too

Irishcyclist's picture

ECB say that they cannot buy sovereign bonds though. ECB claim that buying sovereign bonds is outside it's mandate.

We've no way of judging who is, and who isn't, telling the truth at this stage. Someone is lying for sure.


walküre's picture

When you're rich, everything seems cheap

HowdyDoody's picture

It's like a Brazillian but a lot more messy and painful.

Arrrgh this was supposedly in reply to walküre (5490991)

"What is a Ukrainian?"