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Futures Rebound Continues As "Greece Concession" Story Picked Up By European Desks, Oil Rises
The rally that was sparked by yesterday's late-day FT report had all but fizzled overnight, replaced by more concerns about the state of the global economy when Austrialia's central bank surprised the world (just 9 of 29 analysts had expected this move) by becoming the 15th in a row to ease in 2015 (the list: Singapore, Europe, Switzerland, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan and Pakistan, Russia and now Australia), cutting the cash rate to an all-time low of 2.25%, and sparking more concerns about a global currency war or rather USD war against every other currency, when the USDJPY algos woke up again, and did everything they could to re-defend the critical 117.20 level in the USDJPY which has proven critical in supporting the market in recent weeks, once again using the Greek "softening tone" story as the basis for the ramp as Europe woke up, which in turn sent the DAX promptly to new all time highs, while the Athens stock market surged by 9% at last check.
How long this narrative will sustain today is unclear, especially with Varoufakis explicitly said earlier that he had been misinterpreted once again as we reported earlier. However, it is assured that if not for the Greek "broken telephone", then some other intervention will step in to keep the S&P above the all important 2000 level.
The second most important news overnight comes from the bond where following a surprisingly weak 10 Year auction in Japan, where the Bid to Cover came in the weakest since 2013, "Germany became Japan", as the 10 Year Bund yield (0.31%) is now below that of the sliding 10 Year JGB (0.37%) for the first time ever.
The third main overnight story involves commodity complex, and specifically oil where the surge of the last several days continues, and sees both energy and metals trade higher, with energy WTI and Brent crude futures trade higher for the fourth consecutive day, above USD 51 and USD 56 handles respectively. This comes as an extension of gains seen since Friday following the latest Baker Hughes rig count, which fell by over 90 rigs, the most since 1987, to see WTI finish 8.3% higher as a consequence. The ongoing strike by the United Steelworkers Association is also adding to the upside for prices. This comes as WTI crude futures settled higher yesterday by over 1% for the second consecutive trading day for the first time since two weeks prior to OPEC's November meeting.
Back to equities, Asian stocks trade mixed with notable strength observed across energy stocks following the continued rebound in oil prices. ASX 200 (+1.6%) was the outperformer after surging to a new 7yr high, as the RBA cut its benchmark rate lower by 25 bps. Shanghai Comp (+2.5%) halted its 5-day slide as Chinese money market rates fell stoking speculation that the PBOC will ease in the form of a RRR cut, this comes after the Chinese manufacturing PMI came in at its lowest reading since September 2012 over the weekend, with the HSBC reading printing its second consecutive contraction. The Nikkei 225 (-1.3%) reversed earlier gains, the latter slumping to a 1-week low weighed on by a strong JPY.
This morning has seen equities open in the green (Euro Stoxx +1.42%) amid positive sentiment stemming from Asia, commodities and news on Greek debt. This saw the DAX (+1.15%) touch record highs, resulting in weakness in Bunds (-38 ticks) after Greece’s new finance minister Varoufakis stated he is not looking to write off Greece's debt but prefers a 'menu` of debt swaps, easing the tension anticipated last week. This also saw the Athens Stock Exchange rally over 9% throughout the morning and the GR/GE 10Y spread tightened by over 90bps, with the sentiment further underpinned across Europe the surprise 25 bps rate cut from the RBA overnight and the aforementioned speculation that the PBOC will ease in the form of a RRR cut.
On a sector specific basis, energy has been the outperformer of the session so far after positive earnings from BP (+2.5%), which saw the Co. cut CAPEX to USD 20bln vs. Prev. USD 24-26bln to become the latest Co. to cut expenditure in the wake of falling all prices with BG, joining Shell, Total and ConocoPhillips in their cost cutting. The bout of strength seen in oil prices have also aided the energy sector, while materials have also outperformed, benefitting from AUD weakness. The underperforming sector of the European session has been utilities after an EU court aide said German nuclear fuel tax is in line with European law in a non-binding opinion, meaning RWE (-4.3%) and EON (-3.7%) will not be refunded the EUR 2.2bln in nuclear tax fuel that they had applied for, leading to the DAX underperforming.
Ahead of the Wall Street open, there are a host of US earnings including UPS, with Walt Disney and Gilead reporting after market.
In FX, the surprise 25 bps rate cut by RBA saw AUD/USD fall over 120 pips, with CAD and NZD weakening in sympathy to the commodity currency, particularly against JPY. Analysts at UBS, JPMorgan and Standard Chartered all suggest that 2.25% may not be the lowest rate and the RBA may cut again in either March or May. CAD however rebounded from this weakness throughout the European morning, in tandem with strength seen in the energy complex. Elsewhere, Turkish CPI printed higher than expected (7.24% vs. Exp. 6.80%, Prev. 8.17%), which saw the Turkish Central Bank dismiss speculation that there will be an extraordinary monetary policy meeting tomorrow, while the UK Construction PMI saw a 23rd month of expansion, leading to an aggressive pull back in GBP/USD after the pair earlier fell below 1.5000 to the downside.
In summary: European shares rise, though off intraday highs, with the basic resources and oil & gas sectors outperforming and utilities, food & beverage underperforming. Greek bond yields fall, ASE index rises for second day after govt proposals late Monday for a debt exchange. German 10-year yield falls below Japan’s for first time on record. Australian dollar fell after central bank cut interest rates. The Italian and Spanish markets are the best-performing larger bourses, Swiss the worst. The euro is little changed against the dollar. Commodities gain, with natural gas, gold underperforming and Brent crude outperforming. U.S. ISM New York, vehicle sales, factory orders due later.
Market Wrap
- &P 500 futures up 0.4% 2025
- Stoxx 600 up 1%
to 370.9 - US 10Yr yield
up 4bps to 1.7% - German 10Yr
yield up 2bps to 0.33% - MSCI Asia
Pacific down 0.4% to 139.8 - Gold spot up
0.6% to $1281.5/oz - Euro up 0.03% to $1.1344
- Dollar Index down 0% to 94.5
- Italian 10Yr yield down 6bps to 1.57%
- Spanish 10Yr yield down 5bps to 1.44%
- French 10Yr yield up 1bps to 0.55%
S&P GSCI Index up 2.1% to 404.9 - Brent Futures up 3.3% to $56.6/bbl, WTI Futures up 3% to $51.1/bbl
- LME 3m Copper up 2.9% to $5660.5/MT
- LME 3m Nickel up 0.9% to $15460/MT
- Wheat futures up 1% to 497.5 USd/bu
US Event Calendar
- 9:45am: ISM New York, Jan. (prior 70.8)
- 10:00am: Factory Orders, Dec., est. -2.4% (prior -0.7%)
- 10:00am: IBD/TIPP Economic Optimism, Feb., est. 51.5 (prior 51.5)
- Wards Domestic Vehicle Sales, Jan., est. 13.5m (prior 13.46m)
Bulletin Headline Summary from RanSquawk and Bloomberg:
- RBA cut its benchmark rate lower by 25bps, surprising some analysts and leading to a fall in AUD/USD of 120 pips
- The European morning has seen equities trade firmly in the green after Greece’s new finance minister Varoufakis stated he is not looking to write off Greece's debt but prefers a 'menu` of debt swaps
- Looking ahead, this afternoon sees the release of US Factory orders, Durable Revisions and IBD/TIPP Economic Optimism, with a host of US earnings, including UPS and Fed speakers in the form of Bullard (Non-voter, Soft Hawk) and Kocherlakota (Non-Voter, Dove)
- Treasury benchmark yields rise overnight as Greece retreated from its call for a debt writedown; Fed’s Bullard and Kocherlakota will speak on the economy today.
- Greece retreated from its call on the euro area to write down its debt, and instead proposed to exchange existing borrowings for new bonds linked to the country’s growth
- The Reserve Bank of Australia cut its benchmark interest rate 25bps to a new record low 2.25%, joining a dozen global counterparts in easing policy over the past month to stave off a wave of deflation enveloping the world
- India must maintain fiscal discipline and the government should consider establishing independent institutions to examine its annual budget, central bank Governor Raghuram Rajan said before he reviews monetary policy
- Nomura Holdings Inc. is retreating from U.S. investment- grade trading after last year’s bout of volatility in fixed- income markets, according to two people with knowledge of the decision
- Obama’s $4t budget plan lays out a wish list for populist Democrats, but it also does something more subtle: It tries to drive a wedge between Republicans on taxes and spending
- Islamic State extremists are expanding their international footprint in the Mideast and North Africa, the U.S. military’s top intelligence official said, offering a far bleaker security assessment than Obama and his political appointees
- Ukraine evacuated civilians from a strategically important juncture in the country’s east as the worsening fighting with pro-Russian rebels led to calls for a military buildup on both sides
- Sovereign yields mixed, Greece 10Y falls ~96bps to 9.99% Portugal, Spain and Italy also lower. Asian stocks mixed; European stocks rise, U.S. equity-index futures gain. Brent, WTI and copper rise; gold rallies
* * *
DB's Jim Reid concludes the overnight summary
After nearly a week of playing hard ball, the weekend's more conciliatory stance from Syriza continued last night as the new finance minister Mr Varoufakis was reported as telling the FT that they would no longer call for a headline write-off of Greece's debt. Whether the combination of growth linked and perpetual bonds that have been proposed are workable is open to question but it does seem that Syriza have blinked first in this stand-off after a very feisty week one of their new administration.
According to the FT, Varoufakis has proposed a ‘debt swap’ where by the European rescue loans issued to Greece would be replaced by bonds indexed to nominal growth for the region whilst ECB-owned Greek bonds would be swapped into perpetual bonds. The plan would therefore leave Greek debt at the IMF and private sector intact and in effect the restructuring would remove the risk of any haircuts to the current debt load which Eurozone officials have verbally pushed back on.
Markets reacted positively to the article. The S&P 500 rallied into the close to finish +1.30% after having been as low as -0.7% in early trading. The vast majority of the gains came in the last hour of trading following the Greece headlines. This morning equity markets in Asia are trading mixed however with the Shanghai Composite (+0.75%) higher but the Nikkei (-1.58%) and Hang Seng (-0.51%) softer. The ASX (+1.46%) has rallied following the RBA's decision to ease the benchmark interest rate by 25bps to 2.25%. 7 out of 29 economists surveyed on Bloomberg expected the cut. So they join the ever growing club of 'easy' central banks in 2015. The AUD has weakened nearly 2% versus the Dollar on the back of the cut.
Other than the FT article it was a fairly quiet day as far as Greek news was concerned yesterday. Earlier in the day Varoufakis met with the UK Chancellor Osborne with the outcomes appearing to yield similar results to other recent regional meetings with Varoufakis quoted on Bloomberg saying that the meeting was ‘a breath of fresh air’ and that ‘despite our difference we’re highly tuned to finding common ground’. Meanwhile Osborne took an understandably cautious stance, commenting that ‘we had a constructive discussion and it is clear that the stand-off between Greece and the eurozone is the greatest risk to the global economy’. Greek equities (+4.64%) rallied yesterday following the more conciliatory tone over the weekend whilst 10y yields fell 17bps to 0.62%. The shorter end of the curve however continues to remain under pressure with 3y yields climbing another 80bps to 18.90%. Both Varoufakis and Tsipras continue their European tour today and are due to meet Italian finance minister Padoan in Rome today followed by France’s Hollande and the EC president Juncker on Wednesday.
Back to markets in the US yesterday, the late rally in the S&P 500 masked what was a fairly volatile day for equities as markets traded between gains and losses as oil markets rallied and macro data was generally mixed. Starting with oil, both WTI (+2.76%) and Brent (+3.32%) firmed for the third consecutive day to $49.57/bbl and $54.75/bbl respectively lending support to energy stocks which finished 3% higher. Both markets are up around 11% since Thursday’s close and back to levels we last saw nearly a month ago. The gains appear to be a continuation of the rally we saw on Friday with expectations building that the US could be closer to cutting production following the latest rig count and also news that the United Steelworkers union strike had entered a second day. The better tone caused Treasuries to widen modestly with the yield on the 10y benchmark finishing 2.4bps wider at 1.664% - although at one stage it hit an intraday high of 1.71%.
A softer manufacturing picture was the notable data highlight yesterday with the ISM manufacturing print dropping nearly two points in January to 53.5 and a point below expectations. The reading was the lowest since June 2013 whilst prices paid declined 3.5pts to 35 (well below expectations of 39.5) which was the lowest level since April 2009 and no doubt buoyed by the decline in energy prices. Elsewhere, construction spending improved to +0.4% mom (from -0.2%) although it still came in a touch lower than expected. Lower energy prices were also to blame for a fall in the PCE deflator (-0.2% mom). Finally personal income for December was a modest beat (+0.3% mom versus +0.2% expected) although personal spending dropped to -0.3% mom from +0.6% previously, the lowest level since 2009. The Dollar softened for the first time in four sessions, with the DXY finishing 0.32% lower.
Before all this in European markets away from Greece were largely mixed with developed regions outperforming the periphery. Indeed the Stoxx 600 closed relatively unchanged (+0.06%) whilst the DAX (+1.25%) and CAC (+0.51%) firmed although the IBEX (-0.72%) and FTSE MIB (-0.09%) closed down. Yields in the periphery also finished some 3-7bps wider with Spain in particular appearing to trade weaker on the back of the Podemos rally over the weekend which we highlighted in yesterdays EMR. There was some supportive chatter out of ECB officials yesterday. Firstly the ECB’s Coeure was quoted on Reuters in a meeting in Budapest saying that ‘It (QE) is an open-ended programme’ and that ‘it will be reassessed when we come closer to September 2016, and if this aim of achieving sustained convergence towards 2% inflation in the medium term is not reached, we will do more’. Coeure also played down there being any immediate impact from the programme which was also backed up by the ECB’s Nowotny who was quoted at the same meeting saying that ‘I think in the summer we should get the first indications, because the first things to be overlooked at will be the volume of bonds offered to the ECB either by the banks of other investors’. In terms of the inflation picture Nowotny said that he sees some ‘deflationary impulses’ in H1 this year but ‘then later on the effect of the reduction of oil prices will get much less’. Wrapping up yesterday, it was fairly quiet on the data front. The final Euro-area manufacturing PMI was as expected at 51 and regionally a better than expected reading for Italy (49.9 vs. 48.8 expected) offset the modestly softer readings in France (49.2 vs. 49.5 expected) and Germany (50.9 vs. 51 expected). The UK reading improved to 53.0 from 52.7 previously.
With political risk likely to be high in Europe for years to come it’s worth pointing out that over the weekend Italy appointed Sergio Matarella (of the ruling Democratic Party) as Italy’s new President of the Republic which was as expected. DB’s Marco Stringa points out that although the President role is mainly a formal one, he can steer the formation of a new government at least until the new electoral law and Senate Constitutional reforms are approved. Marco doesn’t think there will be any major changes to the status quo and that going forward Prime Minister Renzi will likely have to be slightly more thoughtful of the demands of the Democratic Party minority to implement its economic reform programme.
With regards to today’s calendar, it’s a fairly quiet morning in Europe with just PPI for the Euro-area along with inflation data out of Italy and the construction PMI for the UK. Over in the US this afternoon we’ve got the ISM New York due along with factory orders, auto sales and the IBD/TIPP economic optimism survey. Comments from the Fed’s Bullard and Kocherlakota who are due to speak today could be of more interest whilst elsewhere the earnings season continues to kick on.
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Greece will only cause the markets to go higher. No matter how bad things may be in Greece the markets will not sell off on the news. However, once this new party buckles and gives into the EU the market will rise on the good news. These markets only go one way..UP
When all I have is a hammer, everything looks like a nail to be smashed.
Long shoeshine boy advice......what could possibly go wrong.
ShoeSHine, ShoeSHine..........CheeseSTake, CheeseSTake.
"The rally that was sparked by yesterday's late-day FT report had all but fizzled overnight, replaced by more concerns about the state of the global economy when Austrialia's central bank surprised the world.... cutting the cash rate to an all-time low of 2.25%."
This is about as surprising as me taking off my shoes and socks and being 'surprised' when I find five toes.
All of this volatility in the global markets and in ever geo-political world, are signs that something big is about to happen. The dollar will crash, just like the other fiat currencies. Will we be pushed to a major war as that happens? The bankers will want to cover their tracks. All I can say that it is easy to see that all is not well. You can feel that something big is coming! Prepare toda while there is still time. Have water and food stored up, buy guns and ammo, learn basic survival skills, and get out of the dollar.
I recommend buying silver rather than gold at the moment. Silver is much more discounted. Plus you won't want to use a gold coin to make small, regular purchases. If you or a friend are a little hesitant about getting started, these candles with a silver coin are a great way to spread the ideas of real money: https://www.etsy.com/shop/ScentSavers?ref=hdr_shop_menu These candles get their silver stacking started!
I would start with rice in a bag and how to boil water.
selling time
Silver is sporting a little morning wood.
Which will now see Hitlary nude.
""Germany became Japan", as the 10 Year Bund yield (0.31%) is now below that of the sliding 10 Year JGB (0.37%) for the first time ever."
So, if Japanese yields are now above German yields can it now be said that markets are correctly pricing in higher risk in Japan because of their huge unpayable debt and imploding demographics?